SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
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 $527,000 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.
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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,
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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.
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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.
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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
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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. The Company has major contracts with the County of Los Angeles and
the City of Chicago. These contracts were responsible for 47% of the revenue
during fiscal 1996 from this segment.
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.
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Global's facilities management and management service contracts are billed
monthly for the life of the contract term, generally, two to five years.
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
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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, 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
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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 $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.
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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
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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.
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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
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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
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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, 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
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report. The information set forth should be read in conjunction with such
financial statements and the notes thereto.
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
As at
December 31,
------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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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.
Results of Operations
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 Company expects that the proposed transaction by virtue
of the sale of the Company's systems business, will cause a significant
reduction in revenue but a greater reduction in expenses that will increase the
possibilities for future profitability. This will happen because the Company
will no longer have any systems, maintenance, or claims processing costs and
75-80% of the sales, general and administrative costs will no longer be needed.
The savings which the Company expects to derive from the sales are also
evidenced by the fact that for the prior two fiscal years the Company has had
expenses that exceeded revenues for the systems business. In 1996 the revenues
from the systems business were $2,780,000 and expenses were $3,400,000. In 1995
revenues were $3,162,000 and expenses were $3,297,000. The Company will retain
its investment in Florida Specialty Networks, a company that manages specialty
networks.
1996 Compared to 1995
Total revenues declined 5% in 1996 to $4,232,000 from $4,445,000 in 1995. New
systems sales decreased 53% 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. In fiscal
1996, the Company also received $157,000 in income from its investment in FSN as
compared to no such income in 1995. FSN's net income was substantially due to a
favorable settlement of litigation of $809,000. Without the settlement FSN would
have had a loss of $110,129.
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Total expenses decreased 6% to $4,361,000 from $4,644,000 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. The Company
increased its reserve for doubtful accounts by $150,000. A substantial portion
of the revenue is for one account that has disputed the Company's charges. Due
to the uncertain status of this receivable the Company reserved 100% of the
balance. 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.
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
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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. 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. 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.
18
<PAGE>
In 1996, 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 NYU.
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. Assuming the
transaction with HMS closes the Company expects net cash proceeds of
approximately $1,900,000. On a long term basis the Company expects that the
proceeds will provide sufficient capital for the next 12-24 months. Nevertheless
the use of these funds could be accelerated if the Company opens additional
Gamma Knife Centers.
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.
19
<PAGE>
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 &
20
<PAGE>
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. Upon closing of the transaction with HMS Alan Gold will retain his
titles of and duties as President and Chief Executive Officer of the Company.
The Company anticipates that there will be no conflict of interest as he
performs his duties. The employment offer made by HMS to Mr. Gold expressly
permits Mr. Gold to continue to fulfill his duties as President and Chief
Executive Officer of GHS.
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
Name and Annual Compensation
Principal Position Year Salary($)
- ------------------ ---- ---------
Alan Gold,
President & Director 1996 $150,000
1995 $150,000
1994 $144,400
The Company and Mr. Gold are parties to an employment agreement giving
either the Company or Mr. Gold the option to terminate the agreement by giving
the other party 6 months written notice.
Stock Option Plan
Effective March 7, 1986, and as amended June 18, 1987, the Company adopted
a 1986 Stock Option Plan (the "Plan") pursuant to which options to purchase up
to 750,000 shares of the Company's Common Stock may be granted to directors,
officers and other
21
<PAGE>
key employees of the Company. As of March 31, 1997, 360,000 options were
outstanding under the Plan. The Plan is administered by the Board of Directors.
The options may be either incentive stock options conforming to the provisions
of Section 422A of the Internal Revenue Code, or non-qualified options. The
purchase price for shares under each option, incentive or non-qualified, is
determined by the Board but will not be less than 100% and 90%, respectively, of
the fair market value of the Common Stock at the time the option is granted. If
an employee at the time the option is proposed to be granted owns more than 10%
of the voting stock of the Company, the option price for incentive options will
not be less than 110% of the fair market value of the Common Stock on the date
of grant and the option will continue in effect for not more than five years. No
options may be granted under the Plan after 1996. The exercise price must be
paid in full upon exercise of an option, in cash or in shares of Common Stock of
the Company. Options are nontransferable except by will or by the laws of
descent and distribution. During 1996, no new options were granted under the
Plan.
Aggregate Unexercised Options & Option Values at December 31, 1995
Value of Unexercised In-The
Number of Unexercised Options Money Options at December
at December 31, 1996 (#) 31, 1996 ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------------------------- ---------------------------
Alan Gold 124,000 / 25,000 $63,000/14,000(1)
(1) Based on average of closing bid and asked prices of the Company's common
stock on December 31, 1996.
22
<PAGE>
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%
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.
23
<PAGE>
(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.
24
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1993, the Company granted a 20% interest in US NeuroSurgical, Inc. to
A. Hyman Kirshenbaum, M.D. an officer of USN, and Jerry Brown, Ph.D., a director
of the Company ("related parties"). 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. The Company exercised its
right in September 1996. The number of shares for the purchase, has been
estimated to be 33,200 by the Company which valuation has been disputed by the
related parties.
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 US NeuroSurgical.
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 US Neuro notes payable from pre-tax earnings of US Neuro. One of the
parties (Dr. Brown) claims that GHS, Inc. will owe 62,500 shares of GHS, Inc.
common 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 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.
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 that $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.
Dr. Brown was paid salary through August 1995 at which time he was
terminated as an employee and removed from the US Neuro Board of Directors.
During the term of his employment with US Neuro, Dr. Brown was fully reimbursed
for expenses which he submitted as incurred in connection with his
responsibilities at US 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.
25
<PAGE>
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
Financial statements for Florida Specialty
Networks, Ltd. for the periods ending
December 31, 1996 and 1995. B-1
Financial statements for Florida Specialty
Networks, Ltd. for the periods ending
December 31, 1995, 1994 and 1993. C-1
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).
26
<PAGE>
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
27
<PAGE>
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) Asset Purchase Agreement dated March 10, 1997 between Health
Management Systems, Inc. and GHS, Inc. (incorporated by reference
10P to the Company's 1994 Annual Report on Form 10-K).
28
<PAGE>
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: May 07, 1997
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.
May 07, 1997 /s/ Alan Gold
-------------------------------------------------
Alan Gold
President and Director
(Chief Executive, Financial Officer)
May 07, 1997 /s/ William F. Leimkuhler
-------------------------------------------------
William F. Leimkuhler
Director
May 07, 1997
-------------------------------------------------
Jerry M. Brown, Ph.D.
Director
29
<PAGE>
[Letterhead for Richard A. Eisner & Company, LLP]
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.
/s/ Richard A. Eisner & Company LLP
New York, New York
March 13, 1997
F-1
<PAGE>
GHS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
A S S E T S 1996 1995
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
F-2
<PAGE>
GHS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
F-3
<PAGE>
GHS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock *
------------------
Number Additional
of Paid-in
Shares Amount Capital (Deficit) Total
------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C>
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
========== ========= ========== =========== ==========
</TABLE>
* Excluding shares with put option
The accompanying notes to financial statements
are an integral part hereof.
F-4
<PAGE>
GHS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
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
Cost incurred with leasehold improvements ................................ (520,000)
----------- ----------- ---------
Net cash (used in) investing activities ........................ (67,000) (83,000) (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 ............................................... 525,000
Release from escrow of proceeds from sale of common shares with put option 500,000
----------- ----------- ---------
Net cash provided by (used in) financing activities ............ (117,000) (310,000) 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
Progress payments - Gamma Knife .......................................... 1,450,000 1,160,000
Loan payable - Gamma Knife ............................................... 1,450,000 1,160,000
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
F-5
<PAGE>
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 20% investment in Florida Specialty Network ("FSN"), a
computerized processing systems provider which operates in the United States 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
<PAGE>
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 and amortization:
The cost of furniture and equipment is depreciated on the
straight-line method over the estimated useful lives of such assets. Leasehold
costs are amortized on the straight-line method over 20 years, 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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
During the year ended December 31, 1996, the Company capitalized interest
cost amounting to $249,000 relating to the construction of a Gamma Knife
project.
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ending Three Year Computer
December 31, Knife 1 Knife 2 Loan Equipment Total
-------------- --------- --------- ------ --------- ------
<S> <C> <C> <C> <C> <C>
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
========== ========== ======== ========== ==========
</TABLE>
(continued)
F-13
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
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 ............. $ (620,000) $ (136,000) $ (327,000)
Gamma Knife ................................. 491,000 441,000 (139,000)
----------- ----------- -----------
Operating income (loss) .................... (129,000) 305,000 (466,000)
----------- ----------- -----------
Interest (expense) ............................ (309,000) (504,000) (308,000)
Investment income .............................. 2,000 1,000 23,000
Gain from equity investee(1) ................... 157,000
----------- ----------- -----------
T o t a l ............................ (150,000) (503,000) (285,000)
----------- ----------- -----------
Loss before income tax benefit and
minority interest ........................... $ (279,000) $ (198,000) $ (751,000)
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Assets:
Computerized processing systems(2) .......... $ 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
=========== =========== ===========
</TABLE>
(1) Substantially all the gain from investee is due to the settlement of
litigation in 1996.
(2) Investment in the net assets of FSN amounted to approximately $187,000,
$83,000 and $83,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
F-18
<PAGE>
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.
/s/ Richard A. Eisner & Company LLP
New York, New York
March 13, 1997
S-1
<PAGE>
SCHEDULE II
GHS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
--------------------------------
(1) (2)
Balance ---------------- --------------
at Charged to Balance
beginning Charged to other at
of costs and accounts - Deductions - end of
Description period expenses describe(A) describe(B) period
- ------------------------------------------- ------------------ ---------------- -------------- ------------------ -------------
<S> <C> <C> <C>
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
======== ========
</TABLE>
(B) Liquidation of obsolete inventory.
The accompanying notes to financial statements
are an integral part hereof.
S-2
<PAGE>
================================================================================
FLORIDA SPECIALTY NETWORK, LTD.
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
================================================================================
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
TABLE OF CONTENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheets 2
Statements of Operations and Partners' Equity 3
Statements of Cash Flows 4
Notes to Financial Statements 5-9
SUPPLEMENTARY INFORMATION
General and Administrative Expenses 10
<PAGE>
[LETTERHEAD OF RACHLIN COHEN & HOLTZ]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
Florida Specialty Network, Ltd.
Miramar, Florida
We have audited the accompanying balance sheets of Florida Specialty Network,
Ltd. as of December 31, 1996 and 1995 and the related statements of operations
and partners' equity and cash flows for the years then ended. 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 referred to above present fairly, in
all material respects, the financial position of Florida Specialty Network, Ltd.
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplementary
information is presented for the purpose of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
/s/ Rachlin Cohen & Holtz
Miami, Florida
March 14, 1997
B-1
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
---------- --------
Current Assets:
Cash and cash equivalents $ 58,245 $ 67,588
Accounts receivable, net 56,790 34,282
Other receivables 400,105 --
Prepaid expenses and other 25,162 16,034
---------- --------
Total current assets 540,302 117,904
Property and Equipment 1,044,990 235,384
Other Assets 67,283 22,622
---------- --------
$1,652,575 $375,910
========== ========
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 374,181 $ 94,683
Due to affiliates 181,675 122,817
Current maturities of long-term debt and
capital lease obligations 86,331 39,528
---------- --------
Total current liabilities 642,187 257,028
Long-Term Debt and Capital Lease Obligations,
Net of Current Maturities 231,703 38,737
Commitments, Contingencies and Other Matters -- --
Partners' Equity 778,685 80,145
---------- --------
$1,652,575 $375,910
========== ========
See notes to financial statements.
B-2
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
Revenue $ 4,325,468 $ 1,277,154
----------- -----------
Operating Expenses:
Salaries and benefits 1,506,963 609,780
Depreciation 115,470 34,109
General and administrative expenses 2,797,308 608,518
----------- -----------
4,419,741 1,252,407
----------- -----------
Income (Loss) from Operations (94,273) 24,747
----------- -----------
Other Income (Expense):
Litigation settlement, net 808,669 --
Interest income 5,784 1,574
Interest expense (16,815) (5,225)
Loss on sale of property and equipment (4,825) --
----------- -----------
792,813 (3,651)
----------- -----------
Net Income 698,540 21,096
Partners' Equity, Beginning 80,145 59,049
----------- -----------
Partners' Equity, Ending $ 778,685 $ 80,145
=========== ===========
See notes to financial statements.
B-3
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 698,540 $ 21,096
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 115,470 34,109
Loss on sale of property and equipment 4,825 --
Changes in operating assets and liabilities:
Increase (decrease) in:
Accounts receivable (22,508) (2,057)
Prepaid expenses and other (9,128) 3,429
Other assets (44,661) (5,773)
Increase in:
Accounts payable and accrued expenses 279,498 56,745
----------- ---------
Net cash provided by operating activities 1,022,036 107,549
----------- ---------
Cash Flows from Investing Activities:
Expenditures for property and equipment (566,403) (98,713)
Other receivables (400,105) --
Proceeds from sale of property and equipment 630 --
----------- ---------
Net cash used in investing activities (965,878) (98,713)
----------- ---------
Cash Flows from Financing Activities:
Repayment of long-term debt and capital lease obligations (124,359) (35,728)
Borrowings from affiliates, net 58,858 63,418
----------- ---------
Net cash provided by financing activities (65,501) 27,690
----------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (9,343) 36,526
Cash and Cash Equivalents, Beginning 67,588 31,062
----------- ---------
Cash and Cash Equivalents, Ending $ 58,245 $ 67,588
=========== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 16,815 $ 5,225
=========== =========
Supplemental Disclosure of Non-Cash Investing and
Financing Activities:
Purchase of new equipment through installment
loans and capital leases $ 364,128 $ 68,870
=========== =========
</TABLE>
See notes to financial statements.
B-4
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 and 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Florida Specialty Network, Ltd. (the "Company") is a limited
partnership organized on January 19, 1993 under the laws of the
State of Florida.
The Agreement and Certificate of Limited Partnership provides,
among other things, that profits, losses and distributions are
based upon the respective interests of the general and limited
partners, and that the General Partner shall have the exclusive
authority to manage the partnership.
Business
The Company provides data processing services to and for managed
care and medical networks.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost and depreciated
using accelerated methods, over the estimated useful lives of the
assets. Gain or loss on disposition of assets is recognized
currently. Repairs and maintenance are charged to expense as
incurred. Major replacements and betterments are capitalized and
depreciated over the remaining useful lives of the assets.
Income Taxes
The Company has elected to be taxed as a partnership under the
applicable sections of the Internal Revenue Code; accordingly,
the partners' share of income or loss is included in their
individual tax returns. Therefore, no provision or credit for
income taxes has been included in these financial statements.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash balances
at financial institutions that, at certain times during the year,
exceed federally insured limits. The Company believes that such
risks are minimized as a result of the size and stature of the
financial institutions in which the Company maintains its
accounts.
Other Receivables
Other receivables at December 31, 1996 are primarily comprised of
amounts due for reimbursement of expenditures by the Company on
behalf of the landlord for tenant improvements. Such amount was
subsequently collected.
B-5
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
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 and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in 1995 have been reclassified to conform to 1996
presentation.
NOTE 2. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Estimated
Useful Lives
(Years) 1996 1995
------- ---- ----
<S> <C> <C> <C>
Computer equipment 5 $762,458 $211,783
Machinery and equipment 5 133,000 38,126
Office furniture and equipment 5-7 122,348 30,271
Leasehold improvements 2-5 184,173 6,901
---------- --------
1,201,979 287,081
Less accumulated depreciation 156,989 51,697
---------- --------
$1,044,990 $235,384
========== ========
</TABLE>
NOTE 3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The Company has an equipment obligation payable to a financial
institution. The outstanding balance at December 31, 1996 and 1995 was
$2,250 and $11,250, respectively. Payments are due in monthly
principal installments of $750, plus interest at 9.5%, with the final
payment in March l997. The note is secured by the equipment.
The Company also has capital lease obligations with varying monthly
payments totaling approximately $8,400, at varying rates of imputed
interest ranging from 11.9% to 16.3%. The obligations are secured by
leased equipment with an amortized cost of approximately $327,000 as
of December 31, 1996.
Maturities of the note payable and capital lease obligations at
December 31, 1996 are due as follows:
B-6
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Note Capital Lease
Payable Obligations
------- -----------
1997 $ 2,250 $100,967
1998 -- 89,548
1999 -- 73,374
2000 -- 73,374
2001 -- 41,061
------- --------
2,250 378,324
Less amount representing interest -- 62,540
------- --------
2,250 315,784
Less current maturity 2,250 84,081
------- --------
$ -- $231,703
======= ========
NOTE 4. RELATED PARTY TRANSACTIONS
Facilities Rental
The Company receives a monthly fee from an affiliated entity for use
of the Company's facilities. The total fees received for 1996 and 1995
were $190,677 and $26,613, respectively.
Due From Affiliate
Accounts receivable due from related companies totaled $22,681 and
$33,334 at December 31, 1996 and 1995.
Loans from Affiliates
The Company has unsecured loans payable to affiliated companies of
$181,675 and $122,818 at December 31, 1996 and 1995. Certain of these
loans bear interest at 8%, with no scheduled repayment plan.
Data Processing Agreements with Affiliates
A significant portion of the Company's revenues are derived from
several affiliated companies. Approximately $3,789,000 (88%),
$1,081,000 (85%) of revenue was attributed to these companies for
years ended December 31, 1996 and 1995.
Consulting Fees
The Company paid consulting fees to a partner and other related
entities in the amount of approximately $727,000 during 1996.
B-7
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 4. RELATED PARTY TRANSACTIONS (Continued)
Construction Contract with Related Party
The Company contracted with an entity owned by an individual related
to one of the partners of the Company to contruct the leasehold
improvements at the Company's new offices. The total amount of the
contract, approximately $520,000, was incurred during 1996.
NOTE 5. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Lease Commitment
The Company leases office facilities under several operating leases
which expire between 1997 and 2002 and provide for a base rent and
additional rent equal to the Company's percentage of direct operating
expenses of the building, subject to certain limitations. The
aggregate monthly obligation is approximately $39,000. One of the
operating leases has been assigned to the Company by an affiliated
entity. The approximate future minimum base lease payments under
leases expiring subsequent to December 31, 1996 are as follows:
1997 $ 480,000
1998 470,000
1999 351,000
2000 237,000
2001 246,000
2002 41,000
----------
$1,825,000
Rent expense relating to operating leases amounted to approximately
$274,000 and $85,000 for 1996 and 1995, respectively.
Consulting/Marketing Agreement
In accordance with the terms of an agreement as amended on June 1,
1996, the Company, together with another company affilated by means of
common control (the "Companies"), is committed to pay compensation to
certain consultants for consulting and marketing services. The term
of the agreement is for one year and is automatically renewed for
successive one year terms until terminated in accordance with the
provisions of the agreement.
The agreement provides, among other things, for compensation in the
form of a marketing fee to be paid by the Companies equal to 10% of
the management fees (as defined) attributable to certain specified
clients with whom the Companies contracted due to the efforts of the
consultants.
B-8
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 5. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Data Processing Agreements with Health Care Providers
The Company generally enters into data processing agreements with
health care providers to provide the Company's computerized claims
processing services. These agreements generally are limited to a
particular medical specialty for a specified geographic area; may be
terminated for default by either party upon thirty days written
notice; and provide, as compensation to the Company for the services,
a monthly fee based upon a percentage of the provider's aggregate
monthly capitation and/or fee-for-service, at specified rates and
ranges.
Letters of Credit
In October 1996, the Company negotiated an irrevocable letter of
credit in the amount of $50,000 in connection with a lease for office
space. The letter of credit expires April 1997.
In January 1997, the Company negotiated an irrevocable letter of
credit in the amount of $400,000 in connection with a security
deposit for a lease of office space. This letter of credit
automatically renews at lesser amounts pursuant to the following
schedule:
February 15, 1998 $320,000
February 15, 1999 240,000
February 15, 2000 160,000
February 15, 2001 80,000
February 15, 2002 Expiration Date
NOTE 6. LITIGATION SETTLEMENT
During 1996 the Company settled litigation in which it was seeking
damages relating to non-performance on the part of the other party to
a certain contract. The total damages received was $1,300,000. The
Company incurred legal fees and other costs of $491,331 resulting in
net proceeds of $808,669.
B-9
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
SUPPLEMENTARY INFORMATION
DECEMBER 31, 1996 AND 1995
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD
GENERAL AND ADMINISTRATIVE EXPENSES
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---------- --------
Consulting $ 727,802 $ 13,000
Commissions 323,715 55,327
Rent 274,358 85,389
Telephone 197,465 45,203
Professional fees 192,015 81,720
Insurance 172,058 41,424
Taxes and licenses 152,149 1,594
Casual labor 139,524 8,818
Employment agency costs 124,016 18,400
Office expense 112,842 57,876
Travel and entertainment 92,833 77,692
Computer 79,470 25,128
Repairs and maintenance 75,201 8,215
Courier services 52,376 17,316
Advertising 26,877 21,289
Auto 26,577 9,267
Postage 21,687 8,189
Data processing 2,035 4,327
Meetings and seminars 1,989 2,308
Contributions 1,350 3,475
Dues and subscriptions 969 4,687
Equipment rental -- 12,098
Physicians services -- 5,776
---------- --------
$2,797,308 $608,518
---------- --------
B-10
<PAGE>
================================================================================
FLORIDA SPECIALTY NETWORK, LTD
FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
================================================================================
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
TABLE OF CONTENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheets 2
Statements of Operations 3
Statements of Partners' Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6-9
SUPPLEMENTARY INFORMATION
General and Administrative Expenses 10
<PAGE>
[LETTERHEAD OF RACHLIN COHEN & HOLTZ]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
Florida Specialty Network, Ltd.
Pembroke Pines, Florida
We have audited the accompanying balance sheets of Florida Specialty Network,
Ltd. as of December 31, 1995, 1994, and 1993, and the related statements of
operations, partners' equity and cash flows for the years then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Florida Specialty Network, Ltd.
as of December 31, 1995, 1994 and 1993 and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
Our audit was conducted for the purpose of forming an opinion of the basic
financial statements taken as a whole. The accompanying supplementary
information is presented for the purpose of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
/s/ Rachlin Cohen & Holtz
Miami, Florida
August 16, 1996
C-1
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
BALANCE SHEETS
DECEMBER 31, 1995, 1994 AND 1993
ASSETS 1995 1994 1993
---- ---- ----
Current Assets:
Cash and cash equivalents $ 67,588 $ 31,062 $ 30,367
Accounts receivable, net 34,282 32,225 36,519
Prepaid expenses and other 16,034 19,463 1,710
-------- -------- --------
Total current assets 117,904 82,750 68,596
Property and Equipment 235,384 101,910 35,532
Other Assets 22,622 16,849 2,210
-------- -------- --------
$375,910 $201,509 $106,338
======== ======== ========
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses 94,683 37,937 16,082
Due to affiliates 122,817 59,400 --
Current maturities of long-term debt and
capital lease obligations 39,528 20,091 9,000
-------- -------- --------
Total current liabilities 257,028 117,428 25,082
Long-Term Debt and Capital Lease Obligations,
Net of Current Maturities 38,737 25,032 20,250
Commitments, Contingencies and Other Matters -- -- --
Partners' Equity 80,145 59,049 61,006
-------- -------- --------
$375,910 $201,509 $106,338
======== ======== ========
See notes to financial statements.
C-2
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
---- ---- ----
Revenue $ 1,277,154 $ 955,667 $ 293,113
----------- --------- ---------
Operating Expenses:
Salaries and benefits 609,780 437,371 50,849
Depreciation 34,109 17,370 3,368
General and administrative expenses 608,518 506,731 207,700
----------- --------- ---------
1,252,407 961,472 261,917
----------- --------- ---------
Income (Loss) from Operations 24,747 (5,805) 31,196
----------- --------- ---------
Other Income (Expense):
Interest income 1,574 304 566
Interest expense (5,225) (4,381) (757)
----------- --------- ---------
(3,651) (4,077) (191)
----------- --------- ---------
Net Income (Loss) $ 21,096 $ (9,882) $ 31,005
=========== ========= =========
See notes to financial statements.
C-3
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
STATEMENTS OF PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
---- ---- ----
Partners' Equity, Beginning $59,049 $ 61,006 $ --
Net Income (Loss) 21,096 (9,882) 31,005
Capital Contributions -- 7,925 30,001
------- -------- -------
Partners' Equity, Ending $80,145 $ 59,049 $61,006
======= ======== =======
See notes to financial statements.
C-4
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 21,096 $ (9,882) $ 31,005
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 34,109 17,370 3,368
Donated services -- 300 --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (2,057) 4,294 (36,519)
Prepaid expenses and other 3,429 (17,753) (1,710)
Other assets (5,773) (14,639) (2,210)
Increase in:
Accounts payable and accrued expenses 56,745 21,855 16,082
--------- -------- --------
Net cash provided by operating activities 107,549 1,545 10,016
--------- -------- --------
Cash Flows from Investing Activities:
Expenditures for property and equipment (98,713) (42,837) (7,400)
--------- -------- --------
Cash Flows from Financing Activities:
Repayment of long-term debt and capital lease obligations (35,728) (17,413) (2,250)
Borrowings from affiliates 63,418 59,400 --
Capital contributions -- -- 30,001
--------- -------- --------
Net cash provided by financing activities 27,690 41,987 27,751
--------- -------- --------
Net Increase in Cash and Cash Equivalents 36,526 695 30,367
Cash arid Cash Equivalents, Beginning 31,062 30,367 --
--------- -------- --------
Cash and Cash Equivalents, Ending $ 67,588 $ 31,062 $ 30,367
========= ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 5,225 $ 4,381 $ 757
========= ======== ========
Supplemental Disclosure of Non-Cash Investing and
Financing Activities:
Purchase of new equipment through installment
loans and capital leases $ 68,870 $ 33,286 $ 31,500
========= ======== ========
Acquisitions of new equipment through capital contributions $ -- $ 7,625 $ --
========= ======== ========
</TABLE>
See notes to financial statements.
C-5
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Florida Specialty Network, Ltd. (the "Company") is a limited
partnership organized on January 19, 1993 under the laws of the
State of Florida.
The Agreement and Certificate of Limited Partnership provides,
among other things, that profits, losses and distributions are
based upon the respective interests of the general and limited
partners, and that the General Partner shall have the exclusive
authority to manage the partnership.
In 1993, the Company's operations were conducted together with a
Delaware corporation, Network Data Systems, Inc. ("NDS"), that
was affiliated by means of common ownership. The financial
statements for 1993 combine the financial position and results of
operations of NDS with those of the Company. In 1994, the net
assets and operations of NDS were effectively combined with those
of the Company.
Business
The Company provides data processing services to and for managed
care and medical networks.
Cash and Cash Equivalents
The Company considers all highly liquid debt securities with
original maturities of three months or less to be cash
equivalents.
Property and Equipment
Property and equipment are recorded at cost and depreciation
using accelerated methods, over the estimated useful lives of the
assets. Gain or loss on disposition of assets is recognized
currently. Repairs and maintenance are charged to expense as
incurred. Major replacements and betterments are capitalized and
depreciated over the remaining useful lives of the assets.
Income Taxes
The Company has elected to be taxed as a partnership under the
applicable sections of the Internal Revenue Code; accordingly,
the partners' share of income or loss is included in their
individual tax returns. Therefore, no provision or credit for
income taxes has been included in these financial statements.
C-6
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash balances
at financial institutions that, at certain times during the year,
exceed federally insured limits. The Company believes that such
risks are minimized as a result of the size and stature of the
financial institutions in which the Company maintains its
accounts.
Use of Estimates
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 and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 2. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Estimated
Useful Lives
(Years) 1995 1994 1993
------- ---- ---- ----
<S> <C> <C> <C> <C>
Machinery and equipment 5 $ 38,126 $ 37,804 $ 38,900
Computer equipment 5 211,783 66,105
Office furniture and equipment 5-7 30,271 8,688 --
Leasehold improvements 2-5 6,901 6,901 --
-------- -------- --------
287,081 119,498 38,900
Less accumulated depreciation 51,697 17,588 3,368
-------- -------- --------
$235,384 $101,910 $ 35,532
======== ======== ========
</TABLE>
NOTE 3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The Company has an equipment obligation payable to a financial
institution. The outstanding balance at December 1995 was $11,250.
Payments are due in monthly principal installments of $750, plus
interest at 9.5%, with the final payment in March l997. The note is
secured by the equipment
The Company also has capital lease obligations with varying monthly
payments, at varying rates of imputed interest ranging from 11.9% to
16.3%. The obligations are secured by leased equipment with an
amortized cost of approximately $82,000 at December 31, 1995.
C-7
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Maturities of the note payable and capital lease obligations at
December 31, 1995 are due as follows:
Note Capital Lease
Payable Obligations
------- -----------
1996 $ 9,000 $37,956
1997 2,250 27,592
1998 -- 16,174
------- -------
11,250 81,722
Less amount representing interest -- 14,707
------- -------
11,250 67,015
Less current maturities 9,000 30,528
------- -------
$ 2,250 $36,487
======= =======
NOTE 4. RELATED PARTY TRANSACTIONS
Beginning in March 1995, the Company received a monthly fee from an
affiliated entity for use of the Company's facilities. The total fees
received for 1995 were $26,613.
Accounts receivable for all related companies total $33,344, $25,914
and $35,440 at December 31, 1995, 1994 and 1993, respectively.
The Company has unsecured loans payable to affiliated companies of
$122,818 and $59,400 at December 31, 1995 and 1994, respectively.
Certain of these loans bear interest at 8%, with no scheduled
repayment plan.
A significant portion of the Company's revenues are derived from
several affiliated companies. Approximately $1,081,000 (85%), $664,000
(69%), and $185,000 (63%) of revenue was attributed to these companies
for 1995, 1994 and 1993, respectively.
NOTE 5. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Leases
The Company leases office facilities under several operating
leases which expire principally through September 1996, and which
provide for a base rent and additional rent equal to the
Company's percentage of direct operating expenses of the
building, subject to certain limitations. One of the operating
leases has been assigned to the Company by an affiliated entity.
The approximate total future minimum base lease commitment
pursuant to the lease for the year ended December 31, 1996 is
$80,000.
Rent expense relating to operating leases amounted to
approximately $85,000, $48,000 and $6,000 for 1995, 1994 and
1993, respectively.
C-8
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 5. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Consulting/Marketing Agreement
Effective July 15, 1994, the Company entered into a certain
agreement for consulting services related to the Company's
computerized claims processing business.
This agreement expires on December 31, 1996, subject to extending
the terms by mutual agreement; provided for compensation based
upon a percentage of net profits, as defined, earned and
collected; and provided that, at commencement, the Company give
the consultant a 1% limited partnership interest, and an
additional 1% limited partnership interest for every $1,500,000
of net profits received by the Company.
This agreement was replaced with a Consulting/Marketing Agreement
made on June 1, 1996.
Data Processing Agreements with Health Care Providers
The Company generally enters into data processing agreements with
health care providers to provide the Company's computerized
claims processing services. These agreements generally are
limited to a particular medical specialty for a specified
geographic area; may be terminated for default by either party
upon thirty days written notice; and provide, as compensation to
the Company for the services, a monthly fee based upon a
percentage of the provider's aggregate monthly capitation and/or
fee-for-service, at specified rates and ranges.
NOTE 6. SUBSEQUENT EVENT
Subsequent to December 31, 1995, the Company entered into a letter of
intent to sell substantially all of its operating assets. The expected
closing date for the transaction is February 1997.
C-9
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD.
SUPPLEMENTARY INFORMATION
DECEMBER 31, 1995, 1994 AND 1993
<PAGE>
FLORIDA SPECIALTY NETWORK, LTD
GENERAL AND ADMINISTRATIVE EXPENSES
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
---- ---- ----
Rent $ 85,389 $ 48,313 $ 5,988
Professional fees 81,720 60,320 36,483
Travel and entertainment 77,692 60,267 11,226
Office expense 57,876 32,543 16,207
Commissions 55,327 12,824 --
Telephone 45,203 28,147 4,410
Insurance 41,424 23,984 2,825
Casual labor 27,218 48,700 7,019
Computer 25,128 18,036 1,747
Advertising 21,289 7,003 12,460
Courier services 17,316 10,431 180
Consulting 13,000 124,100 --
Equipment rental 12,098 11,870 4,495
Auto 9,267 2,491 129
Repairs and maintenance 8,215 5,193 5,637
Postage 8,189 7,195 841
Physicians services 5,776 -- --
Dues and subscriptions 4,687 1,235 673
Data processing 4,327 -- 94,775
Contributions 3,475 625 --
Meetings and seminars 2,308 2,033 255
Taxes and licenses 1,594 1,421 2,350
-------- -------- --------
$608,518 $506,731 $207,700
======== ======== ========
C-10
