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 $40,000 per year. USN occupies approximately 1,600 square feet in its RMC facility. This facility is located on the campus of RMC in Kansas City, Missouri. USN also occupies about 2,000 square feet at the NYU Medical Center in New York, New York. Pursuant to the facility agreements with RMC and NYU, USN is not required to pay separate rent for the premises occupied by its Gamma Knife centers. Rent is deducted up front in the fee paid to USN for the use of the Gamma Knife. USN’s agreements with RMC expire in September 2015 and there are no renewal options. USN’s agreement with NYU was extended this year and now expires in June 2010.
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, 2003 through December 31, 2004.
Period
High Bid
Low Bid
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
January 1 - March 31, 2004
.11
.09
April 1 - June 30, 2004
.11
.09
July 1 - September 30, 2004
.13
.09
October 1 - December 31, 2004
.17
.09
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, 2005, 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.
ITEM 6.
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, 2000 through 2004. 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)
ITEM 7.
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
2004 Compared to 2003
Patient revenue decreased 2% to $2,403,000 in 2004 compared to $2,444,000 in 2003. Patient expenses decreased 5% to $780,000 in 2004 from $820,000 in 2003. S,G & A decreased 2% to $1,384,000 in 2004 from $1,411,000 in 2003. Income from operations was $239,000 in 2004 compared to $213,000 in 2003. Interest expense declined 31% to $59,000 in 2004 from $86,000 in 2003. This was due to the paydown of principal on the Gamma Knife cobalt lease. In 2005, interest expense will increase due to the replacement of the Kansas City Gamma Knife with a newer model. As a result of the above, net income was $123,000 compared to $61,000 in 2003. The trends of the recent past lead us to believe that reimbursement will continue to remain at current levels.
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.
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 the provisions of FAS 143 would have resulted in a decrease in net income of approximately $12,000 for the year ended December 31, 2002. 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.
Liquidity and Capital Resources
At December 31, 2004 the Company had a working capital surplus of $86,000 as compared to a working capital deficit of $359,000 at December 31, 2003. Cash and cash equivalents at December 31, 2003 were $511,000 as compared to $89,000 at December 31, 2003. Net cash provided by operating activities was $497,000 as compared with $992,000 for the same period a year earlier. Depreciation and amortization was $566,000 as compared to $779,000 in 2003. Accounts receivable increased $32,000 during the year as compared to an decrease of $142,000 in 2003. Accounts payable decreased by $159,000 during 2004 as compared to $21,000 in 2003. The Company paid its outstanding obligation of $100,000 with Elekta during 2004
Net cash used in investing activities for the year ended 2004 was $1,071,000 as compared to $1,014,000 in the year ago period. The Company has made progress payments for $1,282,000 towards its new Gamma Knife and also resolved the $211,000 in escrow to pay its debt obligations.
Net cash used in financing activites for the year ended December 31, 2004 was $996,000 as compared to $23,000 in 2003. The Company paid $1,014,000 towards its capital leases in 2004 as compared to $688,000 in 2003. The Company borrowed $2,010,000 for progress capital and cobalt reload purposes during 2004. The Company also retired 205,000 shares in 2004.
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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
ITEM 8.
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.
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, 60, 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, 53, is currently the Director of Business Development for Paice Corporation, the developer of an advanced hybrid electric powertrain for passenger vehicles, a position he has held since October 1999. He also acts as a consultant on corporate and business development matters to several emerging growth companies. From January 1994 until
October 1999, he served as Vice President and General Counsel of Allen & Company Incorporated, an investment banking firm.
Charles H. Merriman, III has served as a director of USN since May 1999. He also served as a director of GHS from October 1997 to November 1999. Mr Merriman, 70, 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, 44, 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, 59, 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.
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, 2004, 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, 2004, all filing requirements applicable to its officers and directors were complied with by such individuals.
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 15, 2005, 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:
__________________
(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.
ITEM 13.
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,
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.
Item 14.
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.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
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
December 16, 2004
Notice of change in certifying public accountant
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).
