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SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(c)
of the Securities Exchange Act of 1934
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Check the appropriate box:
[X] Preliminary Information Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14c-5(d)(2))
[ ] Definitive Information Statement
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GHS, INC.
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(Name of Registrant as Specified in Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(2) Aggregate number of securities to which transaction applies:
7,316,685
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$0.11 -- THIS AMOUNT IS BASED ON THE BOOK VALUE PER
SHARE OF USN COMMON STOCK AT MARCH 31, 1999 AND ON
AN ESTIMATED 7,316,685 SHARES OF USN COMMON STOCK
ISSUABLE IN THE SPIN-OFF DESCRIBED HEREIN
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(4) Proposed maximum aggregate value of transaction:
$789,000
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(5) Total fee paid:
$220
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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GHS, INC.
65 Broadway,
New York, New York 10006
INFORMATION
STATEMENT
SPIN-OFF
OF
U.S. NEUROSURGICAL, INC.
We are sending this Information Statement to you and all other holders of
GHS common stock in connection with the "spin-off" of our 100% owned subsidiary,
U.S. NeuroSurgical, Inc. (USN). As part of the spin-off, we will distribute to
you one share of USN common stock for each share of GHS common stock that you
own on the record date for the spin-off. If you are a holder of GHS common stock
of record at the close of business on , 1999, you will receive as
a dividend one share of USN common stock for each share of GHS common stock you
hold. We expect to mail the stock certificates for the USN common stock on or
about , 1999. After the spin-off, USN will be a separate company, no
longer owned in any way by GHS. Should you have any questions regarding this
Information Statement or the spin-off, please contact the Investor Relations
Department, U.S. NeuroSurgical, Inc., 2400 Research Boulevard, Suite 325,
Rockville, Maryland 20850, at telephone number (301) 208-8998.
In reviewing this Information Statement, you should note the following:
- WE ARE NOT ASKING YOU FOR A PROXY, AND WE REQUEST THAT YOU DO NOT SEND US
A PROXY.
- In assessing the impact of the spin-off on you, as a GHS stockholder, you
should review the matters set forth under the caption "Risk Factors"
beginning on page 3.
- Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved our spin-off of USN. The
Securities and Exchange Commission has not passed upon the fairness or
merits of the spin-off of USN or upon the accuracy or adequacy of the
information contained in this Information Statement.
Please note that the Board of Directors of GHS has unanimously approved the
spin-off, as it believes that the spin-off is in the best interests of GHS and
its stockholders.
You will not need to pay any consideration or surrender or exchange your
GHS common stock in order to receive your USN common stock. After the spin-off
distribution, we expect that the USN common stock will be traded on the OTC
Bulletin Board.
The date of this Information Statement is , 1999. We mailed
this Information Statement to GHS stockholders on or about ,
1999.
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TABLE OF CONTENTS
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SUMMARY..................................................... 1
RISK FACTORS................................................ 3
THE SPIN-OFF OF U.S. NEUROSURGICAL, INC..................... 6
BUSINESSES OF GHS AND USN AFTER THE SPIN-OFF................ 15
MANAGEMENT OF USN FOLLOWING THE SPIN-OFF.................... 20
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS........ 21
SELECTED USN AND USNP COMBINED FINANCIAL DATA............... 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF USN.......................... 24
DESCRIPTION OF GHS AND USN CAPITAL STOCK.................... 27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSHIP AND
MANAGEMENT................................................ 31
INDEPENDENT ACCOUNTANTS..................................... 32
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS..... 32
DOCUMENTS INCORPORATED BY REFERENCE......................... 32
ADDITIONAL INFORMATION...................................... 33
INDEX TO COMBINED FINANCIAL STATEMENTS...................... F-1
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SUMMARY
The following summary answers certain questions you may have with respect
to GHS's spin-off of USN and highlights selected information from this
Information Statement that is important to you. We encourage you to read this
entire Information Statement.
Q: WHAT WILL HAPPEN IN THE SPIN-OFF?
A: In the spin-off, GHS will distribute to its stockholders its 100% interest
in USN by distributing one share of USN common stock for each share of GHS
common stock owned by a stockholder. After the spin-off, USN will be a
separate company, no longer owned in any way by GHS.
Q: WHAT IS U.S. NEUROSURGICAL, INC.?
A: USN was organized in 1993 to own and operate stereotactic radiosurgery
centers, utilizing the Gamma Knife technology. It currently owns and
operates two such Gamma Knife centers (the "USN Gamma Knife Business"). See
"Businesses of GHS and USN After the Spin-off -- The Business of USN"
beginning on page 15 for a further description of USN's business.
Q: WHY ARE WE UNDERTAKING THE SPIN-OFF?
A: GHS intends to develop and pursue business opportunities (further described
herein) which will have, as compared to the business currently carried out
through USN, differences with respect to markets and capital requirements
and will require a different business plan. Your Board of Directors
believes that separating USN's Gamma-Knife Business from the other of GHS's
intended businesses will allow each company to more readily expand its
business, as well as pursue strategies and focus on objectives appropriate
to its business. For a more detailed discussion of our reasons for the
spin-off, see page 6. Please note that USN's business will not
substantially change as a result of the spin-off.
Q: WHAT ARE THE PRINCIPAL DIFFERENCES BETWEEN GHS'S PLANNED BUSINESS AND USN'S
BUSINESS?
A: After certain recent acquisitions, GHS's business involves the creation of
an online network to focus on personal and professional improvement. In
contrast, USN owns and operates two stereotactic radiosurgery centers,
utilizing the Gamma Knife technology.
Q: WHAT WILL I RECEIVE IN THE SPIN-OFF?
A: We are making a pro rata distribution to all holders of GHS common stock.
Accordingly, for every one share of GHS common stock you own on the record
date of the spin-off, you will receive one share of USN common stock.
Shortly after we complete the spin-off, holders of record will receive USN
stock certificates which represent ownership in USN.
Q: DO I HAVE TO PAY FEDERAL INCOME TAXES ON THE RECEIPT OF USN COMMON STOCK?
A: You will be required to pay Federal income taxes on receipt of your USN
Common Stock. As a result of the Spin-off, each holder of GHS Common Stock
will be considered to receive a taxable dividend includable in income in an
amount equal to the fair market value of the shares of USN Common Stock
received in the Spin-off. Management currently estimates that such value
will be $.42 per GHS share. However the actual value will be determined
based on an appraisal to be prepared by Scott & Stringfellow Inc. as of the
date of the Spin-off. See "The Spin-off of U.S NeuroSurgical, Inc. --
Material Federal Income Tax Consequences of the Spin-off to GHS and Its
Stockholders."
Q: WHERE WILL USN COMMON STOCK BE TRADED?
A: We expect that the USN common stock will be traded on the OTC Bulletin
Board. GHS common stock will continue to be traded on the OTC Bulletin
Board under the symbol "GHSI".
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Q: WHEN WILL THE SPIN-OFF OCCUR?
A: If you are a holder of GHS common stock of record at the close of business
on , 1999, you will receive as a dividend one share of USN common
stock for each share of GHS common stock you hold. We expect to mail the
stock certificates for the USN common stock on or about , 1999.
Q: WHAT WILL GHS'S BUSINESS BE AFTER THE SPIN-OFF?
A: Following the Spin-off, GHS's sole business will involve the continued
development of an online network to focus on personal and professional
improvement. In May 1999, GHS consummated the acquisition of
ChangeYourLife.com, LLC, a company founded by Anthony J. Robbins that is
engaged in the development of a web site for personal and professional
improvement. ChangeYourLife.com, LLC has an agreement with Anthony J.
Robbins and his operating company, Robbins Research International Inc. that
makes GHS the exclusive online source for Robbins' training, courses,
content and publications. In addition, in May 1999, GHS completed its
acquisition of Concept Development Inc., which owns Brainfuel.com, the
online arm of The Learning Annex and has the option to purchase The
Learning Annex's traditional offline business. As a result of this
acquisition, GHS has exclusive online access to educational content and
materials covering a wide range of topics. GHS's ultimate objective is to
make its online network the leader in online personal and professional
improvement content, services, communities, and interactive sales.
GHS is a Delaware corporation. Its principal executive offices are located
at 65 Broadway, New York, New York 10006, and its telephone number is (212)
430-6430.
Q: WHAT WILL USN'S BUSINESS BE AFTER THE SPIN-OFF?
A: USN will be a separate public company continuing to own and operate
stereotactic radiosurgery centers, utilizing the Gamma Knife technology.
USN currently owns and operates two Gamma Knife centers, one on the
premises of Research Medical Center in Kansas City, Missouri and one on the
premises of New York University Medical Center (NYU) in New York, New York.
USN intends to continue to explore opportunities to open additional Gamma
Knife Centers. USN's business strategy is to provide a mechanism whereby
hospitals, physicians, and patients can have access to Gamma Knife
treatment capability, a high capital cost item. USN provides the Gamma
Knife to medical facilities on a "cost per treatment" basis. USN owns the
Gamma Knife units, and is reimbursed by the facility where it is housed,
based on utilization.
Following the spin-off, USN's principal executive offices will be located
at 2400 Research Boulevard, Suite 325, Rockville, Maryland 20850, and its
telephone number will be (301) 208-8998.
Q: WILL USN COMPETE WITH GHS AFTER THE SPIN-OFF?
A: Due to the differing lines of business that each company plans to pursue,
there will be no direct competition between them.
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RISK FACTORS
In assessing the impact of the spin-off on you, as a GHS stockholder, you
should be aware of the following risks relating to the spin-off and USN's
operations:
WITHOUT ADEQUATE FINANCING, USN WILL NOT BE ABLE TO GROW
USN has financed its Gamma Knife installations through capital lease
financing. The purchase price of the Gamma Knife is approximately $3,200,000 and
leasehold improvements in establishing a center typically range from $500,000 to
$1,500,000 depending on, among other things, the site and the medical center
involved. The costs to USN of establishing its Kansas City center and New York
center were approximately $3,600,000 and $4,700,000, respectively. USN's
development of new Gamma Knife centers is dependent on its ability to secure
favorable financing. Neither GHS nor USN can guarantee that such financing (or
any other funds necessary to continue and/or expand operations) will be
available on satisfactory terms or in adequate amounts to accomplish USN's
objectives.
SIGNIFICANT COMPETITION IN THE MARKETPLACE MAY HINDER USN'S GROWTH
The health care industry, in general, is highly competitive and GHS and USN
each expects USN 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. Many of these
competitors have greater financial and other resources than USN. 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. Each of
GHS and USN 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.
LACK OF A CURRENT PUBLIC MARKET FOR USN COMMON STOCK MAKES THE FUTURE
PERFORMANCE OF USN COMMON STOCK DIFFICULT TO PREDICT
There is no current public market for USN common stock, and we cannot make
any assurance as to the prices at which USN common stock will trade after the
spin-off. Until USN common stock is distributed and an orderly market develops,
the price at which USN common stock trades may fluctuate significantly. We
expect that the USN common stock will be traded on the OTC Bulletin Board.
THE COMBINED TRADING PRICE OF GHS AND USN COMMON STOCK AFTER THE SPIN-OFF IS
UNCERTAIN
As a result of the spin-off, you will own shares of GHS which will be
traded on the OTC Bulletin Board and shares of USN which we expect will be
traded on the OTC Bulletin Board. The combined trading price of the GHS and USN
common stock may be greater than, less than or equal to the trading price of GHS
common stock immediately prior to the spin-off.
USN HAS A LIMITED OPERATING HISTORY WITH OPERATING LOSSES AND NEGATIVE CASH FLOW
AND MAY NOT BE PROFITABLE
USN sustained operating losses of approximately $1,011,000 in 1998 and
$53,000 in 1997. At December 31, 1998, USN had an accumulated deficit of
$1,777,000. Although USN is currently generating positive cash flow, USN may
incur operating losses and generate negative cash flow from operating activities
during the next several years while it continues to develop its Gamma Knife
operations and builds a customer base. USN cannot assure you that it will
achieve or sustain profitability or positive cash flow from operating activities
in the future or that it will generate sufficient cash flow to service its
future debt requirements.
