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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No.
December 31, 1996 0-15586
GHS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1373960
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1350 Piccard Drive, Suite 360, Rockville, Maryland 20850
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (301) 417-9808
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None Not Applicable
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed in Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K. [ X ].
The aggregate market value of Registrant's Common Stock held by
non-affiliates was approximately $____________ on April 1, 1997, based upon the
average of the bid and asked prices as reported on NASDAQ.
The number of shares of Registrant's Common Stock, par value $.01 per
share, outstanding as of March 14, 1997, was 6,947,828.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits (to this Annual Report on Form 10K for the Registrant's
fiscal year ended December 31, 1996) are incorporated by reference as listed on
the index of exhibits in Part IV, ITEM 14.
1
Part I
ITEM 1. BUSINESS
GHS, Inc. (the Company) provides management services, computer systems,
technology, and management to the health care industry. The Company provides
these products and services primarily via its two operating subsidiaries, Global
Health Systems, Inc. and U.S. NeuroSurgical, Inc.(R). In addition the Company is
a minority partner in Florida Specialty Networks, Ltd. As used herein, unless
the context indicates otherwise, the term "Company", "Registrant" and "GHS,
Inc." means GHS, Inc. and its subsidiaries. The Company, a Delaware corporation,
was formed in December 1984 under the name "Global Health Systems, Inc." GHS,
Inc. was given its present name in October 1988, when it assigned substantially
all of its assets and liabilities to its wholly-owned subsidiary, Global Health
Systems, Inc., a Delaware corporation formed in September 1988 to continue the
business of the Company. The Company's executive offices are located at 1350
Piccard Drive, Suite 360, Rockville, Maryland 20850, and its telephone number is
(301) 417-9808.
Recent Events
On March 10, 1997, GHS, Inc. and Health Management Systems, Inc. (HMS),
announced that they entered into a definitive asset purchase agreement pursuant
to which HMS will acquire substantially all of the assets of GHS' subsidiaries,
Global Health Systems, Inc. and GHS Management Services. These subsidiaries
provide computerized record-based processing systems and services for managed
care, public health and ambulatory care facilities.
The purchase agreement calls for consideration to GHS by HMS of $2,100,000 in
cash, subject to certain closing adjustments. The closing is subject to certain
conditions, including the receipt of consents required for the assignment of
certain contracts and official notice to GHS' shareholders pursuant to federal
securities and state laws. Stockholders of GHS holding a majority of the
outstanding shares of GHS common stock have consented to this sale to HMS. GHS
will retain its subsidiary, US NeuroSurgical, Inc., a company that owns and
operates Gamma Knife Centers, as well as its interest in Florida Specialty
Networks, Ltd., a company that manages medical specialty networks. Upon the
closing of the sale, HMS will employ each of GHS' current employees,
2
including Mr. Alan Gold. Mr. Gold will also remain as the Chairman and President
of GHS following the closing and run GHS's remaining operations.
Global Health Systems, Inc.
General
Global Health Systems, Inc. (Global), provides computerized integrated
patient record-based processing systems and services for managed care facilities
in the public and private sector. The Company currently supports more than 100
client sites in 15 states and the Republic of Iceland. Global offers systems
either as turnkey products or under facilities management agreements providing
hardware, implementation, training, maintenance, and in some cases, billing,
claims processing, and other operational support.
The Company has expanded its scope of services to provide executive
healthcare management services via long term contracts with health care plans
including HMOs and newly emerging health systems like PSNs (Provider Service
Networks), PHOs (Physician Hospital Organizations), and MSOs (Management Service
Organizations). These services include planning and development, executive
management, finance, information systems, membership services, claims
processing, utilization management, provider relations, and quality assurance.
Global Health Information System (GHiS)
Global's major product, the Global Health Information System (GHiS), is a
totally integrated, patient record-based information system designed, developed,
and continuously tailored to meet the needs of managed care organizations. The
system has evolved over more than a decade from an on-line ambulatory care
system supporting FFS billing and electronic medical records, into a
comprehensive information system for managed care organizations. The GHiS
automates the financial, medical, and administrative functions of the facility
in a single, integrated data base. The information in the data base is instantly
available for displaying, printing, and reporting to any authorized user, within
a facility or at geographically dispersed locations.
3
The GHiS contains on-line real time, integrated modules which can be sold as an
integrated whole, or in some instances, as a separate stand-alone system. System
modules include Registration/Enrollment/Eligibility; Claims Processing; Service
Authorizations; Utilization Reports; Regimen Tracking/Protocols; Case
Management; Laboratory; Pharmacy; Medical Records; Report Generator; Member
Services; Billing/Capitation; Patient and Resource Scheduling; Credentialling;
and Provider Contracts.
Software Licensing and Product Protection
Global's license agreements with clients contain provisions designed to
prevent disclosure and unauthorized use of the Company's products. Because
software applications generally cannot be patented, the Company relies upon such
license agreements and confidentiality agreements to protect its proprietary
knowledge. Clients are required to sign contracts restricting use to their own
operations and prohibiting disclosure to third-parties. Further, clients are not
provided with the software source code. Despite these restrictions it may be
possible for competitors to obtain the Company's trade secrets, which could
adversely affect the Company's business.
Hardware
Global's systems are hardware independent and are offered on a variety of
hardware platforms from International Business Machines, Digital Equipment
Corporation, Hewlett Packard, Data General, and other hardware companies that
can support UNIX. The systems can operate on mini or mainframe computers.
Hardware support services are not included with the systems, but clients are
encouraged to obtain hardware maintenance coverage with the hardware vendor or
with third-party maintenance vendors.
4
Implementation, Training, Warranty, Maintenance, Facilities Management, and
Management Services
Global offers systems either as turnkey products, facilities management
agreements, or as part of a contingent fee/service bureau structure. As part of
the turnkey system approach, Global provides customer support services from
pre-installation through post-implementation. Global works with the customer to
plan the implementation of the system and provides software modifications to
customer specifications. Technical specialists install the software and train
users on-site with a simulated training data base.
Global provides annual maintenance contracts for software support and
enhancements to maintain the integrity of the system after purchase. Under the
facilities management approach, Global provides the services described above
including claims processing and also employs one or more system managers who are
responsible for operating and maintaining the system for the facility.
Maintenance and facilities management contracts accounted for approximately 32%
of the Company's revenues for the year ended December 31, 1996.
Global provides management services to managed care organizations and
public health agencies. These services are an expansion of Global's facilities
management approach. Services are offered for a fixed price, a percentage of
capitation or revenues, a rate per member per month, or a rate per system user.
Product Development
Changing client needs as well as technological changes in hardware
necessitate constant software enhancement and/or expansion. In addition,
government regulatory changes such as reimbursement schemes require the
development of new software modules to support shifting needs of existing
clients and new clients. For example, under a managed care scenario it is
necessary to track costs, financial exposure, and utilization review. Product
development projects have been undertaken primarily in response to
5
specific client requests and to satisfy needs of Global's management services
clients. In the fiscal years ended December 31, 1996, 1995, and 1994 the Company
expended approximately $231,000, $320,000, and $124,000, respectively, for
research, development, and enhancement of computer software systems.
Competition
There are several hundred companies involved in the national medical
information systems and services market. Many of these companies are
considerably larger and financially stronger than the Company. These companies
provide varying combinations of hardware, software and services. Major
competitors include Shared Medical, IDX, and Computer Sciences Corporation.
Marketing and Customers
Global markets products and services from its headquarters in Rockville,
Maryland, directly through a marketing staff and sales staff to large
municipalities and managed care providers. The marketing department responds to
Requests for Proposals (RFPs), exhibits at trade conventions, conducts direct
mail, telemarketing and public relations campaigns, and advertises occasionally
in health care computing publications.
Clients are currently distributed geographically through 15 states, the
District of Columbia and the Republic of Iceland. Systems are operating at more
than 100 locations nationwide with approximately 25% of such locations in
California.
Global's turnkey contracts cover both the system sale and the ongoing
maintenance. Revenue related to the system sale is generally recognized in
accordance with the Company's revenue recognition policy. However, billings are
made in installments based on milestones reached in accordance with the contract
provisions. The maintenance portion of the contract extends 2 to 5 years after
system installation with revenue recognized as billed, generally monthly.
Global's facilities management and management service contracts are billed
monthly for the life of the contract term, generally, two to five years.
6
Backlog
As of December 31, 1996, Global's backlog was approximately $1,740,000 as
compared to approximately $1,320,000 as of December 31, 1995. These backlog
figures represent services deliverable under maintenance contracts. Maintenance
contracts generally end at various times during the year, and are expected to be
renewed for additional one year periods. Facilities management and management
services contracts generally extend for a period of five years.
