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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, 1997 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)
2400 Research Boulevard, Suite 325, Rockville, Maryland 20850
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (301) 208-8998
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.
The aggregate market value of Registrant's Common Stock held by
non-affiliates was approximately $1,735,000 on March 16, 1997, based upon the
average of the bid and asked prices as reported on the OTC Bulletin Board.
The number of shares of Registrant's Common Stock, par value $.01 per
share, outstanding as of March 16, 1998, was 6,979,160.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits (to this Annual Report on Form 10K for the Registrant's
fiscal year ended December 31, 1997) are incorporated by reference as listed on
the index of exhibits in Part IV, ITEM 14.
Part I
ITEM 1. BUSINESS
GHS, Inc. (the Company) provides management and financing services to the
health care industry. The Company provides these services primarily via its
subsidiary U.S. NeuroSurgical, Inc.(R) (USN). 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 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 2400 Research Boulevard, Suite 325, Rockville,
Maryland 20850, and its telephone number is (301) 208-8998.
On July 15, 1997, the Company and Health Management Systems, Inc. (HMS),
consummated an agreement pursuant to which HMS acquired substantially all of the
assets of GHS' subsidiaries, Web Health, Inc., formerly Global Health Systems,
Inc. (Global) and Kachina Ventures, Inc., formerly GHS Management Services, Inc
(GHS Management). These subsidiaries provided computerized record-based
processing systems and services for managed care, public health and ambulatory
care facilities. As a result of such sale, the Company received gross proceeds
of $2,146,000 from such sale, including certain closing adjustments.
On December 5, 1997 the assets of Florida Specialty Networks, Ltd. a
company in which the Company owned a 20% interest were sold to CMSF, Inc., a
subsidiary of Magellan Health Services, Inc. As a result of the transaction, the
Company received approximately $2,330,000 net of expenses. In addition, the
Company retained an interest in an escrow fund and has the opportunity to earn
additional consideration upon the achievement of certain performance milestones.
U. S. NeuroSurgical, Inc.
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
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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. The Company,
through USN, intends to continue 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. USN seeks cooperative ventures with these facilities. USN
believes that, as of December 31, 1997, there were approximately thirty-five
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 RMC in Kansas
City, Missouri. USN paid approximately $3,000,000 for the Gamma Knife.
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 sold 500,000 shares of its common stock (
the "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
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 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.
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The Gamma Knife cost and the cost of the facility improvements totaled
approximately $4,700,000. In July the Company commenced its lease for the NYU
Gamma Knife. DVI Financial Services, Inc. (DVI) provided the capital lease
financing for the NYU facility. The term is six years with incremental payments
for the first year and fixed payments thereafter. The interest rate for such
capital lease is 12%. The Company has retained a marketing representative to
help introduce the technology to neurosurgeons in the New York tri-state region.
In March 1997, USN refinanced the lease on the RMC Gamma Knife. The lease
was provided by DVI. The effects of this transaction were to lower its interest
costs to 10.3 % per annum and provide proceeds to pay for the buildout of The
NYU Gamma Knife suite. USN also commenced loans with DVI for working capital of
$188,000 to finance the remainder of the buildout. The terms of these loans are
three years and they bear interest between 12% and 12.9% per annum.
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
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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.
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
5
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 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
6
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. 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 has secured capital lease financing from FSI for the first
Gamma Knife installation at the RMC site, and for its second Gamma Knife in New
York from DVI. The lease at RMC was refinanced in the spring of 1997 with DVI.
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.
7
Employees
GHS, Inc. has five full-time employees and one part-time employee. Of
these employees, three are engaged in sales and marketing, one technical, and
two in administration and office support.
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
1,300 square feet. The rent is approximately $32,000 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.
ITEM 3. LEGAL PROCEEDINGS
As described below under Item 13 - CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, the Company, USN and the Company's Chairman and President, Alan
Gold, are involved in certain legal proceedings in several actions filed in
federal and state court arising out of the events also described under Item 13.
A decision adverse to the Company in these cases could have a material adverse
effect on the Company's results of operations. Because such proceedings are in
their initial stages, the Company cannot currently predict the liklihood of a
favorable or unfavorable outcome or the time frame in which these cases will be
ultimately resolved. The Company intends to vigorously pursue its rights and
defend itself in such proceedings.
8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 23, 1997, the Company held its 1997 Annual Meeting of
Stockholders ( the "Annual Meeting" ). The matters voted upon at the Annual
Meeting and the votes cast for such matters were as follows:
1. The Company's stockholders elected Alan Gold, William F. Leimkuhler and
Charles H. Merriman, III to serve until the next Annual Meeting. Voting
for the nominees for director was as follows: Alan Gold: 4,641,065 FOR and
0 shares WITHHELD; William F. Leimkuhler: 4,641,265 shares FOR and 0
shares WITHHELD; and Charles H. Merriman: 4,641,065 shares FOR and 0
shares WITHHELD.
2. The Company stockholders approved the adoption of the Company's 1997 Stock
Option Plan. For the approval of the 1997 Stock Option Plan, the vote was
3,904,338 FOR ; 14,400 shares AGAINST and 100,575 shares ABSTAINING (and
621,952 broker non votes).
3. The Company's stockholders approved the appointment of Richard A. Eisner,
LLP, as the Company's auditor for the current fiscal year. For the
appointment of Richard A. Eisner, LLP as the Company's auditor, the vote
was 4,548,490 shares FOR ; 200 shares AGAINST ; and 92,575 shares
ABSTAINING.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock traded in the over-the-counter market, NASDAQ
symbol GHSI until January 30, 1997 and has traded since on the OTC Bulletin
Board. The range of high and low bid quotations as reported by NASDAQ System for
the two years ended December 31, 1997 are set forth below.
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
Period High Bid Low Bid
------ -------- -------
January 1 - March 31, 1997 $ .45 $ .19
April 1 - June 30, 1997 .50 .20
July 1 - September 30, 1997 .56 .44
October 1 - December 31, 1997 1.00 .25
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, 1998, there were approximately 150 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.
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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, 1993
through 1997. The latest financial statements of the Company are included in
Item 14 in Part IV of this report. The information set forth should be read in
conjunction with such financial statements and the notes thereto.
Year Ended
December 31,
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Operating Revenue $ 1,830 1,452 1,283 381 --
Income (loss) from continuing operations $ (11) 545 (40) (408) --
Basic and diluted income (loss) per
common share from continuing operations 0.07 (0.01) (0.06) --
Total assets $ 10,712 8,001 7,339 5,885 6,991
Long-term obligations $ 6,511 5,904 3,347 2,776 500
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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.
General
In July 1997, the Company sold to HMS substantially all of the assets
related to the Company's business of providing computerized record-based
processing systems and services for managed care, public health and ambulatory
care facilities ( the "Systems Business" ). The Systems Business was operated
through two of the Company's subsidiaries, formerly known as Global Health
Systems, Inc. and GHS Management Services, Inc. As a result of the closing of
such transaction, GHS received approximately $2,146,000 million of gross
proceeds, which amount included certain closing adjustments.
