SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission file number
September 30, 1999 0-26575
U.S. NEUROSURGICAL, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 52-1842411
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
2400 Research Blvd, Suite 325, Rockville, Maryland 20850
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 208-8998
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |_| NO |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 3, 1999
----- -------------------------------
Common Stock, $.01 par value 7,316,685 Shares
<PAGE>
PART I
FINANCIAL INFORMATION
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 702,000 $ 21,000
Accounts receivable 425,000 238,000
Other current assets 30,000 27,000
----------- -----------
Total current assets 1,157,000 366,000
----------- -----------
Furniture and Equipment (net of accumulated
depreciation of $19,000 in 1999) 49,000 --
Gamma Knife (net of accumulated depreciation of
$3,253,000 in 1999 and $2,560,000 in 1998) 3,213,000 3,906,000
Leasehold improvements (net of accumulated
amortization of $543,000 in 1999 and $395,000 in 1998) 1,299,000 1,447,000
----------- -----------
Total property and equipment 4,561,000 5,353,000
----------- -----------
Cash held in escrow 95,000 92,000
Deferred tax asset 80,000 80,000
Other assets 15,000 --
TOTAL $ 5,908,000 $ 5,811,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 382,000 $ 66,000
Accrued litigation settlement 100,000 200,000
Obligations under capital lease
and loans payable- current portion 1,276,000 1,423,000
Due to GHS, Inc. -- 1,651,000
----------- -----------
Total current liabilities 1,758,000 3,340,000
Accrued litigation settlement 350,000 450,000
Other long term debt 300,000 --
Deferred tax liability 340,000 270,000
Obligations under capital lease and loans payable
Net of current portion 1,895,000 2,794,000
----------- -----------
4,643,000 6,854,000
----------- -----------
Stockholders' equity:
Common stock 73,000 --
Additional paid-in capital 2,789,000 734,000
Accumulated deficit (1,597,000) (1,777,000)
----------- -----------
Total stockholders' equity (deficiency) 1,265,000 (1,043,000)
----------- -----------
TOTAL $ 5,908,000 $ 5,811,000
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
2
<PAGE>
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
-------------
1999 1998
---- ----
Revenue:
Patient Revenue $ 808,000 $ 472,000
----------- -----------
Expenses:
Patient Expenses 298,000 316,000
Selling, General and Administrative 339,000 246,000
----------- -----------
Total 637,000 562,000
----------- -----------
Operating Income (loss) 171,000 (90,000)
Interest expense (95,000) (135,000)
Interest income 6,000 1,000
----------- -----------
Income (loss) before income taxes 82,000 (224,000)
Income tax (benefit) provision 29,000 (74,000)
----------- -----------
Net Income (loss) $ 53,000 $ (150,000)
=========== ===========
Proforma basic and diluted income (loss) per share $ .01 $ (.02)
=========== ===========
Proforma weighted average shares outstanding 7,182,256 6,979,160
----------- -----------
The accompanying notes to financial statements are an integral part hereof.
3
<PAGE>
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
Revenue:
Patient Revenue $ 2,503,000 $ 1,736,000
----------- -----------
Expenses:
Patient Expenses 957,000 943,000
Selling, General and Administrative 950,000 778,000
----------- -----------
Total 1,907,000 1,721,000
----------- -----------
Operating Income (loss) 596,000 15,000
Interest expense (318,000) (430,000)
Interest income 12,000 3,000
----------- -----------
Income (loss) before income taxes 290,000 (412,000)
Income tax (benefit) provision 110,000 (136,000)
----------- -----------
Net Income (loss) $ 180,000 $ (276,000)
=========== ===========
Proforma basic and diluted income (loss) per share $ .02 $ (.04)
=========== ===========
Proforma weighted average shares outstanding 7,182,256 6,979,160
----------- -----------
The accompanying notes to financial statements are an integral part hereof.