Florida Specialty Networks
The Company has installed the GHiS in Florida as part of a joint venture
with Florida Specialty Networks (FSN). FSN is a managed care organization in the
business of providing capitated medical specialty and subspecialty services to
HMO patients. FSN processes claims for more than 3,000,000 patients of multiple
HMOs, for 25 medical specialties. The Network version of the GHiS provides FSN
the ability to segregate financial accounts by patient, by network, by HMO,
while simultaneously creating a fully integrated on-line patient record of all
data to facilitate Utilization Management and Quality Assurance. GHS has a 20%
ownership of FSN. In 1996, GHS received $146,000 from FSN.
FSN's business expanded in 1996 with new networks and contracts with a
national managed care organization. Under these contracts, FSN develops
specialty networks in cities where the organization has large enrollment. During
1996, FSN developed networks for this agreement in New York, New Jersey,
Tennessee and Oklahoma.
U. S. NeuroSurgical, Inc.
US NeuroSurgical, Inc.(R) (USN) of which the Company owns 100%, was
organized in July, 1993 to own and operate stereotactic radiosurgery centers,
utilizing the Gamma Knife technology. USN's business strategy is to provide a
mechanism whereby hospitals, physicians, and patients can have access to Gamma
Knife treatment capability,
7
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. USN seeks cooperative ventures with these facilities. USN
believes that, as of December 31, 1996, there were approximately thirty Gamma
Knife treatment centers in the United States.
In July 1993, USN purchased its first Leksell Gamma Knife from Elekta
Instruments, Inc. (Elekta), for the purpose of installing it at the Research
Medical Center (RMC) in Kansas City, Missouri. USN paid approximately $3,000,000
for the Gamma Knife. In September 1993, USN entered into a lease/purchase
agreement with Financing for Science International, Inc. (FSI), a medical
equipment leasing company, to finance the Gamma Knife purchase. FSI was acquired
by FINOVA Capital Corporation in 1996 and they presently hold the lease.
USN opened its first Gamma Knife Center on the premises of RMC in
September 1994. RMC is part of Health Midwest, a consortium of eleven hospitals
and numerous affiliates. USN formed a cooperative venture with RMC in September,
1993. Per an agreement with RMC, GHS, Inc. sold 500,000 shares of its common
stock for $500,000 to RMC to secure additional working capital in order to
enable USN to develop and construct a Gamma Knife Facility. USN has 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.
Pursuant to a ground lease agreement, RMC leased to USN the land on which to
build the Gamma Knife facility.
USN plans to open a second treatment center on the campus of New York
University (NYU) Medical Center in New York, New York. The Company has secured a
lease purchase agreement with DVI Financial Services, Inc.. In September 1996,
DVI made a progress payment in the amount of $1,160,000 to Elekta and refunded
the
8
$290,000 to USN that was made as a deposit. As a result, USN is currently paying
interest only on $2,610,000. The Certificate of Need (CON) has been obtained
from New York State allowing construction and operation of the Gamma Knife
Center. The Company expects that the Center will open in the spring of 1997. The
agreement with DVI provides for a $2,900,000 lease for the Gamma Knife and up to
$900,000 in construction financing. In November 1996, DVI placed $825,000 in an
escrow account to cover the estimated costs of completing the NYU Center. Of the
$825,000, $300,000 is a three year term loan to USN and $525,000 was advanced as
an accounts receivables credit line.
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 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.
9
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 various means. Although the Company does not believe that the
business activities of USN 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 USN's 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 USN's 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.
The Company is planning to establish future Gamma Knife centers.
Completion of future centers will 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 to be 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
10
equipment. The Company plans to enter into future ventures in which that "need"
will be demonstrable, but it can have no assurance that Certificates of Need
will be granted in every case.
In addition, the Nuclear Regulatory Commission 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 the Company does not directly provide medical services, it has
obtained professional medical liability insurance, and has general liability
insurance as well. 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 that provide the Gamma Knife on a "cost per
treatment basis". In addition, larger hospitals may be expected to install Gamma
Knife technology as part of their regular inpatient services. Some 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.
11
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. Any interruption in the supply or services from Elekta would adversely
affect USN's plans to open additional Gamma Knife treatment centers as well as
to maintain those centers in existence.
Gamma Knife Financing
The Company secured financing from FSI for the first Gamma Knife
installation at the RMC site, and obtained a lease commitment from DVI Financial
Services for its second Gamma Knife installation planned for New York. The Gamma
Knife is an expensive piece of equipment presently costing approximately
$3,000,000. Therefore, the Company's development of new Gamma Knife centers is
dependent on its ability to secure favorable financing. The Company believes
that it will continue to be successful in obtaining financing but can give no
absolute assurance that it will.
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.
Employees
GHS, Inc. has twenty-one full-time employees and five part-time employees.
Of these employees, two are engaged in sales and marketing, eighteen in
technical and functional site support and/or development, four in administration
and office support, one
12
in site development, and one is a medical director. Upon the closing of the sale
with HMS, all employees will be retained by HMS.
ITEM 2. PROPERTIES
The Company's base facility, from which it conducts substantially all of
its operations, are located in Rockville, Maryland, and occupy approximately
2,350 square feet which is currently leased on a month to month basis. The
current rent is approximately $34,000 per year. In December 1994, the Company
opened a second office in Sacramento, California. This office occupies 1,600
square feet, and the annual rent is approximately $28,000. USN occupies
approximately 1,600 square feet in its RMC facility. This facility is located on
the campus of RMC in Kansas City, Missouri. The ground rent is not material.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock trades in the over-the-counter market, NASDAQ
symbol GHSI. The range of high and low bid quotations as reported by NASDAQ
System for the two years ended December 31, 1996 are set forth below.
Period High Bid Low Bid
------ -------- -------
January 1 - March 31, 1995 1.00 .75
April 1 - June 30, 1995 .75 .75
July 1 - September 30, 1995 .75 .75
October 1 - December 31, 1995 .625 .375
Period High Bid Low Bid
------ -------- -------
January 1 - March 31, 1996 $.625 $.50
April 1 - June 30, 1996 .625 .31
July 1 - September 30, 1996 .75 .375
October 1 - December 31, 1996 .56 .125
The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
As of March 31, 1997, there were approximately 113 holders of record of the
Company's Common Stock.
To date the Company declared no dividends on its Common Stock and does not
anticipate declaring dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is the selected financial data pertaining to the financial
condition and operations of the Company for the years ended December 31, 1992
through 1996. The latest financial statements of the Company are included in
Item 14 in Part IV of this
14
report. The information set forth should be read in conjunction with such
financial statements and the notes thereto.
Year Ended
December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
Statement of
Operations Data:
Revenue $ 4,232,000 $ 4,445,000 $ 2,335,000 $ 2,493,000 $ 2,062,000
Net income (loss) 168,000 (176,000) (666,000) 53,000 60,000
Net income (loss)
per share .02 (.03) (.10) .01 .01
Weighted Average
Common Shares 6,947,828 6,947,828 6,935,016 5,817,677 5,185,328
Outstanding
As at
December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
Balance Sheet
Data:
Working Capital ($ 824,000) 579,000 883,000 1,861,000 $ 1,105,000
Total Assets 8,635,000 7,339,000 5,885,000 6,991,000 $ 2,012,000
Long term debt 3,944,000 2,838,000 2,236,000 2,694,000 --
Common Stock issued
with put option 500,000 500,000 500,000 500,000 --
Total Stock-
holders equity $ 2,097,000 1,929,000 2,105,000 2,748,000 $ 1,456,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes set forth elsewhere in this report.
15
Results of Operations
1996 Compared to 1995
Total revenues declined 5% in 1996 to $4,232,000 from $4,445,000 in 1995. New
systems sales decreased 50% to $884,000 from $1,777,000 in 1995. The decrease
was attributable to lower hardware sales as the Company focused on services as
compared to turnkey systems sales. Maintenance revenue increased 27% to
$1,370,000 from $1,083,000 in 1995. This increase was attributable to the
Company's success in selling facilities management to clients to expand the
capability of the GHiS at their facilities. Claims processing increased by 74%
to $526,000. Revenues of the Company's other subsidiary, US NeuroSurgical, Inc.
(USN), grew 13% to $1,452,000 from $1,283,000 in 1995. The revenue growth
reflects the increased acceptance of the Center and the community.
