10-K 1 form10k.htm US NEUROSURGICAL, INC 10-K 12-31-2012 form10k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     .

Commission file number:  0-15586

U.S. NeuroSurgical, Inc.
(Name of small business issuer in its charter)

Delaware
  
52-1842411
(State of other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
     
2400 Research Blvd, Suite 325,
    
Rockville, Maryland
  
20850
(Address of principal executive offices)
  
(Zip Code)

Issuer's telephone number: (301) 208-8998

Securities registered under Section 12(b) of the Act:
  
None
     
Securities registered under Section 12(g) of the Act:
  
Common Stock, par value $.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o     No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o     No x
 
Indicate by check mark whether the issuer (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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x     No  o
 
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
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
 
As of June 29, 2012, the aggregate market value of issuer's Common Stock held by non-affiliates was approximately $568,000, based upon the average closing price as reported on the OTCQB marketplace.

As of March 29, 2013, there were outstanding 7,797,185 shares of the issuer’s Common Stock. $.01 par value.

Documents incorporated by reference:  None
 
 
 
 
 
FORM 10-K

U.S. NeuroSurgical, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2012

 
PART I
  
3
Item 1.
3
Item 1A.   
9
Item 1B.
12
Item 2.
12
Item 3.
13
Item 4.
13
PART II
  
14
Item 5.
14
Item 6.
15
Item 7.
15
Item 7A.
17
Item 8.
18
Item 9.
18
Item 9A.
18
Item 9B.
20
PART III
  
21
Item 10.
21
Item 11.
22
Item 12.
23
Item 13.
24
Item 14.
24
PART IV
  
25
Item 15.
25

 
PART I

Item 1.

U.S. NeuroSurgical, Inc. (“USN” or the “Company”) owns and operates stereotactic radiosurgery centers, utilizing gamma knife technology.  As used herein, unless the context indicates otherwise, the term "Company", "Registrant" and "USN" means U.S. NeuroSurgical, Inc. and its subsidiaries, U.S. NeuroSurgical Physics, Inc. and USN Corona, Inc.  The Company, a Delaware corporation, was formed in July 1993.  Through September 9, 1999, the Company was a wholly owned subsidiary of GHS, Inc. (“GHS”).  Effective  September 17, 1999, GHS distributed its shares of USN to the stockholders of GHS.  The Company's executive offices are located at 2400 Research Boulevard, Suite 325, Rockville, Maryland 20850, and its telephone number is (301) 208-8998.

Disclosure Regarding Forward Looking Statements

Statements contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Investors are cautioned that forward-looking statements are inherently uncertain.  Actual performance and results may differ materially from that projected or suggested herein due to certain risks and uncertainties including, without limitation, the outcome of the Company’s discussions and negotiations regarding the reopening of the gamma knife center at New York University Medical Center, the 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 are included in Item 1A, Risk Factors, and may also be identified from time to time in the Company’s filings with the Securities and Exchange Commission (the “SEC”) and the Company’s public announcements, copies of which are available from the SEC or from the Company upon request.

General

USN, was organized in July 1993 to own and operate stereotactic radiosurgery centers, utilizing gamma knife technology.  USN currently owns and operates one gamma knife center on the premises of New York University Medical Center (“NYU”) in New York, New York.  In January 2009, the Company opened a new center, the Southern California Regional Gamma Knife Center, at the San Antonio Community Hospital (“SACH”) in Upland, California.

Management continues to explore opportunities to organize and participate in additional gamma knife centers.  USN's business strategy is to provide cost-effective approaches that allow hospitals, physicians, and patients access to gamma knife treatment capability, a high capital cost item.  USN provides the gamma knife to medical facilities on a "cost per treatment" basis.  The Company’s business model is to own, or hold an interest in, the gamma knife units, and charge the medical facility, where the unit is housed and maintained, based on utilization.
 

During the fourth quarter of 2007, USN formed a new wholly owned subsidiary, USN Corona, Inc. (“USNC”), to carry investments in Corona Gamma Knife, LLC and Neuro Partners, LLC.  Those subsidiaries were formed to develop and manage the gamma knife center at SACH.

In April 2011, the Company finalized certain transactions and agreements with Midwest Division – RMC, LLC (“RMC”), which owns the property and operates the medical facilities in Kansas City at which one of the Company’s gamma knife centers was located.  The Company sold to RMC the gamma knife radiosurgery equipment, along with related supplies and inventory, located at the Kansas City Center for an aggregate purchase price of $250,000.

USN's principal target market is medical centers in major health care catchment areas that have physicians experienced with and dedicated to the use of the gamma knife.  As it has with its NYU and SACH gamma knife centers, if circumstances support the opening of additional centers, USN would seek cooperative ventures with these facilities.

In October 2012, the Company’s facility at NYU was totally destroyed as a result of flooding from Hurricane Sandy. As of this filing, the Company is in negotiations to reopen the facility.

USN believes that, as of December 31, 2012, there were approximately 131 gamma knife treatment centers in the U.S.

During 2010, USN expanded its market strategy to include opportunities to develop cancer centers featuring radiation therapy.  These centers will utilize linear accelerators with IMRT (Intensity Modulated Radiation Therapy) and IGRT (Image Guided Radiation Therapy) capabilities.  In 2010, the Company formed Florida Oncology Partners, LLC in partnership with local physicians and other investors.  USNC owns a 20% interest in the venture.  The center is located in Miami, Florida and opened in the second quarter of 2011. The Company invested $200,000 in connection with its interest.

In 2011, the Company formed Boca Oncology Partners LLC, in partnership with local physicians and other investors.  USN Corona, Inc., USN’s subsidiary, owns an 11.25% interest in the venture. The center is located in Boca Raton, Florida, and opened in the third quarter of 2012.

The Company is currently exploring other opportunities for the establishment of cancer centers using IMRT and/or IGRT in Florida and other parts of the US.

Gamma Knife Technology

The gamma knife is a unique stereotactic radiosurgical device used to treat brain tumors and other malformations of the brain without invasive surgery.  The gamma knife delivers a single, high dose of ionizing radiation emanating from 201 cobalt-60 sources positioned about a hemispherical, precision machined cavity.  The lesion is first targeted with precision accuracy using advanced imaging and three dimensional treatment planning techniques such as CT Scans, MR Scans, conventional X-rays, or angiography.  Each individual beam is focused on a common target producing an intense concentration of radiation at the target site, destroying the lesion while spreading the entry radiation dose uniformly and harmlessly over the patient's skull.  The mechanical precision at the target site is +/- 0.1mm (1/10 of 1 millimeter).  Because of the steep fall-off in the radiation intensity surrounding the target, the lesion can be destroyed, while sparing the surrounding tissue.
 

The procedure, performed in a single treatment, sharply reduces hospital stay times and eliminates post-surgical bleeding and infection.  When compared with conventional neurosurgery, gamma knife treatment is less expensive.  However, not all patients are candidates for radiosurgery since the decision to use the gamma knife depends on the type, size, and location of the lesion.

Linear Accelerators

A linear particle accelerator (LINAC) is a type of particle accelerator that greatly increases the velocity of charged subatomic particles or ions by subjecting the charged particles to a series of oscillating electric potentials along a linear beamline. LINACs accelerate electrons using a tuned-cavity waveguide, in which the RF (radio frequency) power creates a standing wave. Some LINACs have short, vertically mounted waveguides, while higher energy machines tend to have a horizontal, longer waveguide and a bending magnet to turn the beam vertically towards the patient. Medical LINACs use monoenergetic electron beams between 4 and 25 MeV, giving an X-ray output with a spectrum of energies up to and including the electron energy when the electrons are directed at a high-density (such as tungsten) target. The electrons or X-rays can be used to treat both benign and malignant disease.

The intensity of the radiation in IMRT can be changed during treatment to spare more adjoining normal tissue than is spared during conventional radiation therapy. Because of this an increased dose of radiation can be delivered to the tumor using IMRT. IMRT is a type of conformal radiation, which shapes radiation beams to closely approximate the shape of the tumor.

IGRT is used to help better deliver radiation therapy to cancerous tumors. This is very useful since tumors can move between treatments due to differences in organ filling or movements while breathing. IGRT involves conformal radiation treatment guided by specialized imaging tests, such as CT scans, ultrasound or X-rays. These tests are done in the treatment room just before the patient is to receive his or her daily radiation therapy treatment.

New York Gamma Knife Center

USN opened its New York gamma knife treatment center in July 1997 on the campus of NYU Medical Center.  The Company installed a new Leksell gamma knife, the PERFEXION model, at the NYU Medical Center in March 2009 in replacement of the older gamma knife equipment.  In connection with this upgrade, the Company modified its arrangement with NYU to extend the term for 12 years from March 2009.
 

In October 2012, the Company’s facility at NYU was totally destroyed as a result of flooding from Hurricane Sandy. The gamma knife had to be removed to prevent any cobalt leakage that might occur due to rusting of the equipment. The emergency removal cost was $525,000. The Company paid a lease settlement of the outstanding principal balance only and received from insurance coverage $930,000 above the lease principal payments and emergency removal costs. The Company is in discussions with NYU regarding the future of the Company’s relationship and its long term contract with NYU.  However, there can be no assurance that the Company will be successful in reaching a satisfactory arrangement going forward.  Moreover, if the Company is successful in establishing a continued arrangement for the rebuilt NYU center, it will be at least several months until patients can again be treated at the center.