4
<PAGE>
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ 180,000 $ (276,000)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization: 845,000 841,000
Changes in operating assets and liabilities:
(Increase) in cash held in escrow (3,000) (3,000)
(Increase) decrease in receivables (187,000) 53,000
(Increase) in other assets (18,000) --
Increase in accounts payable and accrued expenses 316,000 155,000
Deferred tax benefit 70,000 --
Increase (decrease) in due to GHS, Inc -- 159,000
----------- -----------
Net cash provided by operating activities 1,203,000 929,000
----------- -----------
Cash flows from investing activities :
Cost Incurred with Leasehold improvements -- (21,000)
----------- -----------
Net cash provided by (used in) investing activities -- (21,000)
Cash flows from financing activities:
Cash received from GHS, Inc. 525,000 --
Payment of capital lease obligations (1,047,000) (968,000)
----------- -----------
Net cash (used in) financing activities (522,000) (968,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents 681,000 (60,000)
Cash and cash equivalents - beginning of period 21,000 60,000
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 702,000 $ --
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for
Interest 318,000 430,000
Income Taxes 7,000 --
Contribution of amount formerly due to GHS, Inc. to capital 2,078,000 --
Contribution of fixed assets of GHS, Inc. 51,000 --
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
5
<PAGE>
GHS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Recent Events
On September 16, 1999, GHS, Inc. ("GHS") distributed to holders of GHS
common stock GHS's entire interest in its wholly-owned subsidiary, U.S.
NeuroSurgical, Inc. ("USN"), in a spinoff transaction. The disposition was
effected by distributing one share of USN common stock for each share of common
Stock owned by stockholders of GHS on September 8, 1999 (the "Spinoff"),
resulting in the issuance of 7,316,685 aggregate shares of USN common stock. On
September 9, 1999, GHS distributed to its stockholders an Information Statement
dated September 8, 1999 regarding the Spinoff. Such Information Statement is
included as an exhibit to USN's Form 10 Registration Statement filed with the
Securities and Exchange Commission ("SEC") on August 25, 1999. The Spinoff is
also described in GHS's Form 8-K filed with the SEC on September 30, 1999. USN
is now a separate company no longer owned in any way by GHS. USN continues to
own and operate two stereotactic radiosurgery centers using Gamma Knife
technology. GHS has changed the focus of its business to an Internet initiative
including a plan for an online learning network to focus on personal and
professional improvement.
Note A - Basis of Preparation
The accompanying financial statements at September 30, 1999, and for the
three and nine months ended September 30, 1999 and 1998, are unaudited. However,
in the opinion of management, such statements include all adjustments necessary
for a fair statement of the information presented therein. The balance sheet at
December 31, 1998 has been derived from the audited financial statements at that
date appearing in the Company's Form 10 Registration Statement filed with the
SEC on August 25, 1999.
Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to quarterly reports on Form 10-Q, the accompanying
financial statements and these notes do not include all disclosures required by
generally accepted accounting principles for complete financial statements.
Accordingly, these statements should be read in conjunction with the Company's
most recent annual financial statements.
Results of operations for interim periods are not necessarily indicative
of those to be achieved for full fiscal years.
Note B - Proforma net loss per share
Proforma net loss per share is computed assuming that the spinoff had
taken place at the beginning of the respective periods.
6
<PAGE>
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND
ANALYSIS OF OPERATIONS
AND FINANCIAL CONDITION
The following discussion and analysis provides information, which the Company's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere herein.
Third Quarter 1999 Compared to Third Quarter 1998 and Nine Months Ended
September 30, 1999 Compared to Nine Months Ended September 30, 1998
Results of Operations
Patient revenue increased 71% to $808,000 in the quarter ended September
30, 1999 from $472,000 for the quarter ended September 30, 1998. The increase is
due to an increase in patient treatments as well as increased reimbursements.
Patient expenses decreased 6% to $298,000 from $316,000 a year earlier. The
decrease was due to equipment upgrades in the previous year. Selling, general
and administrative expense increased 38% to $339,000 from $246,000 for the
quarter ended September 30 a year ago. The increase was due to an increase in
professional fees related to the spin off. Interest expense decreased 30% to
$95,000 from $135,000 in the same period a year earlier. The decrease was due to
increased principal payments on USN's Gamma Knife capital leases. For the
quarter ended September 30 1999, income from operations was $53,000 as compared
to a loss of $150,000 for the same period a year earlier.
For the nine months ended September 30, revenue increased 44% to
$2,503,000 from $1,736,000 in the same period a year earlier. The increase is
due to an increase in patient treatments as well as increased reimbursements.