Total expenses increased 5% to $4,361,000 from $4,140,000 1995. Systems costs
dropped to $1,047,000 from $1,651,000 a year earlier. This decrease was a result
of lower hardware purchases in 1996. Maintenance expense increased to $942,000
from $583,000 in 1995. This increase was caused by higher than anticipated
expenses associated with the start up of new services for clients. Selling,
general and administrative expenses increased by 57% to $1,571,000 from $999,000
a year earlier. The increase was caused by higher insurance costs related to USN
and increased reserves for doubtful Global Health Systems, Inc. accounts
receivable. Patient expenses associated with the operation of the Kansas City
Center were $574,000 for the year, down from $751,000 in the prior year. The
Company had interest expense of $309,000 in 1996 compared to $504,000 in 1995.
An additional $249,000 of 1996 interest costs attributable to the NYU
construction costs were capitalized. The company realized a deferred tax benefit
from the pending HMS sale of $463,000 in 1996. The effect of the capitalized
interest costs and deferred tax benefit was net income of $168,000 in 1996
against a $176,000 net loss in 1995.
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1995 Compared to 1994
Total revenues increased 89% in 1995 to $4,445,000 from $2,335,000 in 1994. New
systems sales increased 39% to $1,777,000 from $1,282,000 in 1994. The increase
was attributable to a new contract with the Chicago Department of Health (CDOH)
to set up and manage public health information systems for the city. Maintenance
revenue increased 61% to $1,083,000 from $672,000 in 1994. This also was
attributable to the contract with CDOH. The company continues to focus on using
facilities management to expand the capability of the GHiS for its clients. The
Company's other subsidiary, US NeuroSurgical, Inc. (USN) had its first full year
of revenue from its center at the Research Medical Center in Kansas City,
Missouri. There were revenues of $1,283,000 in 1995 from USN.
Total expenses increased 47% to $4,140,000 from $2,801,000 in 1994. System
costs increased to $1,651,000 from $847,000 a year earlier. This increase was
caused by the large hardware order for CDOH. Maintenance expense increased to
$583,000 from $487,000 in 1994. This increase is not significant when it is
compared to the revenue increase in this area. Selling, general and
administrative expense declined 14% to $999,000 from $1,161,000 a year earlier.
The decrease is attributable to cost control measures implemented on travel,
office expenses and some salary reductions. The higher revenues were achieved
without any additions to administrative staff. Patient expenses associated with
the operation of the Kansas City Center were $751,000 for the year. The Company
had interest expense of $504,000 in 1995 compared to $308,000 in 1994. USN
continued to pay down its lease in Kansas City and began interest payments on
its second Gamma Knife. As a result of the increased interest payments the net
loss was $176,000.
Liquidity and Capital Resources
The Company had a working capital ratio of .6 in 1996, as compared to 1.3
in 1995. This was due to an increase in operating expenses and a decrease in
gross profit on software systems. As of December 31, 1996, net cash provided by
operating activities was $145,000, as compared to net cash provided of $438,000
in 1995.
17
Depreciation and amortization expense was $631,000 in 1996, as compared to
$617,000 in 1995. Accounts receivable decreased by $307,000 in 1996 from 1995.
Unbilled accounts receivable decreased $545,000 in 1996. The decreases reflect
improved billing and collections efforts. In 1995 unbilled accounts receivable
increased by $465,000 and billed accounts receivable increased by $251,000 from
1994.
In 1996, net cash used in investing activities was $1,517,000. The Company
made a $1,160,000 progress payment on its second Gamma Knife and received back
the $290,000 deposit on the NYU Gamma Knife from DVI. In 1995, net cash used in
investing activities was $1,243,000. The Company made a $1,160,000 progress
payment on the NYU Gamma Knife.
In 1996, net cash provided by financing activities was $1,333,000. The
Company paid $522,000 towards the lease obligations on its Kansas City Gamma
Knife and made a $1,160,000 progress payment for NYU. In addition, the Company
paid $825,000 into an escrow account to fund NYU construction. The Company also
is responsible for making interest payments on the progress payment on its
second Gamma Knife.
In 1995, net cash provided by financing activities was $850,000. In 1995,
the Company paid $430,000 towards the Kansas City lease. The Company made a
$1,160,000 progress payment for the NYU Gamma Knife.
USN has a five year operating lease for Kansas City that began in
September 1994. The annual payments are $805,000. The Company is making interest
payments on progress payments for its NYU Gamma Knife and on the construction
loan for NYU. The progress payments have been for $2,610,000 plus $825,000 in
the construction escrow account. The interest rate is 10% annually.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are listed under Item 14
in this Annual Report of Form 10-K and attached hereto.
18
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Alan Gold 52 President & Chairman
Jerry M. Brown, Ph.D. 58 Director
William F. Leimkuhler 45 Director
Alan Gold has served as President and a director since the Company's
formation. He was one of the founders of Global Health Systems, the predecessor
of the Company, 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.
Jerry M. Brown, Ph.D. He was elected to the GHS board in July, 1993, and
served as President of US NeuroSurgical, Inc. until August, 1995. From 1990 to
1993 he was an independent consultant to the health care industry. Dr. Brown
served in the US Army Medical Department from 1967 - 1990, retiring as a
Lieutenant Colonel.
William F. Leimkuhler has served as director of the Company since its
incorporation in 1984. Since January 1994, Mr. Leimkuhler has been the Vice
President of Allen & Company Incorporated, an investment banking firm. From 1984
to December, 1993, Mr. Leimkuhler was a partner with the law firm of Werbel
McMillin &
19
Carnelutti, which has served as counsel to the Company on various matters since
the Company's formation.
Each director is elected for a one year period ending on the date of the
next annual meeting of shareholders of the Company, and until his or her
successor is duly elected and qualified. Officers serve at the will of the Board
of Directors.
ITEM 11 EXECUTIVE COMPENSATION
The information below sets forth the compensation for the year ended
December 31, 1995, for each executive officer of the Company:
Summary Compensation Table
--------------------------
Annual Compensation
Name and -------------------
Principal Position Year Salary($)
- ------------------ ---- ---------
Alan Gold,
President & Director 1996 $150,000
1995 $150,000
1994 $144,400
The Company and Mr. Gold are parties to an employment agreement giving
either the Company or Mr. Gold the option to terminate the agreement by giving
the other party 6 months written notice.
Stock Option Plan
Effective March 7, 1986, and as amended June 18, 1987, the Company adopted
a 1986 Stock Option Plan (the "Plan") pursuant to which options to purchase up
to 750,000 shares of the Company's Common Stock may be granted to directors,
officers and other key employees of the Company. As of March 31, 1997, 360,000
options were outstanding under the Plan. The Plan is administered by the Board
of Directors. The options may be either incentive stock options conforming to
the provisions of Section 422A of the Internal Revenue Code, or non-qualified
options. The purchase price for shares under each option, incentive or
non-qualified, is determined by the Board but will
20
not be less than 100% and 90%, respectively, of the fair market value of the
Common Stock at the time the option is granted. If an employee at the time the
option is proposed to be granted owns more than 10% of the voting stock of the
Company, the option price for incentive options will not be less than 110% of
the fair market value of the Common Stock on the date of grant and the option
will continue in effect for not more than five years. No options may be granted
under the Plan after 1996. The exercise price must be paid in full upon exercise
of an option, in cash or in shares of Common Stock of the Company. Options are
nontransferable except by will or by the laws of descent and distribution.
Aggregate Unexercised Options & Option Values at December 31, 1995
------------------------------------------------------------------
Value of Unexercised In-The
Number of Unexercised Options Money Options at December
at December 31, 1996 (#) 31, 1996 ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
Alan Gold 137,000 / 12,000 $34,250/3,000 (1)
----------------
(1) Based on average of closing bid and asked prices of the Company's common
stock on December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 23, 1997 certain information
with respect to each beneficial owner of more than 5% of the Company's Common
Stock and each director and executive officer of the Company:
Number of Shares
Name and Address Beneficially Percent of
of Beneficial Owner Owned (1) Class
- ------------------- --------- -----
Alan Gold (2) 535,420 7.6%
1350 Piccard Drive
Rockville, MD 20850
William F. Leimkuhler -- --
711 Fifth Avenue
New York, NY 10022
Jerry M. Brown, Ph.D. 28,500 0.4%
21
1205 Stratford Drive
Anderson, SC 29621
Stanley S. Shuman (3) 1,071,250 15.4%
711 Fifth Avenue
New York, NY 10022
Allen & Company Incorporated (4) 2,022,000 28.6%
711 Fifth Avenue
New York, NY 10022
Research Medical Center 500,000 7.2%
2316 East Meyer Blvd.
Kansas City, MO 64132
Charles Elsner 400,000 5.8%
c/o The Forschner Group Inc.