The Company has a marketing representative to help introduce the gamma knife technology to neurosurgeons in the New York tri-state region.  Pursuant to the facility agreement previously in place with NYU, USN was responsible for the maintenance and insurance for the gamma knife equipment at the NYU facility and was reimbursed for use of the gamma knife based on a fee per procedure performed with the equipment.  NYU provides the medical and technical staff to operate the facility.  NYU pays USN a scheduled fee based on the number of patient procedures performed.  For the years ended December 31, 2012, 2011 and 2010, USN derived revenues from the NYU center of approximately $1,942,000, $2,029,000 and $1,907,000, respectively, as a result of 224, 234 and 222 procedures performed, respectively, during such periods.  Costs associated with closing and restoring the NYU facility to its original condition at the end of the contract term are the responsibility of USN.

The Southern California Regional Gamma Knife Center

During 2007, the Company managed the formation of the Southern California Regional Gamma Knife center at SACH in Upland, California.  The Company participates in the ownership and operation of the center through its wholly-owned subsidiary, USNC.  Corona Gamma Knife, LLC (“CGK”) is party to a 14-year agreement with SACH to renovate space in the hospital and install and operate a Leksell PERFEXION gamma knife.  CGK leased the gamma knife from Neuro Partners LLC, which holds the gamma knife equipment. In addition to returns on its ownership interests, USNC expects to receive fees for management services relating to the facility.

USNC is a 20% owner of Neuro Partners LLC. USNC also owned initially 27% of CGK, but increased its ownership to 44% during 2011 to accommodate a member who desired to transfer his interest.  Subsequently, in the first quarter of 2012, USNC sold a portion of its ownership to a new member, resulting in a decrease in its ownership to 39%.

Construction of the SACH gamma knife center was completed in December 2008 and the first patient was treated in January 2009.  The project has been funded principally by outside investors.  While the Company has led the effort in organizing the business and overseeing the development and operation of the SACH center, its investment to date in the SACH center has been minimal.
 

Sale of Gamma Knife Business and Equipment at Former Kansas City Center
 
In April 2011, the Company finalized certain transactions and agreements with Midwest Division – RMC, LLC (“RMC”), which owns the property and operates the medical facilities in Kansas City at which the Company’s gamma knife center is located.

The Company sold to RMC the gamma knife radiosurgery equipment, along with related supplies and inventory, located at the Kansas City Center for an aggregate purchase price of $250,000.  The Company will, upon request of RMC and at RMC’s cost and expense, assist RMC in replenishing the gamma knife equipment’s radioactive cobalt-60 as is necessary for the proper operation of the gamma knife.

In connection with the sale of the gamma knife equipment described above, the Company and RMC entered into an agreement terminating the gamma knife Neuroradiosurgery Equipment Agreement and the Ground Lease Agreement, each originally entered into between the parties in 1993, and concluded all arrangements between the parties relating to the operation of the gamma knife center and the lease of the premises.  Immediately preceding the termination of these agreements, the Company and RMC satisfied all outstanding obligations between the parties, resulting in a net payment of $385,000 to the Company.  In connection with the agreement, the parties also entered into a mutual release respecting all other outstanding claims and disputes between them relating to the Kansas City center.

The Company agreed with RMC that through September 2015, it will not participate in gamma knife operations in the states of Missouri, Kansas, Nebraska, Iowa and Arkansas.

Future Gamma Knife Centers

USN is currently exploring other opportunities for gamma knife centers and centers that provide related healthcare services located near hospitals throughout the United States.  Discussions regarding such centers is preliminary and there can be no assurance that any such discussions will result in the opening of new centers.

Florida Oncology Partners

During the quarter ended September 30, 2010, the Company participated in the formation of Florida Oncology Partners, LLC (“FOP”) and Florida Oncology Partners RE, LLC (“FOPRE”) (collectively referred to as “Florida Oncology Partners”), which operates a cancer center located in West Kendall (Miami), Florida. The center diagnoses and treats patients utilizing a Varian Rapid Arc linear accelerator and a GE CT scanner. USNC originally invested $200,000 for a 20% interest in Florida Oncology Partners. The remaining 80% is owned by other outside investors. The center opened and treated its first patient in May 2011.  Florida Oncology Partners made several distributions during the year that reduced the Company’s investment significantly.  The Company’s recorded investment in Florida Oncology Partners is $109,000 and $270,000 at December 31, 2012 and 2011, respectively.

In August 2011, the Company advanced $200,000 to FOP working capital purposes, in exchange for a note bearing interest at 10% per annum and due in August 2012. The note (principal) was repaid in May 2012.
 

During 2011, Florida Oncology Partners, LLC entered into a capital lease with Key Bank for approximately $5,600,000. Under the terms of the capital lease, USNC agreed to guarantee 20% of the outstanding lease obligation in the event of default.  The outstanding balance on the lease obligation was $4,917,000 at December 31, 2012.

In June 2012, FOPRE completed the financing agreement to purchase the building that is occupied by FOP.  The amount of the loan was $1,354,275 to be paid at a monthly rate of approximately $8,500 for 120 months with the final payment due on June 15, 2022.

Boca Oncology Partners

During the quarter ended June 30, 2011, the Company participated in the formation of Boca Oncology Partners, LLC (“BOP”), for the purpose of owning and operating a cancer center in Boca Raton, Florida.  In June 2011, Boca Oncology Partners RE, LLC (“BOPRE”), an affiliated entity, purchased a 20% interest in a medical office building in West Boca, Florida in which BOP operates.  BOP occupies approximately 6,000 square feet of the 32,000 square foot building.  The Company’s wholly-owned subsidiary, USNC, invested $225,000 initially and had initially a 22.5% interest in BOP and BOPRE.

In January 2012, an additional investor purchased 50% of the partnership reducing the Company’s ownership to 11.25%.  The Company loaned the proceeds of $56,250 back to BOP under a 5 year note at 7% interest. The remaining 88.75% is owned by other outside investors. In June 2012, BOPRE purchased 3.75% of Boca West IMP from another investor and then sold 31.5% of BOPRE to a new investor. The proceeds of $28,000 were loaned to BOP and USNC’s investment in BOPRE was reduced to 15.4%.  The center opened and treated its first patient in August 2012.

New Strategy for Participation in Cancer Treatment

As a result of the Company’s experiences over the past few years, The Company has expanded its focus to the broader based cancer treatment market.  In order to reduce the risk and broaden its opportunities for profitable growth, the Company, where possible, has been pursuing partnerships with local investors/providers to develop and operate oncology centers that utilize linear accelerators (LINACs) to treat cancers in the whole body.  The Company also continues to evaluate opportunities to also develop additional gamma knife facilities.  FOP, BOP and the Southern California Regional Gamma Knife Center typify this new strategy.

Employees

U.S. NeuroSurgical, Inc. has three full-time employees and relies on consultants for certain services as required from time-to-time.  All of its full-time employees are engaged in sales, marketing and administration.
 

Item 1A.
 
Regulatory Environment

The levels of revenues and profitability of companies involved in the health services industry, such as the Company, may be affected by the continuing efforts of governmental and third party payors to contain or reduce the costs of health care through various means.  Although the Company does not believe that its business activities will be materially affected in the foreseeable future, it is not possible to predict the long term effect of recent and future changes in the regulatory environment, or the responses of federal, state or private payors for healthcare goods and services in response to healthcare proposals or legislation.

In March 2010, significant reforms to the healthcare system were adopted in the form of the Patient Protection and Affordable Care Act (the “PPACA”). The PPACA includes provisions that, among other things, reduce and/or limit Medicare reimbursement to certain providers, require all individuals to have health insurance (with limited exceptions) and impose new and/or increased taxes.  The Company cannot predict the effects these changes may have on its business, and no assurance can be given that any such changes will not have a material adverse effect on the Company.

In addition, the provision of medical services in the United States is dependent on the availability of reimbursement to consumers from third party payors, such as government and private insurance companies.  Although patients are ultimately responsible for services rendered, the Company expects that the majority of its revenues will be derived from reimbursements by third party payors.  Medicare has authorized reimbursement for gamma knife and other forms of cancer treatment.  Over the last several years, such third party payors are increasingly challenging the cost effectiveness of medical products and services and taking other cost containment measures.  Therefore, although treatment costs using the gamma knife compare favorably to traditional invasive brain surgery, it is unclear how this trend among third party payors and future regulatory reforms affecting governmental reimbursement will affect procedures in the higher end of the cost scale.

In the future, the Company may establish additional gamma knife or other types of cancer treatment centers.  Completion of future centers would require approvals and arrangements with hospitals, health care organizations, or other third parties, including certain regulatory authorities.  The Food and Drug Administration has issued the requisite pre-market approval for the gamma knife utilized by USN.  In addition, many states require hospitals to obtain a Certificate of Need (“CON”) before they can acquire a significant piece of medical equipment.  Should the Company enter into future ventures such "need" will be demonstrable, but it can have no assurance that CONs will be granted.  In addition, the Nuclear Regulatory Commission (the “NRC”) must issue a permit to USN to permit loading the cobalt at each gamma knife site.  While the Company believes that it can obtain a NRC permit for each gamma knife unit, there is no assurance that it will.

Liability Insurance

Although USN does not directly provide medical services, it has obtained professional medical liability insurance, and has general liability insurance as well. USN’s professional medical liability and general liability policies have limits of $3 million each.  The Company believes that its insurance is adequate for providing treatment facilities and non-medical services, although there can be no assurance that the coverage limits of such insurance will be adequate or that coverage will not be reduced or become unavailable in the future.
 