The increases have been mainly from the RMC site in Kansas City. The Company
continues to train doctors from the NYU site, but the revenue generated by the
facility has been below the Company's expectations. In addition, NYU has been
behind on their payments for patient treatments. The Board of Directors is
considering all options to rectify the situation. Patient expenses increased to
$957,000 in 1999 from $943,000 in the same period in 1998. The increase was due
to increased salaries. Selling, general and administrative expenses increased
22% to $950,000 as compared to $778,000 in the same period a year earlier. The
increase was due to increased salaries and office costs in 1999 and professional
fees related to the spin off. Interest expense decreased 26% to $318,000 from
$430,000 in the same period a year ago due to paydown of principal on the Gamma
Knife capital leases. Income from operations was $180,000 for the nine months
ended September 30, as compared to a loss of $276,000 for the nine months ended
September 30, 1998.
Liquidity and Capital Resources
At September 30, 1999 the Company had a working capital deficit of
$601,000 as compared to a deficit of $2,974,000 at December 31, 1998. The
decrease is primarily due
7
<PAGE>
to the contribution to USN capital by GHS of GHS's receivable from the Company.
Cash and cash equivalents at September 30, 1999 were $702,000 as compared with
$21,000 at December 31, 1998. The increase is a result of the cash contribution
from GHS resulting from the USN spinoff on September 16, 1999.
Net cash provided by operating activities was $1,203,000 for the nine
months ended September 30, 1999 as compared with $929,000 for the same period, a
year earlier. Depreciation and amortization was $845,000 for the nine month
period ended September 30, 1999 and was 841,000 in the 1998 period. There was an
increase in receivables of $187,000 during the nine months ended September 30,
1999.
Payables and accrued expenses increased $316,000 for the nine months ended
September 30, 1999 as compared to an increase of $155,000 for the same period in
1998.
Net cash used in financing activities was $522,000 for the nine months
ended September 30, 1999 as compared to $968,000 for the same period a year ago.
The Company paid $1,047,000 for the nine months ended September 30, 1999 towards
its capital lease obligations as compared to $968,000 in the same period in
1998. USN received a $525,000 contribution from GHS in 1999.
Year 2000 Disclosure
USN is preparing for the impact of the arrival of the Year 2000 on its
business, as well on the businesses of its customers, supplier and business
partners. The "Year 2000 Problem" is a term used to describe the problems
created by systems that are unable to accurately interpret dates after December
31, 1999. These problems are derived predominately from the fact that certain
computer hardware and many software programs historically recorded a date's
"year" in a two-digit format (i.e., "98" for 1998) and therefore may recognize
the year "00" as 1900 instead of the Year 2000. The Year 2000 Problem creates
potential risks for USN, including the inability to recognize or properly treat
dates occurring on or after January 1, 2000, which may result in computer
systems failures or miscalculations of critical financial or operational
information as well as failures of equipment controlling date-sensitive
microprocessors influencing patient care.
In addition to internal systems, USN relies on third parties in operating
its business. Such third parties include (1) vendors who supply software,
hardware and other equipment to USN, (2) fiscal intermediaries that process
claims and payments on behalf of the various payors, insurance companies, HMO's
and other private payors, (3) utilities which provide electricity, water,
natural gas and telephone services and (4) vendors of medical supplies used in
patient care.
USN began formulating a plan in 1998 to address the Year 2000 Problem and
to ensure that all relevant systems had been subject to a full Year 2000 review
and, if necessary, remediation, replacement or upgrade. Under the plan, USN has
focused on (i) internal financial, billing and medical software and equipment
and (ii) the Year 2000 compliance of all third party suppliers and fiscal
intermediaries doing business with USN. In connection with its Year 2000
compliance activities, USN has contacted outside vendors and intermediaries with
which USN has material relationships and engaged in discussions which will
continue throughout 1999 in furtherance of USN's stated goal of minimizing any
adverse impact related to the Year 2000 Problem.
USN is in the process of completing its review of all equipment in
operation at USN's Gamma Knife centers. Each piece of equipment in operation has
computer systems
8
<PAGE>
and applications, and in many cases, embedded computer processors. USN is in
communication with Elekta Instruments, Inc., the manufacturer of such equipment.