(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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
April 7, 2005
/s/ Alan Gold
------------
Alan Gold
President and Director
(Chief Executive Officer)
April 7, 2005
/s/ William F. Leimkuhler
------------
William F. Leimkuhler
Director
April 7, 2005
/s/ Charles H. Merriman III
------------
Charles H. Merriman III
Director
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders
U.S. NeuroSurgical Inc.
Rockville, Maryland
We have audited the accompanying consolidated balance sheet of US NeuroSurgical, Inc. & subsidiary as of December 31, 2004, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2004. 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 audit. The consolidated financial statements of the Company as of December 31, 2003, and for each of the two years in the period ended, were audited by other auditors whose report dated February 4, 2004, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present fairly, in all material respects, the consolidated financial position of US NeuroSurgical, Inc. & subsidiary as of December 31, 2004, and the consolidated results of their operations and their cash flows for the year ended December 31, 2004, in conformity with United States generally accepted accounting principles.
Goodman and Company, LLP
Rockville, Maryland
January 28, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
U.S. NeuroSurgical Inc.
Rockville, Maryland
We have audited the accompanying consolidated balance sheet of US NeuroSurgical, Inc. & subsidiary as of December 31, 2003, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2003 and 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present fairly, in all material respects, the consolidated financial position of US NeuroSurgical, Inc. & subsidiary as of December 31, 2003, and the consolidated results of their operations and their cash flows for the years ended December 31, 2003, and 2002 in conformity with U.S. generally accepted accounting principles.
Eisner LLP
New York, New York
February 4, 2004
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
See notes to consolidated financial statements
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Consolidated Statements of Operations
See notes to consolidated financial statements
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders’ Equity
See notes to consolidated financial statements
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
See notes to consolidated financial statements
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
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.
[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 3 to 7 years. Depreciation expense for the years ended December 31, 2004, 2003 and 2002 was $566,000, $779,000 and $912,000, respectively.
[6] Income taxes:
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets or liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[7] Earnings per share
Earnings per share are computed by dividing earnings available to common shareholders by the weighted average shares outstanding for the period. There were no common stock equivalents during 2004, 2003 and 2002 and, therefore, no potential dilution for the periods presented.
[8] Advertising costs
The Company follows the policy of charging the costs of advertising to expense as incurred.
[9] Bad debts
The Company evaluates each of their accounts receivable individually and provides a charge to income that is appropriate, in the opinion of management, to absorb probable credit losses.
[10] 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.
[11] Fair values of financial instruments:
The estimated fair value of financial instruments has been determined based on available market information and appropriate valuation methodologies. The carrying amounts of cash, accounts receivable, other current assets and accounts payable approximate fair value at December 31, 2004 and 2003 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, 2004 and 2003.
[12] Asset retirement obligations:
In June 2001, the Financial Accounting Standards Board (“FASB”), issued Statement No. 143, “Accounting for Asset Retirement Obligations,” (“FAS143”) 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 on 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.
[13] Reclassifications:
Certain prior year balances have been reclassified to conform to current year presentation.
[14] Recently issued accounting pronouncements:
The FASB issued FIN No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”). FIN 46R 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 46R became effective for variable interest entities created after
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
January 31, 2003, and had no effect on the Company’s financial position as of December 31, 2004 and 2003, and its results of operations for the years then ended.
In December 2004, the FASB issued Statement No. 123(R), “Share-Based Compensation” which requires the recognition of costs resulting from transactions involving the acquisition of goods and services by issuing its shares, share options, or other equity instruments. This standard requires a fair value-based measurement method in accounting for share-based payment transactions with both employees and nonemployees. This standard replaces Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, the use of the intrinsic value method as provided under APB Opinion No. 25 will be eliminated. SFAS No. 123(R) is effective for all awards of share-based payments granted, modified, or cancelled after June 15, 2005, except for public entities filing as small business issuers. Public entities that file as small business issuers will be required to apply Statement 123(R) in the first interim or reporting period that begins after December 15, 2005. In addition, compensation costs for the unvested portion of awards, issued prior to and outstanding as of June 15, 2005, would continue to be recognized at the grant-date fair value as the remaining requisite service is rendered. The Company does not currently have a stock compensation plan.