Competition

The health care industry, in general, is highly competitive and the Company expects to have substantial competition from other independent organizations, as well as from hospitals in establishing future gamma knife or other types of cancer treatment centers.  There are other companies that provide gamma knife or other types of cancer treatment on a "cost per treatment basis".  In addition, larger hospitals may be expected to maintain a gamma knife as well as competing technologies as part of their regular inpatient services, which could have the effect of reducing the number of gamma knife procedures performed at such facility.  Principal competitive factors include quality and timeliness of test results, ability to develop and maintain relationships with referring physicians, facility location, convenience of scheduling and availability of patient appointment times.  The Company believes that cost containment measures will encourage hospitals to seek companies that are providing the technology, instead of incurring the capital cost of establishing their own treatment centers.

Gamma Knife Financing

The gamma knife is an expensive piece of equipment, presently costing from $3.0 to $4.2 million, depending on features.  Therefore, the Company's development of new gamma knife centers is dependent on its ability to secure favorable financing.  In addition, after a number of years of use, the radioactive cobalt contained in the gamma knife requires replacement.  This is also an expensive process.  For example, the cobalt for the previous gamma knife in the NYU facility was reloaded in August 2003 and the costs were approximately $800,000.

Gamma Knife Supply and Servicing

To date, USN has purchased all of its gamma knife equipment from Elekta Instruments, Inc., a subsidiary of AB Elekta of Stockholm, Sweden.  In March 2009, the Company installed a new PERFEXION model, at the NYU Medical Center in replacement of the older gamma knife equipment.  Elekta is responsible for the installation and testing of the equipment and the training of the hospital staff in the operation of the equipment.  USN arranges for maintenance services for its gamma knife units, including the necessary services related to cobalt replacement, through Elekta.  Any interruption in the supply of equipment or services from Elekta would adversely affect USN's ability to maintain its gamma knife treatment centers.

Also, should restrictions be imposed on the operations of Elekta, such as restrictions relating to the handling and disposal of radioactive materials, necessary support services could become more costly and more difficult to obtain.
 

New Technology/Possible Obsolescence

Gamma knife technology may be subject to technological change.  Consequently, the Company will have to rely on the leading gamma knife's manufacturer, Elekta, to introduce improvements or upgrades in order to keep pace with technological change.  Any such improvements or upgrades which the Company may be required to introduce will require additional financing.  In addition, newly developed techniques and devices for performing brain surgery may render the gamma knife less competitive or obsolete.

Dependence on Hospital, Healthcare Organizations and Others

In establishing new gamma knife centers, USN must reach an arrangement with a hospital or other medical centers for the installation and operation of a gamma knife facility and then to purchase the gamma knife equipment and construct and operate the facility.  Before entering into such an agreement, USN must make an assessment of the economic feasibility of operating the gamma knife at that location.  The Company retains no control or influence over the medical staff or decisions regarding the treatment of patients.  In that regard, USN’s economic success is highly dependent on its initial determinations of the viability of the gamma knife’s location.  Should the medical center or the physicians at that medical center ultimately use the gamma knife facility for significantly fewer patients than initially projected, the Company could be required to operate the gamma knife center at a loss for an extended period of time.

With respect to other cancer centers in which the Company has an interest, the Company participates with other physician groups and other investors in planning and constructing the facility and purchasing the necessary equipment, such as an IMRT or IGRT.  The Company plays a lead role in the initial planning and establishment of those centers, but does not control the day-to-day operations thereafter.  The long term success of those centers depends to a significant degree on the operating decisions made by the physicians and administrators at those centers.

Reliance on Business of the New York University Gamma Knife Center; Recent Destruction of Equipment and Discontinuation of Business at NYU

While it is the Company’s objective to expand activities to additional cancer centers that rely on a broad range of diagnostic and radiation treatments, the Company has relied on the NYU gamma knife for substantially all of its revenue.  In recent periods, services provided at NYU have represented over 90% of the Company’s revenues.  Unless and until the Company is successful in building its activities at other centers and at new locations, disruptions at NYU could have a materially adverse effect on the Company.

In October 2012, the Company’s facility at NYU was totally destroyed as a result of flooding from Hurricane Sandy. The gamma knife had to be removed to prevent cobalt leakage that might occur due to rusting of the equipment.  While the Company is in discussions with NYU regarding the future of the Company’s relationship and its long term contract with NYU, there can be no assurance that the Company will be successful in reaching a satisfactory arrangement going forward.  Moreover, if the Company is successful in establishing a continued arrangement for the rebuilt NYU center, it will be at least several quarters until patients can again be treated at the center.
 

In addition, the cost of the removal of the damaged equipment was $525,000. The Company paid a lease settlement of the outstanding principal of the loan balance only and received from insurance coverage $930,000 above the lease principal payments and emergency removal costs from insurance coverage.   Assuming the Company is successful in reopening the facility at NYU, it is likely to incur additional costs, some of which may be substantial and will not be covered by insurance.

The Company anticipates that these factors will result in operating losses for the next several quarters.

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 or other types of cancer treatment centers.  If the Company experiences operating losses in the future, 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.

Stock Price Volatility; Illiquid Trading Market

The Company’s common stock is thinly traded.  At present, trades are reported on the OTC market only several days a month.  This thin trading and relatively small non-affiliate float lead to a high level of volatility in reported sale prices.  Investors in the Company’s Common Stock will have a limited ability to trade shares on the open market and, even if able to sell shares, could suffer significant market losses due to large swings in the prices of the shares.


None

Item 2.

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 $46,000 per year.  USN occupies about 2,000 square feet at the NYU Medical Center in New York, New York.  Pursuant to the facility agreements with NYU, USN is not required to pay separate rent for the premises occupied by its gamma knife center.  Overhead, including rent, was negotiated in determining the fee paid to USN for the use of the gamma knife.  USN’s agreement with NYU was extended in 2008 and now expires in 2021.  The current lease arrangement at NYU is likely to change as a result of the destruction of the facility as a result of flooding from Hurricane Sandy in October 2012.
 

 
The Company is subject to lawsuits, investigations and potential claims arising out of the ordinary conduct of its business.  The Company is not currently involved in any material litigation.


Not applicable
 
 
PART II


The Company's Common Stock is traded on the over-the-counter market and quoted on the OTCQB marketplace.  OTCQB is the middle tier of the Pink OTC Market, Inc.  OTCQB companies are reporting with the SEC or a U.S. banking regulator.

The following table displays the range of high and low closing prices for the Company’s Common Stock for the period from January 1, 2011 through December 31, 2012.

Period
  
High Close
    
Low Close
  
             
January 1 – March 31, 2011
     .22       .09  
April 1 -  June 30, 2011
     .20       .10  
July 1 – September 30, 2011
     .24       .12  
October 1 – December 31, 2011
     .14       .03  
                 
January 1 – March 31, 2012
     .10       .06  
April 1 -  June 30, 2012
     .14       .05  
July 1 – September 30, 2012
     .29       .13  
October 1 – December 31, 2012
     .20       .08  

The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.

As of March 15, 2013, there were approximately 285 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.

During the fourth quarter of 2012, the Company did not purchase any of its own equity securities.
 
 

Not required for smaller reporting companies


Results of operations

2012 Compared to 2011

Patient revenue decreased 5% to $1,956,000 in 2012 as compared to $2,060,000 in 2011.  This decrease in patient revenue was largely due to the disruption in operations at the NYU center in late October 2012, when the center was destroyed as a result of flooding from Hurricane Sandy.  Prior to that point, patient volumes had been running at levels somewhat higher than in 2011, largely as a result of increased marketing efforts and additional physician interest in the center following the installation of the new equipment.

Patient expenses decreased 24% to $675,000 in 2012 from $884,000 in 2011.  Patient expenses do not vary materially with the number of procedures performed, but are tied to depreciation, maintenance and other fixed expenses.  The decrease experienced in 2012 over 2011 was due to the abnormally high level of maintenance costs in 2011 at the NYU center.  (2011 was the first full year of maintenance following the expiration of the machine warranty period.)  In addition, the Company incurred no maintenance costs in 2012 after the destruction of the NYU gamma knife in late October.  Selling, general and administrative expense (SG&A) increased 9% to $1,034,000 in 2012 from $947,000 in the previous year.  This increase in SG&A resulted from increased professional fees incurred in 2012.  The Company reported net income of $729,000 in 2012, which compares to net income of $29,000 in the prior year.  The large increase reported was due to the fact that the Company recognized a net gain of $930,000 (insurance proceeds receivable of $3,265,000, less the $1,910,000 loss on the gamma knife and $425,000 in disposal costs) relating to the damage caused by flooding from Hurricane Sandy at the NYU center.  During 2012, the Company recorded a tax provision of $362,000 as a result of current year income.

The Company faces challenges in restoring operations at the NYU center.   While the Company is in discussions with NYU regarding the future of the Company’s relationship and its long term contract with NYU, there can be no assurance that the Company will be successful in reaching a satisfactory arrangement going forward.  Moreover, even if the Company is successful in establishing a continued arrangement for the rebuilt NYU center, it will be at least several quarters until patients can again be treated at the center.  Moreover, even if successful in reopening the facility in a timely manner, the Company will incur significant costs that will negatively impact operating results in future periods.

The Company anticipates that these factors will result in operating losses for the next several quarters.
 

2011 Compared to 2010

Patient revenue increased 8% to $2,060,000 in 2011 as compared to $1,916,000 in 2010.  This increase in patient revenue was largely due to the gradual increase in volume at the NYU center following the reopening of the center with the new PERFEXION gamma knife in March 2009.  Patient volumes have now stabilized at a higher level.  This increase in volume at the NYU center was the result of increased marketing efforts and additional physician interest in the center following the installation of the new equipment.

Patient expenses increased 47% to $884,000 in 2011 from $603,000 in 2010.  Patient expenses do not vary materially with the number of procedures performed, but are tied to depreciation, maintenance and other fixed expenses.  The increase experienced in 2011 over 2010 was due largely to the increased maintenance cost at the NYU center after the expiration of the machine warranty period.  SG&A decreased 3% to $947,000 in 2011 from $979,000 in the previous year.  This decrease in SG&A resulted from lower insurance costs and professional fees realized in 2011.  Interest expense decreased 51% to $177,000 in 2011 from $359,000 in 2010.  This decrease was due to the payoff of the Kansas City lease in March 2011 in connection with the sale and transfer of the gamma knife equipment and operations at the Kansas City center.  The Company reported net income of $29,000 in 2011, which compares to net income of $469,000 in the prior year.  This large decrease was due to the fact that the Company recognized revenue from litigation of $459,000 in 2010 due to the settlement with RMC.  In addition, the Company’s performance benefitted from an increase in patient revenue at the NYU center.

Liquidity and capital resources

At December 31, 2012 the Company had working capital of $2,184,000 as compared to $795,000 at December 31, 2011  This increase was due to the destruction of the NYU gamma knife and the resulting insurance recovery.  Total assets increased by $1,128,000 from 2011 to 2012, principally as a result of the gain on this disposal.  Cash and cash equivalents at December 31, 2012 were $1,450,000 as compared to $830,000 at December 31, 2011.

Net cash provided by operating activities was $861,000 in 2012 as compared with $648,000 for 2011 and net cash used in financing activities was $431,000 in 2012 as compared to the $715,000 in 2011.  Again, these amounts were affected to a significant degree by the activity surrounding the destruction of the NYU gamma knife and the insurance recovery.  Depreciation and amortization was $426,000 in 2012 as compared to $661,000 in 2011.

For the year ended December 31, 2012, net cash provided by investing activities was $190,000 as compared to $77,000 in 2011.  The 2012 amount was due to the $190,000 in distributions from FOP and FOPRE and the 2011 amount resulted from the $322,000 payment received upon disposition of the Kansas City gamma knife.

Due to the disruption caused by the flooding from Hurricane Sandy, the Company will not receive revenues from the NYU center for most of 2013.  In addition, assuming the Company is successful in reaching satisfactory arrangements with NYU regarding the reopening of the gamma knife center at that location, it will likely be required to make significant expenditures in connection with the installation of the gamma knife and the construction of the facility.
 

Off-balance sheet arrangements

None

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

The Company records liabilities for legal obligations associated with the retirement of tangible long-lived assets based on the estimated future cost of asset retirement obligations discounted to present value, and records a corresponding asset and liability on its consolidated balance sheets. The values ultimately derived are based on many significant estimates, including future decommissioning costs, inflation, cost of capital, and market risk premiums.  The nature of these estimates requires the Company to make judgments based on historical experience and future expectations.  Revisions to the estimates may be required based on such things as changes to cost estimates or the timing of future cash outlays.  Any such changes that result in upward or downward revisions in the estimated obligation will result in an adjustment to the related capitalized asset and corresponding liability on a prospective basis.  For example, during the last quarter of 2012, the Company increased the liability for asset retirement obligations by $425,000 based on the projected costs for the emergency removal of the NYU gamma knife destroyed by flooding from Hurricane Sandy.  The estimated costs of these obligations are capitalized as costs of the assets subject to the retirement obligations and amortized over the lives of the assets.

Investments in unconsolidated entities

The Company accounts for its investments in unconsolidated entities by the equity method.  The Company records its share of such earnings (losses) in the consolidated statements of operations as “Income (loss) from investments in unconsolidated entities”.  The carrying value of the Company’s investments in unconsolidated entities is recorded in the consolidated balance sheets.

 
Not required for smaller reporting companies
 


The financial statements and supplementary data required by this item are set forth in this Annual Report on Form 10-K beginning at page F-1.


None.


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 President 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,  the Company’s President concluded that the Company’s disclosure controls and procedures were not 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, due to the material weakness in internal control over financial reporting described below.
 

Management’s Report on 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 in the United States of America.  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 generally accepted accounting principles in the United States of America, 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.

All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Our management, including our President, and assisted by our Lead Director, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.  A material weakness is a control deficiency, or a combination of control deficiencies in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.  In connection with the assessment described above, management has identified the following material weakness as of December 31, 2012: the Company did not maintain sufficient qualified personnel with the appropriate level of knowledge, experience and training in the application of accounting principles generally accepted in the United States of America and in internal controls over financial reporting commensurate with its financial reporting requirements.  Specifically, effective controls were not designed and in place to ensure that the Company maintained, or had access to, appropriate resources with adequate experience and expertise in the area of financial reporting for transactions such as investments in unconsolidated entities, income taxes and discontinued operations.  The Company is in the process of developing efficient approaches to remediate this material weakness.
 

Changes in Internal Control over Financial Reporting

Management is in the process of reviewing and developing plans to remediate the material weakness identified above.  Otherwise, 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, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


Not applicable.
 

PART III
 

The directors and executive officers of the Company are as follows:

Name
Age
Position
     
Alan Gold
68
President & Chairman of the Board
     
William F. Leimkuhler
61
Director
     
Charles H. Merriman, III
78
Director
     
Susan Greenwald
67
Vice President and Secretary

Alan Gold has served as President and Chairman of the Board 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 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 currently serves as Lead Director of USN’s Board of Directors.  He also served as a director of GHS since its inception in 1984 through November 1999.  Mr. Leimkuhler is currently General Counsel & 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.  Mr. Leimkuhler also serves as a director of Argan, Inc.

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 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.

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 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.
 

Mr. Gold and Ms. Greenwald are married.

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, 2012, the Board of Directors held one meeting, which was attended by all incumbent directors.  In view of the small size of the Company’s Board, it does not operate through committees.  Instead, the full Board of Directors performs the functions typically performed by the audit, compensation and nominating committees.

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 year ended December 31, 2012, all filing requirements applicable to its officers and directors were complied with by such individuals.
 

The information below sets forth the compensation for the years ended December 31, 2012, 2011, and 2010, for the President of the Company.

Summary Compensation Table
   
Annual Compensation
  
Name and Principal Position
  
Year
  
Salary
  
Alan Gold
  
2012
   $ 300,000  
President & Chairman of the Board
  
2011
   $ 300,000  
   
2010
   $ 300,000  
 
Employee Benefits; Employment Agreement

Mr. Gold is also entitled to reimbursement of up to $1,000 per month for automobile expenses.  In addition, as with other full-time employees, Mr. Gold is entitled to participate in Company health and life insurance program.  The Company also pays the premiums for an additional policy of life insurance in the amount of $500,000, naming Mr. Gold’s wife as beneficiary.
 

The Company and Mr. Gold are parties to an employment agreement giving either party the option to terminate employment by giving the other party six-months written notice.

Director Compensation

During 2012, our directors who are not officers or employees were entitled to an annual retainer of $3,000.  Mr. Leimkuhler, the Lead Director, received a retainer of $3,000 per month in view of the higher level of activity required of him.  Our directors of the Company who are officers or employees do not receive any additional compensation for serving on the Board.


The following table sets forth, as of March 29, 2013, certain information with respect to each beneficial owner of more than 5% of the Company's Common Stock and each director and executive officer of the Company:

   
Number of Shares
        
   
Beneficially
    
Percent of
  
Name and Address of Beneficial Owner
  
Owned (1)
    
Class
  
             
Alan Gold (2)
     1,140,246       14.6 %
2400 Research Blvd.
                
Rockville, MD  20850
                
                 
William F. Leimkuhler
     100,000       1.3 %
43 Salem Straits Road
                
Darien, CT 06820
                
                 
Charles H. Merriman III
     130,672       1.7 %
5507 Cary St. Road
                
Richmond, VA 23226
                
                 
Stanley S. Shuman (3)
     2,367,734       30.4 %
711 Fifth Avenue
                
New York, NY  10022
                
                 
Allen & Company Incorporated
     1,578,489       20.2 %
711 Fifth Avenue
                
New York, NY  10022
                
                 
All Directors and officers of USN as a group (2) (four persons)
     1,370,918       17.6 %
 
(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 1,578,489 shares owned by Allen & Company Incorporated, Mr. Shuman disclaims beneficial ownership in such shares, except to the extent of his pecuniary interest therein.
 
 

None


Audit Fees.  Audit Fees represent fees for services rendered in connection with the annual audit and quarterly reviews of the Company’s financial statements.  For the years ended December 31, 2012, 2011 and 2010, the Company paid $86,000, $62,000 and $60,750, respectively, for Audit Fees to Dixon Hughes Goodman LLP.

Audit-Related Fees.  Audit-Related Fees represent fees for services rendered in connection with assurance and related services that are reasonably related to the performance of the audit or review of the financial statements and are not reported as Audit Fees.  For the years ended December 31, 2012, 2011 and 2010, the Company did not pay or accrue any amounts for Audit Related Fees.

Tax Fees.  Tax Fees represent fees for services rendered in connection with tax compliance, tax advice and tax planning.  For the years ended December 31, 2012, 2011 and 2010, the Company paid $13,000, $13,000 and $29,727 for Tax Fees to Dixon Hughes Goodman, LLP.

All Other Fees.  All Other Fees represent fees for services rendered by the Company’s principal accountants other than those described above.  For the years ended December 31, 2012, 2011 and 2010, the Company did not pay or accrue any amounts for these services.

The Board of Directors has established a policy requiring pre-approval by the Board of Directors of all audit and non-audit services provided by its registered independent public accounting firm.  The policy requires the general pre-approval of annual audit services and all other permitted services.  All of the audit and non-audit services described above were approved by the Board.
 

PART IV


(a)           (1) Financial Statements and Financial Statement Schedules.  The following are filed as part of this report:

 
Page No
Consolidated Financial Statements of the Company
F-1
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets as of December 31, 2012 and 2011
F-3
Consolidated Statements of Operations for the years ended December 31, 2012, 2011, and 2010
F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2012, 2011, and 2010
F-5
Consolidated Statements of Cash Flows for the year ended December 31, 2012, 2011, and 2010
F-6
Notes to Consolidated Financial Statements
F-7

(2) Financial Statement Schedules.  All financial statement schedules as required by Item 8 and Item 15 of Form 10-K have been omitted because the information requested is not required, not applicable, or is shown in the Consolidated Financial Statements or Notes thereto.

(b) 
Exhibits:

 
3.1
Form of Amended and Restated Certificate of Incorporation of U.S. NeuroSurgical, Inc. (“USN”) (incorporated herein by reference to Exhibit 3.1 to our Form 10 Registration Statement as filed July 1, 1999)
 
3.2
Form of Amended and Restated Bylaws of USN (incorporated herein by reference to Exhibit 3.2 to our Form 10 Registration Statement as filed July 1, 1999)
 
4.1
Form of Stock Certificate of Common Stock (incorporated herein by reference to Exhibit 4.1 to our Form 10 Registration Statement as filed July 1, 1999)
 
10.1
Distribution Agreement dated May 27, 1999 between GHS, Inc. (“GHS”) and USN (incorporated herein by reference to Exhibit 10.1 to our Form 10 Registration Statement as filed July 1, 1999)
 
10.2
Tax Matters Agreement dated May 27, 1999 between GHS and USN (incorporated herein by reference to Exhibit 10.2 to our Form 10 Registration Statement as filed July 1, 1999)
 
10.3
Assignment and Assumption Agreement dated May 27, 1999 between GHS and USN (incorporated herein by reference to Exhibit 10.3 to our Form 10 Registration Statement as filed July 1, 1999)
 
10.4
Employment Agreement dated December 14, 1984 between 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)
 
 
 
10.5
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)
 
10.6
Agreement dated August 1, 1996 between USN and DVI, Inc. (incorporated by reference 10j to GHS’s 1997 Annual Report on form 10-K)
 
10.7
Gamma Knife Neuroradiosurgery Equipment dated as of November 26, 1996 between New York University on behalf of New York University Medical Center and USN (incorporated herein by reference to Exhibit 10.10 to our Form 10 Registration Statement as filed July 1, 1999)
 
21.1
List of Subsidiaries (incorporated herein by reference to Exhibit 21.1 to our Form 10 Registration Statement as filed July 1, 1999)
 
Certifications of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certifications of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
*  Filed herewith

(c)
Financial Statement Schedules.  None


SIGNATURES
 
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
U.S. NeuroSurgical, Inc.
  
 
(Registrant)
  
       
 
By
/s/ Alan Gold
  
   
Alan Gold
  
   
President & Chairman of the Board
  
   
and
  
   
Principal Financial Officer
  
       
  Dated: April 1, 2013  
 
In accordance with 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 1, 2013
  
/s/ Alan Gold
  
   
Alan Gold
  
   
President & Chairman of the Board
  
       
April 1, 2013
  
/s/ William F. Leimkuhler
  
   
William F. Leimkuhler
  
   
Director
  
       
April 1, 2013
  
/s/ Charles H. Merriman III
  
   
Charles H. Merriman III
  
   
Director
  

 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
 
Contents


 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
 

Board of Directors and Stockholders
U.S. NeuroSurgical, Inc.
Rockville, Maryland

We have audited the accompanying consolidated balance sheets of U.S. NeuroSurgical, Inc. and Subsidiaries (the "Company") as of December 31, 2012 and 2011, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2012. 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
 
As discussed in Note E to the consolidated financial statements, in October 2012 the Company's facility at New York University Medical Center ("NYU") was totally destroyed as a result of flooding from Hurricane Sandy. The Company derived substantially all of its patient revenue from NYU for the years ended December 31, 2012 and 2011.  The Company is in discussions with NYU regarding the future of the Company's relationship and long-term contract with NYU.

Dixon Hughes Goodman LLP
Raleigh, North Carolina
April 1, 2013
 
 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES


   
December 31,
  
   
2012
    
2011
  
ASSETS
            
Current assets:
            
Cash and cash equivalents
   $ 1,450,000     $ 830,000  
Accounts receivable
     7,000       313,000  
Insurance recoveries receivable
     3,265,000       -  
Due from related parties
     292,000       208,000  
Other current assets
     33,000       7,000  
Total current assets
     5,047,000       1,358,000  
Investments in unconsolidated entities
     246,000       471,000  
                 
Gamma knife (net of accumulated depreciation of  $0 in 2012 and $1,372,000 in 2011)
     -       2,221,000  
Leasehold improvements (net of accumulated amortization of $0 in 2012 and $134,000 in 2011)
     -       115,000  
 
                
      -       2,336,000  
                 
    $ 5,293,000     $ 4,165,000  
 
                
LIABILITIES
                
Current liabilities:
                
Accounts payable and accrued expenses
   $ 67,000     $ 24,000  
Obligations under capital lease - current portion
     2,271,000       539,000  
Asset retirement obligations - current portion
     525,000       -  
Total current liabilities
     2,863,000       563,000  
                 
Deferred Income taxes
     362,000       -  
Asset retirement obligations - net of current portion
     -       100,000  
Obligations under capital lease - net of current portion
     -       2,163,000  
Total liabilities
     3,225,000       2,826,000  
                 
Commitments and contingencies
                
                 
STOCKHOLDERS’ EQUITY
                
Common stock - par value $.01; 25,000,0000 shares authorized; 7,797,185 shares issued and outstanding at December 31, 2012 and 2011
     78,000       78,000  
Additional paid-in capital
     3,100,000       3,100,000  
Accumulated deficit
     (1,110,000 )     (1,839,000 )
      2,068,000       1,339,000  
                 
    $ 5,293,000     $ 4,165,000  
 
See notes to consolidated financial statements
 
 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
 

   
Years Ended December 31,
  
   
2012
    
2011
    
2010
  
Revenue
                  
    $ 1,956,000     $ 2,060,000     $ 1,916,000  
                         
Costs and expenses:
                        
Patient expenses
     675,000       884,000       603,000  
Selling, general and administrative
     1,034,000       947,000       979,000  
      1,709,000       1,831,000       1,582,000  
Operating income
     247,000       229,000       334,000  
                         
Interest expense
     (199,000 )     (177,000 )     (359,000 )
Interest income
     29,000       12,000       5,000  
Gain from sales of investments in unconsolidated entities
     24,000       -       -  
Income (loss) from investments in unconsolidated entities
     60,000       26,000       (40,000 )
Gain on disposal of gamma knife
     930,000       -       -  
                         
Income (loss) from continuing operations before income taxes
     1,091,000       90,000       (60,000 )
                         
Provision for income tax expense
     (362,000 )     -       -  
                         
Income (loss) from continuing operations
     729,000       90,000       (60,000 )
                         
Discontinued operations
                        
Impairment loss
     -       (89,000 )     -  
Gain from operations of Kansas City Gamma Knife Center
     -       28,000       70,000  
Revenue from litigation activity
     -       -       459,000  
      -       (61,000 )     529,000  
                         
Net income
   $ 729,000     $ 29,000     $ 469,000  
                         
Basic and diluted net income per share
   $ 0.09     $ 0.00     $ 0.06  
                         
Net income (loss) per common share from continuing operations - basic and diluted
   $ 0.09     $ 0.01     $ (0.01 )
                         
Net income (loss) per common share from discontinued operations - basic and diluted
   $ 0.00     $ (0.01 )   $ 0.07  
                         
Weighted average common shares outstanding
     7,797,185       7,751,432       7,747,185  
 
See notes to consolidated financial statements
 
 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
 

   
Common Stock
                    
   
Number
          
Additional
              
   
of
          
Paid-In
    
Accumulated
        
   
Shares
    
Amount
    
Capital
    
Deficit
    
Total
  
                               
Balance - December 31, 2009
     7,747,185     $ 77,000     $ 3,099,000     $ (2,337,000 )   $ 839,000  
                                         
Net income for the year ended December 31, 2010
     -       -       -       469,000       469,000  
Balance - December 31, 2010
     7,747,185     $ 77,000     $ 3,099,000     $ (1,868,000 )   $ 1,308,000  
                                         
Issuance of common stock as compensation
     50,000       1,000       1,000       -       2,000  
Net income for the year ended December 31, 2011
     -       -       -       29,000       29,000  
Balance - December 31, 2011
     7,797,185     $ 78,000     $ 3,100,000     $ (1,839,000 )   $ 1,339,000  
                                         
Net income for the year ended December 31, 2012
     -       -       -       729,000       729,000  
Balance - December 31, 2012
  
7,797,185
     $ 78,000     $ 3,100,000     $ (1,110,000 )   $ 2,068,000  
 
See notes to consolidated financial statements
 
 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
 

   
Years Ended December 31,
  
   
2012
    
2011
    
2010
  
                   
Cash flows from operating activities:
                  
Net income
   $ 729,000     $ 29,000     $ 469,000  
Adjustments to reconcile net income to net cash provided by operating activities:
                        
Depreciation and amortization
     426,000       661,000       906,000  
(Income) loss from investment in unconsolidated entites
     (60,000 )     (26,000 )     40,000  
Stock based compensation expense
     -       2,000       -  
Gain from sales of member interests in unconsolidated entities
     (24,000 )                
Gain on disposal of gamma knife
     (930,000 )                
Impairment loss on discontinued operations
     -       89,000       -  
Deferred income taxes
     362,000       -       -  
Changes in:
                        
Accounts receivable
     306,000       108,000       (141,000 )
Due from related parties
     34,000       (138,000 )     -  
Other current assets
     (26,000 )     12,000       (32,000 )
Accounts payable and accrued expenses
     44,000       (89,000 )     46,000  
Net cash provided by operating activities
     861,000       648,000       1,288,000  
                         
Cash flows from investing activities:
                        
Investment in unconsolidated entities
     -       (245,000 )     (240,000 )
Distributions from unconsolidated entities
     190,000       -       -  
Cash from settlement of gamma knife equipment at Kansas City center
     -       322,000       -  
Net cash provided by (used in) investing activities
     190,000       77,000       (240,000 )
                         
Cash flows from financing activities:
                        
Repayment of capital leases
     (431,000 )     (766,000 )     (902,000 )
Decrease in cash held in escrow
     -       51,000       1,000  
Net cash used in financing activities
     (431,000 )     (715,000 )     (901,000 )
                         
Net change in cash and cash equivalents
     620,000       10,000       147,000  
Cash and cash equivalents - beginning of year
     830,000       820,000       673,000  
Cash and cash equivalents - end of year
   $ 1,450,000     $ 830,000     $ 820,000  
                         
Supplemental disclosures of cash flow information:
                        
Cash paid for:
                        
Interest
   $ 199,000     $ 177,000     $ 401,000  
                         
Supplemental disclosures of noncash investing and financing activities:
                        
Distribution from unconsolidated entities included in due from related parties
   $ 50,000     $ -     $ -  
Sales proceeds from sales of member interests in unconsolidated entities included in due from related parties - net
   $ 112,000     $ -     $ -  
Investment in unconsolidated entities included in due from related parties
   $ 44,000     $ -     $    
Leasehold improvements financed by a capital lease
   $ -     $       $ 151,000  
Equipment acquired through a capital lease
   $ -     $ 277,000     $ -  

See Note E for additional discussion on the gain on disposal of gamma knife
 
See notes to consolidated financial statements
 
 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
 

U.S. NeuroSurgical, Inc. (“USN” or the “Company”), a Delaware corporation, was organized in July 1993 for the purpose of owning and operating stereotactic radiosurgery centers, utilizing the gamma knife technology.  USN owned one gamma knife center on the premises of New York University Medical Center (“NYU”) in New York, New York.  Management continues to explore opportunities to organize and participate in additional gamma knife centers.  USN's business strategy is to provide a mechanism whereby hospitals, physicians, and patients can have access to gamma knife treatment capability, a high capital cost item.  USN provides the gamma knife to medical facilities on a "cost per treatment" basis.  USN owns the gamma knife units, and is reimbursed by the facility where it is housed, based on utilization.

During the fourth quarter of 2007, USN formed a wholly-owned subsidiary, USN Corona, Inc. (“USNC”), to carry investments in Corona Gamma Knife, LLC and Neuro Partners, LLC. Those investments were formed to develop and manage a gamma knife center at San Antonio Community Hospital in Upland, California. (See Note C[1])

During 2010, USN expanded its market strategy to include opportunities to develop cancer centers featuring radiation therapy. These centers will utilize linear accelerators with IMRT (Intensity Modulated Radiation Therapy) and IGRT (Image Guided Radiation Therapy) capabilities. In 2010, the Company formed Florida Oncology Partners in partnership with local physicians and other investors. USNC owns a 20% interest in the venture. The center is located in Miami and opened in the second quarter of 2011. (See Note C[2])

In 2011, the Company formed Boca Oncology Partners, in partnership with local physicians and other investors. USNC initially owned a 22.5% interest in the venture. The center is located in Boca Raton, Florida, and was opened in the third quarter of 2012. (See Note C[3])

In April 2011, the Company finalized certain transactions and agreements with Midwest Division – RMC, LLC (“RMC”), which owns the property and operates the medical facilities in Kansas City at which one of the Company’s gamma knife centers was located.  The Company sold to RMC the Leksell Gamma Knife radiosurgery equipment, along with related supplies and inventory, located at the Kansas City center for an aggregate purchase price of $250,000.  (See Note D)

On October 29, 2012, the Company’s facility at NYU was totally destroyed as a result of flooding from Hurricane Sandy. As of this filing, the Company is in negotiations to reopen the facility. (See Note E)
 
Note B - The Company and its Significant Accounting Policies

[1]
Basis of presentation and consolidation

The consolidated financial statements include the accounts of USN and its wholly-owned subsidiaries, U.S. NeuroSurgical Physics, Inc. and USNC. All significant intercompany balances and transactions have been eliminated in consolidation.

[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]
Investments in unconsolidated entities:

The Company accounts for its investments in unconsolidated entities by the equity method. The Company records its share of such earnings (loss) in the Consolidated Statement of Operations as “Income (loss) from investments in unconsolidated entities”. The carrying value of the Company’s investments in unconsolidated entities is recorded in the Consolidated Balance Sheets. The Company records losses of the unconsolidated entities only to the extent of the Company's investment. As such, the recorded balance of Corona Gamma Knife, LLC, Neuro Partners, LLC and Boca Oncology Partners, LLC have been taken to zero.
 

U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
 
[4]
Revenue recognition:

Patient revenue is recognized when the gamma knife procedure is rendered.

[5]
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.

[6]
Depreciation and amortization:

The gamma knives were being depreciated on the straight-line method over an estimated useful life of seven years.  The related costs incurred to reload the cobalt were being amortized on a straight-line method over an estimated useful life of five years.  Leasehold improvements were 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 the straight-line method over their estimated useful lives ranging from 3 to 7 years.  Depreciation expense for 2012, 2011, and 2010, was $414,000, $637,000, and $829,000, respectively.  Amortization expense for 2012, 2011, and 2010, was $12,000, $24,000, and $77,000, respectively.

[7]
Capital leases:

Capital lease obligations are amortized ratably over the original term of the lease agreement, beginning with the earlier of the date the leased assets are placed in service or the effective date of the lease as defined in the lease agreement.

[8]
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. Valuation allowances are established when necessary to reduce tax assets to amounts more likely than not to be realized.

[9]
Earnings per share:

Earnings per share are computed by dividing earnings available to common stockholders by the weighted average shares outstanding for the period.  There were no common stock equivalents during 2012, 2011, and 2010, and therefore, no potential dilution for the periods presented.

[10]
Advertising costs:

The Company follows the policy of charging the costs of advertising to expense as incurred.  There were no advertising costs in 2012, 2011, and 2010.

[11]
Allowance for doubtful accounts:

The Company evaluates each of its accounts receivable individually and provides a charge to income that is appropriate, in the opinion of management, to absorb probable credit losses.  During 2011, the Company released $36,000 of allowance for doubtful accounts related to receivables that were subsequently collected.  The Company considers all accounts receivable to be collectible at December 31, 2012 and 2011.
 

U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
 
[12]
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.

[13]
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, 2012 and 2011 because of the short maturity of these financial instruments.  The carrying values of the obligations under capital leases approximate fair value because the interest rates on these instruments approximate the market rates at December 31, 2012 and 2011.

[14]
Credit risk:

At times, the Company may have cash and cash equivalents at a financial institution in excess of insured limits. The Company places its cash and cash equivalents with high credit quality financial institutions whose credit ratings are monitored by management to minimize credit risk. Accounts receivable consist primarily of amounts due from the medical centers.  Historically, credit losses on accounts receivable have not been significant.

[15]
Asset retirement obligations:

The Company records 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 are capitalized as costs of the assets subject to the retirement obligations and amortized over the lives of the assets.

[16]
Reclassifications:

Certain prior year balances have been reclassified to conform to current year presentation.
 
Note C - Investment in Unconsolidated Entities

[1]
The Southern California Regional Gamma Knife Center

During 2007, the Company managed the formation of the Southern California Regional Gamma Knife Center at San Antonio Community Hospital (“SACH”) in Upland, California.  The Company participates in the ownership and operation of the center through USNC.  Corona Gamma Knife, LLC (“CGK”) is party to a 14-year agreement with SACH to renovate space in the hospital and install and operate a Leksell PERFEXION gamma knife.  CGK leased the gamma knife from Neuro Partners LLC, which holds the gamma knife equipment.  In addition to returns on its ownership interests, USNC expects to receive fees for management services relating to the facility.

USNC is a 20% owner of Neuro Partners LLC. USNC also owned initially 27% of CGK, but increased its ownership to 44% during 2011 to accommodate a member who desired to transfer his interest.  Subsequently, in the first quarter of 2012, USNC sold a portion of its ownership to a new member, resulting in a decrease in its ownership in CGK to 39%.

Construction of the SACH gamma knife center was completed in December 2008 and the first patient was treated in January 2009.  The project has been funded principally by outside investors.  While the Company has led the effort in organizing the business and overseeing the development and operation of the SACH center, its investment to date in the SACH center has been minimal.
 