As part of USN's regular maintenance agreement with Elekta, the Gamma Knife
equipment at the RMC center in Kansas City has already been upgraded to be fully
Year 2000 compliant and the Gamma Knife equipment at the NYU center in New York
City will be similarly upgraded to become Year 2000 compliant. Based upon its
communication with Elekta, USN expects Elekta to complete the upgrade at the NYU
facility by the end of November 1999. The installation of such upgrades by
Elekta includes related testing to ensure Year 2000 compliance. Because such
upgrades are part of its normal maintenance agreement with Elekta, USN does not
expect to incur any additional costs in connection with these upgrades.
USN has completed its assessment of all material financial and billing
computer systems. In connection with this review, USN has determined that its
financial accounting and billing systems are Year 2000 compliant as a result of
upgrades already received from the vendors of such software and installed by
USN. The costs and expenses incurred or expected to be incurred relating to Year
2000 compliance for these systems are not expected to be material.
USN estimates that costs and expenses associated with completing its
outlined Year 2000 compliance plan will not be material. USN presently believes
that it will substantially complete its internal Year 2000 compliance program
prior to January 1, 2000, and that there should be no material adverse impact at
such time related to Year 2000 Problems associated with USN's equipment, systems
or software. Based on communications with its vendors and suppliers, USN also
believes that each third party or intermediary with 26 30 whom USN has a
material relationship is currently Year 2000 compliant or scheduled to be Year
2000 compliant by January 1, 2000.
Despite USN's best efforts, there can be no assurance that (i) USN's
assessments regarding the Year 2000 Problem are correct; (ii) USN will be able
to successfully complete its Year 2000 review and implement such upgrades and/or
remediation as is necessary or (iii) third parties or suppliers with whom USN
does business will avoid Year 2000 problems which might adversely affect USN's
business or operations. While USN is developing contingency plans to address
such failures or unexpected problems (such plans to include identification of
alternative suppliers or intermediaries), there can be no assurance that such
contingency plans will be adequate to resolve these problems.
The Year 2000 Problem involves risk to USN. USN believes today that the
likely worst case scenario regarding the Year 2000 Problem will involve (1)
minor malfunctions in clinical computer software and hardware at the Gamma Knife
centers operated by USN, (2) temporary disruptions in delivery of medical
supplies to the Gamma Knife centers operated by USN and (3) temporary
disruptions in payments from third party payors, such as insurance companies.
USN expects such events, should they occur in whole or in part, will result in
increased expense as the affected facilities access alternative suppliers and
increase staffing to assure adequate patient care.
The foregoing assessment is based on information currently available to
USN. USN will revise its assessment as it implements its Year 2000 compliance
plan. USN can provide no assurances that applications and equipment believed to
be Year 2000 compliant will not experience difficulties or USN will not
experience difficulties
9
<PAGE>
obtaining resources needed to make modifications to or replace USN's affected
systems and equipment. Failure by USN or third parties, on which it relies to
resolve Year 2000 issues, could have a material adverse effect on USN's results
of operations and its ability to provide health care services as described more
fully herein.
Disclosure Regarding Forward Looking Statements
Statements contained in this Information Statement that are not historical facts
may be deemed to be forward-looking statements. 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 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 USN's filings with the
Securities and Exchange Commission (SEC) and USN's public announcements, copies
of which are available from the SEC or from the Company upon request.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. NEUROSURGICAL, INC.
Date November 10, 1999 By /s/ Alan Gold
----------------- -----------------------
Alan Gold
Director and President
Chief Executive Officer
Date November 10, 1999 By /s/ Howard Grunfeld
----------------- -----------------------
Howard Grunfeld
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from US
Neurosurgical 10Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 702,000
<SECURITIES> 0
<RECEIVABLES> 425,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,157,000
<PP&E> 8,308,000
<DEPRECIATION> 3,796,000
<TOTAL-ASSETS> 5,908,000
<CURRENT-LIABILITIES> 1,758,000
<BONDS> 3,171,000
0
0
<COMMON> 73,000
<OTHER-SE> 1,265,000
<TOTAL-LIABILITY-AND-EQUITY> 5,908,000
<SALES> 2,503,000
<TOTAL-REVENUES> 2,503,000
<CGS> 957,000
<TOTAL-COSTS> 1,907,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 318,000
<INCOME-PRETAX> 290,000
<INCOME-TAX> 110,000
<INCOME-CONTINUING> 180,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 180,000
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