In December 2004, the FASB issued Statement No, 153, “Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29,” which eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets that do not culminate an earning process under APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” Statement No. 153 requires that the measurement be based on the recorded amount of the assets relinquished for nonmonetary exchanges that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This standard is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The potential effect of Statement No. 153 on the financial statements is currently being considered.
NOTE B - AGREEMENTS WITH RESEARCH MEDICAL CENTER (“RMC”)
[1] Gamma Knife neuroradiosurgery equipment agreement:
USN entered into a neuroradiosurgery equipment agreement (the “equipment agreement”) with RMC, a stockholder of the Company for a period of 21 years, which commenced, with the completion of the neuroradiosurgery facility (the “facility”) in September 1994. The equipment agreement, among other matters, requires USN to provide (i) the use of the Gamma Knife equipment (the “equipment”) to RMC, (ii) the necessary technical personnel for the proper operation of the equipment, (iii) sufficient supplies for the equipment, (iv) the operation, maintenance and repair of the equipment, (v) all basic hardware and software updates to the equipment and, (vi) an uptime guarantee. In return, RMC pays USN 80% of RMC’s fees, subject to adjustments, for the use of the equipment and the facility. The agreement also provides for USN to establish for the benefit of RMC an escrow account funded with an amount equal to one month’s average of the compensation payable to USN. USN is the owner of and entitled to the income from the escrow account so long as no event of default has occurred. As of December 31, 2004 and 2003, the escrow account balance was $106,000. The equipment agreement terminates automatically upon termination of the ground lease agreement (see Note B[2]). The Company had patient revenue from RMC in the amounts of $1,153,000, $1,449,000 and $1,473,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE B - AGREEMENTS WITH RESEARCH MEDICAL CENTER (“RMC”) (CONTINUED)
The Company has agreed to purchase a new Gamma Knife for $2,136,000 to replace the existing equipment. At December 31, 2004 the Company paid the Gamma Knife manufacturer progress payments of $1,282,000 representing 60 percent of its agreed upon purchase price. The Company expects to complete the installation and begin operations in April 2005.
[2] Ground lease agreement:
USN constructed a facility in Kansas City, Missouri on property which the Company leases from RMC. The lease term is for a period of 21 years commencing September 1994. The lease provides for rent at $3,600 per annum. The terms of the lease include escalation clauses for increases in certain operating expenses and for payment of real estate taxes and utilities. Title to all improvements upon the land vests in RMC.
NOTE C - AGREEMENT WITH NEW YORK UNIVERSITY ON BEHALF OF NEW YORK UNIVERSITY MEDICAL CENTER (“NYU”)
During November 1996, USN entered into a neuroradiosurgery equipment agreement (“NYU agreement”) with NYU for a period of seven years (“the term”), with an option for NYU to extend the term for successive three-year periods or to purchase the Gamma Knife equipment at an appraised market value price. USN may negotiate the purchase price and upon failure of the parties to agree may request that the facility be closed. All costs associated with closing and restoring the facility to its original condition 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 $1,250,000, $995,000 and $1,166,000 for the years ended December 31, 2004, 2003 and 2002, 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 December 2004 and now expires June 2010. In addition, the fee structure under the amendment has changed, effective December 1, 2004, to provide for a payment to USN of a flat fee for each patient procedure performed.
NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE
USN acquired its first Gamma Knife (Knife 1) from Elekta Instruments (Elekta) for $2,900,000 under a capital lease. The Company refinanced the lease with DVI Financial Services, Inc. (DVI) under a 39-month capital lease with an implicit interest rate of approximately 10.4%. The lease obligation has been satisfied.
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. The lease obligation has been satisfied.
During 2000, USN entered into two, 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. These loans have been repaid.
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. The lease obligation has been satisfied.
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE (CONTINUED)
During May 2003, USN entered into a forty-month agreement with DVI in the amount of $137,000. The loan bears interest at 9.208% per annum and is collateralized by the Gamma Knife at RMC. This loan has been repaid.