151 Long Hill Crossroads
Shelton, CT 96484
All Directors and Officers 563,920 8.0%
as a group (three persons) (2)
- ----------
(1) Unless otherwise indicated, all shares are beneficially owned and sole
voting and investment power is held by the person named above.
(2) Includes 420,500 shares held jointly by Mr. Gold and his wife, Ms. Susan
Greenwald, as joint tenants with right of survivorship and 124,000
exercisable stock options.
(3) Includes 210,250 shares held in certain trusts for the benefit of Mr.
Shuman's children, of which shares Mr. Shuman disclaims beneficial
interest. Also includes warrants to purchase 20,000 shares of Common Stock
beneficially owned by Mr. Shuman.
(4) In addition to those shares beneficially owned by Allen & Company, certain
officers of Allen and their families, including Mr. Shuman, own 1,721,750
shares. Also includes warrants to purchase 120,000 shares of common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1996 the Company exercised its option to purchase the 20%
interest in USN owned by A Hyman Kirshenbaum, M.D. and Jerry Brown, Ph.D..
Pursuant to an agreement with Messieurs. Kirshenbaum and Brown, the number of
GHS, Inc. shares to be issued to such individuals, as a result of the exercise
of such options, is 33,200.
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Page No.
--------
Financial Statements of the Company
Report of Independent Auditors F-1
Balance Sheet as of December 31, 1996 and 1995 F-2
Statements of Operations for the years ended
December 31, 1996, 1995, and 1994. F-3
Statement of Changes in Stockholders' Equity
for the period January 1, 1994 through
December 31, 1996 F-4
Statements of Cash Flows for the year ended
December 31, 1996, 1995, and 1994. F-5
Notes to Financial Statements F-6
Report of Independent Auditors with respect
to Supplementary Schedules S-1
Valuation and Qualifying Accounts S-2
All other schedules have been omitted as the conditions requiring
their filing are not present or the information required therein has been
included in the notes to the financial statements.
(b) Reports on Form 8-K
During the three months ended December 31, 1996, the Company did not
file any reports on Form 8-K with the Securities and Exchange Commission.
(c) Exhibits
3 Articles of Incorporation and By-laws
(a) Restated Certificate of Incorporation and by-laws of the Company
(incorporated by reference to exhibits 3.1 and 3.2 of the Company's
Registration Statement No. 33-4532-W on Form S-18)
(b) Certificate of Amendment dated June 18, 1987 (incorporated by
reference to exhibit 3(b) of the Company's 1987 Annual Report on
Form 10-K).
(c) Certificate of Amendment dated November 17, 1989 (pursuant to
which the Company changed its name to GHS, Inc.) (incorporated by
reference to exhibit 3(c) of the Company's 1988 Annual Report on
Form 10-K).
23
10 Material Contracts
(a) Office Lease dated November 1, 1990 (incorporated by reference
to Exhibit 10.2 of the Company's Registration Statement No.
33-4532-W on form S-18).
(b) Employment Agreement dated December 14, 1984 between the Company
and Alan Gold, as amended March 7, 1986 (incorporated by reference
to Exhibit 10.3 of the Company's Registration Statement No.
33-4532-W on form S-18).
(c) Stock Option Plan dated March 7, 1986 (incorporated by reference
to Exhibit 10.4 of the Company's Registration Statement No.
33-4532-W on form S-18).
(d) Asset Purchase Agreement dated as of December 13, 1984 between
GHS Acquisition Corp., Datalab, Inc., Global Health Systems, Inc.
and GHS, Inc. (pursuant to which the Company acquired substantially
all the assets, and assumed certain liabilities, of Global Health
Systems MD) (incorporated by reference to Exhibit 10.5 of the
Company's Registration Statement No. 33-4532-W on form S-18).
(e) Assignment and Assumption Agreement dated as of November 22,
1988 between Global Health Systems, Inc. and Global Health Computer
Systems, Inc. (pursuant to which the parent transferred assets,
liabilities and current operations to the subsidiary) (Incorporated
by reference to exhibit 10(j) of the Company's 1988 Annual Report on
Form 10K)
(f) Gamma Knife Neuroradiosurgery Equipment Agreement dated August,
1993 between Research Medical Center and US NeuroSurgical
(incorporated by reference to Exhibit 10h to the Company's Quarterly
Report or Form 10-Q for the quarter ended September 30, 1993).
(g) Agreement for Issuance and Sale of Stock dated August, 1993
between Research Medical Center and GHS, Inc. (incorporated by
reference to Exhibit 10i to the Company's Quarterly Report or Form
10-Q for the quarter ended September 30, 1993).
(h) Ground Lease Agreement dated August, 1993 between Research
Medical Center and US NeuroSurgical (incorporated by reference to
Exhibit 10j to the Company's Quarterly Report or Form 10-Q for the
quarter ended September 30, 1993).
(i) LGK Agreement dated July 12, 1993 between Elekta Instruments,
Inc. and US NeuroSurgical (incorporated by reference to Exhibit 10k
to
24
the Company's Quarterly Report or Form 10-Q for the quarter ended
September 30, 1993).
(j) Financing for Science International Commitment dated August 16,
1993 between Financing for Science International, Inc. and US
NeuroSurgical (incorporated by reference to Exhibit 10l to the
Company's Quarterly Report or Form 10-Q for the quarter ended
September 30, 1993.)
(k) Employment Agreement dated September 1, 1993 between US
NeuroSurgical and Jerry M. Brown, Ph.D. (incorporated by reference
to Exhibit 10m to the Company's Quarterly Report or Form 10-Q for
the quarter ended September 30, 1993.)
(l) Agreement dated July 23, 1993 between GHS, Inc., and A. Hyman
Kirshenbaum, M.D., and Jerry M. Brown, Ph.D., (incorporated by
reference to Exhibit 10n to the Company's Quarterly Report or Form
10-Q/A for the quarter ended September 31, 1993.)
(m) Amendment dated October 27, 1994 to Employment Agreement
between U.S. NeuroSurgical and Jerry Brown, Ph.D. (incorporated by
reference to Exhibit 10m to the Company's 1994 Annual Report on Form
10-K).
(n) Agreement dated October 28, 1994 between U.S. NeuroSurgical,
Inc. and Financing for Science and Industry, Inc. (incorporated by
reference 10n to the Company's 1994 Annual Report on Form 10-K).
(o) Agreement dated December 29, 1993, between U.S. NeuroSurgical,
Inc. and Elekta Instruments, Inc. (incorporated by reference 10o to
the Company's 1994 Annual Report on Form 10-K).
(p) Agreement dated November 26, 1996, between US NeuroSurgical,
Inc. and New York University on behalf of New York University
Medical Center.
(q) Agreement dated August 1, 1996, between US NeuroSurgical, Inc.
and DVI Financial Services, Inc.
(r) Asset Purchase Agreement dated March 10, 1997 between Health
Management Systems, Inc. and GHS, Inc..
25
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: April 08, 1996
GHS, Inc.
(Registrant)
By /s/ Alan Gold
-------------------------------------------------
Alan Gold
President and Chief Executive 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.
April 08, 1996 /s/ Alan Gold
---------------------------------------------------
Alan Gold
President and Director
(Chief Executive, Financial Officer)
April 08, 1996 /s/ William F. Leimkuhler
---------------------------------------------------
William F. Leimkuhler
Director
April 08, 1996 ___________________________________________________
Jerry M. Brown, Ph.D.
Director
26
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
GHS, Inc.
Rockville, Maryland
We have audited the accompanying consolidated balance sheets of GHS, Inc.
and subsidiaries as at December 31, 1996 and December 31, 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements enumerated above present fairly,
in all material respects, the consolidated financial position of GHS, Inc. and
subsidiaries at December 31, 1996 and December 31, 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
New York, New York
March 13, 1997
F-1
GHS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------
A S S E T S 1996 1995
----------- ----------- -----------
Current assets:
Cash and cash equivalents ................................................ $ 159,000 $ 198,000
Accounts receivable (net of allowance for doubtful
accounts of $164,000 in 1996 and $14,000 in 1995) ...................... 994,000 1,451,000
Unbilled accounts receivable ............................................. 31,000 576,000
Contract installments receivable ......................................... 15,000
Inventory ................................................................ 12,000
Refundable deposits ...................................................... 290,000
Other current assets ..................................................... 86,000 91,000
----------- -----------
Total current assets .............................................. 1,270,000 2,633,000
Furniture and equipment ..................................................... 77,000 56,000
Software development costs .................................................. 180,000 291,000
Other assets ................................................................ 198,000 98,000
Deferred tax asset .......................................................... 463,000
Gamma Knife Venture assets:
Gamma Knife .............................................................. 1,933,000 2,348,000
Progress payments - Gamma Knife .......................................... 2,610,000 1,160,000
Unamortized leasehold costs .............................................. 954,000 661,000
Deposits ................................................................. 43,000 65,000
Cash held in escrow ...................................................... 907,000 27,000
----------- -----------
T O T A L ......................................................... $ 8,635,000 $ 7,339,000
=========== ===========
L I A B I L I T I E S
---------------------
Current liabilities:
Accounts payable and accrued expenses .................................... $ 845,000 $ 1,337,000
Loans payable - officer .................................................. 20,000
Notes payable - other .................................................... 100,000
Accrued costs to complete contracts ...................................... 25,000
Loan payable - Gamma Knife - current portion ............................. 63,000 55,000
Obligation under capital lease - current portion:
Demand loan ............................................................ 525,000
Gamma Knife Venture .................................................... 592,000 512,000
Equipment .............................................................. 69,000 5,000
----------- -----------
Total current liabilities ......................................... 2,094,000 2,054,000
----------- -----------
Obligation under capital lease:
Gamma Knife .............................................................. 1,132,000 1,724,000
Equipment ................................................................ 265,000 9,000
----------- -----------
1,397,000 1,733,000
----------- -----------
Loan payable - Gamma Knife .................................................. 2,547,000 1,105,000
----------- -----------
Minority interest ........................................................... 18,000
-----------
Common stock - par value $.01; 500,000 shares issued with
put option ............................................................... 500,000 500,000
----------- -----------
Commitments and other matters
STOCKHOLDERS' EQUITY
--------------------
Preferred stock - 1,000,000 shares authorized; none issued
Common stock - par value $.01; 25,000,000 shares
authorized; 6,447,828 issued and outstanding in
1996 and 1995 ............................................................ 65,000 65,000
Additional paid-in capital .................................................. 3,082,000 3,082,000
(Deficit) .................................................................. (1,050,000) (1,218,000)
----------- -----------
Total stockholders' equity ........................................ 2,097,000 1,929,000
----------- -----------
T O T A L ......................................................... $ 8,635,000 $ 7,339,000
=========== ===========
The accompanying notes to financial statements are an
integral part hereof.
F-2
GHS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
Revenue:
Software systems .................. $ 884,000 $ 1,777,000 $ 1,282,000
Maintenance ....................... 1,370,000 1,083,000 672,000
Claims processing ................. 526,000 302,000
Patient revenue ................... 1,452,000 1,283,000 381,000
----------- ----------- -----------
T o t a l .................. 4,232,000 4,445,000 2,335,000
----------- ----------- -----------
Costs and expenses:
Software systems .................. 1,047,000 1,651,000 847,000
Maintenance ....................... 942,000 583,000 487,000
Claims processing expense ......... 227,000 156,000
Patient expenses .................. 574,000 751,000 306,000
Selling, general and
administrative .................. 1,571,000 999,000 1,161,000
----------- ----------- -----------
T o t a l .................. 4,361,000 4,140,000 2,801,000
----------- ----------- -----------
Income (loss) from operations
before items below ................ (129,000) 305,000 (466,000)
----------- ----------- -----------
Interest expense ..................... (309,000) (504,000) (308,000)
Interest income ...................... 2,000 1,000 23,000
Income from equity investee .......... 157,000
----------- ----------- -----------
(150,000) (503,000) (285,000)
----------- ----------- -----------
(Loss) before income tax benefit
and minority interest ............. (279,000) (198,000) (751,000)
Deferred income tax benefit .......... 463,000
----------- ----------- -----------
Income (loss) before minority
interest .......................... 184,000 (198,000) (751,000)
Minority interest .................... (16,000) 22,000 85,000
----------- ----------- -----------
NET INCOME (LOSS) ................... $ 168,000 $ (176,000) $ (666,000)
=========== =========== ===========
Net income (loss) per share .......... $ .02 $ (.03) $ (.10)
=========== =========== ===========
Weighted average common shares
outstanding ....................... 6,947,828 6,947,828 6,935,016
=========== =========== ===========
The accompanying notes to financial statements
are an integral part hereof.
F-3
GHS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock *
---------------------
Number Additional
of Paid-in
Shares Amount Capital (Deficit) Total
--------- ------- ---------- ------------ ----------
Balance - January 1,
1994. . . . . . . . 6,424,328 $65,000 $3,059,000 $ (376,000) $2,748,000
Issuance of common
stock for services
rendered. . . . . . 23,500 23,000 23,000
Net (loss) for the
year ended
December 31, 1994 . (666,000) (666,000)
--------- ------- ---------- ------------ ----------
Balance - December 31,
1994. . . . . . . . 6,447,828 65,000 3,082,000 (1,042,000) 2,105,000
Net (loss) for the
year ended
December 31, 1995 . (176,000) (176,000)
--------- ------- ---------- ------------ ----------
Balance - December 31,
1995. . . . . . . . 6,447,828 65,000 3,082,000 (1,218,000) 1,929,000
Net income for the
year ended
December 31, 1996 . 168,000 168,000
--------- ------- ---------- ------------ ----------
BALANCE - DECEMBER 31,
1996. . . . . . . . 6,447,828 $65,000 $3,082,000 $(1,050,000) $2,097,000
========= ======= ========== ============ ==========
* Excluding shares with put option
The accompanying notes to financial statements
are an integral part hereof.
F-4
GHS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------------
1996 1995 1994
----------- ------------ ----------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 168,000 $ (176,000) $(666,000)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 631,000 617,000 341,000
Provision for bad debts. . . . . . . . . . . . . . . . . . . . . . . . 150,000
Gain from equity investee. . . . . . . . . . . . . . . . . . . . . . . (157,000)
Minority interest in net income (loss) of consolidated subsidiary. . . 16,000 (22,000) (85,000)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable . . . . . . . . . . . . . 307,000 (251,000) 84,000
(Increase) decrease in unbilled accounts receivable. . . . . . . . . 545,000 (465,000) 315,000
Decrease in contract installments receivable . . . . . . . . . . . . 15,000 19,000 15,000
Decrease in inventory. . . . . . . . . . . . . . . . . . . . . . . . 12,000
Decrease in other current assets . . . . . . . . . . . . . . . . . . 5,000
Decrease in refundable deposits. . . . . . . . . . . . . . . . . . . 290,000
Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . (463,000)
(Increase) in cash held in escrow. . . . . . . . . . . . . . . . . . (880,000)
(Increase) decrease in other assets. . . . . . . . . . . . . . . . . 57,000 (86,000) 62,000
(Decrease) increase in accounts payable and accrued expenses and
accrued costs to complete contracts. . . . . . . . . . . . . . . . (551,000) 802,000 (159,000)
----------- ------------ ----------
Net cash provided by (used in) operating activities. . . . . . . 145,000 438,000 (93,000)
----------- ------------ ----------
Cash flows from investing activities:
Furniture and equipment purchases. . . . . . . . . . . . . . . . . . . . . (39,000) (33,000) (24,000)
Software development costs . . . . . . . . . . . . . . . . . . . . . . . . (50,000) (50,000) (350,000)
Investment in joint venture. . . . . . . . . . . . . . . . . . . . . . . . (4,000)
Refunds on Gamma Knife . . . . . . . . . . . . . . . . . . . . . . . . . . 22,000 148,000
Progress payments - Gamma Knife. . . . . . . . . . . . . . . . . . . . . . (1,450,000) (1,160,000)
Cost incurred with leasehold improvements. . . . . . . . . . . . . . . . . (520,000)
----------- ------------ ----------
Net cash (used in) investing activities. . . . . . . . . . . . . (1,517,000) (1,243,000) (750,000)
----------- ------------ ----------
Cash flows from financing activities:
Payments of capital lease obligations. . . . . . . . . . . . . . . . . . . (522,000) (430,000) (220,000)
Loan payable - officer . . . . . . . . . . . . . . . . . . . . . . . . . . (20,000) 20,000
Notes payable - other. . . . . . . . . . . . . . . . . . . . . . . . . . . (100,000) 100,000
Loan payable - Gamma Knife . . . . . . . . . . . . . . . . . . . . . . . . 1,975,000 1,160,000
Release from escrow of proceeds from sale of common shares with put option 500,000
----------- ------------ ----------
Net cash provided by financing activities. . . . . . . . . . . . 1,333,000 850,000 280,000
----------- ------------ ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . (39,000) 45,000 (563,000)
Cash and cash equivalents - beginning of period . . . . . . . . . . . . . . . 198,000 153,000 716,000
----------- ------------ ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD . . . . . . . . . . . . . . . . . . $ 159,000 $ 198,000 $ 153,000
=========== ============ ==========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 316,000 $ 510,000 $ 275,000
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000 3,000 3,000
Supplemental disclosures of noncash financing activities:
Property acquired under capital lease obligations. . . . . . . . . . . . . 330,000 14,000
Issuance of common stock for services rendered . . . . . . . . . . . . . . 23,000
The accompanying notes to financial statements
are an integral part hereof.
F-5
GHS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company and its Significant Accounting Policies:
[1] Basis of preparation:
GHS, Inc. (the "Company") through its subsidiaries, Global Health
Systems, Inc. and GHS Management Services Inc. develops, installs and maintains
computerized processing systems for managed care, public health and ambulatory
care facilities.
The Company's subsidiary, U.S. Neuro Surgical, Inc. ("U.S. Neuro")
owns and operates stereotactic radiosurgery centers, utilizing the Gamma Knife
technology, which commenced operations in September 1994.
During 1995, the Company formed a new subsidiary, U.S. Neurosurgical
Physics, Inc. ("USNP") to administer the billing and collection of the
Physicist's fee for operating the Gamma Knife.
The consolidated financial statements include the accounts of GHS,
Inc., its wholly owned subsidiaries, Global Health Systems, Inc., GHS Management
Services, Inc., U.S. Neurosurgical Physics, Inc., and U.S. Neuro. The Company
accounts for its investment in a computerized processing systems provider on the
equity method.
During March 1997 the Company entered into an asset purchase
agreement pursuant to which Health Management Systems, Inc. will acquire
substantially all of the assets, except for accounts receivable, of the
Company's subsidiaries, Global Health Systems, Inc. and GHS Management Services,
Inc. The purchase price is $2,100,000 subject to certain closing adjustments.
The Company will retain its subsidiaries, US Neuro, which owns and operates the
Gamma Knife Center, and USNP.
The financial statements include the following, as at and for the year
ended December 31, 1996, applicable to the assets to be sold:
Assets $ 264,000
Revenue 2,780,000
(Loss) before taxes (620,000)
[2] Revenue recognition:
Revenue from sales of software systems is recognized when the
product is delivered and obligations remaining after delivery are not considered
to be significant. Estimated costs in connection with installing the systems are
accrued when the revenue is recognized. Income from software maintenance
agreements is recognized ratably over
(continued)
F-6
GHS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company and its Significant Accounting Policies:
(continued)
[2] Revenue recognition: (continued)
the periods covered by such agreements. Contract installments receivable arising
from sales of systems with extended payment terms are discounted to present
value. Finance charges representing the discount to present value of the
contract amount are credited to income over the term of the contract.
Unbilled accounts receivable represent revenues which have been
recognized, on delivery of the product, and will become billable at future dates
in accordance with contract provisions.
Patient revenue is recognized when the Gamma Knife procedure is
rendered.
[3] Inventories:
Inventories are stated at the lower of cost (on the first-in,
first-out method) or market and consist of computer equipment and peripheral
devices.
[4] Depreciation:
The cost of furniture and equipment is depreciated on the
straight-line method over the estimated useful lives of such assets. Leasehold
improvements are amortized over the life of the lease.
[5] Software development:
Costs associated with product development subsequent to
establishment of technological feasibility including enhancements to software
products, are capitalized and amortized as required by Statement of Financial
Accounting Standards No. 86. Costs incurred prior to achieving technological
feasibility are expensed as incurred. Amortization is generally provided on the
straight-line method over two to five years commencing when the product is
available for general release to customers.
[6] Earnings per share:
Earnings per share is based on the net income divided by the
weighted average number of common shares outstanding during the year. Common
stock equivalents consisting of stock options and warrants are included when
dilutive.
(continued)
F-7
GHS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company and its Significant Accounting Policies:
(continued)
[7] Statement of cash flows:
For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
[8] Estimates and assumptions:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of 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.
[9] Fair values of financial instruments:
The estimated fair value of financial instruments has been
determined based on available market information and appropriate valuation
methodologies. The carrying amounts of cash, accounts receivable, unbilled
accounts receivable, other current assets and accounts payable approximate fair
value at December 31, 1996 and December 31, 1995 because of the short maturity
of these financial instruments. The estimated carrying value of the obligations
under capital lease and loans payable approximate fair value because the
interest rates on these instruments approximate the market prices at December
31, 1996 and December 31, 1995. The fair value estimates were based on
information available to management as of December 31, 1996 and December 31,
1995.
[10] Stock-based compensation:
The Company accounts for employee stock option grants under the
basis of Accounting Principles Board Opinion No. 25. In fiscal 1996 the Company
adopted the "disclosures only" alternative available under Financial Accounting
Standards Board No. 123 ("FASB 123") for its employee stock option grants. The
pro forma net income and net earnings per share disclosure required by FASB 123
is not disclosed as there were no stock options granted during 1996 or 1995.
(continued)
F-8
GHS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Agreements With Research Medical Center ("RMC"):
[1] Gamma Knife neuroradiosurgery equipment agreement:
U.S. Neuro entered into a neuroradiosurgery equipment agreement (the
"equipment agreement") with RMC 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 U.S. Neuro to
provide (i) the exclusive 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 will pay
U.S. Neuro 80% of RMC's fees for the use of the equipment and the facility. The
equipment agreement terminates automatically upon termination of the ground
lease agreement (see Note B[2]) and may be terminated by mutual agreement in the
sixth year of the ground lease term.
[2] Ground Lease Agreement:
U.S. Neuro entered into a lease with RMC for the premises, defined
as land situated in Kansas City, Missouri together with the facility which the
Company was required to construct thereon. The lease term is for a period of 21
years commencing September 1994. Rent at $2.25 per square foot is payable
annually in advance. 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 vest in RMC.
(NOTE C) - Furniture and Equipment:
Furniture and equipment is stated at cost and is summarized as follows:
December 31,
-------------------
1996 1995
-------- --------
Equipment. . . . . . . . . . . $125,000 $181,000
Furniture. . . . . . . . . . . 38,000 41,000
-------- --------
T o t a l. . . . . . 163,000 222,000
Less accumulated depreciation. 86,000 166,000
-------- --------
B a l a n c e. . . . $ 77,000 $ 56,000
======== ========
(continued)
F-9
GHS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE C) - Furniture and Equipment: (continued)
Equipment, under a capital lease, and leasehold interest, is stated at
cost and is summarized as follows:
December 31,
-----------------------------------------------
1996 1995
----------------------- ---------------------
Leasehold Leasehold
Interest Equipment Interest Equipment
---------- ---------- -------- ----------
Cost. . . . . . . . . . . . . $1,036,000 $2,900,000 $708,000 $2,900,000
Accumulated depreciation and
amortization . . . . . . . 82,000 967,000 47,000 552,000
---------- ---------- -------- ----------
T o t a l . . . . . $ 954,000 $1,933,000 $661,000 $2,348,000
========== ========== ======== ==========
Depreciation aggregated approximately $433,000, $467,000 and $168,000 for
the years ended December 31, 1996, December 31, 1995 and December 31, 1994,
respectively.
Included in the above depreciation expense is approximately $415,000,
$414,000 and $138,000 for the years ended December 31, 1996, December 31, 1995
and December 31, 1994 for assets acquired under capital leases.
(NOTE D) - Software Development Costs:
Software development costs are summarized as follows:
Year Ended December 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
Balance - beginning of
period. . . . . . . . . $ 291,000 $ 389,000 $ 210,000
Additions for the period . 50,000 50,000 350,000
Amortization . . . . . . . (161,000) (148,000) (171,000)
--------- --------- ---------
Balance - end of period. . $ 180,000 $ 291,000 $ 389,000
--------- --------- ---------
Research and development expense, exclusive of amortization of capitalized
software development costs, was approximately $231,000, $320,000 and $124,000
for the years ended December 31, 1996, December 31, 1995 and December 31, 1994,
respectively, and is included in software systems costs.
(continued)
F-10
GHS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE E) - Costs Incurred In Connection With Leasehold Interest:
In a prior year, the Company granted a 20% interest in U.S. Neuro to two
related parties ("related parties") for services rendered in connection with the
leasehold interest, which it valued at $125,000 and credited to minority
interest. Under the terms of the agreement between GHS and the related parties,
GHS has the right to buy for cash or common stock the 20% interest owned by the
related parties at any time during each of the third through sixth full fiscal
years of the agreement. In September 1996, GHS decided to buy the minority
interest for common stock. The number of shares for the purchase, has been
estimated to be 33,200 by the Company which is subject to review by the related
parties. The value of such shares approximated the minority interest and
accordingly no adjustment was made to the basis of the Company's investment in
U.S. Neuro. In 1996, the subsidiary earned $80,000 through September 30, 1996 of
which $16,000 was allocated to the 20% interest. Such earnings are net of a
management fee of $119,000 charged by GHS. In 1995, the subsidiary incurred a
loss of $115,000 of which $22,000 was allocated to the 20% interest.
In July 1994, the Company issued 24,000 shares of its common stock to an
employee in consideration for services rendered in connection with the leasehold
interest. The Company valued the shares at a fair value of $24,000 which it has
included in leasehold cost.
In connection with the grant of the 20% interest, the Company entered into
an agreement with the related parties which provided for reimbursement to such
parties of their reasonable expenditures towards establishing U.S. Neuro.
The Company agreed to repay up to $250,000 of such valid, documented
expenses by issuing up to 125,000 shares of GHS, Inc. common stock and up to
$125,000 in U.S. Neuro notes payable from pre-tax earnings of U.S. Neuro. One of
the parties (Dr. Brown) claims that GHS, Inc. will owe 62,500 shares of GHS,
Inc. stock and interest bearing notes totaling $62,500, when he provides
documentation to the Company. The Company has requested documentation of the
claimed expenses since August 1993. No documentation has been produced. However,
the Company acting in good faith issued 62,500 shares of GHS, Inc. common stock
during 1993 and 1994. Dr. Brown has not documented any valid expenses. The
Company has paid $30,000 for legal fees incurred prior to September 1, 1993 by
Dr. Brown. The Company may take action to recover the 62,500 shares of GHS, Inc.
stock issued to Dr. Brown.
(continued)
F-11
GHS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE E) - Costs Incurred In Connection With Leasehold Interest:
(continued)
Dr. Brown entered into a three year employment contract with the Company
in September 1993. Dr. Brown claims that his contract was unilaterally modified
by the Company in November of 1994 and he was terminated without proper
authority in August 1995. Dr. Brown also claims that he has been denied
reimbursement of legitimate expenses of more than $20,000. The Company believes
that Dr. Brown's claims are completely without merit. Upon signing his
employment agreement Dr. Brown requested a $60,000 pay advance. The advance was
granted as a loan with monthly repayments culminating in December 1995. Dr.
Brown still owes the Company $6,900 on this loan. In November 1994, the Company
negotiated an incentive compensation plan with Dr. Brown whereby he was paid a
salary of $150,000 per annum with quarterly adjustments against his salary if
the Gamma Knife operation did not meet minimum performance standards. The
agreement guaranteed Dr. Brown a minimum salary of $100,000 per annum.
Dr. Brown was paid salary through August 1995 at which time he was
terminated as an employee and removed from the U.S. Neuro Board of Directors.
During the terms of his employment with U.S. Neuro, Dr. Brown was fully
reimbursed for expenses which he submitted as incurred in connection with his
responsibilities at U.S. Neuro; however, the Company did not reimburse him for
travel and expenses that he incurred which were for personal business or not
pre-authorized by the Company.
(NOTE F) - Obligation Under Capital Lease and Loans Payable:
Gamma Knife Venture:
U.S. Neuro purchased a Gamma Knife ("Knife 1") from Elekta Instruments
("Elekta") for $2,900,000. The purchase was financed by Financing for Science
International ("FFSI") under a 5 year capital lease bearing interest at
approximately 12.7% per annum. During September 1996, Finova Capital Corp.
bought out FFSI and became the lien holder. The lease is guaranteed by GHS, Inc.
and Global Health Systems, Inc.
On December 6, 1994, U.S. Neuro entered into an additional purchase
agreement with Elekta to buy a second Gamma Knife ("Knife 2") for $2,900,000 for
which it made a deposit of $290,000 in 1994. The knife initially was financed by
Financing for Science, however, during 1996 the Company refinanced this knife
with DVI Financial Services Inc. ("DVI") at which time the Company's deposit was
returned. This equipment lease provides for the funding of the Gamma Knife of
(continued)
F-12
GHS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - Obligation Under Capital Lease and Loans Payable:
(continued)
Gamma Knife Venture: (continued)
$2,900,000. Interest to be charged on the equipment lease will be the higher of
12.7% or that rate adjusted for any increase in the thirty month Treasury Note
rate. At December 31, 1996 the Company had a liability of $2,610,000 for
progress payments for the Gamma Knife. In addition, the Company has entered into
a three year loan with DVI for $300,000 and a demand loan of $535,000, both of
which bear interest at approximately 13.7% per annum. These loans are secured by
the accounts receivable of the Company and its subsidiaries. The two loans are
to fund the leasehold improvements required to install the Gamma Knife at New
York University Medical Center and are currently in an interest bearing escrow
account.
In November 1996 U.S. Neuro entered into an agreement to provide Knife 2
to a hospital for a fee based on the number of patient procedures performed. The
agreement is for seven years.
The Company anticipates the second Knife to be installed by June 1997 at
which time the final payment of $290,000 will be made.
In addition, the Company has two leases for computer equipment which bear
interest at between 9% and 13%.
Future lease payments on the equipment leases are as follows:
Year Ending Three Year Computer
December 31, Knife 1 Knife 2 Loan Equipment Total
--------------- ---------- ---------- -------- ------- ----------
1997 . . . $ 805,000 $ 263,000 $ 84,000 $16,000 $1,168,000
1998 . . . 805,000 731,000 143,000 15,000 1,694,000
1999 . . . 472,000 731,000 143,000 10,000 1,356,000
2000 . . . 731,000 731,000
2001 . . . 731,000 731,000
2002 . . . 731,000 731,000
Thereafter 245,000 245,000
---------- ---------- -------- ------- ----------
2,082,000 4,163,000 370,000 41,000 6,656,000
Less interest. 358,000 1,263,000 70,000 7,000 1,698,000
Less: final
payment . . 290,000 290,000
---------- ---------- -------- ------- ----------
Present value
of net
minimum
obligation. $1,724,000 $2,610,000 $300,000 $34,000 $4,668,000
========== ========== ======== ======= ==========
(continued)
F-13
GHS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Common Stock Issued With Put Option:
In a prior year the Company issued 500,000 shares of its common stock for
$1.00 per share to RMC. If the fair market value ("FMV") of the shares is equal
to or less than $1.25 per share, RMC has the right to resell the shares to GHS,
Inc. at $1.00 per share. If the FMV exceeds $1.25, GHS, Inc. has the right of
first refusal to repurchase the shares at a price equal to 80% of the FMV
("Transaction Price"). If GHS, Inc. elects not to exercise its right of first
refusal and RMC is unable to obtain a buyer for the shares at the Transaction
Price, RMC has the right to resell the shares to GHS, Inc. at a purchase price
equal to the greater of $1.00 per share or the Transaction Price.
However, in no event shall the Company be required to purchase
shares of stock after the earlier of 2003 or such time as U.S. Neuro,
Inc. no longer occupies the premises (the "facility").
(NOTE H) - Stockholders' Equity:
[1] Stock options:
The Company has a stock option plan (the "Plan") for officers and
other key personnel of the Company. The Plan authorizes the granting of
incentive and nonqualified stock options to purchase up to 750,000 shares of the
Company's common stock at a price not less than 100% (90% as to nonqualified) of
the fair market value of the common stock on the date of grant.
All options outstanding were granted to employees of the Company and
shall terminate immediately upon the termination of employment of the employee
by the Company or its subsidiaries or its parent.
No part of any option granted under the Plan will be exercisable
less than one year or more than ten years after the date of grant.
Listed below is information as to options granted and exercisable.
As of December 31, 1996 no options have been exercised.
Number of Shares
------------------------- Exercisable
1996 1995 1994 Price
------- ------- ------- ------------
Outstanding January 1. . 430,000 430,000 430,000 $1.00
Options expired. . . . . 70,000 1.00
------- ------- -------
Options outstanding. . . 360,000 430,000 430,000 1.00
======= ======= =======
Options exercisable. . . 338,375 364,875 307,750
======= ======= =======
(continued)
F-14
GHS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - Stockholders' Equity:
[2] Preferred stock:
The Company has authorized 1,000,000 shares of preferred stock, none
of which is issued. The rights and preferences of preferred stock are
established at the discretion of the Board of Directors upon issuance.
[3] Issuance of warrants:
On November 30, 1993, the Company granted warrants to a stockholder
to purchase 200,000 shares of the Company's common stock at a purchase price of
$1.00 per share, which equaled fair value at the date of grant. Such warrants
were granted as consideration for services rendered in connection with a private
placement of securities. The warrants contain registration and certain
anti-dilution rights and are exercisable through November 30, 1998.
(NOTE I) - Commitments and Other Matters:
[1] In 1995 the Company entered into a lease for office premises which
expires in 2000. The terms of the lease include escalation clauses for increases
in certain operating expenses.
The Company has a three year lease for an office facility in
Sacramento, California at a yearly rental of approximately $27,000.
Minimum future obligations under operating leases as described above
are as follows:
Year Ending
December 31,
------------
1997. . . . . . . . . . $ 68,000
1998. . . . . . . . . . 36,000
1999. . . . . . . . . . 34,000
2000. . . . . . . . . . 33,000
--------
$171,000
========
Total rent expense aggregated $62,000, $61,000 and $33,000 for the
years ended December 31, 1996, December 31, 1995, and December 31, 1994,
respectively.
[2] The Company maintains the majority of its cash at one bank.
[3] The Company was contingently liable on an equipment lease of a
customer which provided for an annual rental of approximately $95,000 per year.
This lien was removed during February 1996.
(continued)
F-15
GHS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - Taxes:
Income tax (benefit) is comprised of the following:
Year Ended December 31,
--------------------------
1996 1995 1994
--------- ------ ------
Current:
Federal. . . . . . . . $ - 0 - $- 0 - $- 0 -
State. . . . . . . . . - 0 - - 0 - - 0 -
--------- ------ ------
- 0 - - 0 - - 0 -
--------- ------ ------
Deferred:
Federal. . . . . . . . (404,000) - 0 - - 0 -
State. . . . . . . . . (59,000) - 0 - - 0 -
--------- ------ ------
(463,000) - 0 - - 0 -
--------- ------ ------
Income tax benefit. . . . $(463,000) $- 0 - $- 0 -
========= ====== ======
The difference between income tax benefit at the statutory federal income
tax rate and income tax benefit reported in the statement of operations is as
follows:
Year Ended December 31,
--------------------------
1996 1995 1994
--------- -------- ---------
Income tax (benefit) at the
federal statutory rate. . . $(100,000) $(67,000) $(255,000)
State income tax (benefit),
net of federal taxes. . . . (15,000) (10,000) (38,000)
Change in valuation allowance. (348,000) 77,000 293,000
--------- -------- ---------
$(463,000) $ - 0 - $ - 0 -
========= ======== =========
Temporary differences which give rise to deferred tax asset are as
follows:
Year Ended December 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
Net operating loss
carryforwards . . . . . . . $1,013,000 $ 730,000 $ 570,000
Allowance for doubtful
accounts. . . . . . . . . . 64,000 6,000 6,000
Unbilled accounts receivable . 77,000 37,000
Excess of tax depreciation
over book depreciation. . . (344,000) (195,000) (72,000)
Valuation allowance. . . . . . (270,000) (618,000) (541,000)
---------- --------- ---------
Deferred tax asset - net . . . $ 463,000 $ - 0 - $ - 0 -
---------- --------- ---------
(continued)
F-16
GHS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - Taxes: (continued)
In 1996 the Company reevaluated its deferred income tax asset and reversed
part of the valuation allowance related to this asset of $348,000. The
reevaluation was based on the fact that the Company entered into a contract in
March 1997 (see Note A) which, if closed, will result in a substantial gain.
Accordingly, management has concluded that it is more likely than not that part
of the deferred tax asset will be realized.
At December 31, 1996, the Company has net operating loss carryforwards for
income tax purposes aggregating approximately $2,708,000, which expire in the
years 2008 through 2011.
(NOTE K) - Major Customers:
For the year ended December 31, 1996, the Company earned revenues from a
municipality which accounted for 23% of revenues. Two customers represent 15%
and 48% of receivables at December 31, 1996. These sales and receivables are
from the computerized processing systems.
For the year ended December 31, 1995, the Company earned revenues from a
municipality which accounted for 43% of revenues. Two customers represent 35%
and 27% of receivables at December 31, 1995. These sales and receivables are
from the computerized processing system segment. Also, one customer represents
72% of the unbilled accounts receivable.
For the year ended December 31, 1994, the Company earned revenues from one
customer which accounted for 21% of revenues. Two customers represent 42% and
15% of receivables at December 31, 1994. These sales and receivables are from
the computerized processing system segment.
(continued)
F-17
GHS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE L) - Business Segments:
The Company's business segments are the development, installation and
maintenance of computerized integrated processing systems and the operation of
stereotactic radiosurgery centers, utilizing the Gamma Knife technology.
Corporate assets are principally cash and cash equivalents. The following is the
Company's business segment data:
Year Ended December 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
Revenue:
Computerized processing
systems. . . . . . . . . . $2,780,000 $3,162,000 $1,954,000
Gamma Knife. . . . . . . . . 1,452,000 1,283,000 381,000
---------- ---------- ----------
T o t a l . . . . . . $4,232,000 $4,445,000 $2,335,000
========== ========== ==========
Operating income (loss):
Computerized processing
systems. . . . . . . . . . $ (463,000) $ (136,000) $ (327,000)
Gamma Knife. . . . . . . . . 491,000 441,000 (139,000)
---------- ---------- ----------
Operating income (loss). . . 28,000 305,000 (466,000)
---------- ---------- ----------
Interest (expense). . . . . . . (309,000) (504,000) (308,000)
Investment income . . . . . . . 2,000 1,000 23,000
---------- ---------- ----------
T o t a l . . . . . . (307,000) (503,000) (285,000)
---------- ---------- ----------
Loss before income tax benefit
and minority interest. . . . $ (279,000) $ (198,000) $ (751,000)
========== ========== ==========
December 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
Assets:
Computerized processing
systems. . . . . . . . . . $1,307,000 $2,505,000 $1,966,000
Gamma Knife. . . . . . . . . 6,623,000 4,834,000 3,889,000
Corporate assets . . . . . . 705,000 30,000
---------- ---------- ----------
T o t a l . . . . . . $8,635,000 $7,339,000 $5,885,000
========== ========== ==========
Capital expenditures:
Computerized processing
systems. . . . . . . . . . $ 89,000 $ 80,000 $ 367,000
Gamma Knife. . . . . . . . . 330,000 3,000 544,000
---------- ---------- ----------
T o t a l . . . . . . $ 419,000 $ 83,000 $ 911,000
========== ========== ==========
Depreciation and amortization:
Computerized processing
systems. . . . . . . . . . $ 179,000 $ 168,000 $ 191,000
Gamma Knife. . . . . . . . . 452,000 449,000 150,000
---------- ---------- ----------
T o t a l . . . . . . $ 631,000 $ 617,000 $ 341,000
========== ========== ==========
F-18
REPORT OF INDEPENDENT AUDITORS WITH RESPECT TO
SUPPLEMENTARY SCHEDULES
Board of Directors and Stockholders
GHS, Inc.
Rockville, Maryland
The audits referred to in our report dated March 13, 1997 includes
Schedule II. In our opinion, this schedule presents fairly the information set
forth therein in relation to the financial statements taken as a whole and in
compliance with the applicable accounting regulation of the Securities and
Exchange Commission.
New York, New York
March 13, 1997
S-1
SCHEDULE II
GHS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
Additions
Balance (1) (2)
at Charged to Balance
beginning Charged to other at
of costs and accounts - Deductions - end of
Description period expenses describe (A) describe (B) period
Allowance for doubtful accounts:
1996 . . . . . . . . . . . . . . . . . . . . .$14,000 $150,000 $164,000
======= ======== ========
1995 . . . . . . . . . . . . . . . . . . . . .$14,000 $ 14,000
======= ========
1994 . . . . . . . . . . . . . . . . . . . . .$14,000 $ 14,000
======= ========
Reserve for inventory obsolescence:
1996 . . . . . . . . . . . . . . . . . . . . .$15,000 $15,000 (B) $ - 0 -
======= ========
1995 . . . . . . . . . . . . . . . . . . . . .$15,000 $ 15,000
======= ========
1994 . . . . . . . . . . . . . . . . . . . . .$15,000 $ 15,000
======= ========
(B) Liquidation of obsolete inventory.
The accompanying notes to financial statements
are an integral part hereof.
S-2