US NEUROSURGICAL INC
Business.              U.S. Neurosurgical, Inc. (“USN”) owns and operates stereotactic radiosurgery centers, utilizing the Leksell Gamma Knife technology (the “Gamma Knife”). As used herein, unless the context indicates otherwise, the term “Company”, “Registrant” and “USN.” means U.S.Neurosurgical, Inc. and its subsidiary, U.S. Neurosurgical Physics, Inc..  The Company, a Delaware corporation, was formed in July 1993.  The Company’s executive offices are located at 2400 Research   Boulevard, Suite 325, Rockville, Maryland 20850, and its telephone number is (301) 208-8998. Disclosure Regarding Forward Looking Statements           Statements contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Investors are cautioned that forward-looking statements are inherently uncertain. Actual performance and results may differ materially from that projected or suggested herein due to certain risks and uncertainties including, without limitation, the outcome of the Company’s payment, timing and ultimate collectability of accounts receivable for Gamma Knife procedures from different payor groups such as Medicare and private payors; competition; technological obsolescence; government regulation and malpractice liability.  Additional information concerning certain risks and uncertainties that could cause actual results to differ materially from that projected or suggested may be identified from time to time in the Company filings with the Securities and Exchange Commission (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 the Gamma Knife technology. USN currently owns and operates two Gamma Knife centers, one on the premises of Research Medical Center (“RMC”) in Kansas City, Missouri, and one on the premises of New York University Medical Center(“NYU”) in New York, New York. Management continues to explore opportunities to open additional Gamma Knife centers.  USN’s business strategy is to provide a mechanism whereby hospitals, physicians, and patients can have access to Gamma Knife treatment capability, a high capital cost item. USN provides the Gamma Knife to medical facilities on a “cost per treatment” basis.  USN owns the Gamma Knife units, and is reimbursed by the facility where it is housed, based on utilization.           USN’s principal target market is medical centers in major health care catchment areas that have physicians experienced with and dedicated to the use of the Gamma Knife.  As it has with its RMC and NYU Gamma Knife centers, USN would seek cooperative ventures with these facilities, if it were to explore opening additional centers. USN believes that, as of December 31, 2005, there were approximately 100 Gamma Knife treatment centers in the United States of America. 3            Through September 9, 1999, USN was a wholly owned subsidiary of GHS, Inc (“GHS”).  Effective on  September 17, 1999, GHS distributed its shares of USN to the stockholders of GHS. Gamma Knife Technology           The Leksell Gamma Knife is a unique stereotactic radiosurgical device used to treat brain tumors and other malformations of the brain without invasive surgery.  The Gamma Knife delivers a single, high dose of ionizing radiation emanating from 201 cobalt-60 sources positioned about a hemispherical, precision machined cavity. The lesion is first targeted with precision accuracy using advanced imaging and three dimensional treatment planning techniques such as CT Scans, MR Scans, conventional X-rays, or angiography. Each individual beam is focused on a common target producing an intense concentration of radiation at the target site, destroying the lesion while spreading the entry radiation dose uniformly and harmlessly over the patient’s skull.  The mechanical precision at the target site is +/- 0.1mm (1/10 of 1 millimeter).  Because of the steep fall-off in the radiation intensity surrounding the target, the lesion can be destroyed, while sparing the surrounding tissue.             The procedure, performed in a single treatment, sharply reduces hospital stay times and eliminates post-surgical bleeding and infection.  When compared with conventional neurosurgery, Gamma Knife treatment is less expensive. However, not all patients are candidates for radiosurgery since the decision to use the Gamma Knife depends on the type, size, and location of the lesion. Kansas City and New York Centers           In July 1993, USN purchased its first Leksell Gamma Knife from Elekta Instruments, Inc. (Elekta), for the purpose of installing it at RMC in Kansas City, Missouri.  USN paid approximately $3,000,000 for the Gamma Knife through a capital lease financing.           USN opened its first Gamma Knife Center on the premises of RMC in September 1994. RMC is part of Hospital Corporation of America (HCA).  USN formed a cooperative venture with RMC in September, 1993.  Per an agreement with RMC, GHS sold 500,000 shares of its common stock for $500,000 to RMC to secure additional working capital in order to enable USN to construct a Gamma Knife facility.  USN installed the Gamma Knife in the facility, where it is being utilized by neurosurgeons credentialled by RMC. USN is reimbursed for use of the Gamma Knife by RMC based on a percentage of the fees collected by RMC for Gamma Knife procedures. USN is responsible for the maintenance and insurance for the Gamma Knife equipment at the RMC facility.  Pursuant to a ground lease agreement, RMC leased to USN the land on which to build the Gamma Knife facility.  USN’s facility agreements with RMC expire in 2015 and there are no renewal options.  Costs associated with closing and restoring the RMC facility to its original condition are the responsibility of USN.  For the year ended December 31, 2005, 2004 and 2003, USN derived revenues from the RMC center of approximately $1,134,500, $1,153,000 and $1,449,000 respectively, as a result of 103, 111 and 117 procedures performed, respectively, during such periods.  4            USN opened its second treatment center in July 1997 on the campus of NYU in New York, New   York. Construction of the Gamma Knife suite was completed in July 1997.  The Gamma Knife cost and the cost of the facility improvements totaled approximately $4,700,000.  In August 2003, the cobalt source was reloaded in the New York Gamma Knife. After making the first 80% of payments equivalent to $582,000 to Elekta Instruments, DVI, the leasing company that USN had used for the previous six years on all transactions, filed for protection under Chapter 11 of the U.S. Bankcruptcy Code.  USN began making all lease payments into an escrow account beginning in September 2003 while the Company continued to negotiate with DVI and its successor. The Company refinanced the lease with SMT Leasing in April 2004.  During November 2002, the Company extended the term of its agreement with NYU until 2010. The Company has a marketing representative to help introduce the technology to neurosurgeons in the New   York tri-state region.  Pursuant to USN’s facility agreement with NYU, USN is responsible for the maintenance and insurance for the Gamma Knife equipment at the NYU facility and is reimbursed for use of the Gamma Knife based on a fee per procedure performed with the equipment.  Costs associated with closing and restoring the NYU facility to its original condition are the responsibility of USN.  NYU provides the medical and technical staff to operate the facility.  NYU pays USN a scheduled fee based on the number of patient procedures performed. For the years ended December 31, 2005, 2004, and 2003, USN derived revenues from the NYU center of approximately $973,500, $1,250,000 and $995,000, respectively, as a result of 161, 162 and 131 procedures performed, respectively, during such periods.             In August 2003, USN commenced payment on a $750,000 lease for the NYU cobalt reload, that was originally thought to be fully funded by DVI, Inc.  In August, after making the first payment of $21,584 on August 10, 2003, USN found that DVI, Inc. had failed to make the final 2 payments to Elekta that amounted to $150,000.  On August 15, 2003, DVI, Inc. filed for protection under Chapter 11 of the U.S. Bankcruptcy Code seeking to reorganize.  In September 2003 and the months after, the Company made lease payments into an escrow account controlled by counsel while it negotiated a resolution to the shortfall created by DVI.  The new financing was for approximately $728,000 that will be payable over 36 months at $23,000 per month beginning in April 2004.  Employees           U.S. Neurosurgical, Inc. has four full-time employees and two part-time employee. Of these employees, three are engaged in sales and marketing, one is a physicist, and two are in administration and office support.
Risk Factors.    Regulatory Environment           The levels of revenues and profitability of companies involved in the health services industry, such as USN, may be affected by the continuing efforts of governmental and third party payors to contain or reduce the costs of health care through  5  various means.  Although the Company does not believe that its business activities will be materially affected by changes in the regulatory environment, it is uncertain what legislative proposals will be adopted or what actions federal, state or private payors for healthcare goods and services may take in response to any healthcare reform proposals or legislation.  The Company cannot predict the effects healthcare reform may have on its business, and no assurance can be given that any such reforms will not have a material effect on USN.           In addition, the provision of medical services in the United States is dependent on the availability of reimbursement to consumers from third party payors, such as government and private insurance companies.  Although patients are ultimately responsible for services rendered, the Company expects that the majority of  its revenues will be derived from reimbursements by third party payors.  Medicare has authorized reimbursement for Gamma Knife treatment.  Over the last several years, such third party payors are increasingly challenging the cost effectiveness of medical products and services and taking other cost-containment measures.  Therefore, although treatment costs using the Gamma Knife compare favorably to traditional invasive brain surgery, it is unclear how this trend among third party payors and future regulatory reforms affecting governmental reimbursement will affect procedures in the higher end of the cost scale.           In the future, the Company may establish additional Gamma Knife centers.  Completion of future centers would require approvals and arrangements with hospitals, health care organizations, or other third parties, including certain regulatory authorities.  The Food and Drug Administration has issued the requisite pre-market approval for the Gamma Knife utilized by USN.  In addition, many states require hospitals to obtain a Certificate of Need (“CON”) before they can acquire a significant piece of medical equipment.  Should the Company enter into future ventures such “need” will be demonstrable, but it can have no assurance that 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 machine, 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 $2 million each and USN has also purchased an excess coverage policy providing an additional $8 million of insurance coverage.  The Company believes that its insurance is adequate for providing treatment facilities and non-medical services, although there can be no assurance that the coverage limits of such insurance will be adequate or that coverage will not be reduced or become unavailable in the future. Competition           The health care industry, in general, is highly competitive and the Company expects to have substantial competition from other independent organizations, as well as from hospitals in establishing future Gamma Knife centers.  There are other companies  6  that provide the Gamma Knife on a “cost per treatment basis”.  In the past two years a new technology called CyberKnife has also entered into the noninvasive market.  In addition, larger hospitals may be expected to install Gamma Knife or competing  technologies as part of their regular inpatient services. Virtually all of these competitors have greater financial and other resources than the Company.  Principal competitive factors include quality and timeliness of test results, ability to develop and maintain relationships with referring physicians, facility location, convenience of scheduling and availability of patient appointment times.  The Company believes that cost containment measures will encourage hospitals to seek companies that are providing the technology, instead of incurring the capital cost of establishing their own Gamma Knife centers. Gamma Knife Supply and Servicing           Currently the only company that manufactures, sells, and services the Gamma Knife is Elekta Instruments, Inc., a subsidiary of AB Elekta of Stockholm, Sweden.  In 1993, USN entered into purchase agreements with Elekta for the purchase of the Gamma Knives at its RMC and NYU centers.  During 2004, the Company entered into an agreement to upgrade to a new Gamma Knife at RMC.  After the trade in of the older unit the cost will be approximately $2,500,000. Elekta is responsible for the installation and testing of the equipment and the training of the hospital staff in the operation of the equipment.  As part of the purchase of the Gamma Knife devices from Elekta, USN entered into purchase and maintenance agreements pursuant to which Elekta provides USN with ongoing maintenance, repairs and software upgrades for the RMC and NYU Gamma knives at an aggregate cost of $145,000 per year.  Any interruption in the supply or services from Elekta would adversely affect USN’s ability to maintain its Gamma Knife treatment centers. Gamma Knife Financing           The Gamma Knife is an expensive piece of equipment presently costing approximately $3,800,000.  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.  The cobalt at the NYU facility was reloaded in August 2003 and the costs were approximately $800,000, which were partially financed.  The payments are for $23,000 per month until March 2007.   New Technology/Possible Obsolescence           Gamma     Knife technology may be subject to technological change. Consequently, the     Company will have to rely on the Gamma Knife’s manufacturer, Elekta,     to introduce improvements or upgrades in order to keep pace with technological     change. Any such improvements or upgrades which the Company may be required     to introduce will require additional financing. In addition, newly developed     techniques and devices for performing brain surgery may render the Gamma Knife     less competitive or obsolete. 7               Item           2.  Properties.              The Company’s base facility, from which it conducts substantially all of its administrative operations, is located in Rockville,  Maryland and occupies approximately 1,300 square feet. The rent is approximately $40,000 per year. USN occupies approximately 1,600 square feet in its RMC facility.  This facility is located on the campus of RMC in Kansas City, Missouri. USN also occupies about 2,000 square feet at the NYU Medical Center in New York, New York. Pursuant to the facility agreements with RMC and NYU, USN is not required to pay separate rent for the premises occupied by its Gamma Knife centers. Rent is deducted up front in the fee paid to USN for the use of the Gamma Knife. USN’s agreements with RMC expire in September 2015 and there are no renewal options.  USN’s agreement with NYU was extended this year and now expires in June  2010.
Properties   8
Legal Proceedings.              The Company is not involved in any material pending legal proceedings.
Submission of Matters to a Vote of Security Holders.              None 8  PART II Item 5.         Market For The Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Secuities.           The Company’s Common Stock is traded on the OTC Bulletin Board. The following table displays the range of high and low bid quotations as reported by NASDAQ System for the period from January 1, 2004 through December 31, 2005.                                                  Period               High Bid       Low Bid                                    January 1 –   March 31, 2004       .11           .09         April 1 -   June 30, 2004       .11         .09        July 1 –   September 30, 2004       .13           .09         October 1 –   December 31, 2004       .17         .09                                  January 1 –   March 31, 2005       .28           .16         April 1 -   June 30, 2005      .21         .18        July 1 –   September 30, 2005       .18           .16         October 1 –   December 31, 2005      .20         .15                 The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.           As of March 17, 2006, there were approximately 400 holders of record of the Company’s Common Stock.           To date the Company declared no dividends on its Common Stock and does not anticipate declaring dividends in the foreseeable future.           During the fourth quarter of 2005, the Company did not purchase any of its own equity securities. 9
Year Ended December 31,                          2005       2004       2003       2002       2001                                              (in thousands, except per share amounts)       (As restated)                                                                       Operating Revenue       $   2,108       $   2,403       $   2,444       $   2,639       $   2,573     Expenses:                                                                 Patient expense           816           780           820           930           1133     General and administrative           1,447           1384           1411           1386           1282     Interest expense           252           59           86           163           277     Cumulative effect of accounting method change (net of applicable income income tax   of $56,000)                                   (84   )                         Net Income (loss)           (285   )       123           (23   )       98           120                                                                       Basic and diluted Income (loss) per common share:                                                                 Income   before cumulative effect of accounting method change       $   (0.04   )   $   0.02       $   0.01       $   0.01       $   0.02     Cumulative   effect of accounting method change                               $   (0.01   )                         Net income (loss)       $   (0.04   )   $   0.02       $   0.00       $   0.01       $   0.02                                                                                  December 31,             2005       2004       2003       2002       2001                                              Balance Sheet Data:                                                                 Cash   and cash equivalents       $   422       $   511       $   89       $   88       $   311     Total   assets           4,663           4,201           3,150           2,963           3,795     Long-term   obligations           2,300           1,652           542           101           1,005     Stockholders   equity           1,179           1,464           1,337           1,368           1,279    10
have been recorded with a corresponding increase in the carrying value of the Gamma Knives. The Company is amortizing such costs over the lives of the respective useful lives from inception.           Upon initial application of FAS 143, the Company has recognized $140,000 of accumulated depreciation and a deferred tax asset of $56,000 and a decrease in net income of $84,000 as the cumulative effect of the accounting method change during the year ended December 31, 2003. Application of the provisions of FAS 143 would have resulted in a decrease in net income of approximately $12,000 for the year ended December 31, 2002. If the Company had adopted this standard effective January 1, 2003, total assets, liabilities and accumulated deficit at the end of each of the first three quarters would have increased by $120,000, $200,000 and $80,000, respectively. In addition, amortization expense would be $1,000 higher in each of the first three quarters of 2003. Liquidity and capital resources           At December 31, 2005 the Company had a working capital deficit of $251,000 as compared to a working capital surplus of $86,000 at December 31, 2004.            Cash and cash equivalents at December 31, 2005 were $422,000 as compared to $511,000 at December 31, 2004. Net cash provided by operating activities was $420,000 in 2005 as compared with $497,000 for the same period a year earlier. Depreciation and amortization was $682,000 in 2005 as compared to $566,000 in 2004. Accounts receivable decreased $124,000 during the year as compared to an increase of $32,000 in 2004. Accounts payable increased by $23,000 during 2005 as compared to a decrease of $159,000 in 2004.            Net cash used in investing activities for the year ended 2005 was $1,323,000 as compared to $1,071,000 in the year ago period.            Net cash used in financing activites for the year ended December 31, 2005 was $814,000 as compared to $996,000 in 2004.  Off-balance sheet arangements           None 12  Tabular disclosure of contractual obligations           The following is a summary of the Company’s contractual obligations at December 31, 2005:                                                                                  Payments due by period                    Contractual Obligations       Total       Less than 1   year       1-3 years       3-5   years       More than   5 years                                                 Capital (Finance) Lease Obligations     $   3,365,000     $   849,000     $   1,211,000     $   1,305,000               Operating Lease Obligations     $   90,000     $   40,000     $   50,000                       Asset retirement obligation     $   200,000                         $   100,000     $   100,000                                                  Total     $   3,655,000     $   889,000     $   1,261,00     $   1,405,000     $   100,000                                                 Critical accounting policies      Estimates and assumptions           The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.       Asset retirement obligations           In June 2001, the Financial Accounting Standards Board (“FASB”), issued Statement No. 143, “Accounting for Asset Retirement Obligations,” (“FAS 143”) effective for the fiscal years beginning after June 15, 2002.  Accordingly, the Company recorded liabilities for legal obligations associated with the retirement of tangible long-lived assets based the estimated fair value of such liabilities.  The estimated costs of these obligations is capitalized as costs of the assets subject to the retirement obligations and amortized over the lives of the assets.
Quantitative and Qualitative Disclosures about Market Risk.              Market risk represents the risk of loss that may impact the Company’s financial position due to adverse changes in financial market prices and rates.  Market risk exposure is primarily a result of fluctuations in interest rates.  The Company does not hold or issue financial instruments for trading purposes. 13            The Company has exposure to market rate risk for changes in interest rates related to the interest income on our cash, cash equivalents, and short-term investments, but we believe that the impact of these fluctuations does not have a material effect on our financial position due to the short-term nature of any such investments.  The obligations under the Company’s capital lease and its loans payable are based on fixed interest rates and thus the amounts due under these instruments do not fluctuate with changes in market prices and rates.
Financial Statements and Supplementary Data.              The Financial Statements and Supplementary Data are listed under Item 15 in this Annual Report of Form 10-K and attached hereto.                                                                                  Quarter Ended                          2005       31-Mar       30-Jun       30-Sep        31-Dec       Year                                                                                                    Revenue      $   476      $   664     $   546      $   422      $   2,108       Income (Loss) from   operations       (119   )     41       38       (115   )     (155   )     Net Income (loss)       (151   )     (41   )     (3   )     (90   )     (285   )     Basic           and diluted net income (loss) per common share     $   (0.02  )  $   (0.01  )   $   0.00     $   (0.01  )   $   (0.04  )                                                                              2004     31-Mar       30-Jun       30-Sep       31-Dec       Year                                                                                              Revenue     $   529     $   774     $   637      $   463     $   2,403       Income (Loss) from   operations       40       246       85       (132   )     239       Net Income (loss)       33       131       44       (85   )     123       Basic           and diluted net income (loss) per common share     $   0.00     $   0.02     $   0.01     $   (0.01  )   $   0.02                                                                                2003 (Restated)     31-Mar       30-Jun       30-Sep       31-Dec       Year                                                                                              Revenue     $   835     $    550     $   490     $   569     $   2,444       Income (Loss) from   operations       257       (54   )     (157   )     167       213       Net Income (loss)       136       (41   )     (110   )     (8   )     (23   )     Basic           and diluted net income per (loss) common share     $   0.02    $   (0.01  )   $   (0.01  )   $   0.00     $   0.00      14
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.              There have been no disagreements between the Company and its former accountant during the past two fiscal years on any matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedure, which have not been resolved to the satisfaction of the former accountant.
Controls and Procedures.    Disclosure Controls and Procedures           As further discussed in Note A[1] to the consolidated financial statements, in connection with the filing of Amendment No. 1 on Form 10-K/A (“Form 10-K/A”) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, we have restated the consolidated financial statements in order to reflect the cumulative effect of adopting the Financial Accounting Standards Board’s Statement No. 143, Accounting for Asset Retirement Obligations (“SFAS No. 143”), in the statement of operations for the year ended December 31, 2003, rather than reflecting it directly within retained earnings.  In connection with such restatement, under the direction of the Company’s Chief Executive Officer, management reevaluated the Company’s disclosure controls and procedures and determined that the failure to correctly apply SFAS No. 143 constituted a material weakness in the Company’s control over financial reporting for asset retirement obligations.  In connection with the preparation and filing of the Form 10-K/A, management of the Company took certain steps to enhance its disclosure controls and procedures, not only in connection with the deficiency with respect to asset retirement obligations, but also due to other recent changes in the Company’s operations, including (1) the sudden death of our former CFO and (2) issues with major customers that have required us to re-evaluate operations to achieve greater efficiencies. The Company chose not to hire a new CFO at this time, but in the interests of efficiency, one of the Company’s outside directors will play a greater role in the reporting and disclosure process (the “Director/Advisor”) and a part-time controller has been retained. Consideration is being given to increasing the size of the Board of Directors and steps have been taking to providing the members of the Audit Committee with broader access to employees and advisors responsible for accounting and financial reporting.  In addition, the Company has formed a Disclosure Committee, initially consisting of the CEO and the Director/Advisor, which will periodically review the Company’s disclosure controls and procedures, will take steps to ensure that material information is available to the Disclosure Committee (as well as the Board of Directors and the Audit Committee) on a timely basis and will have principal oversight and responsibility for the preparation of periodic reports.  In addition, the Disclosure Committee is charged with evaluating the applicability and the appropriate implementation of prevailing accounting standards and concepts and pronouncements issued by the FASB and other regulatory bodies and self-regulatory organizations (such as SFAS 143).  While these steps were prompted in large part by recent changes in the Company’s operations, these adjustments will improve disclosure controls and procedures generally, and specifically as they relate to the  15  previously identified deficiency in reporting for asset retirement obligations as provided under SFAS 143.  Moreover, management believes that it has fully remediated that weakness as of the date of filing of the Form 10-K/A.             Management of the Company, including the Chief Executive Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.  Based upon that evaluation (including an evaluation of the updated procedures described above) the Company’s Chief Executive Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report for the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, to be recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Changes in Internal Control Over Financial Reporting           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, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Other Information.              None 16  PART III
Directors and Executive Officers of the Registrant              The directors and executive officers of the Company are as follows:                          Name        Age    Position                       Alan Gold   61   President   & Chairman     William F.   Leimkuhler   54   Director     Charles H.   Merriman, III   71   Director     Susan   Greenwald   60   Vice   President and Secretary              Alan Gold  has served as President and Chairman of USN since 1996. Mr. Gold has also been a director of USN since its formation in 1993. Mr Gold served as President of GHS from 1983 through May 1999 and director of GHS since its formation through November 1999. Mr. Gold was one of the founders of Global Health Systems, the predecessor of GHS, serving as its President since its formation in July 1983.  From 1981 to 1983 he served as Executive Vice-President of Libra Group, a company located in Rockville, Maryland, engaged in health care automation, where he was President of Global Health Foundation and Libra Research and Executive Vice President of Libra Technology. From July 1997 through March 1998 Mr. Gold was also an employee of Health Management Systems.            William F. Leimkuhler has served as director of USN since May 1999. He also served as a director of GHS since its inception in 1984 through November 1999. Mr Leimkuhler 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.             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  17  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.            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, 2005, the Board of Directors held three meetings, which were attended by all incumbent directors.  The Company has a standing audit committee, but does not have a nominating or compensation committee.           Pursuant to the Company’s bylaws, officers of the Company hold office until the first meeting of directors following the next annual meeting of stockholders and until their successors are chosen and qualified. Section 16 (a) Beneficial Ownership Reporting Compliance           Based solely upon a review of the copies of the forms furnished to the Company, or written representations from certain reporting persons, the Company believes that during the years ended December 31, 2005, all filing requirements applicable to its officers and directors were complied with by such individuals.
Executive Compensation              The information below sets forth the compensation for the year ended December 31, 2005, 2004, and 2003, for the Chief Executive Officer of the Company.  Summary Compensation Table                                              Name andPrincipal Position       Annual Compensation                                  Year       Salary($)                                          Alan Gold          2005          $ 300,000                 President   & Director          2004          $ 300,000                         2003          $ 300,000            18  Director Compensation           During 2005, our Directors who are not officers or employees (“Non-Employee Directors”) received an annual retainer of $3,000.  The Chairman of the Company’s Audit Committee received an additional retainer $5,000. Our Directors of the Company who are officers or employees do not receive any additional compensation for serving on the Board or on any Board committee. Employmnt Agreements           The Company and Mr. Gold are parties to an employment agreement giving either the Company or Mr. Gold the option to terminate the agreement by giving the other party 6 months written notice.
The following table sets forth, as of March 15, 2005, certain information with respect to each beneficial owner of more than 5% of the Company’s Common Stock and each director and executive officer of the Company:                                          Name and Address   of Beneficial Owner       Number of Shares   Beneficially   Owned (1)       Percent of   Class                            Alan Gold (2)     2400 Research Blvd. Rockville, MD 20850     1,140,246         14.5   %                               William F.     Leimkuhler43 Salem Straits Road Darien, CT 06820     100,000         1.3   %                               Charles H.   Merriman III 5507 Cary St.   Road Richmond, VA 23226     130,672         1.7   %                               Stanley S. Shuman (3)711 Fifth Avenue New York,   NY  10022     2,688,000         34.2   %                               Allen &   Company Incorporated 711 Fifth Avenue New York, NY 10022     1,847,000         23.4   %                               All   Directors and Officers of USN   as a group (2) (three persons)     1,370,918         19.5   %      19                          (1)   Unless otherwise indicated, all shares are   beneficially owned and sole voting and investment power is held by the person   named above.                     (2)   Includes 1,140,246 shares held jointly by Mr. Gold   and his wife, Susan Greenwald, as joint tenants with right of survivorship.                     (3)   Includes 1,847,000 shares owned by Allen &   Company Incorporated, Mr. Shuman disclaims beneficial ownership in such   shares, except to the extent of his pecuniary interest therein.
Certain Relationships and Related Transactions              None
Principal Accounting Fees and Services.              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, 2005 and 2004, the Company paid or accrued $23,079 and $40,000, respectively, for Audit Fees to Goodman and Company, LLP and for the year ended December 31, 2004 the Company paid or accrued $18,500 for Audit Fees to Eisner LLP.            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, 2005 and 2004, the Company did not pay or accrue any amounts for Audit Related Fees.           Tax Fees represent fees for services rendered in connection with tax compliance, tax advice and tax planning. For the years ended December 31, 2005 and 2004, the Company paid $5,586 for Tax Fees to Goodman and Company, LLP and for the year ended December 31, 2004 the Company paid $18,000 for Tax Fees to Eisner LLP.           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, 2005 and 2004, the Company did not pay or accrue any amounts for these services.           The Audit Committee of the Company’s Board of Directors has established a policy requiring its pre-approval 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 Audit Committee. 20  PART IV
Exhibits, Financial Statement Schedules.                              (a)   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-2,3         Balance Sheets   as of December 31, 2005 and 2004           F-4         Statements of   Operations for the years ended December 31, 2005, 2004, and 2003.           F-5         Statements of   Changes in Stockholders’ Equity for the period January 1, 2003 through   December 31, 2005           F-6         Statements of   Cash Flows for the year ended December 31, 2005, 2004, and 2003.           F-7         Notes to   Financial Statements           F-8              All schedules have been omitted as the conditions requiring their filing are not present or the information required therein has been included in the notes to the financial statements.                   (b)   Exhibits:                                   (a)   Form of Amended and Restated Certificate of   Incorporation of U.S. Neurosurgical, Inc. (“USN”) (1)                       (b)   Form of Amended and Restated Bylaws of USN (1)                     (c)   Form of Stock Certificate of Common Stock (1)                       (d)   Distribution Agreement dated May 27, 1999 between   GHS, Inc. (“GHS”) and USN (1)                   (e)   Tax Matters Agreement dated May 27,1999 between GHS   and USN (1)                     (f)   Assignment and Assumption Agreement dated May 27,   1999 between GHS and USN (1)                     (g)   Employment Agreement dated December 14,1984 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)                      (h)   Gamma Knife Neuroradiosurgery Equipment Agreement   dated August, 1993 between Research Medical Center and USN (incorporated by   reference to Exhibit 10h to GHS’s Quarterly Report or Form 10-Q for the   quarter ended September 30, 1993).                       (i)   Ground Lease Agreement dated August, 1993 between   Research Medical Center and USN (incorporated by reference to Exhibit 10j to   GHS’s Quarterly Report on Form 10-Q for the quarter ended September 30,   1993).                   (j)   LGK Agreement dated July 12, 1993 between Elekta   Instruments, Inc. and USN (incorporated by reference to Exhibit 10k to GHS’s   Quarterly Report on Form 10-Q for the quarter ended September 30, 1993).    21                     (k)   Agreement dated December 29, 1993 between USN and   Elekta Instruments, Inc. (incorporated by reference to 10o to GHS’s 1994   Annual Report on Form 10-K).                           (l)   Agreement dated August 1, 1996 between USN and DVI,   Inc. (incorporated by reference 10j to GHS’s 1997 Annual Report on form   10-K).                           (m)   Certifications of CEO and CFO pursuant to Section   302 of the Sarbanes-Oxley Act of 2002                           (n)   Gamma Knife Neuroradiosurgery Equipment dated as of   November 26, 1996 between New York University on behalf of New York   University Medical Center and USN. (1)                           (o)   List of Subsidiaries (1)                       (1) Previously filed as an exhibit to the Form 10.   Registration Statement of USN filed with the SEC on August 25, 1999.                  (c)   Financial Statement Schedules.   None    22  SIGNATURES           Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 28, 2006                          U.S. Neurosurgical, Inc.         (Registrant)                   By    /s/ Alan Gold                                  Alan Gold                 President and   Chief Executive Officer                 and                         Principal   Financial Officer                Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.                  March 28, 2006   /s/ Alan Gold                  Alan Gold         President and Director         (Chief Executive Officer)                     March 28, 2006   /s/ William F. Leimkuhler                        William F. Leimkuhler             Director                       March 28, 2006   /s/ Charles H. Merriman III                        Charles H. Merriman III             Director          U.S. NEUROSURGICAL, INC. AND SUBSIDIARY Contents                Page                    Consolidated   Financial Statements   F-1               Report   of Independent Registered Public Accounting Firm   F-2               Report   of Independent Registered Public Accounting Firm   F-3               Consolidated   balance sheets as of December 31, 2005 and 2004   F-4               Consolidated   statements of operations for the years ended December 31, 2005, 2004 and 2003   F-5               Consolidated   statements of stockholders’ equity for the years ended December 31, 2005,   2004 and 2003   F-6               Consolidated   statements of cash flows for the years ended December 31, 2005, 2004 and 2003   F-7               Notes   to consolidated financial statements   F-8     F-1  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders U.S. NeuroSurgical Inc. Rockville, Maryland We have audited     the accompanying consolidated balance sheets of U.S. NeuroSurgical, Inc. and     subsidiary as of December 31, 2005 and 2004, and the related consolidated     statements of operations, stockholders’ equity and cash flows for the     years ended December 31, 2005 and 2004. These consolidated financial     statements are the responsibility of the Company’s management. Our responsibility     is to express an opinion on these consolidated financial statements based     on our audit. The consolidated financial statements of the Company for the     year ended December 31, 2003 were audited by other auditors whose report     dated February 4, 2004, expressed an unqualified opinion on those statements. We conducted     our audits in accordance with the standards of the Public Company Accounting     Oversight Board (United States). Those standards require that we plan and     perform the audit to obtain reasonable assurance about whether the financial     statements are free of material misstatement. An audit includes examining,     on a test basis, evidence supporting the amounts and disclosures in the financial     statements. An audit also includes assessing the accounting principles used     and significant estimates made by management, as well as evaluating the overall     financial statement presentation. We believe that our audits provide a reasonable     basis for our opinion. In our opinion,     the consolidated financial statements enumerated above present fairly, in     all material respects, the consolidated financial position of U.S. NeuroSurgical,     Inc. and subsidiary as of December 31, 2005 and 2004, and the consolidated     results of their operations and their cash flows for the years ended December 31,     2005 and 2004, in conformity with United States generally accepted accounting     principles.  Goodman and Company, LLP Rockville, Maryland January 26, 2006 F-2  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders U.S. NeuroSurgical, Inc. We have audited the accompanying consolidated statements of operations, stockholders’ equity and cash flows of U.S. NeuroSurgical, Inc. and subsidiary for the year ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements enumerated above present fairly, in all material respects, the consolidated results of operations and consolidated cash flows of U.S. NeuroSurgical, Inc. and subsidiary for the year ended December 31, 2003 in conformity with U.S. generally accepted accounting principles. New York, New York February 4, 2004                  With respect to the third paragraph of Note A[1]     December 23, 2005             F-3  U.S. NEUROSURGICAL, INC. AND SUBSIDIARY   Consolidated Balance Sheets                                              December   31,                                  2005       2004                                 ASSETS                                 Current assets:                                 Cash and cash equivalents       $   422,000       $   511,000         Accounts receivable (net of allowance for doubtful accounts of $36,000   in 2005 and 2004)           280,000           404,000         Accounts receivable - RMC           79,000           57,000         Other current assets           152,000           199,000                                             Total current assets           933,000           1,171,000               Property and equipment:                                 Gamma Knives (net of accumulated depreciation of $3,987,000 in 2005   and $7,147,000 in 2004)           2,982,000           965,000         Leasehold improvements (net of accumulated amortization of $1,641,000   in 2005 and $1,545,000 in 2004)           400,000           497,000         Office furniture and computers (net of accumulated depreciation of   $107,000 in 2005 and $107,000 in 2004)           0           0                                                         3,382,000           1,462,000                                             Progress payments - RMC Gamma Knife           0           1,282,000         Cash held in escrow           108,000           106,000         Deferred tax asset           240,000           180,000                                                     $   4,663,000       $   4,201,000                                       LIABILITIES                                 Current liabilities:                                 Accounts payable and accrued expenses       $   62,000       $   39,000         Obligations under capital leases and loans payable - current portion           632,000           467,000         Due to stockholder           300,000           300,000         Deferred tax liability           190,000           240,000         Other current liabilities           0           39,000                                             Total current liabilities           1,184,000           1,085,000               Asset retirement obligations           200,000           200,000         Obligations under capital leases and loans payable - net of current   portion           2,100,000           1,452,000                                             Total liabilities           3,484,000           2,737,000               Commitments, litigation and other matters (Notes A[10], C, E and H)                                                                   STOCKHOLDERS’ EQUITY                                 Common stock - par value $.01; 25,000,000 shares authorized; 7,697,185   shares issued at December 31, 2005 and 2004           77,000           77,000         Additional paid-in capital           2,797,000           2,797,000         Accumulated deficit           (1,695,000   )        (1,410,000   )                                                      1,179,000           1,464,000                                                     $   4,663,000       $   4,201,000                                                    See   notes to consolidated financial statements   F-4         U.S. NEUROSURGICAL, INC. AND SUBSIDIARY  Consolidated Statements of Operations                                                           Year Ended   December 31,                                  2005       2004       2003                                                                        (Restated   Note A[1])                                                       Revenue (Notes B and C)       $   2,108,000       $   2,403,000           2,444,000                                                                                               Costs and expenses:                                             Patient expenses           816,000           780,000           820,000         Selling, general and administrative           1,447,000           1,384,000           1,411,000                                                                                                           2,263,000           2,164,000           2,231,000                                                                                               Income (loss) from operations           (155,000   )       239,000           213,000                                                                                               Interest expense           (252,000   )       (59,000   )       (86,000   )     Interest income           12,000           3,000           1,000                                                                                                           (240,000   )       (56,000   )       (85,000   )                                                                                           Income           (loss) before income taxes           (395,000   )       183,000           128,000                                                       Provision for income tax benefit (expense)           110,000           (60,000   )       (67,000   )                                                                                           Income           (loss) before cumulative effect of accounting method change           (285,000   )       123,000           61,000         Cumulative effect of accounting method change (net of applicable   income tax of $56,000)           —           —           (84,000   )                                                                                           Net income (loss)       $   (285,000   )   $   123,000           (23,000   )                                                                                           Basic and diluted net income (loss) per share:                                                                                           Net income (loss)       $   (0.04   )   $   0.02           —                                                                                               Weighted average common shares outstanding           7,697,185           7,767,100           7,791,555                                                              See   notes to consolidated financial statements   F-5         U.S. NEUROSURGICAL, INC. AND SUBSIDIARY  Consolidated Statements of Stockholders’ Equity (Restated Note A[1])                                                                                  Common           Stock                       Treasury           Stock                                                                     Number           of           Shares     Amount     Additional           Paid-in           Capital     Accumulated           Deficit     Number           of           Shares     Amount     Total                                                                                                                                Balance           - January 1, 2003        7,866,185      $  79,000      $  2,808,000      $  (1,510,000  )     (114,000  )   $  (9,000  )   $  1,368,000       Purchase           of 90,000 shares of treasury stock        —        —        —        —        (90,000  )     (8,000  )     (8,000  )    Net           income (loss) for the year ended December 31, 2003        —        —        —        (23,000  )     —        —        (23,000  )                                                                                                                                                  Balance           - December 31, 2003        7,866,185        79,000        2,808,000        (1,533,000  )     (204,000  )     (17,000  )     1,337,000       Retirement           of treasury stock        (204,000  )     (2,000  )     (15,000  )     —        204,000        17,000        —       Issuance           of common stock as compensation        35,000        —        4,000        —        —        —        4,000       Net           income (loss) for the year ended December 31, 2004        —        —        —        123,000        —        —        123,000                                                                                                                                                     Balance           - December 31, 2004        7,697,185        77,000        2,797,000        (1,410,000  )     —        —        1,464,000       Net           income (loss) for the year ended December 31, 2005        —        —                 (285,000  )     —        —        (285,000  )                                                                           Balance           - December 31, 2005       7,697,185     $  77,000     $  2,797,000     $  (1,695,000  )    —     $  —     $  1,179,000                                                                                           See notes   to consolidated financial statements   F-6         U.S. NEUROSURGICAL, INC. AND SUBSIDIARY  Consolidated Statements of Cash Flows                                                           Year Ended   December 31,                                  2005       2004       2003                                                                        (Restated   Note A[1])               Cash flows from operating activities:                                             Net income (loss)       $   (285,000   )   $   123,000       $   (23,000   )     Adjustments           to reconcile to net cash provided by operating activities:                                             Cumulative effect of accounting method change for asset retirement   obligations           —           —           84,000         Issuance of stock as compensation           —           4,000           —         Depreciation and amortization           682,000           566,000           779,000         Deferred income tax provision           (110,000   )       14,000           41,000         Changes in:                                             Accounts   receivable           124,000           (32,000   )       142,000         Accounts   receivable - stockholder           (22,000   )       39,000           13,000         Other   current assets           47,000           (55,000   )       (26,000   )     Accounts   payable and accrued expenses           23,000           (159,000   )       (21,000   )     Other   current liabilities           (39,000   )       (3,000   )       3,000                                              Net cash provided by operating activities           420,000           497,000           992,000                                              Cash flows from investing activities:                                             Property and equipment           (2,603,000   )       —           (803,000   )     Progress payments - RMC Gamma Knife           1,282,000           (1,282,000   )       —         Decrease (increase) in cash held in escrow           (2,000   )       211,000           (211,000   )                                          Net cash used in investing activities           (1,323,000   )       (1,071,000   )       (1,014,000   )                                          Cash flows from financing activities:                                             Repayment of capital lease and loan obligations           (505,000   )       (1,014,000   )       (688,000   )     Cash received on financing of equipment           1,319,000           2,010,000           719,000         Purchase of treasury stock           —           —           (8,000   )                                          Net cash used in financing activities           814,000           996,000           23,000                                              Net change in cash and cash equivalents           (89,000   )       422,000           1,000         Cash and cash equivalents - beginning of year           511,000           89,000           88,000                                              Cash and cash equivalents - end of year       $   422,000       $   511,000       $   89,000                                                                                                                                    Supplemental disclosures of cash flow information:                                             Cash paid for:                                             Interest       $   252,000       $   59,000       $   86,000         Income taxes       $   —       $   44,000       $   —               Supplemental disclosures of noncash activities:                                             Issuance of stock as compensation       $   —       $   4,000       $   —                      See notes to consolidated financial statements    F-7       U.S. NEUROSURGICAL, INC. AND SUBSIDIARY NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES              [1]   Basis of preparation and restatement:                   U.S.   NeuroSurgical, Inc. (“USN” or “the Company”) owns and operates stereotactic   radiosurgery centers, utilizing the Gamma Knife technology. U.S.   NeuroSurgical Physics, Inc. (“USNP”) administers the billing and collection   of the fees charged by the physicist who operates the Kansas City gamma   knife. USN and USNP are collectively referred to herein as the Company. The   Company was a wholly owned subsidiary of GHS, Inc. (“GHS”), a publicly owned   company. Effective May 27, 1999, GHS transferred its investment in USNP to   USN. On May 20, 1999 the Board of Directors of USN authorized a stock split   of USN’s common stock which resulted in the number of outstanding shares of   USN common stock equaling the number of shares of GHS common stock   outstanding on the date of the spin-off. The Board of Directors of GHS   resolved to distribute and the Company did distribute such common shares to   its own stockholders on a one-to-one basis in a spin-off transaction.   Immediately following the spin-off, USN became a publicly held company.                   The   consolidated financial statements include the accounts of USN and USNP.   Intercompany transactions and balances have been eliminated.                   The Company   has restated the consolidated financial statements in order to reflect the   cumulative effect of adopting the Financial Accounting Standards Board’s   Statement No. 143, Accounting for Asset Retirement Obligations, in the   statement of operations for the year ended December 31, 2003, rather than   reflecting it directly within retained earnings. This resulted in restatement   of the consolidated statements of operations, consolidated statements of   stockholders’ equity, consolidated statements of cash flows and notes E and M   to reflect the $84,000 (net of income tax effect of $56,000) change in the   results of operations of the Company.                                                      Year ended December 31, 2003                                   As previously reported:                                                           Net income           $   61,000                                                                                   Net income per share           $   0.01                                                                                   As restated:                                                                   Income before cumulative effect of   accounting method change           $   61,000                                                   Cumulative effect of accounting method   change (net of applicable income tax of $56,000)               (84,000   )                                                                               Net (loss)           $   (23,000   )                                                                               Net income (loss) per share:                                                                   Income before cumulative effect of   accounting method change           $   0.01                                                   Cumulative effect of accounting method   change               (0.01   )                                                                               Net (loss)           $   0.00                                                          [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.    F-8  U.S. NEUROSURGICAL, INC. AND SUBSIDIARY              NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)               [3]   Revenue recognition:                   Patient   revenue is recognized when the Gamma Knife procedure is rendered.               [4]   Long-lived assets:                   The Company   reviews its long-lived assets for impairment whenever events or changes in   circumstances indicate that the carrying amount of an asset may not be   recoverable.               [5]   Depreciation and amortization:                   The Gamma   Knives are being depreciated on the straight-line method over an estimated   useful life of seven years. The related costs incurred to reload the cobalt   are being amortized on a straight-line method over an estimated useful life   of five years. Leasehold improvements are being amortized on the   straight-line method over 7 to 20 years, the shorter of useful life or the   life of the leases. Office furniture and computers are being depreciated on a   straight-line method over their estimated useful lives ranging from 3 to 7   years. Depreciation expense for the years ended December 31, 2005, 2004, and   2003 was $682,000 $566,000, and $779,000, respectively.               [6]   Income taxes:                   Income taxes   are accounted for under the asset and liability method. Deferred tax assets   and liabilities are recognized for the future tax consequences attributable   to differences between the financial statement carrying amounts of existing   assets and liabilities and their respective tax bases. Deferred tax assets   and liabilities are measured using enacted tax rates expected to apply to   taxable income in the years in which those temporary differences are expected   to be recovered or settled. The effect on deferred tax assets or liabilities   of a change in tax rates is recognized in income in the period that includes   the enactment date.               [7]   Earnings           per share:                   Earnings per   share are computed by dividing earnings available to common shareholders by   the weighted average shares outstanding for the period. There were no common   stock equivalents during 2005, 2004, and 2003 and therefore, no potential   dilution for the periods presented.               [8]   Advertising           costs:                   The Company   follows the policy of charging the costs of advertising to expense as   incurred.               [9]   Bad debts:                   The Company           evaluates each of its accounts receivable individually and provides           a charge to income that is appropriate, in the opinion of management,           to absorb probable credit losses.               [10]   Estimates and assumptions:                   The preparation   of financial statements in conformity with accounting principles generally   accepted in the United States of America requires management to make   estimates and assumptions that affect the reported amounts of assets and   liabilities and contingent assets and liabilities at the date of the   financial statements and the reported amounts of revenues and expenses during   the reporting period. Actual results could differ from those estimates.               [11]   Fair values of financial instruments:                   The   estimated fair value of financial instruments has been determined based on   available market    F-9  U.S. NEUROSURGICAL, INC. AND SUBSIDIARY NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)               information           and appropriate valuation methodologies. The carrying amounts of cash,           accounts receivable, other current assets and accounts payable approximate           fair value at December 31, 2005 and 2004 because of the short maturity           of these financial instruments. The carrying values of the obligations           under capital leases and loans payable approximate fair value because           the interest rates on these instruments approximate the market rates           at December 31, 2005 and 2004.           [12] 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 two           medical centers. Historically, credit losses on accounts receivable           have not been significant.          [13]  Asset           retirement obligations:               In           June 2001, the Financial Accounting Standards Board (“FASB”),           issued Statement No. 143, “Accounting for Asset Retirement Obligations,”           (“FAS143”) effective for the fiscal years beginning after           June 15, 2002. Accordingly, the Company recorded liabilities for legal           obligations associated with the retirement of tangible long-lived assets           based on the estimated fair value of such liabilities. The estimated           costs of these obligations is capitalized as costs of the assets subject           to the retirement obligations and amortized over the lives of the assets.            [14]  Reclassifications:               Certain           prior year balances have been reclassified to conform to current year           presentation.            [15]  Recently           issued accounting pronouncements:               The           FASB issued FIN No. 46R, “Consolidation of Variable Interest Entities”           (“FIN 46R”). FIN 46R relates to certain entities in which           equity investors do not have the characteristics of a controlling financial           interest or do not have sufficient capital at risk for the entity to           finance its activities without additional subordinated financial support           from other parties. Under certain circumstances, an enterprise may be           required to consolidate such an entity if it will absorb a majority           of the entity’s expected losses, receive a majority of the entity’s           residual returns, or both. FIN 46R became effective for variable interest           entities created after January 31, 2003, and had no effect on the Company’s           financial position as of December 31, 2005 and 2004, and its results           of operations for the years then ended.               In           December 2004, the FASB issued Statement No. 123(R), “Share-Based           Compensation” which requires the recognition of costs resulting           from transactions involving the acquisition of goods and services by           issuing its shares, share options, or other equity instruments. This           standard requires a fair value-based measurement method in accounting           for share-based payment transactions with both employees and nonemployees.           This standard replaces Statement No. 123, “Accounting for Stock-Based           Compensation,” and supersedes Accounting Principles Board (APB)           Opinion No. 25, “Accounting for Stock Issued to Employees.”           Accordingly, the use of the intrinsic value method as provided under           APB Opinion No. 25 will be eliminated. SFAS No. 123(R) is effective           for all awards of share-based payments granted, modified, or cancelled           after June 15, 2005, except for public entities filing as small business           issuers. Public entities that file as small business issuers will be           required to apply Statement 123(R) in the first interim or reporting           period that begins after December 15, 2005. In addition, compensation           costs for the unvested portion of awards, issued prior to and outstanding           as of June 15, 2005, would continue to be recognized at the grant-date           fair value as the remaining requisite service is rendered. The Company           does not currently have a stock compensation plan.               In           December 2004, the FASB issued Statement No, 153, “Exchanges of           Nonmonetary Assets – An Amendment of APB Opinion No. 29,”           which eliminates the exception from fair value measurement for nonmonetary           exchanges of similar productive assets that do not culminate an earning           process under APB Opinion No. 29, “Accounting for Nonmonetary Transactions.”           Statement No. 153 requires that the measurement be based on the recorded           amount of the assets relinquished for nonmonetary exchanges that do           not have commercial substance. A nonmonetary exchange has commercial           substance if the future cash flows of the entity are expected to change           significantly as a result of the exchange. This standard is effective           for nonmonetary asset exchanges occurring in fiscal periods beginning           after June 15, 2005. The potential effect of Statement No. 153 on the           financial statements is currently being considered.   F-10  U.S. NEUROSURGICAL, INC. AND SUBSIDIARY NOTE B - AGREEMENTS WITH RESEARCH MEDICAL CENTER (“RMC”)              [1]   Gamma Knife neuroradiosurgery equipment agreement:                   USN entered           into a neuroradiosurgery equipment agreement (the “equipment agreement”)           with RMC, a stockholder of the Company, for a period of 21 years, which           commenced, with the completion of the neuroradiosurgery facility (the           “facility”) in September 1994. The equipment agreement, among           other matters, requires USN to provide (i) the use of the Gamma Knife           equipment (the “equipment”) to RMC, (ii) the necessary technical           personnel for the proper operation of the equipment, (iii) sufficient           supplies for the equipment, (iv) the operation, maintenance and repair           of the equipment, (v) all basic hardware and software updates to the           equipment and, (vi) an uptime guarantee. In return, RMC pays USN 80%           of RMC’s fees, subject to adjustments, for the use of the equipment           and the facility. The agreement also provides for USN to establish for           the benefit of RMC an escrow account funded with an amount equal to           one month’s average of the compensation payable to USN. USN is           the owner of and entitled to the income from the escrow account so long           as no event of default has occurred. As of December 31, 2005 and 2004,           the escrow account balance was $108,000 and $106,000, respectively.           The equipment agreement terminates automatically upon termination of           the ground lease agreement (see Note B[2]). The Company derived patient           revenue from the RMC center in the amounts of $1,134,500, $1,153,000,           and $1,449,000 for the years ended December 31, 2005, 2004, and 2003,           respectively.                   In April of           2005, the Company purchased and installed a new Gamma Knife at RMC to           replace the existing equipment. The cost to purchase and install the           new equipment was $2,606,000.               [2]   Ground lease agreement:                   USN   constructed a facility in Kansas City, Missouri on property which the Company   leases from RMC. The lease term is for a period of 21 years commencing   September 1994. The lease provides for rent at $3,600 per annum. The terms of   the lease include escalation clauses for increases in certain operating   expenses and for payment of real estate taxes and utilities. Title to all   improvements upon the land vests in RMC.    NOTE C - AGREEMENT WITH NEW YORK UNIVERSITY ON BEHALF OF NEW YORK UNIVERSITY MEDICAL CENTER (“NYU”) During November 1996, USN entered into a neuroradiosurgery equipment agreement (“NYU agreement”) with NYU for a period of seven years (“the term”), with an option for NYU to extend the term for successive three-year periods or to purchase the Gamma Knife equipment at an appraised market value price. USN may negotiate the purchase price and upon failure of the parties to agree may request that the facility be closed. All costs associated with closing and restoring the facility to its original condition are the responsibility of USN. The equipment agreement, among other matters, requires USN to provide (i) the use of the Gamma Knife equipment to NYU, (ii) training necessary for the proper operation of the Gamma Knife equipment, (iii) sufficient supplies for the equipment, (iv) the repair and maintenance of the equipment, (v) all basic hardware and software upgrades to the equipment and, (vi) an uptime guarantee. In return, NYU pays USN a scheduled fee based on the number of patient procedures performed. The Company derived patient revenue from the NYU center in the amounts of $973,500, $1,250,000, and $995,000 for the years ended December 31, 2005, 2004, and 2003, respectively. During November 2002, USN and NYU agreed to an early renewal of the NYU agreement and an early reload of the cobalt contained in the Gamma Knife Equipment. The reload process was completed in the summer of 2003 at a cost of $803,000. The NYU agreement has been extended from December 2004 and now expires June 2010. In addition, the fee structure under the amendment has changed, effective December 1, 2004, to provide for a payment to USN of a flat fee for each patient procedure performed. F-11  U.S. NEUROSURGICAL, INC. AND SUBSIDIARY NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE USN acquired its first Gamma Knife (Knife 1) from Elekta Instruments (Elekta) for $2,900,000 under a capital lease. The Company refinanced the lease with DVI Financial Services, Inc. (DVI) under a 39-month capital lease with an implicit interest rate of approximately 10.4%. The lease obligation has been satisfied. On December 6, 1994, USN entered into an additional agreement with Elekta to acquire a second Gamma Knife (Knife 2) for $2,900,000 which was also financed by DVI pursuant to a capital lease obligation. The lease terms provided for interest at the higher of 12.0% or that rate adjusted for any increase in the thirty-month Treasury Note rate, as defined in the agreement. The lease obligation has been satisfied. During 2000, USN entered into two, three-year loan agreements with DVI in the amounts of $625,000 and $194,000 to finance the removal and reinstallation of the supply of cobalt at RMC. The loans bore interest at 10.7% per annum and were collateralized by the Gamma Knife at RMC. These loans have been repaid. During July 2003, USN entered into a 30-month lease agreement with DVI to finance the removal and reinstallation of the supply of cobalt at NYU. The loan bore interest at 8.5% and was collateralized by the Gamma Knife at NYU. The lease obligation has been satisfied. On May 22, 2001, USN entered into a forty-month loan agreement with DVI or its successor in the amount of $200,000. The loan bore interest at 9.479% and was collateralized by the Gamma Knife at RMC. This loan has been repaid. During May     2003, USN entered into a forty-month agreement with DVI in the amount of $137,000.     The loan bears interest at 9.208% per annum and is collateralized by the Gamma     Knife at RMC. The monthly payment for this loan is $2,897 and will be fully     satisfied in July of 2006. In August 2003, USN commenced payment on a $750,000 lease for the NYU cobalt reload, which was originally thought to be fully funded by DVI. Also in August 2003, DVI filed for protection under Chapter 11 of the U.S. Bankruptcy Code and it was determined that DVI had failed to make payments of $150,000 to the cobalt vendor, Elekta. Commencing September 2003, the Company made all loan and lease payments, then owed to DVI or its successor, into an escrow account held by the Company’s attorney and commenced negotiations for a resolution to the underfunding of the payments to Elekta. During February 2004, the Company paid $50,000 of the amount owed to Elekta. The Company released the escrowed amounts to DVI or its successor in payment of all loan and lease obligations through March 15, 2004 and reached an agreement that the amount owed to DVI or its successor for the NYU cobalt reload was equal to $560,000 representing the amount funded by DVI of $582,000 reduced by a payment made by USN during August 2003. In April 2004, the Company refinanced the lease for an amount of $728,000 which was used to repay $560,000 owed to DVI or its successor, to pay the remaining $100,000 plus sales tax owed to Elekta and to refund $50,000 to the Company for the payment made to Elekta during February 2004. The agreement with SMT Leasing requires 36 monthly payments of $23,107, bears interest at 8.883% and is collateralized by the Gamma Knife at NYU. In 2004, the Company has purchased a replacement Gamma Knife (Knife 3) at the RMC site and has financed this purchase with a capital lease arrangement with SMT Leasing. The lease agreement provides that any progress payments made to the Gamma Knife manufacturer bear interest at the 60 day U.S. Treasury note rate, with interest only payments every 30 days until installation is completed and accepted. Upon equipment acceptance, the lease obligation repayment begins. Such lease terms require 72 monthly payments of $46,602, at an implicit interest rate of 8.4%. F-12  U.S. NEUROSURGICAL, INC. AND SUBSIDIARY NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE (CONTINUED) The obligations under the capital leases and loans payable are as follows:                                              December 31,                                  2005       2004                                                                   Capital leases - Gamma Knife       $   2,701,000       $   1,845,000          Loans payable - leasehold improvements           31,000           74,000                                                                                      2,732,000           1,919,000          Less current portion           (632,000   )       (467,000   )                                                                             $   2,100,000       $   1,452,000                                      Future payments as of December 31, 2005 on the equipment leases and loans are as follows:                                 Year   Ending          December 31,                                                                   2006       $   849,000             2007           652,000             2008           559,000             2009           559,000             2010           559,000             2011   and thereafter           187,000                                                                3,365,000             Less   interest           (633,000   )                                               Present   value of net minimum obligation       $   2,732,000                             The Company’s Gamma Knives are held under capital leases and amortization is included in depreciation expense. NOTE E – ASSET RETIREMENT OBLIGATIONS During 2003, the Company adopted FAS 143 and recorded asset retirement obligations of $200,000 based upon estimated amounts, consisting principally of removal of Gamma Knives and disposal of regulated materials and the restoration of facilities at NYU and RMC. The pro forma amount of the liability as of January 1, 2002 and December 31, 2002 would also approximate $200,000. Such liabilities have been measured using current information, current assumptions and current interest rates and have been recorded with a corresponding increase in the carrying value of the Gamma Knives. The Company is amortizing such costs over the lives of the respective useful lives from inception. Upon initial application of FAS 143, the Company has recognized $140,000 of accumulated depreciation and a deferred tax asset of $56,000 and a decrease in net income of $84,000 as the cumulative effect of the accounting method change during the year ended December 31, 2003.  F-13  U.S. NEUROSURGICAL, INC. AND SUBSIDIARY NOTE F - CONCENTRATIONS For the years ended December 31, 2005, 2004, and 2003,, the Company derived all of its patient revenue from two hospitals. These two hospitals also accounted for 100% of the accounts receivable at December 31, 2005 and 2004. The Company has been dependent on one manufacturer who sells, supplies and services the Gamma Knife. NOTE G - TAXES The components     of the income tax provision (benefit) are as follows:                                             Year           Ended December 31,                           2005     2004     2003                                 Current:                                  Federal     $             —     $             32,000                $  (15,000  )    State        —        14,000                   41,000                                                                                                 —        46,000                   26,000                                                                                        Deferred:                                  Federal        (78,000             )                10,000                   35,000                  State        (32,000             )                4,000                   6,000                                                                                                 (110,000             )                14,000                   41,000                                                                                                 (110,000             )                60,000                   67,000                                                    A reconciliation of the tax provision (benefit) calculated at the statutory federal income tax rate with amounts reported follows:                                                          Year Ended December 31,                                  2005       2004       2003                                                                                      Income tax (benefit) at the federal   statutory rate       $   (92,000   )   $   64,000       $   44,000          State income tax (benefit), net of federal   taxes           (18,000    )       9,000           23,000          Other           —           (13,000   )       —                                                                                               Income tax provision (benefit)       $   (110,000   )   $   60,000       $   67,000                                                 Items which give rise to deferred tax assets and liabilities are as follows:                                              December 31,                                  2005       2004                                 Deferred tax asset:                                 Net operating loss       $   142,000       $   —          Asset retirement obligations recorded for   financial reporting relating to cumulative change in accounting principles           —           60,000          Excess of book depreciation over tax depreciation           98,000            120,000          Deferred tax liability:                                 Net effect of the conversion from accrual   basis of accounting to cash basis accounting for tax purposes (1)           (190,000   )       (240,000   )                                                                     Net deferred tax asset (liability)       $   50,000       $   (60,000   )                                                (1)   In   January 2003, the Company filed with the Internal Revenue Service to compute   its taxable income utilizing the cash basis of accounting rather than the   accrual basis.    F-14  U.S. NEUROSURGICAL, INC. AND SUBSIDIARY NOTE H - LITIGATION The Company is involved in certain claims and legal actions from time to time arising in the ordinary course of business. In the opinion of management, the ultimate disposition of any such matters has not, and is not expected to, have a material adverse effect on the financial position of the Company. NOTE I – COMMITMENTS AND CONTINGENCIES Leases: The Company leases office space under an operating lease expiring March 2008. The terms of the lease include an escalation clause for a portion of certain operating expenses. At December 31, 2005, the annual future minimum rental payments under the operating lease and the ground lease referred to in Note B(2) are as follows:                              Year   Ending       December 31,                                                                       2006       $   40,000                 2007           40,000                 2008           10,000                                                            $   90,000                             Rent expense was approximately $39,000, $41,000, and $36,000 for the years ended December 31, 2005, 2004, and 2003, respectively. Gamma Knives: The Company purchased and installed a new Gamma Knife for $2,606,000 to replace the existing equipment at the RMC site. The Company has obtained lease financing in connection with this purchase of the Gamma knife. The Company is required to reload cobalt at each facility approximately every 5 years. The cobalt of RMC was reloaded in 2000 at a cost of approximately $800,000 and cobalt at NYU was reloaded in 2003 at a cost of approximately $803,000. Product Liability: Although the Company does not directly provide medical services, it has obtained professional medical liability insurance, and has general liability insurance as well. The Company’s professional medical liability and general liability policies have limits of $2 million each and the Company also has an excess coverage policy providing $8 million of insurance coverage. The Company believes that its insurance is adequate for providing treatment facilities and non-medical services, although there can be no assurance that the coverage limits of such insurance will be adequate or that coverage will not be reduced or become unavailable in the future. NOTE J - EMPLOYEES’ 401(K) PLAN The Company has established an employee benefits plan covering substantially all of its employees, which includes employer participation, in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The plan allows participants to make pre-tax contributions and the Company may, at its discretion, match certain percentages of the employee contribution. Amounts contributed to the plan are deposited into a trust fund administered by independent trustees. The Company’s discretionary matching 401(k) contributions for the years ended 2005, 2004, and 2003 were approximately $58,000, $61,000, and $45,000, respectively. F-15  U.S. NEUROSURGICAL, INC. AND SUBSIDIARY NOTE K - RELATED PARTY TRANSACTIONS              [1]   The amount   due to stockholder is due on demand without interest.               [2]   The Company           and its president are parties to an employment agreement giving either           party the option to terminate employment by giving the other party six           months written notice. The president’s compensation for the years           ended December 31, 2005, 2004, and 2003 was $300,000, $300,000 and $300,000,           respectively.    NOTE L - TREASURY STOCK In December 2000, the USN board of directors authorized the repurchase of up to 500,000 shares of USN’s common stock. Through December 31, 2005, the Company had repurchased 454,500 shares at a cost of $32,000, of which 250,500 shares were retired in 2001 and 204,000 shares were retired in 2004. NOTE M – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations:                                                      Three           Months Ended             31-Mar     30-Jun     30-Sep     31-Dec                                       2005                                           Revenue        476        664        546        432                  Income           (loss) from operations        (119  )     41        38        (115  )    Net           income (loss)        (151  )     (41  )     (3  )     (90  )    Basic           and diluted income per common share     $  (0.02  )  $  (0.01  )  $  0.00     $  (0.01  )                                  2004                                           Revenue        529        774        637        463                  Income           (loss) from operations        40        246        85        (132  )    Net           income (loss)        33        131        44        (85  )    Basic           and diluted income per common share     $  0.00     $  0.02     $  0.01     $  -0.01                                                              2003                                           Revenue        835        550        490        569                  Income           (loss) from operations        257        (54  )     (157  )     167                  Income           (loss) before cumulative effect of accounting method change        136        (41  )     (110  )     76                  Cumulative           effect of accounting method change (as restated - See note A[1])        —        —        —        (84  )    Net           income (loss)        136        (41  )     (110  )     (8  )    Basic           and diluted income per common share     $  0.02     $  -0.01     $  -0.01     $  0.00                 F-16        EX-31.1 2 d67567_ex31-1.htm CERTIFICATIONS      EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Alan Gold, certify that:                  1.   I have   reviewed this Annual Report on Form 10-K of U.S. Neurosurgical, Inc.;               2.   Based on my   knowledge, this quarterly report does not contain any untrue statement of a   material fact or omit to state a material fact necessary to make the   statements made, in light of the circumstances under which such statements   were made, not misleading with respect to the period covered by this   quarterly report;               3.   Based on my   knowledge, the financial statements, and other financial information included   in this quarterly report, fairly present in all material respects the   financial condition, results of operations and cash flows of the registrant   as of, and for, the periods presented in this quarterly report;               4.   I am   responsible for establishing and maintaining disclosure controls and   procedures (as defined in Exchange Act Rules 13a-14 and 15d-15e) for the   registrant and I have:         a)   designed   such disclosure controls and procedures to ensure that material information   relating to the registrant, including its consolidated subsidiaries, is made   known to me by others within those entities, particularly during the period   in which this quarterly report is being prepared;         b)   evaluated   the effectiveness of the registrant’s disclosure controls and procedures as   of a date within 90 days prior to the filing date of this quarterly report   (the “Evaluation Date”); and          c)   presented in   this quarterly report my conclusions about the effectiveness of the   disclosure controls and procedures based on my evaluation as of the   Evaluation Date;                   5.   I have   disclosed, based on my most recent evaluation, to the registrant’s auditors   and the audit committee of registrant’s board of directors (or persons   performing the equivalent function):         a)   all   significant deficiencies in the design or operation of internal controls   which could adversely affect the registrant’s ability to record, process,   summarize and report financial data and have identified for the registrant’s   auditors any material weaknesses in internal controls; and         b)   any fraud,   whether or not material, that involves management or other employees who have   a significant role in the registrant’s internal controls; and                   6.   I have   indicated in this quarterly report whether or not there were significant   changes in internal controls or in other factors that could significantly   affect internal controls subsequent to the date of my most recent evaluation,   including any corrective actions with regard to significant deficiencies and   material weaknesses.                      Date:  March 28, 2006   /s/ Alan   Gold                      Alan Gold             President                  EX-32.1 3 d67567_ex32-1.htm CERTIFICATIONS      EXHIBIT 32.1 Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of U.S. Neurosurgical, Inc. on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Alan Gold, President and Chief Executive Officer of U.S. Neurosurgical, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:                      (1)   The Report   fully complies with the requirements of section 13(a) or 15(d) of the   Securities Exchange Act of 1934; and                       (2)   The   information contained in the Report fairly presents, in all material   respects, the financial condition and results of operations of U.S.   Neurosurgical, Inc.                  /s/ Alan   Gold               Alan Gold     President   and Chief Executive Officer     March 28,   2006            -----END PRIVACY-ENHANCED MESSAGE-----