On May 22, 2001, USN entered into a forty-month loan agreement with DVI or its successor in the amount of $200,000. The loan bears interest at 9.479% and is collateralized by the Gamma Knife at RMC.
In August 2003, USN commenced payment on a $750,000 lease for the NYU cobalt reload, which 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. The Company released the escrowed amounts to DVI or its successor in payment of all loan and lease obligations through March 15, 2004 and 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. In April 2004, the Company refinanced the lease for an amount of $728,000 which was 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. The agreement with SMT Leasing requires 36 monthly payments of $23,107, bears interest at 8.883% and is collateralized by the Gamma Knife at NYU.
In 2004, the Company has purchased a replacement Gamma Knife (Knife 3) at the RMC site and has financed this purchase with a capital lease arrangement with SMT Leasing. The lease agreement provides that any progress payments made to the Gamma Knife manufacturer bear interest at the 60 day U.S. Treasury note rate, with interest only payments every 30 days until installation is completed and accepted. Upon equipment acceptance, the lease obligation repayment begins. Such lease terms require 72 monthly payments of $37,869, at an implicit interest rate of 8.4%.
The obligations under the capital leases and loans payable are as follows:
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE (CONTINUED)
Future payments as of December 31, 2004 on the equipment leases and loans are as follows:
The above schedule of minimum lease payments only provides for repayment of the RMC Gamma Knife progress payments funded by SMT Leasing through December 31, 2004. When fully funded, such minimum rentals will increase by approximately $1,890,000.
The Company’s Gamma Knives are held under capital leases and amortization is included in depreciation expense.
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 the year ended December 31, 2002.
NOTE F - CONCENTRATIONS
For the years ended December 31, 2004, 2003 and 2002, the Company derived all of its patient revenue from two hospitals. These two hospitals also accounted for 100% of the accounts receivable at December 31, 2004 and 2003.
The Company has been dependent on one manufacturer who sells, supplies and services the Gamma Knife.
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE G - TAXES The components of the income tax provision are as follows:
A reconciliation of the tax provision (benefit) calculated at the statutory federal income tax rate with amounts reported follows:
Items which give rise to deferred tax assets and liabilities are as follows:
(1) 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.
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE H - LITIGATION The Company is involved in certain claims and legal actions from time to time arising in the ordinary course of business. In the opinion of management, the ultimate disposition of any such matters has not, and is not expected to, have a material adverse effect on the financial position of the Company.
NOTE I - COMMITMENTS AND CONTINGENCIES
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, 2004, the annual future minimum rental payments under the operating lease and the ground lease referred to in Note B(2) are as follows:
Rent expense was approximately $41,000, $36,000 and $36,000 for the years ended December 31, 2004, 2003, and 2002, respectively.
Gamma Knives: The Company has entered into a contract to purchase a new Gamma Knife for approximately $2,136,000 to replace the existing equipment at the RMC site. Additionally, the Company has obtained lease financing in connection with its purchase of the Gamma knife and has received advances under this lease (used to fund progress payments) of $1,282,000 at December 31, 2004. Additional advances of $854,000 will be required to fully fund the purchase of the new Gamma Knife equipment.
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.
Product Liability:
Although the Company does not directly provide medical services, it has obtained professional medical liability insurance, and has general liability insurance as well. The Company’s professional medical liability and general liability policies have limits of $2 million each and the Company also has an excess coverage policy providing $8 million of insurance coverage. The Company believes that its insurance is adequate for providing treatment facilities and non-medical services, although there can be no assurance that the coverage limits of such insurance will be adequate or that coverage will not be reduced or become unavailable in the future.
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
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 2004, 2003 and 2002 were approximately $61,000, $45,000 and $33,000, respectively.
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, 2004, 2003 and 2002 were $300,000, $300,000 and $300,000, respectively.
[3] During the year ended December 31, 2002, the Company hired a family member of an officer for computer consulting services. Such consulting expense amounted to $4,000.
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. Through December 31, 2004, the Company had repurchased 454,500 shares at a cost of $32,000, of which 250,500 shares were retired in 2001 and 204,000 shares were retired in 2004.
NOTE M - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations: