U.S. NeuroSurgical Holdings, Inc. - Quarter Report: 2008 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from to .

Commission file number: 0-15586

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)

(301) 208-8998
(Registrant’s telephone number)

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 Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3. Quantitative and Qualitative Disclosures About Market Risk	12
Item 4T. Controls and Procedures	12
PART II - OTHER INFORMATION	15
Item 1. Legal Proceedings	15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3. Defaults Upon Senior Securities	15
Item 4. Submission of Matters to a Vote of Security Holders	15
Item 5. Other Information	16
Item 6. Exhibits	16
SIGNATURES	17

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

PART 1 - FINANCIAL INFORMATION
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS


	September 30,			December 31,
	2008			2007

ASSETS

Current assets:
Cash and cash equivalents	$	593,000		$	372,000
Accounts receivable (net of allowance for doubtful accounts of $36,000 in 2008 and 2007)		50,000			96,000
Accounts receivable-stockholder		62,000			45,000
Other current assets		62,000			52,000

Total current assets		767,000			565,000


Gamma Knife (net of accumulated depreciation of $5,667,000 in 2008 and $5,242,000 in 2007)		1,333,000			1,758,000
Leasehold improvements (net of accumulated amortization of $1,801,000 in 2008 and $1,771,000 in 2007)		240,000			266,000

Total property and equipment		1,573,000			2,024,000


Cash held in escrow		52,000			52,000


TOTAL	$	2,392,000		$	2,641,000


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued expenses	$	80,000		$	69,000
Obligations under capital lease and loans payable- current portion		464,000			434,000

Total current liabilities		544,000			503,000

Obligations under capital lease and loans payable-net of current portion		824,000			1,177,000
Asset retirement obligations		200,000			200,000


Total liabilities		1,568,000			1,880,000

Stockholders’ equity:
Common stock		77,000			77,000
Additional paid-in capital		3,097,000			3,097,000
Accumulated deficit		(2,350,000	)		(2,413,000	)

Total stockholders’ equity		824,000			761,000


TOTAL	$	2,392,000		$	2,641,000

The accompanying notes to financial statements are an integral part hereof.

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended September 30,

	2008			2007


Revenue:
Patient revenue	$	497,000		$	376,000


Expenses:
Patient expenses		148,000			132,000
Selling, general and administrative		239,000			182,000


Total		387,000			314,000


Operating income		110,000			62,000

Interest expense		(31,000	)		(41,000	)
Interest income		3,000			3,000
Other income		—			3,000


Income before income taxes		82,000			27,000
Income tax expense		—			(1,000	)


Net income	$	82,000		$	26,000


Basic and diluted net income per share	$	0.01		$	0.00


Weighted average common shares outstanding		7,697,185			7,697,185

The accompanying notes to financial statements are an integral part hereof.

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS


	Nine Months Ended September 30,

	2008			2007


Revenue:
Patient revenue	$	1,422,000		$	1,230,000


Expenses:
Patient expenses		525,000			597,000
Selling, general and administrative		745,000			815,000


Total		1,270,000			1,412,000


Operating income (loss)		152,000			(182,000	)

Interest expense		(99,000	)		(130,000	)
Interest income		9,000			9,000
Other income		—			3,000


Income (loss) before income taxes		62,000			(300,000	)
Income tax expense		—			(1,000	)


Net income (loss)	$	62,000		$	(301,000	)


Basic and diluted net income (loss) per share	$	0.01		$	(0.04	)


Weighted average common shares outstanding		7,697,185			7,697,185

The accompanying notes to financial statements are an integral part hereof.

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30,

	2008			2007

Cash flows from operating activities:
Income (loss) from continuing operations	$	62,000		$	(301,000	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization		452,000			480,000
Deferred income taxes
Changes in:
Accounts receivable		29,000			126,000
Other current assets		(10,000	)		11,000
Accounts payable and accrued expenses		11,000			(3,000	)


Net cash provided by operating activities		544,000			313,000


Cash flows from investing activities:
Investment in unconsolidated entities		—			(19,000	)
Increase in cash held in escrow		—			62,000


Net cash (used in) provided by investing activities		—			43,000


Cash flows from financing activities:
Repayment of capital lease obligations and loans payable		(323,000	)		(365,000	)


Net cash used in financing activities		(323,000	)		(365,000	)


Net increase (decrease) in cash and cash equivalents		221,000			(9,000	)

Cash and cash equivalents - beginning of period		372,000			297,000


CASH AND CASH EQUIVALENTS - END OF PERIOD	$	593,000		$	288,000


Supplemental disclosures of cash flow information:
Cash paid for
Interest	$	99,000		$	130,000

The accompanying notes to financial statements are an integral part hereof.

U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS

Note A - Basis of Preparation

The accompanying financial statements at September 30, 2008, and for the three months and nine months ended September 30, 2008 and 2007, 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, 2007 has been derived from the audited financial statements at that date appearing in the Company’s Annual Report on Form 10-KSB.

Pursuant to accounting requirements of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the accompanying financial statements and notes do not include all disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. Accordingly, these statements should be read in conjunction with the Company’s most recent annual financial statements.

Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years.

Note B – Uncertainties

In May of 2007, the Company filed a lawsuit against Research Medical Center (“RMC”) in the Circuit Court of Jackson County, Missouri. RMC is the hospital in Kansas City where the Company’s Kansas City center is located and to which USN provides Gamma Knife Services on a cost per treatment basis. The litigation involves the Company’s claims for additional reimbursement from RMC under the Gamma Knife Neuroradiosurgery Equipment Agreement of December 29, 1993 between USN and RMC. On July 3, 2008, following the trial at the Circuit Court, the jury found in favor of USN and assessed damages at $1,919,124. The Circuit Court ordered that judgment be entered in favor of the Company in that amount. The defendant retains the right to request a new trial and a right to appeal the verdict. USN expects that the defendant will pursue those rights, so the prospect for payment of any amounts to the Company remain uncertain. In view of these remaining uncertainties, no amounts with respect to the above damages award have been accrued by the Company.

Primarily due to decreased patient procedures in recent periods at the Kansas City center, the Company has incurred operating losses which have contributed to a substantial reduction in its working capital. The Company experienced net after tax losses of $335,000 for the year ended December 31, 2007 and $383,000 for the year ended December 31, 2006.

The Company’s management is taking steps to improve profitability and overcome the negative effects of recent reductions in working capital. In recent quarters, 7 the Company has been successful in reducing maintenance expenses and insurance costs. Working capital increased to $223,000 at September 30, 2008 and the Company reported net income of $62,000 for the fist nine months of 2008.

While the Company can not be certain of the effects of these and other measures on long term profitability, management believes such changes will improve its liquidity and will be sufficient to preserve adequate amounts of cash to meet the Company’s needs for operating expenses and debt (and lease) service requirements for the next year.

Note C – New Gamma Knife Center

During 2007, the Company undertook the formation of a new Gamma Knife center at San Antonio Community Hospital in Upland, California. The Company will participate in the ownership and operation of the center through its wholly-owned subsidiary, USN Corona, Inc. (“USNC”). Corona Gamma Knife, LLC (“CGK”) is party to a 14-year agreement with the San Antonio Community Hospital to renovate space in the hospital and install and operate a Leksell Perfexion Gamma Knife. CGK will lease the Gamma Knife from Neuropartners LLC, which will purchase the Gamma Knife equipment. USNC is a 27% owner of CGK and a 20% owner of Neuropartners LLC. Construction of the project is underway and the Company expects to open the center in December of 2008. The project has been funded principally by outside investors, and USN’s investment to date in these two entities has been minimal.

Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations.

Critical Accounting Policies

The condensed financial statements of U.S. Neurosurgical, Inc. (“USN” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America. As such, some accounting policies have a significant impact on amounts reported in the financial statements. A summary of those significant accounting policies can be found in our 2007 Annual Report on Form 10-KSB, filed, in the Notes to the Financial Statements, Note B. In particular, judgment is used in areas such as determining the allowance for doubtful accounts and asset impairments.

The following discussion and analysis provides information which the Company’s management believes is relevant to an assessment and understanding of the Company’s results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes there to appearing elsewhere herein.

Results of Operation

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

Patient revenue increased 32% to $497,000 in the quarter ended September 30, 2008 from $376,000 for the quarter ended September 30, 2007. This increase in patient revenue was largely due to the increase in the number of procedures performed at the Company’s New York center during the third quarter of 2008 as compared to the same period a year ago. Patient expenses increased 12% to $148,000 for the third quarter of 2008 compared to $132,000 in the same period a year ago. Selling, general and administrative expense increased 31% to $239,000 for the quarter ended September 30, 2008 from $182,000 in the comparable period in 2007. This relative increase over the 2007 period was largely due to the fact that the Company’s Chief Executive Officer agreed to take a salary reduction in the later part of 2007 in view of the losses that the Company was experiencing at the time. Interest expense decreased 24% to $31,000 from $41,000 in the same period a year earlier. This was due primarily to the fact that the Gamma Knife assets at the New York center were not under a financing arrangement during the third quarter of 2008. For the quarter ended September 30, 2008, the Company reported net income of $82,000 as compared to net income of $26,000 for the same period a year earlier, an increase of 215%. This increase in net income resulted primarily from the increase in procedures at the New York center compared to the prior period as noted above.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

For the nine months ended September 30, 2008, patient revenue increased 16% to $1,422,000 from $1,230,000 for the same period a year earlier. This increase was due to the increase in overall patient procedures at both the New York and Kansas City centers for the period in question. Patient expenses for the nine months ended September 30, 2008 decreased 12% to $525,000 from $597,000 in the same period a year ago. Even though patient procedures increased for the period, the cost of owning, operating and maintaining the Gamma Knives are generally fixed, and this period-over-period decrease in patient expenses was due largely to a restructuring of the maintenance arrangements for the Company’s Gamma Knives which took place in mid-2007. Selling, general and administrative expense decreased 9% to $745,000 for the nine months ended September 30, 2008 from $815,000 in the comparable period a year ago. This decrease was due to decreases in amortization expense and insurance costs for the period in question. Interest expense in the first nine months of 2008 decreased 24% to $99,000 from the $130,000 reported in the same period a year ago. This was due primarily to the fact that the Gamma Knife assets at the New York center were not under a financing arrangement at any point during the first nine months of 2008. For the nine months ended September 30, 2008, the Company reported net income of $62,000 as compared to a net loss of $300,000 for the same period a year earlier. This reduction in net loss resulted from the increase in patient procedures for the first nine months of 2008 as compared to the prior period, as well as the expense reductions discussed above.

Liquidity and Capital Resources

At June 30, 2008 the Company had working capital of $223,000 as compared to working capital of $62,000 at December 31, 2007. Cash and cash equivalents at June 30, 2008 were $593,000 as compared with $372,000 at December 31, 2007.

Net cash provided by operating activities for the nine months ended September 30, 2008 was $544,000 as compared to $313,000 for the same period a year earlier. Depreciation and amortization was $452,000 for the nine months ended September 30, 2008, as compared with $480,000 the first nine months of 2007.

The Company paid $323,000 towards its lease obligations during the nine months ended September 30, 2008 as compared to $365,000 in the same period a year ago. With our current cash position, and continued collection on our accounts receivable, the Company believes that its cash position will be sufficient to support operations for at least the next twelve months.

Risk Factors

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The following factors, as well as the factors

listed under the caption “Risk Factors” in our Form 10-KSB for the fiscal year ended December 31, 2007, have affected or could affect our actual results and could cause such results to differ materially from those expressed in any forward-looking statements made by us. Investors should carefully consider these risks and speculative factors inherent in and affecting our business and an investment in our common stock.

Operating Losses. We have experienced significant operating losses in recent periods and may continue to do so in the future. We reported a net loss of $335,000 for the year ended December 31, 2007. While the Company is taking steps to improve profitability, and it did operate with a slight profit the first nine month of 2008, it is possible that the Company will experience material losses in the future periods.

Availability of Working Capital. To date, we have earned sufficient income from operations to fund periodic operating losses and support efforts to pursue new Gamma Knife centers. If losses continue, we will be required to seek additional capital to support continued operations and the development of new centers, but we cannot assure you, however, that we will be able to raise such additional capital as and when required.

Disclosure Regarding Forward Looking Statements

The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This document contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues and cash flow. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes,” “will be,” “will continue,” “will likely result,” and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify such forward-looking statements. Those forward-looking statements are based on management’s present expectations about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the Company is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of such changes, new information, future events or otherwise.

The Company operates in a highly competitive and rapidly changing environment and business segments that are dependent on our ability to: achieve profitability; increase revenues; sustain our current level of operation; introduce on a timely basis new products; maintain satisfactory relations with our customers; attract and retain key personnel; maintain and expand our strategic alliances; and protect our know-how. The Company’s actual results could differ materially from management’s expectations because of changes in such factors. New risk factors can arise and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Investors should also be aware that while the Company might, from time to time, communicate with securities analysts, it is against the Company’s policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, investors should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts or others contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

In addition, the Company’s overall financial strategy, including growth in operations, maintaining financial ratios and strengthening the balance sheet, could be adversely affected by increased interest rates, failure to meet earnings expectations, significant acquisitions or other transactions, economic slowdowns and changes in the Company’s plans, strategies and intentions.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We do realize that we are a very small company and as a small company with only the officers and directors participating in the day to day management, with the ability to override controls, each officer and director has multiple positions and responsibilities that would normally be distributed among several employees in larger organizations with adequate segregation of duties to ensure the appropriate checks and balances. Because the Company does not currently have a separate chief financial officer, the Chief Executive Officer performs these functions with the support of one of the Company’s outside directors who assists in the reporting and disclosure process (the “Lead Director”).

Our management evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the

period covered by this report. Based upon that evaluation (including an evaluation of the updated procedures described above) the Company’s Chief Executive Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report for the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, to be recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:


	(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

	(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

	(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

Changes in Internal Control over Financial Reporting

As described in Item 8A(T) of our Form 10-KSB for the fiscal year ended December 31, 2007, management has identified the following material weaknesses in the Company’s internal control over financial reporting as of December 31, 2007: (1) the Company did not maintain a sufficient complement of personnel with the appropriate level of knowledge, experience and training in the application of GAAP and in internal controls over financial reporting commensurate with its financial reporting requirements, (2) the Company did not maintain effective controls over the determination and reporting of its income tax payable, deferred income tax assets and liabilities, the related valuation allowances and income tax expenses. Specifically, effective controls were not designed and in place to ensure that management maintained the appropriate level of personnel resources with an adequate experience and expertise in the area of GAAP accounting for

income taxes. These material weaknesses contributed to control deficiencies, as well as audit adjustments to the 2007 annual consolidated financial statements in the financial reporting and close process. As described in Item 8A(T) of our Form 10-KSB for the fiscal year ended December 31, 2007, management has taken steps to remediate the control deficiencies noted above through the use of additional outside contractors with the requisite experience and expertise in GAAP accounting.

Other than as described above, there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

During 2007, USN instituted a lawsuit against Midwest Division – RMC LLC, in the Circuit Court of Jackson County, Missouri seeking damages against the defendant as successor to USN’s agreement with RMC relating to the Kansas City Gamma Knife center. This lawsuit arose out of USN’s agreement with RMC, executed in December 1993. In the course of an audit, USN discovered that the defendant had failed to make proper payments to USN under that agreement. USN sought to recover amounts representing such underpayments.

On July 3, 2008, following the trial at the Circuit Court, the jury found in favor of USN and assessed damages at $1,919,124. The Circuit Court ordered that judgment be entered in favor of the Company in that amount. The defendant retains the right to request a new trial and a right to appeal the verdict. USN expects that the defendant will pursue those rights, so the prospect for payment of any amounts to the Company remain uncertain.

Patients continue to receive treatment at the Kansas City center, but payments for those treatments are being calculated by RMC according to the method that USN has contested, and which is the subject of the lawsuit. Management believes that the only issue is the extent to which USN will benefit through this lawsuit with respect to prior periods.

Although patients continue to be treated in Kansas City, it is not clear how the presence, or the ultimate outcome, of the lawsuit will impact the Company’s working relationship with RMC. RMC is a unit of HCA, Inc., a very large health services organization which has substantially greater resources than are available to USN. Nevertheless, USN has made a substantial investment in Kansas City to build its business and provide quality healthcare to patients in the Kansas City community in reliance on the RMC’s performance under their agreement, and thus USN intends to pursue its rights aggressively in an effort to protect that business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits


31.1	Rule 13a-14(a)/15d-14(a) Certification

32.1	Section 1350 Certifications

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	U.S. Neurosurgical, Inc.
	(Registrant)

Date: November 12, 2008	By:	/s/ Alan Gold

		Alan Gold
		Director, President and Chief Executive Officer and Principal Financial Officer of the Registrant