In December 1997, the assets of FSN, a company in which GHS possessed a
20% interest, and several of its affiliates were sold to CMSF, Inc., a
subsidiary of Magellan Health Services, Inc. As a result of the closing of such
transaction, GHS received approximately $2,330,000 net of expenses. In addition,
GHS will retain an interest in an escrow fund established at closing and in
additional contingent consideration which may be earned in the future upon the
achievement of certain performance milestones. Subject to the occurrence of
certain future events, GHS could receive up to approximately $1.1 million from
such escrow fund and up to $5 million in such contingent consideration. There
can be no assurance that GHS will receive any amounts from such escrow fund or
contingent consideration.
The sale by the Company in 1997 of its System Business and its interest in
FSN resulted in the receipt by GHS of a total of approximately $4.5 million net
of expenses. GHS plans to use the proceeds to pursue strategic opportunities
that exist for the Company. GHS' remaining subsidiary, USN, will continue to
develop, own and operate Gamma Knife Centers.
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Results of Operations
1997 Compared to 1996
Patient revenue increased 26% to $1,830,000 in 1997 from $1,452,000 in
1996. The increase was due to two factors. The Gamma Knife at the RMC Gamma
Knife Center (Kansas City Center) continued to increase its patient treatments.
The other increase was due to the fact that USN opened its second center and the
first in New York City. This center commenced operations in the second half of
1997. Patient expenses increased 47% to $843,000 from $574,000 in 1996. The
increase was due to increased depreciation to the New York Gamma Knife and due
to the amortization for the New York improvements. Selling, general and
administrative expense (S,G & A) increased 40% to $585,000 in 1997 from $417,000
in 1996. The increase was due to increased insurance costs for the two Gamma
Knive's and legal fees related to the legal proceedings described in Items 3 and
13 hereof.
For the year ended 1997, income from operations was $402,000 as compared
to income from operations of $461,000 in 1996. There was a 60% increase in
interest expense to $485,000 in 1997 from $302,000 in 1996. The increase in
interest expense was expected due to the opening of the second Gamma Knife
Center at NYU in July 1997. Prior to the opening, interest on the progress
payments of the Gamma Knife and the demand loan for the leasehold improvements
at NYU had been capitalized. Interest capitalized was $178,000 for 1997 and
$249,000 for 1996. With the commencement of the NYU Gamma Knife Center, the
second equipment lease started replacing the progress payments, leasehold
improvements of $487,000 were financed over three years and the capitalized
interest cost began to be amortized over seven years. The Company earned $64,000
in interest income in 1997. The Company had an income tax benefit of $8,000 in
1997 as compared to an income tax benefit of $402,000 in 1996. As a result of
these transactions the Company has a loss from continuing operations of $11,000
in 1997 and income from continuing operations of $545,000 in 1996.
Income from discontinued operations was $2,083,000 in 1997 as compared to
a loss of $377,000 in 1996. This was due to the Company's sale of the Systems
Business which resulted in a gain of $1,311,000, net of income tax of $565,000,
and the sale of its interest in Florida Specialty Networks, Ltd (FSN) resulting
in a gain of $1,389,000, net of
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income tax of $916,000. In addition, the Company had a loss in 1997 from its 20%
equity of FSN of $97,000 as compared to net income of $136,000 in 1996. The
Company also participates in an earnout which could bring additional proceeds
from discontinued operations of as much as $6,000,000 over the next three years,
based upon the operations of the purchaser. There is no assurance that the
Company will receive any proceeds from the earnout or from an escrow fund also
established for such sale. For the year ended 1997 the Company had net income of
$2,072,000 as compared to net income of $168,000 in 1996.
1996 Compared to 1995
Revenues of the Company's subsidiary, USN, grew 13% to $1,452,000 in 1996
from $1,283,000 in 1995. The revenue growth reflects the increased acceptance of
the Kansas City Center and the community. Patient expenses associated with the
operation of the Kansas City Center were $574,000 for the year, down from
$670,000 in the prior year. S, G & A was $417,000 as compared to $176,000 in
1995. The Company had interest expense of $302,000 in 1996 compared to $500,000
in 1995. The decrease in interest was primarily due to the Company's
capitalization of $249,000 of interest pursuant to the NYU construction in 1996.
Management anticipated the utilization of a portion of the Company's net
operating loss carryforward due to the contract with HMS for the sale of the
assets of the two subsidiaries for $2,100,000 and therefore provided a deferred
tax benefit of $402,000. As a result of the capitalized interest costs and
deferred tax benefit the Company had income from continuing operations of
$545,000 in 1996 compared to a net loss of $40,000 in 1995. The Company had a
loss from dicontinued operations of $377,000 in 1996 as compared to $136,000 in
1995. This was due primarily to to the increase in costs and decline in revenue
of the Systems business. The Company had income in 1995 from its equity investee
of $136,000.
Liquidity and Capital Resources
The Company had a working capital ratio of 3.1 in 1997, as and compared to
.6 in 1996. For the year ended December 31, 1997, net cash used in operating
activities was $96,000 as compared to net cash provided of $735,000 in 1996.
Depreciation and
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amortization was $784,000 in 1997 as compared to $450,000 in the preceding year.
This increase was due to the NYU Gamma Knife beginning service as well as
increased amortization for the leasehold improvements. There was an increase of
$115,000 in accounts receivable and a decrease of $96,000 in accounts payable
from 1996. The Company also had cash used by discontinued operations of $703,000
in 1997 versus cash provided of $37,000 in 1996.
The Company had net cash provided by investing activities of $3,789,000 in
1997 as compared to net cash used in investing activities of $657,000 in 1996.
There was a decrease in cash held in escrow of $818,000 in 1997 versus an
increase of $880,000 in the previous year. Property and equipment purchases of
$1,102,000 in 1997 were for the NYU Gamma Knife. There was cash received of
$2,100,000 for the sale of its System Business, and $2,330,000 from the sale of
its investment in FSN.
There was net cash used in financing activities of $386,000 in 1997
compared to $117,000 in 1996. USN made lease repayments of $486,000 in 1997
versus $522,000 in 1996.
In 1997, USN refinanced the capital lease on the Kansas City Gamma
Knife.There are two and one half years remaining on the lease. The purpose of
the refinance was to achieve a lower interest rate (10.3%) as well as to receive
proceeds of $625,000 to finance lease hold improvements at NYU. $525,000 was
used to pay the existing demand loan that was used as a deposit on the leasehold
improvements. The remaining lease term was extended for twelve months. USN has
two and a half years remaining on the capital lease for Kansas City that began
in September 1994. The annual payments are $828,000. The leases for the NYU
equipment and improvements have annual payments of $792,000 and $220,000,
respectively. As a result of all of the above, there was an increase of cash and
cash equivalents of $3,307,000 as compared to a decrease of $39,000 in 1996. As
of December 31, 1997 the Company had $3,466,000 in cash and cash equivalents as
compared to $159,000 in 1996. On a long term basis the Company expects that the
proceeds from the sale transactions of its Systems Business and its interest in
FSN will provide sufficient capital for at least the next 12 months. In
addition, such 12 month period may be extended to the extent the company
receives any amounts from the escrow fund or the contingent consideration
resulting from the FSN transaction. However, there
15
can be no assurance that GHS will receive any amounts from such escrow fund or
contingent consideration. However, because the Company believes the level of
financial resources is a significant competitive factor in its industry, it may
choose at any time to raise additional capital through debt or equity financing
to strengthen its financial position, facilitate growth, and provide the Company
with additional flexibility to take advantage of business opportunities that may
arise.
Year 2000 Compliance
The Company relies significantly on computer technology throughout its
business to effectively carry out its day-to-day operations. As the millennium
approaches, the Company is assessing all of its computer systems to ensure that
they are "Year 2000" compliant. In this process the Company may replace or
upgrade certain systems which are not Year 2000 compliant, in order to meet its
internal needs and those of its customers. The Company expects its Year 2000
project to be completed on a timely basis. However, there can be no assurance
that the systems of other companies on which the Company may rely also will be
timely converted or that such failure to convert by another company would not
have an adverse effect on the Company's systems. The cost to the Company of such
changes are difficult to estimate but are not expected to have a material
financial impact. Actual results could differ materially from the Company's
expectations due to unanticipated technological difficulties, vendor delays, and
vendor cost overruns.
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.
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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 53 President & Chairman
William F. Leimkuhler 45 Director
Charles H. Merriman, III 63 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. From July 1997 through March 1998 Mr. Gold was an
employee of HMS.
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 &
Carnelutti, which has served as counsel to the Company on various matters since
the Company's formation.
Charles H. Merriman, III is Managing Director of the Investment Banking
and Corporate Finance Department of Scott & Stringfellow, an investment banking
firm where
17
he has been employed since 1972. Mr. Merriman has extensive knowledge of the
Company's primary focus on healthcare and technology.
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.
Section 16 (a) Beneficial Ownership Reporting Compliance
Based soley upon a review of the copies of the forms furnished to the
Company, or written representations from certain reporting persons, the Company
believes that during the year ended December 31, 1997, except as set forth
below, all filing requirements applicable to its officers and directors were
complied with by such individuals. Mr. Alan Gold, the Chairman and President of
the Company, inadvertently failed to timely report on Form 4 a grant of options
to purchase Common Stock, and Mr. Charles H. Merriman, III, a Director of the
Company, inadvertently failed to file a Form 3 upon becoming a director of the
Company and to timely report on Form 4 a grant of options to purchase Common
Stock.
ITEM 11 EXECUTIVE COMPENSATION
The information below sets forth the compensation for the year ended
December 31, 1997, for each executive officer of the Company:
Summary Compensation Table
Name and Annual Compensation Long Term Compensation
Principal Position Year Salary($) Options/ SARs
- ------------------ ---- --------- -------------
Alan Gold,
President & Director 1997 $115,000 100,000
1996 $150,000
1995 $150,000
18
The Company and Mr. Gold are parties to an employment agreement giving
either the Company or Mr. Gold the option to terminate the agreement by giving
the other party 6 months written notice.
Stock Option Plan
Effective October 23, 1997 the Company adopted a 1997 Stock Option Plan ("the
Plan") for officers, directors, consultants and other key personnel of the
Company. This Plan replaces the 1986 Stock Option Plan which had expired.
Options outstanding from the 1986 Stock Option Plan are 166,500. The Plan
authorizes the granting of incentive stock options ("ISO) and non qualified
stock options to purchase up to 750,000 shares of the Company's common stock at
a price not less than 100% (110% in the case of ISO's granted a person who owns
stock possessing more than 10% of the voting power of the Company) of the fair
market value of the common stock on the date of grant and that no portion of the
option may be exercised beyond ten years from that date (five years in the case
of ISO's granted to 10% shareholder). During 1997 325,000 options were granted
and at December 31, 1997, 425,000 options were available for grants.
Options Granted During Fiscal Year Ended December 31, 1997
The following table sets forth certain information concerning options
granted during the fiscal year ended December 31, 1997 to Alan Gold.
Potential recallable
value at assumed
annual rates of stock
Individual Grants option term(1)
---------------------------------------------
Percent of
total
options/SARs
granted to Exercise or
Options employees in base price Expiration
Name Granted fiscal year ($/Sh) date 5% ($) 10% ($)
- ---- ------- ----------- ------ ---- ------ -------
Alan Gold 100,000 30.80% $1.00 12/31/07 $0 $0
(1) The 5% and 10% assumed annual rates of appreciation are mandated by
rules of the Securities and Exchange Commission and do not reflect
estimates or projections of future Common Stock prices. There can be no
assurance that the amounts reflected in this table will be achieved.
19
Aggregate Unexercised Options & Option Values at December 31, 1997
The following table sets forth, as of December 31, 1997 the number of options
and the value of unexercised options held by Alan Gold.
Value of Unexercised In-The
Number of Unexercised Options Money Options at December
at December 31, 1997 (#) 31, 1997 ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
Alan Gold 149,000 / 0 $37,250/ 0 (1)
(1) Based on average of closing bid and asked prices ($.25) of the
Company's common stock on December 31, 1997.
20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 3, 1998 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) 584,428 8.0%
1350 Piccard Drive
Rockville, MD 20850
William F. Leimkuhler (3) 100,000 1.4%
711 Fifth Avenue
New York, NY 10022
Charles H. Merriman III (4) 107,000 1.4%
C/O Scott & Stringfellow
PO Box 1575
Richmond, VA 23218
Stanley S. Shuman (5) 1,071,250 15.3%
711 Fifth Avenue
New York, NY 10022
Allen & Company Incorporated (6) 2,022,000 28.5%
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 (7) 791,428 10.8%
as a group (three persons) (2) (3) (4)
- ----------------
(1) Unless otherwise indicated, all shares are beneficially owned and sole
voting and investment power is held by the person named above.
21
(2) Includes 435,428 shares held jointly by Mr. Gold and his wife, Susan Gold,
as joint tenants with right of survivorship and 149,000 exercisable stock
options.
(3) Includes 100,000 exercisable stock options held by Mr. Leimkuhler.
(4) Includes 100,000 exercisable stock options held by Mr. Merriman.
(5) 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.
(6) 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.