 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

The following tables present the aggregation of summarized financial information of Neuro Partners LLC and CGK:

Neuro Partners LLC and CGK Condensed Income Statement Information

   
Year Ended
  
   
December 31,
  
   
2012
    
2011
    
2010
  
                   
Patient revenue
   $ 1,023,000     $ 1,197,000     $ 765,000  
Rental income
     888,000       888,000       828,000  
Net sales
   $ 1,911,000     $ 2,085,000     $ 1,593,000  
                         
Net income (loss)
   $ (108,000 )   $ (95,000 )    $ (467,000 )
                         
USNC's equity in income (loss) of Neuro Partners LLC and CGK
   $ (34,000 )   $ (23,000 )    $ (135,000 )

Neuro Partners LLC and CGK Condensed Balance Sheet Information

   
December 31,
  
   
2012
    
2011
  
             
Current assets
   $ 468,000     $ 607,000  
                 
Noncurrent assets
   $ 2,261,000     $ 2,603,000  
                 
Total assets
   $ 2,729,000     $ 3,210,000  
                 
Current liabilities
   $ 442,000     $ 440,000  
                 
Noncurrent liabilities
   $ 2,896,000     $ 3,169,000  
                 
Equity
   $ (609,000 )   $ (399,000 )
                 
Total liabilities and equity
   $ 2,729,000     $ 3,210,000  

 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
 
[2]
Florida Oncology Partners

During the quarter ended September 30, 2010, the Company participated in the formation of Florida Oncology Partners, LLC (“FOP”) and Florida Oncology Partners RE, LLC (“FOPRE”), which operates a cancer center located in West Kendall (Miami), Florida.  The center diagnoses and treats patients utilizing a Varian Rapid Arc linear accelerator and a GE CT scanner. USNC originally invested $200,000 for 20% ownership interest in FOP and FOPRE. The remaining 80% is owned by other outside investors. The center opened and treated its first patient in May 2011. FOP made several distributions during the year that reduced the Company’s investment significantly.  The Company’s recorded investment in FOP and FOPRE is $135,000 and $270,000 at December 31, 2012 and 2011, respectively.

The Company entered into a note receivable with FOP for working capital purposes, for $200,000 in August 2011, bearing interest at 10% per annum and due in August 2012. The note receivable and accrued interest total $208,000 at December 31, 2011. The note (principal) was repaid in May 2012.

During 2011, Florida Oncology Partners, LLC entered into a capital lease with Key Bank for approximately $5,600,000. Under the terms of the capital lease, USNC agreed to guarantee 20% of the outstanding lease obligation in the event of default.  The outstanding balance on the lease obligation was $4,917,000 at December 31, 2012.

In June 2012, FOPRE completed the financing agreement to purchase the building that is occupied by FOP.  The amount of the loan was $1,354,275 to be paid at a monthly rate of approximately $8,500 for 120 months with the final payment due on June 15, 2022.

The following tables present the aggregation of summarized financial information of FOP and FOPRE:

FOP and FOPRE Condensed Income Statement Information

   
Year Ended December 31,
  
   
2012
    
2011
    
2010
  
                   
Patient revenue
   $ 3,251,000     $ 2,117,000        
Rental income
   $ 90,000     $ -        
Net sales
   $ 3,341,000     $ 2,117,000     $ -  
                         
Net income (loss)
   $ 530,000     $ 469,000     $ (118,000 )
                         
USNC's equity in income (loss) of FOP and FOPRE
   $ 106,000     $ 94,000     $ (24,000 )

FOP and FOPRE Condensed Balance Sheet Information

   
December 31,
  
   
2012
    
2011
  
             
Current assets
   $ 919,000     $ 1,524,000  
                 
Noncurrent assets
   $ 6,374,000     $ 5,717,000  
                 
Total assets
   $ 7,293,000     $ 7,241,000  
                 
Current liabilities
   $ 965,000     $ 1,001,000  
                 
Noncurrent liabilities
   $ 5,734,000     $ 4,977,000  
                 
Equity
   $ 594,000     $ 1,263,000  
                 
Total liabilities and equity
   $ 7,293,000     $ 7,241,000  

 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
 
[3]
Boca Oncology Partners

During the quarter ended June 30, 2011, the Company participated in the formation of Boca Oncology Partners, LLC (“BOP”), for the purpose of owning and operating a cancer center in Boca Raton, Florida.  In June 2011, Boca Oncology Partners RE, LLC (“BOPRE”), an affiliated entity, purchased a 20% interest in a medical office building in West Boca, Florida in which BOP operates.  BOP occupies approximately 6,000 square feet of the 32,000 square foot building.  The Company’s wholly-owned subsidiary, USNC invested $225,000 initially and had a 22.5% interest in BOP and BOPRE.  In January 2012, an additional investor purchased 50% of the partnership reducing the Company’s ownership to 11.25%.  The Company loaned the proceeds of $56,250 back to BOP as a 5 year note at 7% interest. The remaining 88.75% is owned by other outside investors.  In June 2012, BOPRE purchased 3.75% of Boca West IMP from another investor and then sold 31.5% of BOPRE to a new investor. The proceeds of $28,000 were loaned to BOP and USNC’s investment in BOPRE was reduced to 15.4%.  Due to the outstanding loans, BOP is considered to be a variable interest entity of the Company.  However, as the Company is not deemed to be the primary beneficiary of BOP, since it does not have the power to direct the activities that most significantly affect its economic performance, certain disclosures are required rather than consolidation.  The center opened in August 2012.

The following tables present the aggregation of summarized financial information of BOP and BOPRE:

BOP and BOPRE Condensed Income Statement Information

   
Year Ended December 31,
  
   
2012
    
2011
  
             
Patient revenue
   $ 261,000     $ -  
                 
Net loss
   $ (578,000 )   $ (106,000 )
                 
USNC's equity in loss
   $ (65,000 )   $ (24,000 )

BOP and BOPRE Condensed Balance Sheet Information

   
December 31,
  
   
2012
    
2011
  
             
Current assets
   $ 289,000     $ 236,000  
                 
Noncurrent assets
   $ 2,897,000     $ 439,000  
                 
Total assets
   $ 3,186,000     $ 675,000  
                 
Current liabilities
   $ 308,000     $ -  
                 
Noncurrent liabilities
   $ 2,368,000     $ -  
                 
Equity
   $ 510,000     $ 675,000  
                 
Total liabilities and equity
   $ 3,186,000     $ 675,000  

Note D - Sale of Kansas City Gamma Knife Center and Focus on Continuing Businesses

In April 2011, the Company finalized certain transactions and agreements with Midwest Division – RMC, LLC (“RMC”), which owns the property and operates the medical facilities in Kansas City at which the Company’s gamma knife center is located.
 
 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

[1]
Sale of Gamma Knife Equipment at Kansas City Center

The Company sold to RMC the Leksell gamma knife radiosurgery equipment, along with related supplies and inventory, located at the Kansas City center for an aggregate purchase price of $250,000.  RMC has also indicated its intention to employ the physicist who, up to the time of the sale, operated the gamma knife equipment on the Company’s behalf.  The Company will, upon request of RMC and at RMC’s cost and expense, assist RMC in replenishing the gamma knife equipment’s radioactive cobalt-60 as is necessary for the proper operation of the gamma knife.

[2]
Termination of Arrangements with RMC and Settlement of Outstanding Claims

In connection with the sale of the gamma knife equipment described above, the Company and RMC entered into an agreement terminating the Gamma Knife Neuroradiosurgery Equipment Agreement and the Ground Lease Agreement, each originally entered into between the parties in 1993, and concluded all arrangements between the parties relating to the operation of the gamma knife center and the lease of the premises.  Immediately preceding the termination of these agreements, the Company and RMC satisfied all outstanding obligations between the parties, resulting in a net payment of $385,000 to the Company.  In connection with the agreement, the parties also entered into a mutual release respecting all other outstanding claims and disputes between them relating to the Kansas City center.

The Company agreed with RMC that through September 2015, it will not participate in gamma knife operations in the states of Missouri, Kansas, Nebraska, Iowa and Arkansas.
 
 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
 
[3]
Effect of Discontinued Kansas City Operations

The amounts of revenue and pretax profit or loss reported in discontinued operations are as follows:

   
Year Ended December 31,
  
             
   
2011
    
2010
  
             
Revenue from operations
   $ 184,000     $ 641,000  
                 
Pretax profit (loss)
     (61,000 )     529,000  
 
Included in the pretax loss for the year ended December 31, 2011 is an impairment recorded on the gamma knife for the Kansas City center totaling $161,000.  This impairment loss is being offset by $72,000, for a net impairment loss of $89,000, received by the Company attributed to revenues from prior years which had been disputed by RMC, and, as such, never recorded by the Company due to the uncertainty of collection.
 
Note E - 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 NYU agreement, among other matters, required 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 paid USN a scheduled fee based on the number of patient procedures performed.  The Company derived patient revenue from the NYU center of $1,942,000, $2,029,000 and $1,907,000, for 2012, 2011, and 2010, respectively.

In 2004, the NYU agreement was extended through March 2009.  In 2008, the NYU agreement was extended for an additional 12 years through March 2021.  To secure this extension, USN agreed to install a new gamma knife PERFEXION model.  The new equipment and certain space improvements, costing approximately $3,742,000 in total, was financed through a seven-year lease arrangement.  The amendment provides for a payment to USN of a flat fee for each patient procedure performed.

In October 2012, the Company’s facility at NYU was totally destroyed as a result of flooding from Hurricane Sandy.  The gamma knife had to be removed to prevent any cobalt leakage that might occur due to rusting of the equipment.  The emergency removal cost was $525,000.  The Company paid a lease settlement of the outstanding principal balance only and received from insurance coverage $930,000 above the lease principal payments and emergency removal costs. The Company is in negotiations with NYU discussing the future of the Company’s relationship and long term contract.
 
 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
 
The Company incurred the following income statement items in relation to Hurricane Sandy which are included in the other income/expense section:

   
2012
  
       
Insurance recovery income
   $ 3,265,000  
         
Damaged gamma knife equipment due to flooding
     1,910,000  
Costs related to disposal of gamma knife equipment
     425,000  
         
      2,335,000  
         
Net gain on disposal
   $ 930,000  

Note F - Obligation Under Capital Lease

In March 2009, the Company installed a PERFEXION model gamma knife at the NYU center with a seven year lease from Elekta Capital. The amount financed, covering the cost of the new gamma knife equipment and certain space improvements, was approximately $3,742,000 in total. The monthly payment was $63,000 per month, at an implicit interest rate of approximately 11%. This lease became payable as a result of the damage at the NYU facility in October 2012, and the remainder of the balance due was paid in January 2013.

The obligations under the capital leases are as follows:

   
December 31,
  
   
2012
    
2011
  
             
Capital leases - Gamma Knife
   $ 2,271,000     $ 2,702,000  
                 
Less current portion
     (2,271,000 )     (539,000 )
                 
    $ -     $ 2,163,000  
 
The following is an analysis of the leased assets included in property and equipment:

   
2011
  
       
Capitalized costs
   $ 3,742,000  
Less - accumulated depreciation
     (1,406,000 )
         
Capitalized lease equipment and improvements-reported as property and equipment - net
   $ 2,336,000  

 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

Future payments as of December 31, 2011 on the equipment leases and loans are as follows:

Year Ending
      
December 31,
      
       
2013
   $ 2,271,000  
         
Less interest
     -  
         
Present value of net minimum obligation
   $ 2,271,000  
 
Note G – Asset Retirement Obligations

During 2003, the Company recorded asset retirement obligations of $200,000 based upon estimated amounts, consisting principally of removal of gamma knives, disposal of regulated materials and the restoration of facilities at NYU and RMC.  Such liabilities have been measured historically 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.  However, during 2011, when the Company sold the equipment at RMC, the asset retirement obligation was reduced to $100,000.  During the last quarter of 2012, the Company increased the liability by $425,000 due to projected costs for the emergency removal of the NYU gamma knife destroyed by flooding from Hurricane Sandy.  The Company was amortizing such costs over the lives of the respective useful lives from inception.

   
2012
    
2011
  
             
Asset retirement obligations, beginning of year
   $ 100,000     $ 200,000  
Liabilities settled during the year
     -       (100,000 )
Increase in obligations during the year
     425,000       -  
                 
Asset retirement of obligations, end of the year
   $ 525,000     $ 100,000  
 
Note H - Stock Based Compensation

During 2011, the Company awarded 50,000 shares of its common stock to an employee as additional compensation.  The fair value of each award was determined by management to be approximately $2,000.  Compensation expense of $2,000 (common stock of $1,000 and additional paid in capital of $1,000) was recorded by the Company to account for this transaction in 2011.
 
Note I - Concentrations

For the last nine months of 2011 and the entire year ended December 31, 2012, the Company derived substantially all of its revenue from NYU.  NYU also represented 100% of the accounts receivable balance at December 31, 2011.

For the first three months of 2011 and the year ended December 31, 2010, the Company derived substantially all of its patient revenue from NYU and RMC.
 

U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
 
Note J - Taxes

A reconciliation of the tax provision (benefit) calculated at the statutory federal income tax rate with amounts reported follows:

   
Year Ended December 31,
  
   
2012
    
2011
    
2010
  
                   
Income tax at the federal statutory rate
   $ 371,000     $ 7,000     $ 173,000  
State income tax, net of federal taxes
     37,000       1,000       17,000  
Other
     10,000       18,000       (30,000 )
Change in valuation allowance
     (56,000 )     (26,000 )     (160,000 )
                         
Income tax provision (benefit)
   $ 362,000     $ -     $ -  

Items which give rise to deferred tax assets and liabilities are as follows:

   
December 31,
  
    2012     2011  
Deferred tax asset:
            
Net operating loss
   $ 313,000     $ 578,000  
Asset retirement obligations
     159,000          
      472,000          
                 
Deferred tax liability:
                
Deferred gain on disposal of gamma knife
     (834,000 )     -  
Excess of book depreciation over tax depreciation
     -       (406,000 )
Net effect of the conversion from accrual basis of accounting to cash basis accounting for tax purposes primarily related to accounts receivable, prepaid expenses, and accounts payable
     -       (116,000 )
      (362,000 )     56,000  
Valuation allowance
     -       (56,000 )
Net deferred tax liability
   $ (362,000 )   $ -  
 
A full valuation allowance had been provided at December 31, 2011, due principally to the evidence that it was more likely than not that the deferred tax assets would not be realized because certain loss carryforwards would not be utilized prior to expiration. The changes in the valuation allowance are as follows:

   
Beginning Balance
    
Additions
    
Deductions
    
Ending Balance
  
                         
December 31, 2012
   $ 56,000     $ -     $ (56,000 )   $ -  
December 31, 2011
   $ 82,000     $ -     $ (26,000 )   $ 56,000  
December 31, 2010
   $ 242,000     $ -     $ (160,000 )    $ 82,000  

 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

On December 31, 2012, the Company had loss carryforwards of $942,000, which may be offset against future taxable income.  If not used, the carryforwards will begin to expire in 2029.

The Company adopted the accounting provisions for Accounting for Uncertainty in Income Taxes, effective January 1, 2007.  It provides a comprehensive model for how the Company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on its tax return.  The Company had no uncertain material tax positions at December 31, 2012 and 2011.

The Company files income tax returns in the U.S. federal jurisdiction and the State of Maryland.  With few possible exceptions, the Company is no longer subject to U.S. or state income tax examinations by tax authorities for years before 2009.
 
Note K– Commitments and Contingencies

[1]
Leases:

The Company leases office space under an operating lease which was renewed March 2013, and expires March 2018.  The terms of the lease include an escalation clause for a portion of certain operating expenses.  At December 31, 2012, the annual future minimum rental payments under operating leases are as follows:

Year Ending December 31,
  
       
2013
   $ 39,000  
2014
     39,000  
2015
     39,000  
2016
     39,000  
2017
     39,000  
thereafter
     10,000  
    $ 205,000  
 
Rent expense was approximately $47,000, $47,000, and $48,000, for 2012, 2011 and 2010, respectively.

[2]
Gamma Knives:

In 2009, the Company installed a new gamma knife PERFEXION model at the NYU Medical Center.  This new equipment and certain space improvements, costing approximately $3,742,000 in total, was financed through a seven-year lease arrangement.  This PERFEXION equipment was recorded as a total loss as a result of flooding from Hurricane Sandy.  See Note E.

To maintain efficient operation, the Company is required to reload cobalt for each gamma knife every 5 to 10 years.
 
 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
 
[3]
Maintenance Contract:

In September 2010, the Company entered into a maintenance agreement with Elekta, the supplier of the gamma knife PERFEXION model, for 5 years. The monthly payment for this maintenance agreement is $20,000.  As of December 2012, this maintenance agreement has been cancelled due to the total loss of the NYU equipment as a result of flooding from Hurricane Sandy.

[4]
Guarantee of Lease Obligation:

USNC is a 20% guarantor on Neuro Partners, LLC’s seven-year lease with respect to the gamma knife equipment and certain leasehold improvements at the Southern California Regional Gamma Knife Center at SACH in Upland, California, where the equipment is located.  The outstanding balance on the lease obligations was $2,896,000 at December 31, 2012.  In 2014, Neuro Partners, LLC has the option to purchase the gamma knife for $490,000.

USNC is also a 20% guarantor on Florida Oncology Partners, LLC’s seven-year lease with respect to the oncology equipment at its West Kendall, Florida cancer center. The outstanding balance on the lease obligation was $4,977,000 at December 31, 2012.

[5]
Product liability:

Although USN does not directly provide medical services, it has obtained professional medical liability insurance, and has general liability insurance as well. USN’s professional medical liability and general liability policies have limits of $3 million each.  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.
 
Note L - Employees' 401(k) and IRA Plans

The Company discontinued its 401(k) on December 31, 2006. The Company established a Company IRA covering all employees. 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 made a discretionary matching IRA contribution for 2012, 2011 and 2010 of $14,000, $9,000 and $14,000, respectively.
 
 
U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
 
Note M – Quarterly Results of Operations (unaudited)

The following is a summary of the unaudited 2012, 2011 and 2010 quarterly results of operations: (in thousands)

   
Three Months Ended
  
   
March 31
    
June 30
    
September 30
    
December 31
  
2012
                        
Revenue
   $ 595     $ 469     $ 617     $ 275  
Operating income (loss)
     111       39       151       (54 )
Net income (loss)
     62       (11 )     125       553  
Basic and diluted income (loss) per common share
     0.01       0.00       0.02       0.07  
                                 
2011
                                
Revenue
   $ 496     $ 548     $ 503     $ 513  
Operating income (loss)
     56       173       (29 )     29  
Income (loss) from discontinued operations
     (61 )     -       -       -  
Net income (loss)
     (74 )     106       (131 )     128  
Basic and diluted income (loss) per common share
     (0.01 )     0.01       (0.02 )     0.02  
                                 
2010
                                
Revenue
   $ 389     $ 472     $ 548     $ 507  
Operating income
     26       101       73       134  
Income (loss) from discontinued operations
     (4 )     381       73       79  
Net income (loss)
     (67 )     395       55       86  
Basic and diluted income (loss) per common share
     (0.01 )     0.05       0.01       0.01  
 
Note N – Subsequent Events

In January 2013, the Company formed Broward Oncology Partners, LLC (BROP) with other outside investors. The Company initially invested $50,000 for 12.5% ownership of BROP. BROP will operate a radiation oncology center in Fort Lauderdale, Florida under a lease from Tenet Health Services.
 
 
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