22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1993, pursuant to an agreement (the "USN Agreement") between the
Company and A. Hyman Kirshenbaum, M.D. ("Kirshenbaum") and Jerry Brown, Ph.D
("Brown") , the Company, among other things, granted an aggregate 20% interest
in USN to Brown and Kirshenbaum. In addition, following the execution of the USN
agreement, Kirshenbaum was appointed as an officer of USN and Brown was
appointed to the Company's Board of Directors and executed an employment
agreement with USN. Under the terms of the USN Agreement, the Company possessed
the right to repurchase for cash or Common Stock such 20% interest during each
of the third through sixth full fiscal years of the USN Agreement. The Company
exercised its right to repurchase the 20% interest in USN in September 1996 at a
value of $38,781.40 , which value was calculated by the Company in accordance
with the terms of the USN Agreement. Such valuation was disputed by Brown and
Kirshenbaum.
In June 1997, the Company instituted an action (the "Declaratory Action")
in the United States District Court of Maryland, Southern Division against
Kirshenbaum and Brown seeking a declaration from the Court that its repurchase
of Brown's and Kirshenbaum's 20% interest in USN for $38,781.40 was fair and
equitable. Because of the dispute between the Company and Brown and Kirshenbaum
on the valuation of their 20% in USN, the Company filed the Declaratory Action
to determine: (1) whether the Company's repurchase is proper; (2) whether the
valuation of Brown's and Kirshenbaum's 20% interest in USN is just and fair; (3)
whether Brown's and Kirshenbaum's valuation of their 20% interest in USN is
improper. If successful in this action, the Company will be entitled to purchase
Brown's and Kirshenbaum's 20% interest for $38,781.40 or 38,782 shares of Common
Stock. If unsuccessful, the Company may be required to purchase Brown's and
Kirshenbaum's interests in USN for approximately $584,497.
In response to the Declaratory Action, Brown and Kirshenbaum filed a
counterclaim and third party claim against the Company, USN and others,
including Alan Gold. The counterclaim against the Company and third party claim
against USN and the other parties is purportedly for violations of : (1) the
RICO statutes (18 U.S.C. ss1962(c) and (d)) ; (2) various causes of action for
fraud ; and (3) various causes of action for breach of contract. The RICO and
fraud counts seek damages of not less than $9 million per count and also seek
the imposition of treble damages for RICO and punitive
23
damages for the fraud counts. The breach of contract counts range from $250,000
to $600,000. The claims of RICO and other paries to missappropriate a business
concept allegedly created by Brown and Kirshenbaum. The remainder of Brown's and
Kirshenbaum's claims are in the nature of a breach of contract between the
Company, USN and Brown and Kirshenbaum.
The Company feels strongly about its position in the Declaratory Action
and intends to vigorously pursue its claim in the Declaratory Action. However,
no evaluation of the likelihood of a favorable or unfavorable outcome can be
made at this time. In addition, the Company and USN intend to vigorously defend
Brown's and Kirshenbaum's counterclaim and third party claims.
In addition to the above-described federal court action, Brown has filed a
state court action in the District Court in and for Montgomery County, Maryland
against USN and other parties seeking breach of contract damages for lost
salary, unreimbursed expenses and for consequential damages and costs arising
out of what he claims to be an improper termination from USN. Brown seeks
approximately $381,000 for lost salary and $36,000 for unreimbursed expenses in
addition to the consquential damages and treble damages he seeks under his
various counts of his Complaint. USN has and continues to vigorously defend this
action. Because the case in in the initial pleading stages, no evaluation of the
likelihood of an unfavorable outcome can be made at this time.
24
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, 1997 and 1996 F-2
Statements of Operations for the years ended
December 31, 1997, 1996, and 1995. F-3
Statement of Changes in Stockholders' Equity
for the period January 1, 1995 through
December 31, 1997 F-4
Statements of Cash Flows for the year ended
December 31, 1997, 1996, and 1995. 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, 1997, the Company filed a
report on Form 8-K on December 12, 1997 with the Securities and Exchange
Commission. This was to disclose the sale of the Company's interest in
Florida Specialty Networks, Ltd.
(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).
25
(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).
10 Material Contracts
(a) 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).
(b) 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).
(c) 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).
(d) 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).
(e) LGK Agreement dated July 12, 1993 between Elekta Instruments,
Inc. and US NeuroSurgical (incorporated by reference to Exhibit 10k
to the Company's Quarterly Report or Form 10-Q for the quarter ended
September 30, 1993).
(f) 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.)
(g) 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).
(h) 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).
26
(i) Asset Purchase Agreement dated March 10, 1997 between Health
Management Systems, Inc. and GHS, Inc. (incorporated by reference
to 10p the Company's 1997 Annual Report on Form 10-K).
(j) Agreement dated August 1, 1996 between U. S. Neurosurgical, Inc
and DVI, Inc.
(k) 1997 Stock Option Plan
(m) Asset Purchase Agreement dated October 16, 1997 between Florida
Specialty Network, Ltd. and CMSF, Inc.
27
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 6, 1998
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 6, 1998 /s/ Alan Gold
--------------------------------------------
Alan Gold
President and Director
(Chief Executive, Financial Officer)
April 6, 1998 /s/ William F. Leimkuhler
--------------------------------------------
William F. Leimkuhler
Director
April 6, 1998 /s/ Charles H. Merriman III
--------------------------------------------
Charles H. Merriman III
Director
28
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
GHS, Inc.
Rockville, Maryland
We have audited the accompanying consolidated balance sheets of GHS, Inc. and
subsidiaries as of December 31, 1997 and 1996, 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, 1997. 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 as of December 31, 1997 and 1996, and the consolidated results of
their operations and their consolidated cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
January 30, 1998
With respect to Note G[1]
March 5, 1998
F-1
GHS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
-------------------------
1997 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 3,466,000 $ 159,000
Certificates of deposit - at cost which
approximates market 400,000
Accounts receivable 209,000 94,000
Other current assets 51,000 64,000
Net current assets - discontinued operations 43,000 340,000
----------- -----------
Total current assets 4,169,000 657,000
----------- -----------
Property and equipment:
Gamma Knifes (net of accumulated depreciation of
$1,636,000 in 1997 and $967,000 in 1996) 4,830,000 1,933,000
Leasehold improvements (net of accumulated
amortization of $198,000 in 1997 and
$83,000 in 1996) 1,624,000 954,000
----------- -----------
Total property and equipment 6,454,000 2,887,000
----------- -----------
Progress payments - Gamma Knife 2,610,000
Deferred tax asset 463,000
Deposits 43,000
Cash held in escrow 89,000 907,000
Net long-term assets - discontinued operations 434,000
----------- -----------
89,000 4,457,000
----------- -----------
$10,712,000 $ 8,001,000
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 149,000 $ 245,000
Obligations under capital lease and loans
payable - current portion 1,195,000 711,000
Demand loan 525,000
----------- -----------
Total current liabilities 1,344,000 1,481,000
Deferred tax liability 450,000
Obligations under capital lease and loans
payable - net of current portion 4,217,000 3,923,000
Common stock - par value $.01; 500,000 shares
issued with put option 500,000 500,000
----------- -----------
6,511,000 5,904,000
----------- -----------
Commitments, litigation and other matters
STOCKHOLDERS' EQUITY
Preferred stock - 1,000,000 shares authorized;
none issued Common stock - par value $.01;
25,000,000 shares authorized; 6,479,160 issued
and outstanding in 1997 6,447,828 issued and
outstanding in 1996 65,000 65,000
Additional paid-in capital 3,114,000 3,082,000
Retained earnings 1,022,000 (1,050,000)
----------- -----------
Total stockholders' equity 4,201,000 2,097,000
----------- -----------
$10,712,000 $ 8,001,000
=========== ===========
- --------------------------------------------------------------------------------
See notes to financial statements
F-2
GHS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
Revenue:
Patient revenue $1,830,000 $1,452,000 $1,283,000
---------- ---------- ----------
Costs and expenses:
Patient expenses 843,000 574,000 670,000
Selling, general and administrative 585,000 417,000 176,000
---------- ---------- ----------
1,428,000 991,000 846,000
---------- ---------- ----------
Income from operations 402,000 461,000 437,000
---------- ---------- ----------
Interest expense (485,000) (302,000) (500,000)
Interest income 64,000 1,000
---------- ---------- ----------
(421,000) (302,000) (499,000)
---------- ---------- ----------
Income (loss) from continuing operations
before income tax provision (benefit)
and minority interest (19,000) 159,000 (62,000)
Income tax (benefit) (8,000) (402,000)
---------- ---------- ----------
Income (loss) from continuing operations
before minority interest (11,000) 561,000 (62,000)
Minority interest (16,000) 22,000
---------- ---------- ----------
Income (loss) from continuing operations (11,000) 545,000 (40,000)
---------- ---------- ----------
Discontinued operations:
Loss from operations of discontinued
subsidiaries less applicable income
tax (benefits) of ($225,000) in 1997,
($82,000) in 1996 and $0 in 1995 (520,000) (513,000) (136,000)
Equity in income (loss) of investee less
applicable income tax (benefit) of
($65,000) in 1997 and $21,000 in 1996 (97,000) 136,000
Gain on sale of equity investee less
applicable income tax of $916,000 in 1997 1,389,000
Gain on sale of assets of subsidiaries less
applicable income taxes of $565,000 1,311,000
---------- ---------- ----------
Income (loss) from discontinued operations 2,083,000 (377,000) (136,000)
---------- ---------- ----------
Net income (loss) $2,072,000 $ 168,000 $ (176,000)
========== ========== ==========
Basic and diluted income (loss) per share:
Continuing operations $ 0.00 $ 0.07 $ (0.01)
Discontinued operations 0.30 (0.05) (0.02)
---------- ---------- ----------
Net income (loss) $ 0.30 $ 0.02 $ (0.03)
========== ========== ==========
Weighted average common shares outstanding 6,967,786 6,947,828 6,947,828
========== ========== ==========
See notes to financial statements
F-3
GHS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Common Stock *
-------------------------
Number Additional Retained
of Paid-in Earnings
Shares Amount Capital (Deficit) Total
----------- ----------- ----------- ----------- -----------
Balance - January 1, 1996 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
Issuance of common stock for
purchase of minority
interest 31,332 32,000 32,000
Net income for the year ended
December 31, 1997 2,072,000 2,072,000
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1997 6,479,160 $ 65,000 $ 3,114,000 $ 1,022,000 $ 4,201,000
=========== =========== =========== =========== ===========
* Excluding shares with put option
See notes to financial statements
F-4
GHS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities:
Income (loss) from continuing operations $ (11,000) $ 545,000 $ (40,000)
Adjustments to reconcile income (loss) from
continuing operations to net cash provided
by (used in) operating activities:
Depreciation and amortization 784,000 450,000 449,000
Deferred income tax (benefit) (402,000)
Other 32,000
Minority interest in net (loss) of
consolidated subsidiary 16,000 (22,000)
Changes in:
Accounts receivable - net (115,000) 104,000 (139,000)
Other current assets 13,000 26,000 (57,000)
Accounts payable and accrued expenses (96,000) (41,000) 138,000
Cash provided by continuing operations
Cash provided by (used in) discontinued
operations (703,000) 37,000 191,000
----------- ----------- -----------
Net cash (used in) provided by operating
activities (96,000) 735,000 520,000
----------- ----------- -----------
Cash flows from investing activities:
Property and equipment (1,102,000) (5,000)
Refundable deposits 43,000 290,000
(Increase) decrease in cash held in escrow 818,000 (880,000) (82,000)
Refunds on Gamma Knife 22,000
Proceeds from the sale of discontinued operation 2,100,000
Proceeds from the sale of equity investee 2,330,000
Purchase of certificates of deposit (400,000)
Cash used in discontinued operations (89,000) (78,000)
----------- ----------- -----------
Net cash provided by (used in) investing
activities 3,789,000 (657,000) (165,000)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of capital lease and loan obligations (486,000) (522,000) (430,000)
Cash received on refinancing of capital lease 100,000
Loan payable - officer (20,000) 20,000
Notes payable - other (100,000) 100,000
Loan payable - Gamma Knife 525,000
----------- ----------- -----------
Net cash used in financing activities (386,000) (117,000) (310,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 3,307,000 (39,000) 45,000
Cash and cash equivalents - beginning of period 159,000 198,000 153,000
----------- ----------- -----------
Cash and cash equivalents - end of period $ 3,466,000 $ 159,000 $ 198,000
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 485,000 $ 316,000 $ 510,000
Income taxes 290,000 13,000 3,000
Supplemental disclosures of noncash financing
activities:
Property acquired under capital lease obligations
and through loans payable 3,327,000
Issuance of common stock for services rendered 32,000 23,000
Increase (decrease) in progress payments and
related loans payable for Gamma Knife (2,610,000) 1,450,000 1,160,000
Refinancing of loans payable and capital lease
obligation with new capital lease obligation 2,172,000
Refinancing of progress payment obligation with
capital lease 3,139,000
Loans payable to finance property acquisitions 188,000
See notes to financial statements
F-5
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
[1] Basis of preparation:
GHS, Inc. (the "Company") through its subsidiary, U.S. Neuro Surgical,
Inc. ("U.S. Neuro") owns and operates stereotactic radiosurgery centers,
utilizing the Gamma Knife technology. During 1995, the Company formed a
subsidiary, U.S. Neurosurgical Physics, Inc. ("USNP") to administer the
billing and collection of the Physicist's fee for operating the Gamma
Knife.
In July 1997 the Company sold substantially all the assets except accounts
receivable of two of its subsidiaries, Web Health Inc. (formerly Global
Health Systems, Inc.) and Kachina Ventures, Inc. (formerly GHS Management
Services, Inc.) to Health Management Systems, Inc. The sales price was
$2,100,000 subject to certain closing adjustments. These subsidiaries
develop, install and maintain computerized processing systems for managed
care, public health and ambulatory care facilities.
In December 1997 the Company sold its 20% investment in Florida Specialty
Network ("FSN"), a computerized processing systems provider which operates
in the United States to CMSF, Inc. ("Buyer") and Magellan Health Services,
Inc., parent of the Buyer. The Company received proceeds of approximately
$2,330,000 net of expenses and recorded a gain on sale of $2,143,000. In
addition, the Company has the opportunity to earn additional consideration
upon the achievement by FSN of certain performance milestones. Prior to
sale, the Company accounted for its investments in FSN on the equity
method.
The consolidated financial statements include the accounts of GHS, Inc.
and its wholly owned subsidiaries. The results of operations of Web
Health, Inc. and Kachina Ventures Inc. and the equity in the operating
results of FSN have been reported separately as discontinued operations.
In addition, the net assets of such entities have been segregated in the
accompanying balance sheets. In connection therewith, the 1996 and 1995
financial statements have been reclassified from amounts previously
reported (see Note I).
[2] Revenue recognition:
Patient revenue is recognized when the Gamma Knife procedure is rendered.
[3] Long-lived assets:
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 121 ("FAS 121"), "Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of." FAS 121
requires that long lived assets to be held and used by an entity, be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Adoption of this statement had no impact in the Company's financial
position, results of operations, or liquidity.
[4] Depreciation and amortization:
The Gamma Knifes are being depreciated on the straight-line method over an
estimated useful life of 7 years. Leasehold improvements are being
amortized on the straight-line method over 7 to 20 years, the life of the
leases.
F-6
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[5] Income (loss) per share:
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" ("Statement No. 128"). Statement No. 128
replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share is based on the weighted average number of
common shares outstanding and excludes any dilutive effects of options and
warrants. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts
for all years have been presented to conform to the Statement No. 128
requirements.
Outstanding options and warrants were not included in the computation of
diluted earnings per share because to do so would have been antidilutive
for the years presented.
[6] 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.
[7] 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.
[8] 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, certificates of deposit,
accounts receivable, other current assets and accounts payable approximate
fair value at December 31, 1997 and 1996 because of the short maturity of
these financial instruments. The estimated carrying value 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, 1997 and 1996. The fair value estimates were based
on information available to management as of December 31, 1997 and 1996.
[9] Stock-based compensation:
The Company accounts for employee stock option grants under Accounting
Principles Board Opinion No. 25 ("APB 25"). Under APB 25, when the
exercise price of employee stock options is greater than or equal to the
market price of the underlying stock on the date of grant, no compensation
expense is recorded.
F-7
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
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 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 U.S. Neuro 80% of RMC's fees for the use of
the equipment and the facility. The agreement also provides for U.S. Neuro
to establish for the benefit of RMC an escrow account funded with an
amount equal to one month average of the compensation payable to U.S.
Neuro. U.S. Neuro shall be 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, 1997, the escrow account had a balance of $85,000. 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 was
constructed by the Company thereon. The lease term is for a period of 21
years commencing September 1994. Rental expense is $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 vest in RMC.
NOTE C - AGREEMENT WITH NEW YORK UNIVERSITY ON BEHALF OF NEW YORK UNIVERSITY
MEDICAL CENTER ("NYU")
During November 1996 U.S. Neuro entered into a neuroradiosurgery equipment
agreement ("NYU agreement") with NYU for a period of 7 years ("the term") with
the option of NYU extending the term for successive three year periods or
purchasing the Gamma Knife equipment at an appraised market value price. U.S.
Neuro may negotiate the purchase price and upon failure of the parties to agree
may request the facility be closed. All costs associated with closing and
restoring the facility to its original condition will be the liability of U.S.
Neuro. The equipment agreement, among other matters, requires U.S. Neuro 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 will pay U.S. Neuro a scheduled fee based on the
number of patient procedures performed.
NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE
U.S. Neuro acquired a Gamma Knife ("Knife 1") from Elekta Instruments ("Elekta")
for $2,900,000. The acquisition 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.
("Finova") bought out FFSI and became the lessor. During March 1997 U.S. Neuro
refinanced this lease with DVI Financial Services, Inc. ("DVI") for $2,272,000
under a 39 month capital lease which bears interest at approximately 10.4%. In
connection with the refinancing, DVI paid to Finova $1,647,000 in settlement of
the lease obligations, the Company's demand loan of $525,000 payable to DVI was
repaid and DVI paid U.S. Neuro $100,000.
F-8
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE (CONTINUED)
On December 6, 1994, U.S. Neuro entered into an additional agreement with Elekta
to acquire a second Gamma Knife ("Knife 2") for $2,900,000 for which it made a
deposit of $290,000 in 1994. The construction of the knife initially was
financed by FFSI through funding of progress payments made to Elekta, however,
during 1996 the Company refinanced the progress payments with DVI at which time
the Company's deposit was returned. In July 1997, upon completion of
construction, the progress payments were converted into a capital lease
obligation for $3,139,000. The lease payments provide for interest at the higher
of 12.0% or that rate adjusted for any increase in the thirty month Treasury
Note rate.
In addition, the Company entered into two (2) three year loans with DVI in the
amounts of $325,000 and $163,000 to finance the leasehold improvements required
to install the Gamma Knife at New York University Medical Center. The loans bear
interest at 12.0% - 12.9% per annum. The leases and loans payable are
collateralized by all the assets of GHS, Inc. and subsidiaries.
The obligations under the capital lease and loans payable are as follows:
December 31,
----------------------
1997 1996
---------- ----------
Capital leases - Gamma Knife $4,999,000 $1,724,000
Loans payable - leasehold
improvements 413,000 300,000
Progress payment obligation 2,610,000
---------- ----------
5,412,000 4,634,000
Less current portion 1,195,000 711,000
---------- ----------
$4,217,000 $3,923,000
========== ==========
Future lease payments on the equipment leases are as follows:
Capital Lease Loans Payable
Year Ending ------------------------ ------------------------
December 31, Knife 1 Knife 2 Leasehold 1 Leasehold 2 Total
- ---------------- ----------- ---------- ----------- ----------- ----------
1998 $ 827,000 $ 713,000 $156,000 $ 65,000 $1,761,000
1999 827,000 792,000 156,000 65,000 1,840,000
2000 482,000 792,000 32,000 1,306,000
2001 792,000 792,000
2002 792,000 792,000
2003 462,000 462,000
---------- ---------- -------- -------- ----------
2,136,000 4,343,000 312,000 162,000 6,953,000
Less: interest 270,000 1,210,000 38,000 23,000 1,541,000
---------- ---------- -------- -------- ----------
Present value of
net minimum
obligation $1,866,000 $3,133,000 $274,000 $139,000 $5,412,000
========== ========== ======== ======== ==========
During the year ended December 31, 1997 and 1996, the Company capitalized
interest cost amounting to approximately $177,000 and $249,000, respectively,
relating to the construction of the Gamma Knife project.
F-9
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE E - 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 RMC premises (see Note B[2]).
NOTE F - STOCKHOLDERS' EQUITY
[1] Stock options:
Effective October 23, 1997, the Company adopted a 1997 Stock Option Plan
(the "Plan") for officers, directors, consultants and other key personnel
of the Company. This plan replaces the 1986 Stock Option Plan which had
expired. Options outstanding from the 1986 Option Plan are 166,500. The
Plan authorizes the granting of incentive stock options ("ISO") and
nonqualified stock options to purchase up to 750,000 shares of the
Company's common stock at a price not less than 100% (110% in the case of
ISO's granted a person who owns stock possessing more than 10% of the
voting power of the Company) of the fair market value of the common stock
on the date of grant and that no portion of the option may be exercised
beyond ten years from that date (five years in the case of ISO's granted
to a 10% shareholder). During 1997, 325,000 options were granted (all of
which are immediately exercisable) and at December 31, 1997, 425,000
options were available for grants.
All options outstanding granted to employees of the Company shall
terminate immediately upon the termination of employment of the employee
by the Company or its subsidiaries or its parent.
Listed below is information as to options granted and exercisable.
Period Ended Period Ended Period Ended
December 31, 1995 December 31, 1996 December 31, 1997 Weighted
------------------ ----------------- ------------------ Average
Average Average Average Remaining
Exercise Exercise Exercise Life
Shares Price Shares Price Shares Price In Years
------- -------- ------- -------- ------- -------- ---------
Options
outstanding at
beginning of
the year 430,000 $1.00 430,000 $1.00 360,000 $1.00 3.66
Granted 325,000 10.00
Cancelled (8,500)
Expired (70,000) (185,000)
------- ----- ------- ----- ------- ----- -----
Options
outstanding at
end of the
period 430,000 $1.00 360,000 $1.00 491,500 $1.00 8.67
======= ===== ======= ===== ======= ===== =====
Options
exercisable at
end of the year 364,875 $1.00 338,375 $1.00 491,500 $1.00
======= ===== ======= ===== ======= ===== =====
No compensation expense relating to the stock option grants were recorded
in 1997 as the option exercise prices were greater than the fair market
value of the stock at date of grant. There were no options granted during
1996 and 1995.
F-10
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE F - STOCKHOLDERS' EQUITY (CONTINUED)
[1] Stock options: (continued)
Pro forma information regarding net income and basic and diluted income
(loss) per share is required by FASB 123, and has been determined as if
the Company had accounted for its employee stock options under the fair
value method of that statement. The following pro forma information gives
effect to fair value for those options issued during 1997 and was
estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions: dividend yield 0%,
volatility of 60%, risk free interest rates of 6.09% and expected life of
10 years.
Loss from continuing operations:
As reported $ (11,000)
Pro forma (210,000)
Basic and diluted loss per share from
continuing operations:
As reported $.00
Pro forma (.03)
[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 G - COMMITMENTS AND OTHER MATTERS
[1] Lease agreement:
In March 5, 1998 the Company entered into a lease for office premises
which expires March 31, 2003. The terms of the lease include an escalation
clause beginning January 1, 1999 for payment of a pro rata share of
certain operating expenses.
F-11
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE G - COMMITMENTS AND OTHER MATTERS (CONTINUED)
[1] Lease agreement: (continued)
Minimum future obligations under the operating lease are as follows:
Year Ending
December 31,
------------
1998 $24,000
1999 32,000
2000 32,000
2001 32,000
2002 32,000
Thereafter 8,000
No rent was paid in connection with continuing operations during 1997,
1996 or 1995.
[2] Concentrations:
For the year ended December 31, 1997 the Company derived substantially all
its patient revenue from two hospitals, one of which accounted for 90% of
the Company's revenue. For the years ended December 31, 1996 and 1995 one
hospital accounted for all its patient revenue.
The Company is dependent on one manufacturer who sells, supplies and
services the Gamma Knife.
NOTE H - TAXES
The components of the income tax provision (benefit) applicable to continuing
operations is comprised of the following:
Year Ended
December 31,
-----------------------------
1997 1996 1995
--------- --------- -----
Current:
Federal $(112,000) $ 0 $ 0
State (2,000) 0 0
--------- --------- -----
(114,000) 0 0
--------- --------- -----
Deferred:
Federal 106,000 (353,000) 0
State 0 (49,000) 0
--------- --------- -----
106,000 (402,000) 0
--------- --------- -----
Income tax provision (benefit) $ (8,000) $(402,000) $ 0
========= ========= =====
F-12
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE H - TAXES (CONTINUED)
A reconciliation of the tax provision (benefit) calculated at the statutory
federal income tax rate with amounts reported in the statements of operations
applicable to continuing operations follows:
Year Ended
December 31,
------------------------------
1997 1996 1995
------- --------- --------
Income tax provision (benefit) at the
federal statutory rate $(6,000) $ 54,000 $(13,000)
State income tax provision (benefit),
net of federal taxes (2,000) 7,000 (2,000)
Change in valuation allowance (463,000) 15,000
Other
------- --------- --------
Income tax provision (benefit) $(8,000) $(402,000) $ 0
======= ========= ========
Items which give rise to deferred tax assets and liabilities are as follows:
December 31,
----------------------------------
1997 1996 1995
--------- ---------- ---------
Net operating loss carryforward $1,013,000 $ 730,000
Allowance for doubtful accounts 64,000 6,000
Unbilled accounts receivable 77,000
Excess of tax depreciation over book
depreciation $(450,000) (344,000) (195,000)
Valuation allowance (270,000) (618,000)
--------- ---------- ---------
Deferred tax asset (liability) - net $(450,000) $ 463,000 $ 0
========= ========= =========
The valuation allowance decreased by $270,000 in 1997 and $348,000 in 1996. The
1997 decrease was reflected as a tax benefit in discontinued operations. The
1996 decrease was reflected as a tax benefit of $463,000 in continuing
operations. The $115,000 net difference was related to the net operating loss
attributable to discontinued operations. The valuation allowance increased by
$77,000 in 1995 of which $15,000 was related to continuing operations and
$62,000 was related to discontinued operations.
NOTE I - DISCONTINUED OPERATIONS
On July 15, 1997, the Company sold substantially all the assets of two of its
subsidiaries, Web Health Inc. (formerly Global Health Systems, Inc.) and Kachina
Ventures, Inc. (formerly GHS Management Services, Inc.) to Health Management
Systems, Inc.
In addition, in December 1997 the Company sold its 20% investment in FSN to
CMSF, Inc.
F-13
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE I - DISCONTINUED OPERATIONS (CONTINUED)
The components of the net assets of discontinued operations included in the
consolidated balance sheets are as follows:
Year Ended
December 31,
------------------
1997 1996
------- --------
Current assets:
Accounts receivable $43,000 $900,000
Unbilled accounts receivable 31,000
Other current assets 22,000
Less current liabilities
Accounts payable and accrued expenses (600,000)
Obligations under capital lease - equipment (13,000)
------- --------
Net current assets $43,000 $340,000
======= ========
Long-term assets:
Furniture and equipment $ $ 77,000
Software development costs 180,000
Other assets 198,000
Long-term liabilities:
Obligations under capital lease - equipment (21,000)
------- --------
Net long-term assets $ $434,000
======= ========
The condensed statement of loss from discontinued operations attributable to
subsidiaries whose net assets were sold is presented below.
Year Ended
December 31,
1997 1996 1995
Revenue $1,202,000 $2,780,000 $3,162,000
Costs and expenses 1,947,000 3,375,000 3,298,000
---------- ---------- ----------
Loss from operations before income tax
(benefit) (745,000) (595,000) (136,000)
--------- ---------- ----------
Income tax (benefit):
Current (70,000)
Deferred (155,000) (82,000) 0
--------- ---------- ----------
(225,000) (82,000) 0
--------- ---------- ----------
Loss from discontinued operations $(520,000) $ (513,000) $ (136,000)
========= ========== ==========
F-14
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE J - PURCHASE OF MINORITY INTEREST AND RELATED LITIGATION
In 1993, pursuant to an agreement (the "USN Agreement") between the Company and
A. Hyman Kirshenbaum, M.D. ("Kirshenbaum") and Jerry Brown, Ph.D ("Brown"), the
Company, among other things, granted an aggregate 20% interest in USN to Brown
and Kirshenbaum. In addition, following the execution of the USN Agreement,
Kirshenbaum was appointed as an officer of USN and Brown was appointed to the
Company's Board of Directors and executed an employment agreement with USN.
Under the terms of the USN Agreement, the Company possessed the right to
repurchase for cash or common stock such 20% interest during each of the third
through sixth full fiscal years of the USN Agreement. The Company exercised its
right to repurchase the 20% interest in USN in September 1996 at a value of
$38,781.40, which value was calculated by the Company in accordance with the
terms of the USN Agreement and in 1997 the Company paid the purchase price
through the issuance of shares of common stock valued at $31,332 plus offsetting
a receivable of $7,450 from Brown against the purchase price. Such valuation was
disputed by Brown and Kirshenbaum.
In June 1997, the Company instituted an action (the "Declaratory Action") in the
United States District Court of Maryland, Southern Division against Kirshenbaum
and Brown seeking a declaration from the Court that its repurchase of Brown's
and Kirshenbaum's 20% interest in USN for $38,781.40 was fair and equitable.
Because of the dispute between the Company and Brown and Kirshenbaum on the
valuation of their 20% in USN, the Company filed the Declaratory Action to
determine: (1) whether the Company's repurchase is proper; (2) whether the
valuation of Brown's and Kirshenbaum's 20% interest in USN is just and fair; and
(3) whether Brown's and Kirshenbaum's valuation of their 20% interest in USN is
improper. If successful in this action, the Company will be entitled to purchase
Brown's and Kirshenbaum's 20% interest for $38,781.40. If unsuccessful, and
Brown's and Kirshenbaum's valuation is determined to be correct, the Company may
be required to purchase Brown's and Kirshenbaum's interests in USN for
approximately $584,497.
In response to the Declaratory Action, Brown and Kirshenbaum filed a
counterclaim and third party claim against the Company, USN and others. The
counterclaim against the Company and third party claim against USN and the other
parties is purportedly for violations of: (1) the RICO statutes; (2) various
causes of action for fraud; and (3) various causes of action for breach of
contract. The RICO and fraud counts seek damages of not less than $9 million per
count and also seek the imposition of treble damages for RICO and punitive
damages for the fraud counts. The breach of contract counts range from $250,000
to $600,000. The claims of RICO and fraud arise out of an alleged conspiracy
between the Company and other parties to misappropriate a business concept
allegedly created by Brown and Kirshenbaum. The remainder of Brown's and
Kirschenbaum's claims are in the nature of a breach of contract between the
Company, USN and Brown and Kirshenbaum.
The Company intends to vigorously pursue its claim in the Declaratory Action.
However, no evaluation of the likelihood of a favorable or unfavorable outcome
can be made at this time. In addition, the Company and USN intend to vigorously
defend Brown's and Kirshenbaum's counterclaim and third party claims.
In addition to the above-described federal court action, Brown has filed a state
court action in the District Court in and for Montgomery County, Maryland
against USN and other parties seeking breach of contract damages for lost
salary, unreimbursed expenses and for consequential damages and costs arising
out of what he claims to be an improper termination from USN. Brown seeks
approximately $381,000 for lost salary and $36,000 for unreimbursed expenses in
addition to the consequential damages and treble damages he seeks under his
various counts of his compliant. USN has and continues to vigorously defend this
action. Because the case is in the initial pleading stages, no evaluation of the
likelihood of an unfavorable outcome can be made at this time.
F-15
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997 and 1996
NOTE K - EMPLOYEES 401K PLAN
During 1997 the Company established a 401(k) plan covering substantially all 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 pretax contributions and the Company may, at its
discretion, match certain percentages of the employee contribution. All amounts
contributed to the plan are deposited into a trust fund administered by
independent trustees. The Company's discretionary matching 401(k) contributions
for 1997 were $2,200.
F-16
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY SCHEDULES
Board of Directors and Stockholders
GHS, Inc.
Rockville, Maryland
The audits referred to in our report dated January 30, 1998 includes Schedule
II. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit. In our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Richard A. Eisner & Company, LLP
New York, New York
January 30, 1998
S-1
GHS, INC. AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts
Column C
Column B Additions
Balance (1) Column E
at Balance
beginning Charged to Column D at
Column A of costs and Deductions - end of
Description period expenses describe (B) period
- ---------------------------- ---------- ---------- ------------ --------
Allowance for doubtful
accounts:
1997 $164,000 $164,000(A) $ 0
======== ========
1996 $ 14,000 $150,000 $164,000
======== ======== ========
1995 $ 14,000 $ 14,000
======== ========
Reserve for inventory
obsolescence:
1997 $ 0 $ 0
======== ========
1996 $ 15,000 $ 15,000(B) $ 0
======== ========
1995 $ 15,000 $ 15,000
======== ========
(A) 1997 - Bad debt write-off
(B) 1996 - Liquidation of obsolete inventory
Amounts shown above relate to discontinued operations.
See notes to financial statements
S-2