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THE HEALTH CARE INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION, ANY
CHANGE IN WHICH COULD AFFECT USN'S FINANCIAL PERFORMANCE
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 neither GHS nor USN believes 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. Neither GHS nor USN can 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 it.
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, each of GHS and USN 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.
However, over the last several years, such third party payors are increasingly
challenging the cost effectiveness of medical products and services and taking
other cost-containment measures. Therefore, although treatment costs using the
Gamma Knife compare favorably to traditional invasive brain surgery, it is
unclear how this trend among third party payors and future regulatory reforms
affecting governmental reimbursement will affect procedures in the higher end of
the cost scale.
In the future, USN may establish additional Gamma Knife centers. Completion
of future centers would require approvals and arrangements with hospitals,
health care organizations, or other third parties, including certain regulatory
authorities. The Food and Drug Administration has issued the requisite
pre-market approval for the Gamma Knife to be utilized by USN. In addition, many
states require hospitals to obtain a Certificate of Need (CON) before they can
acquire a significant piece of medical equipment. Should USN enter into future
ventures such "need" will be demonstrable, but it can have no assurance that
Certificates of Need will be granted.
In addition, the Nuclear Regulatory Commission (NRC) must issue a permit to
USN to permit loading the Cobalt at each Gamma Knife site. While each of GHS and
USN believes that USN can obtain a NRC permit for any future Gamma Knife
machine, there is no assurance that it will.
USN'S LOSS OF ITS SOURCE OF SUPPLY WOULD AFFECT ITS ABILITY TO MAINTAIN
OPERATIONS
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 ability to maintain its Gamma Knife treatment centers.
NEW TECHNOLOGY COULD RENDER USN'S GAMMA KNIFE TECHNOLOGY OBSOLETE
Gamma Knife technology may be subject to technological change.
Consequently, USN 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 USN 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.
USN'S LOSS OF ANY MEMBER OF ITS MANAGEMENT TEAM COULD AFFECT ITS FINANCIAL
PERFORMANCE
USN is dependent on the services of current management, including Mr. Alan
Gold as Chairman of the Board and President. Losing the services of Mr. Gold or
other members of management could have a significant negative effect on its
business. Qualified replacements may be difficult or impossible to find or
retain.
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A TAKE-OVER OF USN MAY BE DIFFICULT, IRRESPECTIVE OF WHETHER IT IS BENEFICIAL TO
USN SHAREHOLDERS
USN anticipates that certain principal stockholders of USN, including
certain officers and directors of USN, will beneficially own in excess of 50% of
the outstanding shares of the USN common stock. This anticipated voting control
and certain provisions of Delaware law affecting acquisitions and business
combinations applicable to USN may discourage certain transactions involving an
actual or potential change of control of USN, including transactions in which
USN stockholders might receive a premium for their shares over the
then-prevailing market price. Such voting control and provisions of Delaware law
may also have a depressive effect on the market price for USN common stock.
THE SPIN-OFF WILL RESULT IN TAXABLE INCOME TO THE GHS STOCKHOLDERS
As a result of the Spin-off, each holder of shares of GHS Common Stock will
be deemed to have received, to the extent of GHS's current and accumulated
earnings and profits, a taxable dividend includable in income in an amount equal
to the value of USN Common Stock received in the Spin-off. In addition, GHS will
be required to recognize taxable gain to the extent of the excess, if any, of
the fair market value of the USN Common Stock distributed over GHS's adjusted
basis in those shares. Management currently estimates that such value will be
$.42 per GHS share. However the actual value will be determined based on an
appraisal to be prepared by Scott & Stringfellow as of the date of the Spin-off.
See "The Spin-off of U.S NeuroSurgical, Inc. -- Material Federal Income Tax
Consequences of the Spin-off to GHS and Its Stockholders."
POTENTIAL RESPONSIBILITY FOR LIABILITIES NOT EXPRESSLY ASSUMED
The Distribution Agreement, the Assignment and Assumption Agreement and the
Tax Matters Agreement allocate between GHS and USN responsibility for various
indebtedness, liabilities and obligations. See "The Spin-off of U.S.
NeuroSurgical, Inc." -- "Agreement And Plan Of Distribution; Relationship
Between GHS And USN After The Spin-off "; -- "Assignment and Assumption
Agreement"; and -- "Tax Matters Agreement". It is possible that a court would
disregard this contractual allocation of indebtedness, liabilities and
obligations between the parties and require GHS or USN or their respective
subsidiaries to assume responsibility for obligations allocated to the other
party, particularly if such other party were to refuse or was unable to pay or
perform any of its allocated obligations. Such events could have a material
adverse effect on the financial condition and operations of USN or GHS, as the
case may be.
POTENTIAL INDEMNIFICATION LIABILITIES
Under the terms of the Distribution Agreement, the Assignment and
Assumption Agreement and the Tax Matters Agreement, each of GHS and USN has
agreed to indemnify the other (and certain related persons) from and after
consummation of the Spin-off with respect to certain indebtedness, liabilities
and obligations, which indemnification obligations could be significant. The
availability of such indemnities will depend upon the future financial strength
of the companies. No assurance can be given that the relevant company will be in
a position to fund such indemnities. See "The Spin-off of U.S. NeuroSurgical,
Inc." -- "Agreement And Plan Of Distribution; Relationship Between GHS And USN
After The Spin-off "; -- "Assignment and Assumption Agreement"; and -- "Tax
Matters Agreement".
THIS INFORMATION STATEMENT INCLUDED FORWARD-LOOKING STATEMENTS AND WE CAUTION
YOU NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS
Statements contained in this Information Statement that are not historical
facts may be deemed to be forward-looking statements. Investors are cautioned
that forward-looking statements are inherently uncertain. Actual performance and
results may differ materially from that projected or suggested herein due to
certain risks and uncertainties including, without limitation, the payment,
timing and ultimate collectability of accounts receivable for Gamma Knife
procedures from different payor groups such as Medicare and private payors;
competition; technological obsolescence; government regulation; and malpractice
liability. Additional information concerning certain risks and uncertainties
that could cause actual results to differ materially from
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that projected or suggested may be identified from time to time in GHS's and
USN's filings with the Securities and Exchange Commission (SEC) and GHS's and
USN's public announcements, copies of which are available from the SEC or from
the applicable company upon request.
GIVEN THESE UNCERTAINTIES, WE CAUTION PROSPECTIVE INVESTORS NOT TO PLACE
UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. USN disclaims any obligation
to update any such factors or to publicly announce any revisions to any of the
forward-looking statements contained herein to reflect future results, events or
developments.
THE SPIN-OFF OF U.S. NEUROSURGICAL, INC.
GENERAL
GHS, Inc. ("GHS") intends to "spin-off " its 100% interest in its
subsidiary, U.S. NeuroSurgical, Inc. ("USN"). In the spin-off transaction (the
"Spin-off "), GHS will distribute to its stockholders one share of common stock,
$.01 par value per share, of USN (the "USN Common Stock") for each share of
common stock, $.01 par value per share, of GHS (the "GHS Common Stock") owned by
each stockholder as of the record date for the Spin-off. After the Spin-off, USN
will be a separate company, no longer owned in any way by GHS.
CONDITIONS TO THE SPIN-OFF
The Spin-off is conditioned upon the satisfaction of certain conditions
necessary to consummate the Spin-off. In particular, (a) GHS and USN must have
obtained all orders, rulings, consents or approvals, governmental or otherwise,
necessary to consummate the Spin-off; (b) GHS and USN must furnish to the other
all documents and certificates, including assignments and conveyances, necessary
to consummate the Spin-off; and (c) the USN Common Stock shall have been
registered under the 1934 Act.
The GHS Board of Directors has the right to cancel or defer the Spin-off,
in its sole discretion, even if the conditions to the Spin-off are met.
MANNER OF EFFECTING THE SPIN-OFF
Following the Spin-off, each stockholder of record on , 1999
(the "Record Date") will receive a USN stock certificate which represents the
USN Common Stock owned by such stockholder. Shareholders that hold through
brokerage and "street name" accounts should expect to receive an account
statement from their brokerage firm reflecting the number of shares of USN
Common Stock received by such stockholder in the Spin-off. Following the
Spin-off, stockholders who hold through brokerage accounts may request physical
certificates for their shares of USN Common Stock. GHS expects to mail such
stock certificates to stockholders on , 1999 (the "Spin-off Payment
Date").
No holder of GHS Common Stock will be required to pay any cash or other
consideration for shares of USN Common Stock received in the Spin-off or to
surrender or exchange shares of GHS Common Stock in order to receive shares of
USN Common Stock. However, holders will be required to pay income taxes as a
result of the Spin-off. See "-- Material Federal Income Tax Consequences of the
Spin-off to GHS and Its Stockholders."
REASONS FOR THE SPIN-OFF
GHS intends to develop and pursue business opportunities which will have,
as compared to the business currently carried out through USN, differences with
respect to markets and capital requirements and will require a different
business plan. As a result of GHS's recent acquisitions of Change Your Life.com,
LLC and Concept Development, Inc., which owns Brainfuel.com and its agreement
with The Learning Annex (see "Businesses of GHS and USN After the
Spin-off -- The Business of GHS"), GHS's sole business will involve the
continued development of an online network to focus on personal and professional
improvement (the "Self-Improvement Business"). GHS's ultimate objective is to
make its online network the leader in
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online personal and professional improvement content, services, communities, and
interactive sales. Both companies believe that separating USN's Gamma-Knife
Business from GHS's Self-Improvement Business will allow each company to more
readily expand its business, as well as pursue strategies and focus on
objectives appropriate to its business.
The Board of Directors approved the Spin-off for the following principal
reasons:
Management Focus. GHS's Self-Improvement and Gamma Knife Businesses
have different dynamics and business cycles, serve different marketplaces
and customer bases, are subject to different competitive forces and must be
managed with different long-term and short-term strategies and goals. GHS
believes that separating its businesses into independent public companies,
each with its own management team and board of directors, is necessary to
address current and future management issues and considerations that result
from operating these diverse businesses within a single company. The
separation will enable the management of each business to manage that
business, and to adopt and implement strategies for that business, solely
with regard to the needs and objectives of that business. In addition, as a
result of the separation, the management of each business will be able to
devote its full attention to managing that business.
Capital Structure. GHS believes that the Spin-off will allow each of
the companies to organize its capital structure and allocate its resources
to support the very different needs and goals of the particular business.
Capital borrowings can be tailored to the specific needs of the various
business units. Each business will be able to allocate its resources
without considering the needs of the other businesses.
Attracting and Retaining Key Employees. GHS's management believes
that the ability to attract and retain key personnel is fundamental to its
ability to establish a leadership position in its Self-Improvement
Business. The Spin-off would enable each company to establish focused
equity-based compensation programs that should enable each of them to
better attract and retain key personnel.
Investor Understanding. Debt and equity investors and securities
analysts should be able to better evaluate the financial performance of
each company and their respective strategies, thereby enhancing the
likelihood that each will achieve appropriate market recognition. The stock
of each of the two companies will also appeal to investors with differing
investment objectives and risk tolerance, and will allow potential
investors to focus their investments more directly to the areas of their
primary interest.
Cost Savings. Each company should be able to rationalize better its
organizational structure after the Spin-off.
AGREEMENT AND PLAN OF DISTRIBUTION: RELATIONSHIP BETWEEN GHS AND USN AFTER THE
SPIN-OFF
USN and GHS have entered into an Agreement and Plan of Distribution (the
"Distribution Agreement") which, in general, outlines the anticipated
relationship between the two companies after the Spin-off. The following sets
forth a summary of the material terms and provisions of the Distribution
Agreement.
ADMINISTRATIVE SERVICES
GHS and USN expect to provide their own administrative services after the
Spin-off. However, the Distribution Agreement provides that for a period of up
to two years after the Spin-off, GHS and USN will generally make their employees
available to each other as necessary to support the activities of each party in
areas including, without limitation, accounting, tax and legal advice and
services and human resources. GHS and USN each have agreed in the Distribution
Agreement to provide to the other, upon the other's request, at all reasonable
times, full and complete access to any and all books, records, contracts,
instruments, data and other information as the other may reasonably request and
require in the conduct of its business. GHS and USN have also agreed to use
their best efforts to make available to the other, upon the other's request,
their respective officers, directors, employees and agents as witnesses to the
extent that such persons may reasonably be required in connection with any
legal, administrative or other proceedings in which USN or GHS, may from time to
time be involved.
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The party rendering these services will be entitled to receive from the
other payment for its reasonable costs and expenses incurred in providing such
services.
INDEMNIFICATION
Pursuant to the Distribution Agreement, other than liabilities and
obligations in respect of taxes, which shall be governed by the terms of the Tax
Matters Agreement (described below) (a) USN shall be liable for all claims,
liabilities and obligations attributable to the USN Gamma Knife business or any
of the other assets assigned by GHS to USN pursuant to the Assignment and
Assumption Agreement described below (collectively, the "USN Liabilities"); (b)
GHS shall be liable for all claims, liabilities and obligations retained or
assumed by GHS pursuant to the Assignment and Assumption Agreement
(collectively, the "GHS Liabilities"); and (c) USN shall be responsible for
"Distribution Liabilities" (defined as expenses, costs, or liabilities directly
related to the Spin-off) which are incurred or accrued prior to or following May
27, 1999.
USN will indemnify GHS and its officers, directors, employees, agents and
affiliates from and against any and all losses, liabilities, claims, damages,
costs and expenses arising out of or related in any manner to the USN
Liabilities. GHS will indemnify USN similarly, with respect to the GHS
Liabilities.
OTHER PROVISIONS
The Distribution Agreement also includes provisions relating to: (i)
allocating liability with respect to pending litigation and other potentially
significant obligations; and (ii) continued cooperation between GHS and USN with
respect to post-Spin-off matters. With respect to all significant outstanding
contracts, licenses, guarantees and other obligations relating to the Gamma
Knife Business to which GHS had been a party and the liability for which will be
assumed by USN pursuant to the Assignment and Assumption Agreement discussed
below, GHS and USN have agreed, to the extent not already provided for, to have
USN substituted in the place of and for GHS (and to have GHS removed) as a party
as promptly as is reasonably practicable. GHS and USN also agreed to deliver
such other instruments and documents, and take all such other actions, as may be
reasonably required in order to effectuate the purposes of the Distribution
Agreement and to consummate the transactions contemplated thereby.
ASSIGNMENT AND ASSUMPTION AGREEMENT
Pursuant to the Assignment and Assumption Agreement, USN shall accept the
assignment from GHS to USN of the following assets (collectively, the "Assigned
Assets"):
(i) All assets of GHS related exclusively or primarily to the USN Gamma
Knife Business;
(ii) All accounts receivable of GHS and each of its subsidiaries arising
through May 27, 1999;
(iii) All intercompany accounts due from USN to GHS at May 27, 1999, which
contribution shall be deemed a capital contribution from GHS to USN;
(iv) All prepaid expenses and deposits made by GHS prior to May 27, 1999;
(v) All refunds payable to GHS for business conducted by GHS prior to May
27, 1999;
(vi) The capital stock of U.S. Neurosurgical Physics, Inc., a wholly owned
subsidiary of GHS ("USNP");
(vii) cash in the amount of $374,144.71; and
(viii) Lease dated March 5, 1998 between GHS and Research Grove Associates,
relating to the lease of the premises located at 2400 Research
Boulevard, Suite 325, Rockville, Maryland 20850 (the "Maryland
Lease").
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The following assets of GHS are specifically excluded from the assignment
from GHS to USN (collectively, the "Excluded Assets"):
(i) cash and cash equivalents (a) held by GHS as of May 27, 1999, other
than the cash included in the Assigned Assets above , (b) raised in
GHS's May 1999 private placement of its Series B Preferred Stock and
(c) which come into GHS's possession following May 27, 1999;
(ii) the capital stock of GHS's subsidiaries owned by GHS, other than
USNP; and
(iii) all assets of GHS acquired in connection with the CYL Transaction
and the Brainfuel Transaction (as described below under "Business of
GHS") or acquired by GHS following May 27, 1999.
In addition, USN shall assume, be liable for and shall indemnify GHS with
respect to all claims, liabilities and obligations which are attributable to the
following (collectively, the "Assumed Liabilities"):
(i) any of the Assigned Assets;
(ii) any event, occurrence, action or omission relating to GHS and its
subsidiaries taken or occurring prior to May 27, 1999, except to the
extent they are specifically included in the Excluded Liabilities;
(iii) the obligations of GHS under the employment agreement dated November
14, 1984, as amended, with Alan Gold;
(iv) the obligations of GHS under the Maryland Lease; and
(v) the obligations of GHS to Allen & Company Incorporated for the
payment of fees in respect of financial advisory services rendered to
GHS in connection with the CYL Transaction and Brainfuel Transaction.
See "Certain Relationships and Related Party Transactions."
GHS shall retain, be liable for and shall indemnify USN with respect to all
claims, liabilities and obligations set forth below (collectively, the "Excluded
Liabilities"):
(i) all claims, liabilities and obligations which are attributable to any
of the Excluded Assets;
(ii) the obligations of GHS to issue GHS Common Stock pursuant to options,
warrants and commitments to issue capital stock outstanding at May
27, 1999, as well as GHS's obligations under its 1997 Stock Option
Plan;
(iii) the obligations of GHS to pay the consideration, fees, expenses and
other costs arising in connection with the CYL Transaction and the
Brainfuel Transaction;
(iv) all claims, liabilities or litigation arising out of any event,
occurrence, action or omission relating to GHS and its subsidiaries
taken or occurring following May 27, 1999;
(v) GHS's obligations under the Warrant Certificate, dated November 30,
1993, as amended, issued to Allen & Company Incorporated; and
(vi) GHS's obligations under that certain Settlement Agreement dated as of
March 22, 1999 by and among GHS, USN and the other parties thereto.
TAX MATTERS AGREEMENT
GHS and USN have entered into a tax matters agreement (the "Tax Matters
Agreement") that defines the parties' rights and obligations with respect to
federal, state, foreign and other income or franchise taxes relating to GHS's
and USN's businesses for tax periods prior to, including and following the
Spin-off and with respect to certain other tax matters. Pursuant to the Tax
Matters Agreement, USN shall be liable for, and shall indemnify and hold
harmless GHS from and against any liability for, taxes which are allocated to
USN under the Tax Matters Agreement as follows: (1) all taxes resulting from the
Spin-off, (2) all taxes resulting from the operations of USN and GHS prior to
May 27, 1999 (the date of the closings of the acquisitions of Change Your
Life.com, LLC and Concept Development, Inc.), and (3) all taxes resulting from
the
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operations of USN following May 27, 1999. GHS shall be liable for, and shall
indemnify and hold harmless USN from and against any liability for, taxes which
are allocated to GHS under the Tax Matters Agreement as follows: (1) all taxes
resulting from the Brainfuel Transaction or the CYL Transaction and (2) all
taxes resulting from the operations of GHS (other than USN and its subsidiaries)
following May 27, 1999.
GHS's Board of Directors determined that the allocation of responsibilities
for taxes provided by the Tax Matters Agreement was fair to the stockholders of
GHS and USN. The allocation of responsibility in the Tax Matters Agreement is
based on the fact that prior to May 27, 1999, the closing date of both the CYL
Transaction and the Brainfuel Transaction, USN's Gamma Knife operations
represented all of GHS's operations. Therefore, the Board determined that
allocating to USN the responsibility for taxes for periods through May 27, 1999
was appropriate. The Board recognized that for periods following May 27, 1999,
the Tax Matters Agreement allocated to USN the responsibility for its Gamma
Knife operations and to GHS the responsibility for its new online personal and
professional improvement business. The Board also determined that the allocation
to USN of all taxes resulting from the Spin-off was reasonable. The allocation
to USN of all taxes resulting from the Spin-off was required as a condition to
the closing of the CYL Transaction by the sellers of Change Your Life. com, LLC.
Because the Board believed that consummating the CYL Transaction was in the best
interests of GHS's stockholders and because the tax liabilities, if any,
resulting from the Spin-off were determined not to be material, the Board
determined that allocating such responsibility to USN was reasonable.
It is possible that a court or the IRS could disregard this contractual
allocation of responsibility for taxes and require GHS or USN or their
respective subsidiaries to assume responsibility for obligations allocated to
the other party, particularly if such other party were to refuse or was unable
to pay or perform any of its allocated obligations. Such events could have a
material adverse effect on the financial condition and operations of USN or GHS,
as the case may be.
BOARD AND SHAREHOLDER APPROVAL: APPRAISAL RIGHTS
The GHS Board of Directors has unanimously approved the Spin-off after
careful consideration. GHS will not hold a meeting or solicit proxies for the
Spin-off, as no approval of the GHS stockholders is required under Delaware law.
Additionally, under Delaware law, GHS stockholders have no right to an
appraisal of the value of their shares in connection with the Spin-off.
OUTSIDE CONSULTANTS
Neither GHS nor USN has engaged a consultant or other outside party to
prepare a report, opinion or appraisal with respect to the Spin-off, except that
GHS retained Scott & Stringfellow, Inc., an investment banking firm, to prepare
an appraisal of USN in connection with the Spin-off. See "-- Appraisal of USN."
APPRAISAL OF USN
Scott & Stringfellow, Inc. ("S&S") was retained by GHS to appraise the fair
market value of USN as of the date of its Spin-off to serve as a basis for
establishing the amount of any taxable gain to GHS and the USN dividend value to
stockholders resulting from the Spin-off. S&S, as a customary part of its
investment banking business, is regularly engaged in the appraisal of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and appraisals for estate, corporate and
other purposes. Charles H. Merriman, who is a director of GHS and will serve as
a director of USN after the Spin-off, is Senior Vice President of S&S. GHS
retained S&S because of S&S's and Mr. Merriman's familiarity with the business
of USN.
For purposes of the appraisal, dated June 17, 1999, the term "fair market
value" was defined as the amount at which the USN capital stock in aggregate on
a majority interest basis would change hands between a willing buyer and willing
sellers, all having reasonable knowledge of all relevant facts and none being
under
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any compulsion to act, with equity to all. Furthermore, for purposes of the
appraisal, S&S assumed that, after the Spin-off, the outstanding shares of USN
Common Stock will have been fully distributed, the USN Common Stock will be
trading on an established market, and information concerning USN of the type
normally available concerning publicly-traded companies will have been widely
disseminated.
The full text of the written appraisal of S&S, dated June 17, 1999, is set
forth as Appendix A to this Information Statement and describes the assumptions
made, matters considered and limits on the review undertaken. GHS stockholders
are urged to read the appraisal carefully and in its entirety. The summary of
the appraisal of S&S set forth in this Information Statement is qualified in its
entirety by reference to the full text of such opinion.
The preparation of a corporate appraisal is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary, without considering the analysis as
a whole, could create an incomplete view of the processes underlying the
appraisal. In arriving at its appraisal conclusions, S&S considered the result
of all such analyses. The analyses were prepared for the purposes of enabling
S&S to render its appraisal of USN to GHS for purposes of establishing the
amount of taxable gain, if any, arising from the Spin-off. Analyses based upon
forecasts of future results are not necessarily indicative of actual future
values, which may be significantly more or less favorable than suggested by such
analyses, nor should they be viewed as predictions of potential future trading
prices for shares of USN Common Stock.
In connection with the appraisal, S&S made such reviews, analyses and
inquiries as it deemed necessary and appropriate under the circumstances,
including, among other things, the following: (i) meetings with certain members
of the senior management of GHS to discuss the operations, financial condition,
prospects and projected operations and performance of USN; (ii) visits to
certain facilities and business offices of GHS; (iii) GHS's annual reports to
stockholders and annual reports on Form 10-K for the five fiscal years ended
December 31, 1998; (iv) the unaudited pro forma financial statements for the USN
business for the five years ended December 31, 1998; (v) the forecasts and
projections prepared by GHS's management with respect to USN for the five years
ended December 31, 2003; (vi) the historical market prices and trading volume
for GHS stock; (vii) certain publicly available financial data for certain
companies that S&S deemed comparable to USN; (viii) the Preliminary Information
Statement pursuant to Section 14(c) of the Securities Exchange Act of 1934 of
GHS, Inc. with respect to the Spin-off to be filed with the Securities and
Exchange Commission; and (ix) such other studies, analyses and inquiries as S&S
deemed appropriate.
The financial forecasts and projections prepared by GHS's management with
respect to USN for the five years ending December 31, 2003, were based upon the
historical financial results of the USN business while a part of GHS and the
material assumptions set forth below. Revenues were projected to increase each
year by 8% and salaries and benefits were projected to increase each year by 6%.
No new investment in Gamma Knife facilities were contemplated, accordingly,
depreciation expense was reduced in year 2001 and thereafter due to the Kansas
City facility becoming fully depreciated in year 2001. Operating expenses were
projected to approximate historical levels with the exception of management's
estimates of the additional general and administrative expenses expected to be
incurred as a result of USN operating as a stand-alone company. The combined
federal and state income tax rate was estimated to be 40%.
S&S relied upon the financial forecasts and projections provided to it and
assumed, without independent verification, that those financial forecasts and
projections had been reasonably prepared and reflected the best currently
available estimates of the future financial results and condition of USN and
that there had been no material change in the assets, financial condition,
business or prospects of USN since the date of the most recent financial
statements made available to it. S&S did not independently verify the accuracy
and completeness of the information supplied to it with respect to USN and does
not assume any responsibility with respect thereto. S&S did not make any
independent appraisal of any of the properties or assets of USN.
As part of its analysis, S&S analyzed the trading volume of GHS's publicly
traded common stock, both before and after the announcement of the Spin-off.
GHS's Common Stock traded in the range of $5/32 to $18 1/4 per share in the year
prior to such announcement. While S&S considered this trading activity in its
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analysis, S&S utilized an independent valuation analysis to determine the
aggregate fair market value on a majority interest basis of the capital stock of
USN that will be outstanding after the Spin-off.
In determining the aggregate fair market value on a majority interest basis
of the USN Common Stock that will be outstanding after the Spin-off, S&S
considered generally accepted valuation methodologies and, after such due
consideration, utilized primarily the capitalization of funds generated from
operations and discounted cash flow approaches.
The capitalization of funds generated from operations approach is a method
of determining the fair market value of a company by determining the level of
funds generated from operations which is considered to be representative of the
future operating performance of the company and capitalizing this level at a
selected multiple. Such comparable public companies as are available are
selected for comparison purposes and a risk analysis is performed. The selection
of appropriate multiples for the company is made based on this comparative risk
analysis and a thorough analysis of the comparable market multiples.
Capitalizing the representative levels at the selected multiple determines the
company's total enterprise value. Certain adjustments for non-operating assets
and interest-bearing debt are made to determine the fair market value of the
company's equity.
The discounted cash flow approach is another method of determining the
value of an operating enterprise. This approach entailed determining the
appropriate cash flows, based upon projected financial information for the
enterprise. An appropriate discount rate for the enterprise projections is
selected based upon an analysis of alternative investments. The terminal value,
which is the value of the enterprise at the end of the projected period, is
determined by using the capitalization of earnings approach. The summation of
the discounted value for the projected period and the discounted value of cash
flow for the terminal value determines the company's total enterprise value.
Similarly, to determine the fair market value of the Company's equity,
adjustments for non-operating assets and interest-bearing debt are made.
In the capitalization of funds generated from operations, S&S capitalized
USN's earnings before interest and taxes ("EBIT") and earnings before interest,
taxes, depreciation and amortization ("EBITDA"). USN's actual 1998 EBIT and
EBITDA figures were capitalized and for 1999 "annualized" EBIT and EBITDA
figures were employed based on 4X the actual results achieved in the quarter
ended March 31, 1999. The highest Total Enterprise Values ("TEV") were developed
using the 1999 annualized figures which are $952,000 for EBIT and $2,068,000 for
EBITDA. S&S determined that the market-driven TEV of American Shared Hospital
Services ("AMS") reflects a 3.65X multiple of annualized EBIT and 2.34X multiple
of annualized EBITDA based on AMS's results for the first quarter ended March
31, 1999 annualized. AMS operates five (5) Gamma Knives. Its operations are
virtually identical to USN's except larger and AMS is over-capitalized with
excess liquidity on its balance sheet. Operationally, AMS is a compelling
market-driven proxy for USN. S&S rounded the AMS multiples up to 4X for
projected 1999 EBIT and 3X for EBITDA. TEV for USN employing 4X projected EBIT
for 1999 produced a figure less than the total of USN's deficit working capital
and term debt. Accordingly, the EBIT capitalization was discarded. USN employs
rapid depreciation of its facilities to the extent that depreciation and
amortization for 1999 total approximately $1.1 million which in combination with
projected earnings after tax is insufficient to service the principal
amortization and interest expense associated with the capital leases supporting
the Gamma Knives. This cash generation short-fall is projected for both fiscal
1999 and 2000. Internally generated fund flows that are insufficient to service
debt are of relatively low value to equity holders and for that reason S&S
considered the multiple of 3X 1999 EBITDA to be reasonable. 3X annualized EBITDA
produced a TEV of $6,204,000. After subtracting from this TEV figure the total
of a deficit working capital of $820,000 added to long term liabilities of
$2,990,000, the minority interest equity value produced is $2,394,000. This
figure is divided by .70 to adjust for the median premium over the past ten (10)
years offered over market prices for majority interest. The majority interest
capitalized in this fashion for USN is $3,420,000.
In the discounted cash flow analysis, S&S determined USN's minority
interest equity capitalization value by adding (1) the present value of
projected discretionary cash flow for the five years ended December 31, 2003 net
of debt service and anticipated capital expenditures, and (2) the net present
value of the terminal value after five years. The projected cash flows for the
years 1999 through 2003 were based upon the financial
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projections provided by USN's management. S&S discounted these cash flows at a
ratio of 20%. The selected discount rate reflects the rate of return that S&S
estimates would be reasonably required by providers of capital to USN to
compensate such providers for the time value of their money, as well as the
risks inherent in their investment. The terminal value was determined by
multiplying the projected discretionary cash flow for fiscal 2003 times 5. This
multiple was selected after an analysis of the market capitalization on a
minority interest basis of the discretionary cash flow projected to be generated
by AMS based on its first quarter 1999 results. In arriving at the multiple of
5X, we attributed $1.00 per share of market capitalization, 35% of the actual
per share cash balance, or $3,909,000 of the total AMS market capitalization of
$9,772,500 to the cash on the balance sheet totaling $11,071,000. Employing 5X
as the multiple for calculating USN's terminal value in the discounted
discretionary cash flow analysis resulted in an aggregate equity capitalization
on a minority interest basis of $2,128,761. S&S factored this finding by .70 to
adjust minority interest capitalization to majority interest which generated a
value of $3,041,084, rounded to $3,040,000.
In their filings with the SEC, both USN and AMS state that direct cost of a
new Gamma Knife is approximately $3 million. Assuming a 10% administrative
burden to bring an opportunity from conception through all the associated
regulatory approvals and construction risks to completion would suggest a
replacement cost value approximating $3.3 million per knife or a total of $6.6
million for USN's two facilities. Reducing this figure by $3.81 million, total
liabilities less current assets, produces a net value to equity of $2,790,000 as
a base price with no attribution of value for the fact that USN is a going
concern. This reference to replacement cost serves to support S&S's findings.
For further comfort, S&S analyzed the effect on AMS of acquiring USN for
$3,040,000 worth of its common stock, 1,216,000 shares at today's market price,
and determined to its satisfaction that at this price the acquisition would be
reasonably accretive to AMS on a per share EBIT, and EBITDA basis, and only
marginally dilutive to earnings per share ("EPS"). AMS was considered for this
test because of its similarity in virtually all operational respects to USN,
because of its stated intent to expand through acquisition and de novo
installations and because it has excess cash as well as a marketable security to
use in such an acquisition. A price to AMS of $3,040,000 would represent a
premium of 9% over the replacement cost calculation S&S made which seems
reasonable. Alternatively, the $3,420,000 equity capitalization derived from the
EBITDA calculation would represent a 22.6% premium when debt assumed is included
over what S&S estimates AMS would have to spend to build two new Gamma Knife
facilities. This would appear to be more than is reasonable, furthermore, in an
exchange of securities at today's price for AMS common, the transaction would
dilute EPS by more than 10%, accordingly, S&S selected the $3,040,000 majority
interest appraisal in preference to the $3,420,000 calculation.
Appraisal Summary and Conclusion
Based on the foregoing analysis, S&S determined that the discretionary cash
flow model discounted at 20% and factored for majority interest produced a
reasonable approximation of USN's aggregate majority interest equity
capitalization at this time. Based upon the investigation, premises, provisos,
and analyses outlined above, as of June 17, 1999 S&S appraised the fair market
value of the capital stock of USN to be reasonably stated in the amount of
$3,040,000 or $0.43 per share based on 7,047,828 shares of Common Stock issued
and outstanding after the Spin-off. If necessary, S&S will update its appraisal
of the fair market value of the USN Common Stock received in the Spin-off as of
the Spin-off Payment Date.
In accordance with its engagement letter, S&S has addressed its report
solely to the Board of Directors of GHS for their use in connection with their
review and evaluation of the Spin-off. Neither the report nor the underlying
financial analysis may be relied upon by any person other than the members of
the Board of Directors of GHS without the prior written consent of S&S.
Accordingly, under the terms of the engagement letter and the report, no GHS or
USN shareholder or any other person may rely or allege reliance on S&S's report
or analysis in any manner. Notwithstanding S&S's assertion that only the Board
of Directors may rely on its report, a court of competent jurisdiction would
need to resolve the validity of any such defense if presented with such issue.
In any event, the resolution of such issue would have no effect on the rights
and responsibilities of the Board of Directors under state law or on the rights
and responsibilities of either S&S or the Board under federal securities laws.
Pursuant to its engagement letter, S&S will receive a fee of $20,000 upon the
delivery of its appraisal and GHS has agreed to indemnify S&S for certain
liabilities which may arise out of the rendering of S&S's appraisal.
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ACCOUNTING TREATMENT
As part of the Spin-off, GHS will restate its consolidated financial
statements to reflect USN as a discontinued operation. Because the Spin-off is
comprised of an ongoing business, the distribution will be recorded at book
value rather than at market value.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFF TO GHS AND ITS
STOCKHOLDERS
The following discussion summarizes the material U. S. federal income tax
consequences of the Spin-off that affect GHS and its stockholders and does not
address all of the aspects of federal income taxation that may be relevant to
GHS and its stockholders. This discussion is based on current provisions of the
Internal Revenue Code of 1986 (the "Code"), existing, temporary and proposed
Treasury Regulations promulgated thereunder and current administrative rulings
and court decisions, all of which are subject to change. No assurance can be
given that future legislation, regulations, administrative rulings and court
decisions will not significantly change these authorities, possibly with
retroactive effect. Stockholders should note that this discussion is not binding
on the Internal Revenue Service ("IRS") or the courts and that GHS has not
sought, and does not intend to seek, a ruling from the IRS as to any of the
federal income tax consequences to either GHS or its stockholders of the
Spin-off, and no opinion of counsel has been, or will be, rendered to GHS or its
stockholders with respect to any of the federal income tax consequences of the
Spin-off. The following discussion summarizes the material U. S. federal income
tax issues raised by the Spin-off and does not reflect either the special
circumstances that may be relevant to a particular stockholder or the effect of
the Spin-off under the tax laws of any state, local or foreign jurisdiction.
As previously discussed, GHS has authorized the Spin-off of USN to its
stockholders. GHS will be required to recognize gain on the Spin-off to the
extent of the excess, if any, of the fair market value of the USN Common Stock
over its adjusted basis in the hands of GHS. In order to determine such fair
market value for this purpose, an appraisal of USN will be made by Scott &
Stringfellow as of the date of the Spin-off. Scott & Stringfellow has provided
an appraisal of USN as of June 17, 1999 of $3,040,000, or $.43 per share based
on 7,047,828 shares of USN Common Stock outstanding after the Spin-off (which is
based on such same number of shares of GHS Common Stock outstanding on June 17,
1999). See "--Appraisal of USN." As of June 30, 1999, 7,316,685 shares of GHS
Common Stock were outstanding; therefore, based on the S&S appraisal, the fair
market value of USN would be $.42 per share. The final per share value of the
USN Common Stock will be determined as of the Spin-off Payment Date and will
depend on the actual number of shares of USN Common Stock issued in the
Spin-off. If necessary, S&S will update its appraisal of the fair market value
of the USN Common Stock received in the Spin-off as of the Spin-off Payment
Date.
As a result of the Spin-off, each holder of GHS Common Stock will be
considered to receive, to the extent of GHS's current and accumulated earnings
and profits, a taxable dividend includable in income in an amount equal to the
fair market value of the USN Common Stock received in the Spin-off. The fair
market value of the USN shares distributed to the GHS stockholders will be
reported to each stockholder by way of an IRS Form 1099-DIV (the "Form
1099-DIV") reflecting the appraisal made by Scott & Stringfellow. The portion of
the Spin-off to each GHS stockholder that is taxable as a dividend will be
reported as "ordinary dividends" in Box #1 of the stockholder's Form 1099-DIV.
GHS stockholders that are corporations generally will qualify for the 70%
intercorporate dividends-received deduction subject to satisfaction of the
requisite minimum holding period (generally, the GHS Common Stock must be held
for at least 46 days within the 90 day period of time beginning 45 days before
the GHS Common Stock becomes ex-dividend) and other applicable requirements. If
the dividend is an "extraordinary dividend," as defined by Section 1059(c) of
the Code, a corporate stockholder generally will be required to reduce its basis
in its GHS Common Stock by the amount of the dividends-received deduction it was
allowed. An "extraordinary dividend" with respect to common stock is one in
which the amount of such dividend equals or exceeds 10% of the stockholder's
adjusted basis in its GHS Common Stock and the corporate stockholder had not
held the GHS Common Stock for more than two years as of April 26, 1999 (the date
the Spin-off was first announced publicly.)
GHS's management anticipates that the value of the distributed USN Common
Stock will not exceed GHS's accumulated earnings and profits. If the value of
the distributed USN Common Stock was to exceed
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GHS's accumulated earnings and profits, the portion of the Spin-off to each
stockholder that exceeds GHS's accumulated earnings and profits would be
reported as a "nontaxable distribution" in Box #3 of the Form 1099-DIV received
by the stockholder. Any such excess would be treated as a non-taxable return of
capital to a recipient stockholder and each recipient stockholder would reduce
his or her adjusted basis in his or her shares of GHS Common Stock in an amount
equal to such excess. To the extent that the non-taxable portion of the Spin-off
exceeds a stockholder's basis in his or her GHS Common Stock, the excess would
be treated as capital gain. A stockholder thus would recognize capital gain to
the extent the amount shown in Box #3 of the Form 1099-DIV exceeds the
stockholder's adjusted basis in his or her GHS Common Stock. Gain or loss would
be determined separately for each block of GHS common stock (i.e., GHS Common
Stock acquired at the same cost in a single transaction) and this gain would be
short-term or long-term depending on how long the stockholder has held the
shares of GHS Common Stock.
Each stockholder's basis in the shares of USN Common Stock he or she
receives will be equal to the fair market value of these shares on the date of
the Spin-off. Each stockholder's holding period for tax purposes under the Code
for the shares of USN Common Stock received in the Spin-off will begin on the
day after the date of the Spin-off.
Payments to a stockholder in connection with the Spin-off may be subject to
"backup withholding" at a rate of 31%, unless the stockholder is a (1)
corporation or comes within certain exempt categories and, when required,
demonstrates this fact, or, (2) provides a correct tax identification number
("TIN") to the payor, certifies as to no loss of exemption from backup
withholding and otherwise complies with the applicable requirements of the
backup withholding rules. A stockholder who does not provide a correct TIN may
be subject to penalties imposed by the IRS. Any amount withheld as backup
withholding does not constitute an additional tax and will be creditable against
the stockholder's federal income tax liability provided the required information
is provided to the IRS.
The summary of the material U. S. federal income tax consequences set forth
above may not be applicable to shareholders who received their shares of GHS
Common Stock through the exercise of an employee stock option or otherwise as
compensation, who do not hold their shares as capital assets within the meaning
of Section 1221 of the Code, who are not citizens or residents of the United
States, or who are otherwise subject to special treatment under the Code.
Accordingly, because individual circumstances may differ, each stockholder
should consult such stockholder's own tax advisor to determine the applicability
of the rules discussed above and the particular tax effects to such stockholder
of the Spin-off, including the application and effect of state, local, foreign
and other income tax laws and changes thereto.
REASONS FOR FURNISHING THE INFORMATION STATEMENT TO GHS STOCKHOLDERS
This Information Statement is being furnished by GHS solely to provide
information to GHS stockholder who will receive the USN Common Stock in the
Spin-off. It is not, and is not to be construed as, an inducement or
encouragement to buy or sell and securities of GHS or USN. The information
contained in this Information Statement is believed by GHS and USN to be
accurate as of the date set forth on its cover. Changes may occur after that
date, and neither GHS nor USN will update the information except in the normal
course of their respective public disclosure practices.
BUSINESSES OF GHS AND USN AFTER THE SPIN-OFF
After the Spin-off, GHS and USN will operate as separate businesses. GHS
will, among other things, pursue certain business opportunities in the personal
and professional improvement industry. USN will continue to operate its USN
Gamma Knife Business.
THE BUSINESS OF GHS
Following the Spin-off, GHS's sole business will involve the continued
development of an online network to focus on personal and professional
improvement. In May 1999, GHS consummated the acquisition of ChangeYourLife.com,
LLC, a company founded by Anthony J. Robbins that is engaged in the development
15
<PAGE> 19
of a web site for personal and professional improvement (the "CYL Transaction").
ChangeYourLife.com, LLC has an agreement with Anthony J. Robbins and his
operating company, Robbins Research International Inc. that makes GHS the
exclusive online source for Robbins' training, courses, content and
publications. In addition, in May 1999, GHS completed its acquisition of Concept
Development, Inc., which owns Brainfuel.com, the online arm of The Learning
Annex and has the option to purchase The Learning Annex's traditional offline
business (the "Brainfuel Transaction"). As a result of this acquisition, GHS has
exclusive online access to educational content and materials covering a wide
range of topics. GHS's ultimate objective is to make its online network the
leader in online personal and professional improvement content, services,
communities, and interactive sales.
THE BUSINESS OF USN
GENERAL
USN was organized in July 1993 to own and operate stereotactic radiosurgery
centers, utilizing the Gamma Knife technology. USN currently owns and operates
two Gamma Knife centers, one on the premises of Research Medical Center ("RMC")
in Kansas City, Missouri and one on the premises of New York University Medical
Center ("NYU") in New York, New York. USN intends to continue to explore
opportunities to open additional Gamma Knife centers. USN's business strategy is
to provide a mechanism whereby hospitals, physicians, and patients can have
access to Gamma Knife treatment capability, a high capital cost item. USN
provides the Gamma Knife to medical facilities on a "cost per treatment" basis.
USN owns the Gamma Knife units, and is reimbursed by the facility where it is
housed, based on utilization.
If USN were to decide to establish new Gamma Knife centers, USN's principal
target market would be medical centers in major health care catchment areas that
have physicians experienced with and dedicated to the use of the Gamma Knife. As
it has with its RMC and NYU Gamma Knife centers, USN would seek cooperative
ventures with these facilities if it were to explore opening additional centers.
USN believes that, as of December 31, 1998, there were approximately forty other
Gamma Knife treatment centers in the United States.
As a result of the Assignment and Assumption Agreement, U.S. Neurosurgical
Physics, Inc. ("USNP") is the sole subsidiary of USN USNP administers the
billing and collection of the fees charged by the physicist who operates the
Kansas City Gamma Knife.
GAMMA KNIFE TECHNOLOGY
The Leksell Gamma Knife is a unique stereotactic radiosurgical device used
to treat brain tumors and other malformations of the brain without invasive
surgery. The Gamma Knife delivers a single, high dose of ionizing radiation
emanating from 201 cobalt-60 sources positioned about a hemispherical, precision
machined cavity. The lesion is first targeted with precision accuracy using
advanced imaging and three dimensional treatment planning techniques such as CT
Scans, MR Scans, conventional X-rays, or angiography. Each individual beam is
focused on a common target producing an intense concentration of radiation at
the target site, destroying the lesion while spreading the entry radiation dose
uniformly and harmlessly over the patient's skull. The mechanical precision at
the target site is +/- 0.1mm (1/10 of 1 millimeter). Because of the steep
fall-off in the radiation intensity surrounding the target, the lesion can be
destroyed, while sparing the surrounding tissue.
The procedure, performed in a single treatment, sharply reduces hospital
stay times and eliminates post-surgical bleeding and infection. When compared
with conventional neurosurgery, Gamma Knife treatment is less expensive.
However, not all patients are candidates for radiosurgery since the decision to
use the Gamma Knife depends on the type, size, and location of the lesion.
16
<PAGE> 20
KANSAS CITY AND NEW YORK CENTERS
In July 1993, USN purchased its first Leksell Gamma Knife from Elekta
Instruments, Inc. (Elekta), for the purpose of installing it at RMC in Kansas
City, Missouri. USN paid approximately $3,000,000 for the Gamma Knife through a
capital lease financing.
USN opened its first Gamma Knife Center on the premises of RMC in September
1994. RMC is part of Health Midwest, a consortium of eleven hospitals and
numerous affiliates. USN formed a cooperative venture with RMC in September,
1993. Per an agreement with RMC, GHS sold 500,000 shares of GHS Common Stock for
$500,000 to RMC to secure additional working capital in order to enable USN to
develop and construct a Gamma Knife Facility. USN installed the Gamma Knife in
the facility, where it is being utilized by neurosurgeons credentialled by RMC.
USN is reimbursed for use of the Gamma Knife by RMC based on a percentage of the
fees collected by RMC for Gamma Knife procedures. USN is responsible for the
maintenance and insurance for the Gamma Knife equipment at the RMC facility.
Pursuant to a ground lease agreement, RMC leased to USN the land on which to
build the Gamma Knife facility. USN's facility agreements with RMC expire in
September 2015 and there are no renewal options. Pursuant to these agreements,
USN and RMC agreed to meet in 2000 and mutually determine whether to terminate
or continue their agreements. USN has no reason to believe that its agreements
with RMC will terminate prior to the end of their scheduled term. For the six
months ended June 30, 1999 and the fiscal years 1998, 1997 and 1996, USN derived
revenues from the RMC center of approximately $1,115,000, $1,442,000, $1,640,000
and $1,452,000, respectively, as a result of 81, 124, 134 and 119 procedures
performed, respectively, during such periods.
USN opened its second treatment center in July 1997 on the campus of NYU in
New York, New York. Construction of the Gamma Knife suite was completed in July
1997. The Gamma Knife cost and the cost of the facility improvements totaled
approximately $4,700,000. In July 1997 GHS commenced its lease for the NYU Gamma
Knife. DVI Financial Services, Inc. (DVI) provided the capital lease financing
for the NYU facility. The term is six years with incremental payments for the
first year and fixed payments thereafter. The interest rate for such capital
lease is 12%. GHS has retained a marketing representative to help introduce the
technology to neurosurgeons in the New York tri-state region. Pursuant to USN's
facility agreement with NYU, USN is responsible for the maintenance and
insurance for the Gamma Knife equipment at the NYU facility and is reimbursed
for use of the Gamma Knife based on a fee per procedure performed with the
equipment. NYU provides the medical and technical staff to operate the facility.
USN's agreement with NYU expires in November 2003 and NYU has options to renew
the agreement for successive three year periods thereafter. For the six months
ended June 30, 1999 and the fiscal years 1998 and 1997, USN derived revenues
from the NYU center of approximately $580,000, $890,000, and $190,000,
respectively, as a result of 58, 89 and 19 procedures performed, respectively,
during such periods.
In March 1997, USN refinanced the lease on the RMC Gamma Knife with DVI.
The effects of this transaction were to lower its interest costs to 10.4 % per
annum and provide proceeds to pay for the buildout of the NYU Gamma Knife suite.
USN also commenced loans with DVI of $188,000 to finance the remainder of the
buildout. The terms of these loans are three years and they bear interest
between 12% and 12.9% per annum.
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 neither GHS nor USN believes 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. Neither GHS nor USN can 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.
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<PAGE> 21
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, each of GHS and USN 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.
In the future, GHS may establish additional Gamma Knife centers. Completion
of future centers would require approvals and arrangements with hospitals,
health care organizations, or other third parties, including certain regulatory
authorities. The Food and Drug Administration has issued the requisite
pre-market approval for the Gamma Knife to be utilized by USN. In addition, many
states require hospitals to obtain a Certificate of Need (CON) before they can
acquire a significant piece of medical equipment. Should USN enter into future
ventures such "need" will be demonstrable, but it can have no assurance that
Certificates of Need will be granted.
In addition, the Nuclear Regulatory Commission must issue a permit to USN
to permit loading the Cobalt at each Gamma Knife site. While USN believes that
it can obtain a NRC permit for any future Gamma Knife machine, there is no
assurance that it will.
LIABILITY INSURANCE
Although USN does not directly provide medical services, it has obtained
professional medical liability insurance, and has general liability insurance as
well. USN's professional medical liability and general liability policies have
limits of $2 million each and USN has also purchased an excess coverage policy
providing an additional $8 million of insurance coverage. USN 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 USN 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. Many of these competitors have greater
financial and other resources than USN. 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. USN believes that cost
containment measures will encourage hospitals to seek companies that are
providing the technology, instead of incurring the capital cost of establishing
their own Gamma Knife centers.
GAMMA KNIFE SUPPLY AND SERVICING
Currently the only company that manufactures, sells, and services the Gamma
Knife is Elekta Instruments, Inc., a subsidiary of AB Elekta of Stockholm,
Sweden. In 1993, USN entered into purchase agreements with Elekta for the
purchase of the Gamma Knives at its RMC and NYU centers. The purchase price for
each Gamma Knife was approximately $3,000,000. Elekta was responsible for the
installation and testing of the equipment and the training of hospital staff in
the operation of the equipment. As part of the purchase of the Gamma Knife
devices from Elekta, USN entered into purchase and maintenance agreements
pursuant to which Elekta provides USN with ongoing maintenance, repairs and
software upgrades for the RMC and NYU Gamma Knives at an aggregate cost of
$120,000 per year. Any interruption in the supply or services from Elekta would
adversely affect USN's ability to maintain its Gamma Knife treatment centers.
18
<PAGE> 22
GAMMA KNIFE FINANCING
USN has secured capital lease financing from DVI for both its first Gamma
Knife installation at the RMC site and its second Gamma Knife in New York. The
Gamma Knife is an expensive piece of equipment presently costing approximately
$3,500,000. Therefore, USN's development of new Gamma Knife centers is dependent
on its ability to secure favorable financing. Each of GHS and USN believes that
USN 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, USN 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 USN 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
USN has five full-time employees and one part-time employee. Of these
employees, two are engaged in sales and marketing, one technical, and three in
administration and office support.
PROPERTIES
USN's base facility, from which it conducts substantially all of its
operations, is located in Rockville, Maryland and occupies approximately 1,300
square feet. The rent is approximately $32,000 per year. USN occupies
approximately 1,600 square feet in its RMC facility. This facility is located on
the campus of RMC in Kansas City, Missouri. USN also occupies about 2,000 square
feet at the NYU Medical Center in New York, New York. Pursuant to the facility
agreements between USN and RMC and the facility agreement between RMC and NYU,
USN does not pay separate rental payments for the premises occupied by its Gamma
Knife centers on the premises of RMC and NYU. USN's agreements with RMC expire
in September 2015 and there are no renewal options. Pursuant to these
agreements, USN and RMC agreed to meet in 2000 and mutually determine whether to
terminate or continue their agreements. USN has no reason to believe that its
agreements with RMC will terminate prior to the end of their scheduled term.
USN's agreement with NYU expires in November 2003 and NYU has options to renew
the agreement for successive three year periods thereafter.
LITIGATION
USN is not currently a party to any material legal proceeding. USN has
recently settled a litigation in which it, GHS and certain other parties had
been involved. See "Certain Relationships and Related Party Transactions."
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<PAGE> 23
MANAGEMENT OF USN FOLLOWING THE SPIN-OFF
DIRECTORS AND OFFICERS
After the Spin-off, the following officers and directors shall serve USN:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
Alan Gold President, Chief Executive Officer & Director
William F. Leimkuhler Director
Charles H. Merriman, III Director
Howard Grunfeld Vice President -- Finance, Treasurer and Chief Financial
Officer
Susan Greenwald Gold Vice President and Secretary
</TABLE>
Each of the officers and directors of USN had held similar positions with GHS
prior to the consummation of the CYL Transaction. Set forth below is certain
biographical information on such officers and directors:
ALAN GOLD served as President and a director of GHS since its formation.
Mr. Gold has also been a director of USN since its formation in 1993 and its
President since 1996. Mr. Gold, 54, was one of the founders of Global Health
Systems, the predecessor of GHS, serving as its President since its formation in
July 1983. From 1981 to 1983 he served as Executive Vice-President of Libra
Group, a company located in Rockville, Maryland, engaged in health care
automation, where he was President of Global Health Foundation and Libra
Research and Executive Vice President of Libra Technology. From July 1997
through March 1998, Mr. Gold was also an employee of Health Management Systems.
WILLIAM F. LEIMKUHLER served as director of GHS since its incorporation in
1984 and was appointed a director of USN in May 1999. Since January 1994, Mr.
Leimkuhler, 47, has been a Vice President of Allen & Company Incorporated, an
investment banking firm. From 1984 to December, 1993, Mr. Leimkuhler was a
partner with the law firm of Werbel & Carnelutti, which has served as counsel to
GHS on various matters since GHS's formation.
CHARLES H. MERRIMAN, III served as a director of GHS since October 1997 and
was appointed a director of USN in May 1999. Mr. Merriman, 64. is a Managing
Director of the Investment Banking and Corporate Finance Department of Scott &
Stringfellow, an investment banking firm where he has been employed since 1972.
Mr. Merriman has extensive knowledge of USN's primary focus on healthcare and
technology.
HOWARD GRUNFELD served as Controller of GHS since 1990 and as Treasurer of
USN since 1993. Mr. Grunfeld, 38, was appointed Vice President -- Finance and
Chief Financial Officer of USN in May 1999. Mr. Grunfeld served as the
Controller of Global Health Systems from 1990 through July 1997. From July 1997
through February 1998, Mr. Grunfeld was an employee of Health Management
Systems, Inc. (HMS).
SUSAN GREENWALD GOLD served as Vice President of Marketing Communications
and as Secretary of GHS since its formation. Ms. Gold, 54, was one of the
founders of Global Health Systems, the predecessor of GHS, and served as its
Vice President of Marketing Communications since 1983. From 1981 through 1983
she was the Proposal Manager for Libra Technology and Global Health Foundation,
sister companies engaged in Federal contracting and private enterprise,
respectively, in the healthcare information technology business. From July
1997-February 1998, Ms. Gold was an employee of Health Management Systems, Inc.
(HMS). Ms. Gold is the wife of Alan Gold.
Pursuant to USN's Bylaws, USN's Board of Directors will elected by
stockholders at each annual meeting to serve until the next annual meeting or
until their successors are elected and qualified. In the case of a vacancy, a
director will be appointed by a majority of the remaining directors then in
office to serve the remainder of the term left vacant. Directors will not
receive any fees for attending Board meetings. Directors are entitled to receive
reimbursement for travelling costs and other out-of-pocket expenses incurred in
attending Board meetings. USN does not have a standing audit, nominating or
compensation committee.
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<PAGE> 24
Pursuant to USN's Bylaws, officers of USN hold office until the first
meeting of directors following the next annual meeting of stockholders and until
their successors are chosen and qualified.
EXECUTIVE COMPENSATION
The following table sets forth the compensation for the years ended
December 31, 1998, 1997 and 1996 for the Chief Executive Officer of USN. All
such compensation was paid by GHS for services performed for GHS and USN prior
to the Spin-off. Following the Spin-off, the compensation of USN's officers and
other employees will be paid solely by USN.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
NAME AND ------------------- ----------------------
PRINCIPAL POSITION YEAR SALARY($) OPTIONS/SARS
------------------ ---- ------------------- ----------------------
<S> <C> <C> <C>
Alan Gold, President & Director................ 1998 $207,500
1997 $115,000 100,000
1996 $150,000
</TABLE>
EMPLOYMENT AGREEMENTS
In connection with the Spin-off, USN is assuming the employment agreement
between Mr. Gold and GHS. Mr. Gold's annual compensation will be set by USN's
Board of Directors. Such employment agreement gives either USN or Mr. Gold the
option to terminate the agreement by giving the other party 6 months written
notice.
STOCK OPTION PLANS
Immediately following the Spin-off, USN will not have an formal stock
option plans. If the Board of Directors deems it advisable, USN may, in the
future, adopt a stock option plan in accordance with all applicable legal
requirements.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In 1993, pursuant to an agreement (the "USN Agreement") between GHS and A.
Hyman Kirshenbaum, M.D. ("Kirshenbaum") and Jerry Brown, Ph.D ("Brown") , GHS,
among other things, granted an aggregate 20% interest in USN to Brown and
Kirshenbaum. In addition, following the execution of the USN agreement,
Kirshenbaum was appointed as an officer of USN and Brown was appointed to GHS's
Board of Directors and executed an employment agreement with USN. Under the
terms of the USN Agreement, GHS possessed the right to repurchase for cash or
GHS Common Stock such 20% interest during each of the third through sixth full
fiscal years of the USN Agreement at a value to be calculated by GHS in
accordance with the terms of the USN Agreement. GHS exercised its right to
repurchase the 20% interest in USN in November 1996 at a value of $38,781.40,
which value was disputed by Brown and Kirshenbaum.
In June 1997, GHS instituted an action (the "Declaratory Action") in the
United States District Court of Maryland, Southern Division against Kirshenbaum
and Brown seeking a declaration from the Court that its repurchase of Brown's
and Kirshenbaum's 20% interest in USN for $38,781.40 was fair and equitable. In
response to the Declaratory Action, Brown and Kirshenbaum filed a counterclaim
and third party claim against GHS, USN, Alan Gold and Allen & Company
Incorporated, a significant stockholder of GHS, citing various claims including
causes of action for breach of contract and fraud. USN filed a counterclaim
against Brown and Kirshenbaum alleging various torts claims arising out of the
business relationship. In addition to the above described federal court action,
Brown filed a state court action in the District Court in and for Montgomery
County, Maryland against USN and other parties seeking breach of contract
damages for lost salary, unreimbursed expenses and for consequential damages and
costs arising out of what he claims to be an improper termination from USN.
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<PAGE> 25
On May 25, 1999, the parties to the above-described actions settled all of
above-described legal proceedings pursuant to an Agreement and Plan of
Settlement dated March 22, 1999 between Brown, Kirshenbaum, GHS, USN, Alan Gold
and Allen & Company. As part of the closing of such settlement, GHS issued in
the aggregate 68,688 additional shares of GHS Common Stock to Brown and
Kirshenbaum and delivered $200,000 in cash to them. In addition, USN delivered
to Brown and Kirshenbaum promissory notes (the "Settlement Notes") in the
aggregate amount of $450,000, bearing interest at the rate of 6% per annum, and
payable over a four-year period as follows: $100,000 on the first, third and
fourth anniversaries of such closing and $150,000 on the second anniversary of
such closing. USN will be solely responsible for the payment of the Settlement
Notes. The Settlement Notes are secured by a second-priority security interest
in USN's receivables from its Kansas City and New York Gamma Knife centers. On
June 9, 1999, the Declaratory Action was dismissed with prejudice by the
parties, and said dismissal was approved by the District Court judge.
As consideration for financial advisory services rendered by Allen &
Company Incorporated ("Allen") to GHS in connection with the CYL Transaction and
Brainfuel Transaction through May 27, 1999, GHS agreed to pay Allen a financial
advisory fee of $400,000, payable in installments of $100,000 on each of August
1, 1999, August 1, 2000, September 1, 2000 and October 1, 2000. As a result of
the Assignment and Assumption Agreement entered into between GHS and USN, USN
will be solely responsible for the payment of such fees because such fees relate
to events occurring prior to May 27, 1999. Allen will be the beneficial holder
of approximately 27% of the USN Common Stock following the Spin-off and William
F. Leimkuhler, a director of GHS and USN, is a Vice President of Allen.
In May 1999, GHS retained Scott & Stringfellow, an investment banking firm,
to prepare an appraisal of USN in connection with the Spin-off. Mr. Charles H.
Merriman III, a director of GHS and USN, is a Managing Director of Scott &
Stringfellow. See "The Spin-off of U.S. NeuroSurgical, Inc. -- Appraisal of
USN."
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<PAGE> 26
SELECTED USN AND USNP COMBINED FINANCIAL DATA
The following table sets forth certain selected combined financial and
operating data for USN and USNP as of and for each of the five years in the
period ended December 31, 1998. Balance sheet data as of December 31, 1998 and
1997 and statement of operations data for each of the three years in the period
ended December 31, 1998, have been derived from USN's and USNP's combined
financial statements and notes thereto that have been audited by Richard A.
Eisner & Company, LLP, independent public accountants. The financial data as of
December 31, 1996, 1995 and 1994 and for the two years ended December 31, 1995
and the financial data as of and for the six-month periods ended June 30, 1999
and 1998 have been derived from unaudited financial statements and contain all
adjustments necessary for a fair presentation of such financial information.
Operating results for the six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the entire fiscal year ending
December 31, 1999. All the data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations of USN"
and USN's and USNP's combined financial statements and notes thereto.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- ---------------
1998 1997 1996 1995 1994 1999 1998
------- ------ ------ ----------- ----------- ------ ------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating Revenue............. $ 2,332 $1,830 $1,452 $1,283 $ 381 $1,695 $1,263
Expenses:
Patient expense............. 1,221 843 574 545 177 659 631
General and
administrative........... 1,148 585 417 279 253 611 527
Interest expense............ 555 485 302 499 308 223 295
Net Income (loss)............. (1,011) (53) 95 (40) (357) 127 (188)
Pro forma basic and diluted
income (loss) per common
share (1)................... $ (0.16) $(0.01) $ 0.01 $(0.01) $(0.05) $ 0.02 $(0.03)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------- JUNE 30,
1998 1997 1996 1995 1994 1999
------- ------ ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..... $ 21 $ 60 $ 14 $ 0 $ 9 $ 585
Total assets.................. 5,811 6,836 6,604 3,636 3,955 6,132
Long-term obligations......... 3,514 4,667 5,659 3,347 3,246 2,906
Stockholders equity
(deficiency)............... (1,043) (657) (712) (486) (392) 1,213
</TABLE>
NOTES:
(1) Pro forma basic and diluted income (loss) per common share is calculated
assuming that the Spin-off and the stock-split of USN Common Stock required
to effect the Spin-off had occurred as of January 1, 1994.
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<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF USN
The following discussion should be read in conjunction with USN's and
USNP's Combined Financial Statements and Notes set forth elsewhere in this
Information Statement.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Patient revenue increased 12% to $755,000 in the quarter ended June 30,
1999 from $675,000 for the quarter ended June 30, 1998. The increase is due to
an increase in patient treatments as well as increased reimbursements. Patient
expenses decreased 4% to $316,000 from $328,000 a year earlier. Selling, general
and administrative expense decreased 17% to $288,000 for the quarter ended June
30, 1999 from $346,000 for the quarter ended June 30 a year ago. The decrease
was due to a decrease in professional fees that were incurred in 1998. Interest
expense for the quarter ended June 30, 1999 decreased 25% to $107,000 from
$143,000 in the same period a year earlier. The decrease was due to increased
principal payments on its Gamma Knife capital leases. For the quarter ended June
30, 1999, income from operations was $29,000 as compared to a loss of $142,000
for the same period a year earlier.
For the six months ended June 30, 1999 revenue increased 34% to $1,695,000
from $1,263,000 in the same period a year earlier. The increase is due to an
increase in patient treatments as well as increased reimbursements. Patient
expenses for the six months ended June 30, 1999 increased 4% to $659,000 in 1999
from $631,000 in the same period in 1998. The increase was due to increased
salaries. S,G & A for the six months ended June 30, 1999 increased 16% to
$611,000 as compared to $527,000 in the same period a year earlier. The increase
was due to increased salaries and office costs in 1999. Interest expense for the
six months ended June 30, 1999 decreased 24% to $223,000 from $295,000 in the
same period a year ago due to paydown of principal on the Gamma Knife capital
leases. Income from operations was $127,000 for the six months ended June 30,
1999 as compared to a loss of $188,000 for the six months ended June 30, 1998.
1998 COMPARED TO 1997
Patient revenue increased 27% to $2,332,000 in 1998 from $1,830,000 in
1997. The increase was due to added revenue from the NYU Gamma Knife which
completed its first calendar year of service. Patient expenses increased 45% to
$1,221,000 from $843,000 in 1997. The increase was due to a full year of
depreciation to the NYU Gamma Knife as well as amortization for the NYU
leasehold improvements. Selling, general and administrative expense (S, G & A)
increased 96% to $1,148,000 from $585,000 in 1997. The increase was due to the
legal expenses incurred in connection with proceedings described in "Certain
Relationships and Related Party Transaction" herein and in the Combined
Financial Statements and the effects of salaries and related office costs
incurred for employees who were employed by USN for a greater period in 1998
than for 1997. For the year ended 1998, loss from operations was $971,000 as
compared to income from operations of $402,000 in 1997. The loss reflects an
estimated cost of $934,000 to settle the legal proceedings described in "Certain
Relationships and Related Party Transactions" herein. Interest expense increased
14% to $555,000 from $485,000 in the previous year. The increase was due to a
full year of debt service on the NYU Gamma Knife in 1998 as compared to 1997
when $178,000 of interest was capitalized, prior to the opening of the Center.
USN had an income tax benefit of $511,000 in 1998 as compared to an income tax
benefit of $8,000 in 1997. As a result of these factors, USN had a loss from
continuing operations of $1,011,000 in 1998 and a loss of $53,000 in 1997.
1997 COMPARED TO 1996
Patient revenue increased 26% to $1,830,000 in 1997 from $1,452,000 in
1996. The increase was due to two factors. The Gamma Knife at the RMC Gamma
Knife Center (Kansas City Center) continued to increase its patient treatments.
The other increase was due to the fact that USN opened its second center and the
first in New York City. This center commenced operations in the second half of
1997. Patient expenses increased 47% to $843,000 from $574,000 in 1996. The
increase was due to increased depreciation to the New
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<PAGE> 28
York Gamma Knife and due to the amortization for the New York improvements.
Selling, general and administrative expense (S, G & A) increased 40% to $585,000
in 1997 from $417,000 in 1996. The increase was due to increased insurance costs
for the two Gamma Knives and legal fees related to the legal proceedings
described in "Certain Relationships and Related Party Transaction" herein and in
the Combined Financial Statements.
For the year ended December 31, 1997, income from operations was $402,000
as compared to income from operations of $461,000 in 1996. There was a 60%
increase in interest expense to $485,000 in 1997 from $302,000 in 1996. The
increase in interest expense was due to the opening of the second Gamma Knife
Center at NYU in July 1997. Prior to the opening, interest on the progress
payments of the Gamma Knife and the demand loan for the leasehold improvements
at NYU had been capitalized. Interest capitalized was $178,000 for 1997 and
$249,000 for 1996. With the commencement of the NYU Gamma Knife Center, the
second equipment lease started replacing the progress payments, leasehold
improvements of $487,000 were financed over three years and the capitalized
interest cost began to be amortized over seven years. As a result of these
factors, USN had a loss from continuing operations of $53,000 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999 the Company had a working capital deficit of $902,000 as
compared to $2,974,000 at December 31, 1998. The decrease in the deficit is
primarily due to the contribution by GHS of its receivable from the Company to
the capital of the Company. Cash and cash equivalents at June 30, 1999 were
$585,000 as compared with $21,000 at December 31, 1998. The increase is
primarily due to a cash contribution from GHS. Net cash provided by operating
activities was $826,000 as compared with $665,000 for the same period, a year
earlier. Depreciation and amortization was $562,000 for the six months ended
June 30, 1999 and also was $562,000 in the 1998 period. There was an increase in
receivables of $264,000 during the six months ended June 30, 1999. Payables and
accrued expenses increased $403,000 in 1999 as compared to an increase of
$185,000 in 1998. For the year ended December 31, 1998 net cash provided by
operating activities amounted to $475,000 as compared to net cash used of
$494,000 in 1997. Depreciation and amortization was $1,121,000 in 1998, a 43%
increase from the $784,000 in 1997. This increase was due to the NYU Gamma Knife
being in service for a full calendar year. Accounts payable and accrued expenses
increased by $657,000 from 1997 to 1998 as a result of an accrual of $650,000
made for settlement of a lawsuit.
Net cash used in financing activities for the six months ended June 30,
1999 was $313,000 as compared to $644,000 for the same period a year earlier.
The Company paid $687,000 towards its capital lease obligations for the six
months ended June 30, 1999 as compared to $644,000 in the same period in 1998.
In addition, USN received a $374,000 contribution from GHS during the six months
ended June 30, 1999. Net cash used in financing activities was $491,000 in 1998
compared to $211,000 in 1997. USN made lease repayments of $1,195,000 in 1998
versus $486,000 in 1997.
Net cash provided from investing activities for the six months ended June
30, 1999 was $51,000 as compared to net cash used of $21,000 in the same period
in 1998. USN's net cash used in investing activities was $23,000 in 1998
compared to $241,000 in 1997. There were purchases of property and equipment of
$20,000 in 1998 as compared to $1,102,000 in 1997 when USN completed
construction of the NYU Gamma Knife facility.
The annual capital lease payments for the Gamma Knife at RMC in Kansas City
total $827,000. At December 31, 1998 USN had one and one-half years remaining on
this capital lease. The capital leases for the NYU equipment and improvements
require annual payments of $792,000 and $221,000 respectively. In addition, as
part of the settlement of a litigation involving GHS and USN in May 1999, USN
issued promissory notes in the aggregate amount of $450,000, bearing interest at
the rate of 6% per annum, and payable over a four-year period as follows:
$100,000 on the first, third and fourth anniversaries of closing of the
settlement and $150,000 on the second anniversary of such closing. USN will be
solely responsible for the payment of these promissory notes.
After giving effect to the CYL Transaction, the Company had $1,132,000 in
current assets and $6,250,000 of total assets, reflecting approximately $374,000
in cash transferred from GHS to USN pursuant
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<PAGE> 29
to the Distribution Agreement. In addition, after giving effect to the CYL
Transaction, current liabilities in the amount of $1,960,000 gave USN negative
working capital of $828,000.
Management believes that the capital resources derived through internally
generated funds from operations and current cash balances will be sufficient to
satisfy USN's operating and capital needs for at least the next 18 to 24 months.
YEAR 2000 COMPLIANCE
USN is preparing for the impact of the arrival of the Year 2000 on its
business, as well on the businesses of its customers, supplier and business
partners. The "Year 2000 Problem" is a term used to describe the problems
created by systems that are unable to accurately interpret dates after December
31, 1999. These problems are derived predominately from the fact that certain
computer hardware and many software programs historically recorded a date's
"year" in a two-digit format (i.e., "98" for 1998) and therefore may recognize
the year "00" as 1900 instead of the Year 2000. The Year 2000 Problem creates
potential risks for USN, including the inability to recognize or properly treat
dates occurring on or after January 1, 2000, which may result in computer
systems failures or miscalculations of critical financial or operational
information as well as failures of equipment controlling date-sensitive
microprocessors influencing patient care.
In addition to internal systems, USN relies on third parties in operating
its business. Such third parties include (1) vendors who supply software,
hardware and other equipment to USN, (2) fiscal intermediaries that process
claims and payments on behalf of the various payors, insurance companies, HMO's
and other private payors, (3) utilities which provide electricity, water,
natural gas and telephone services and (4) vendors of medical supplies used in
patient care.
USN began formulating a plan in 1998 to address the Year 2000 Problem and
to ensure that all relevant systems had been subject to a full Year 2000 review
and, if necessary, remediation, replacement or upgrade. Under the plan, USN has
focused on (i) internal financial, billing and medical software and equipment
and (ii) the Year 2000 compliance of all third party suppliers and fiscal
intermediaries doing business with USN. In connection with its Year 2000
compliance activities, USN has contacted outside vendors and intermediaries with
which USN has material relationships and engaged in discussions which will
continue throughout 1999 in furtherance of USN's stated goal of minimizing any
adverse impact related to the Year 2000 Problem.
USN is in the process of completing its review of all equipment in
operation at USN's Gamma Knife centers. Each piece of equipment in operation has
computer systems and applications, and in many cases, embedded computer
processors. USN is in communication with Elekta Instruments, Inc., the
manufacturer of such equipment. As part of USN's regular maintenance agreement
with Elekta, the Gamma Knife equipment at the RMC center in Kansas City has
already been upgraded to be fully Year 2000 compliant and the Gamma Knife
equipment at the NYU center in New York City will be similarly upgraded to
become Year 2000 compliant. Based upon its communication with Elekta, USN
expects Elekta to complete the upgrade at the NYU facility by the end of
September 1999. The installation of such upgrades by Elekta includes related
testing to ensure Year 2000 compliance. Because such upgrades are part of its
normal maintenance agreement with Elekta, USN does not expect to incur any
additional costs in connection with these upgrades.
USN has completed its assessment of all material financial and billing
computer systems. In connection with this review, USN has determined that its
financial accounting and billing systems are Year 2000 compliant as a result of
upgrades already received from the vendors of such software and installed by
USN. The costs and expenses incurred or expected to be incurred relating to Year
2000 compliance for these systems are not expected to be material.
USN estimates that costs and expenses associated with completing its
outlined Year 2000 compliance plan will not be material. USN presently believes
that it will substantially complete its internal Year 2000 compliance program
prior to January 1, 2000, and that there should be no material adverse impact at
such time related to Year 2000 Problems associated with USN's equipment, systems
or software. Based on communications with its vendors and suppliers, USN also
believes that each third party or intermediary with
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<PAGE> 30
whom USN has a material relationship is currently Year 2000 compliant or
scheduled to be Year 2000 compliant by January 1, 2000.
Despite USN's best efforts, there can be no assurance that (i) USN's
assessments regarding the Year 2000 Problem are correct; (ii) USN will be able
to successfully complete its Year 2000 review and implement such upgrades and/or
remediation as is necessary or (iii) third parties or suppliers with whom USN
does business will avoid Year 2000 problems which might adversely affect USN's
business or operations. While USN is developing contingency plans to address
such failures or unexpected problems (such plans to include identification of
alternative suppliers or intermediaries), there can be no assurance that such
contingency plans will be adequate to resolve these problems.
The Year 2000 Problem involves risk to USN. USN believes today that the
likely worst case scenario regarding the Year 2000 Problem will involve (1)
minor malfunctions in clinical computer software and hardware at the Gamma Knife
centers operated by USN, (2) temporary disruptions in delivery of medical
supplies to the Gamma Knife centers operated by USN and (3) temporary
disruptions in payments from third party payors, such as insurance companies.
USN expects such events, should they occur in whole or in part, will result in
increased expense as the affected facilities access alternative suppliers and
increase staffing to assure adequate patient care.
The foregoing assessment is based on information currently available to
USN. USN will revise its assessment as it implements its Year 2000 compliance
plan. USN can provide no assurances that applications and equipment believed to
be Year 2000 compliant will not experience difficulties or USN will not
experience difficulties obtaining resources needed to make modifications to or
replace USN's affected systems and equipment. Failure by USN or third parties,
on which it relies to resolve Year 2000 issues, could have a material adverse
effect on USN's results of operations and its ability to provide health care
services as described more fully herein.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Statements contained in this Information Statement that are not historical
facts may be deemed to be forward-looking statements. Investors are cautioned
that forward-looking statements are inherently uncertain. Actual performance and
results may differ materially from that projected or suggested herein due to
certain risks and uncertainties including, without limitation, the payment,
timing and ultimate collectability of accounts receivable for Gamma Knife
procedures from different payor groups such as Medicare and private payors;
competition; technological obsolescence; government regulation; and malpractice
liability. Additional information concerning certain risks and uncertainties
that could cause actual results to differ materially from that projected or
suggested may be identified from time to time in GHS's and USN's filings with
the Securities and Exchange Commission (SEC) and GHS's and USN's public
announcements, copies of which are available from the SEC or from the applicable
company upon request.
DESCRIPTION OF GHS AND USN CAPITAL STOCK
DESCRIPTION OF GHS CAPITAL STOCK
The authorized capital stock of GHS consists of 25,000,000 shares of Common
Stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par
value $.01 per share (the "GHS Preferred Stock"). As of June 30, 1999, there
were 7,316,685 shares of GHS Common Stock outstanding, with 77 holders of
record. As of June 30, 1999, there were approximately 308,621 shares of GHS
Preferred Stock outstanding which were convertible into 33,051,665 shares of GHS
Common Stock. The foregoing numbers do not include the number of stockholders
whose shares are held of record by a broker or clearing agency, but do include
each such broker or clearing agency as one record holder. In addition, as of
June 1, 1999, GHS had outstanding (a) options to acquire 175,000 shares of its
Common Stock, which options had been granted under GHS's 1986 and 1997 stock
option plans, and (b) warrants to purchase 200,000 shares of GHS Common Stock.
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<PAGE> 31
GHS has never declared a cash dividend with respect to its capital stock
and does not anticipate paying any dividends on its capital stock in the
foreseeable future. The declaration and payment of dividends by GHS are subject
to the discretion of GHS's Board of Directors. Any determination as to the
payment of dividends in the future will depend upon results of operations,
capital requirements, restrictions in loan agreements, if any, and such other
factors as GHS's Board of Directors may deem relevant.
GHS COMMON STOCK
The GHS Common Stock has one vote per share. Holders of GHS Common Stock
have no cumulative voting rights and no preemptive, subscription or sinking fund
rights. Subject to preferences that may be applicable to any then-outstanding
GHS Preferred Stock, holders of GHS Common Stock will be entitled to receive
ratably such dividends as may be declared by the GHS Board of Directors out of
funds legally available therefor. In the event of a liquidation, dissolution or
winding up of GHS, holders of GHS Common Stock will be entitled to share ratably
in all assets remaining after payment of liabilities and the liquidation
preference of any then-outstanding GHS Preferred Stock.
GHS PREFERRED STOCK
Pursuant to its Certificate of Incorporation, GHS is authorized to issue
1,000,000 shares of GHS Preferred Stock, which may be issued from time to time
in one or more classes or series or both upon authorization by the GHS Board of
Directors. The GHS Board of Directors, without further approval of the
stockholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences and
any other rights, preferences, privileges and restrictions applicable to each
class or series of GHS Preferred Stock. The issuance of GHS Preferred Stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely affect the voting power
of the holders of GHS Common Stock and, under certain circumstances, make it
more difficult for a third party to gain control of GHS, discourage bids for GHS
Common Stock at a premium or otherwise adversely affect the market price of the
GHS Common Stock.
As of June 30, 1999, GHS has outstanding (a) 99,059.338 shares of Series A
Preferred Stock convertible into 30,708,395 shares of GHS Common Stock, (b)
178,582 shares of Series B Preferred Stock convertible into 1,785,820 shares of
GHS Common Stock, and (c) 55,745 shares of Series C Preferred Stock convertible
into 557,450 shares of GHS Common Stock. The holders of GHS's outstanding
Preferred Stock will not be entitled to the Spin-off dividend of USN Common
Stock.
DESCRIPTION OF USN CAPITAL STOCK
As of the Record Date, the authorized capital stock of USN will consist of
25,000,000 shares of Common Stock, par value $.01 per share (the "USN Common
Stock") and 1,000,000 shares of preferred stock, par value $.01 per share (the
"USN Preferred Stock"). There is no USN Preferred Stock outstanding. As a result
of a 73,166.85-for-1 stock split, to be effected prior to the Record Date in the
form of a stock dividend, there will be 7,316,685 shares of USN Common Stock
outstanding, with 1 holder of record, GHS (100%). On the Record Date, all
7,316,685 shares held by GHS will be distributed to its stockholders.
There are no other rights outstanding to acquire USN stock.
USN has never declared a cash dividend with respect to its capital stock
and does not anticipate paying any dividends on its capital stock in the
foreseeable future. The declaration and payment of dividends by USN are subject
to the discretion of USN's Board of Directors. Any determination as to the
payment of dividends in the future will depend upon results of operations,
capital requirements, restrictions in loan agreements or agreements issued in
connection with the sale of USN's securities, if any, and such other factors as
USN's Board of Directors may deem relevant.
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<PAGE> 32
USN COMMON STOCK
The USN Common Stock has one vote per share. Holders of USN Common Stock
have no cumulative voting rights and no preemptive, subscription or sinking fund
rights. Subject to preferences that may be applicable to any then outstanding
USN Preferred Stock, holders of USN Common Stock will be entitled to receive
ratably such dividends as may be declared by the USN Board of Directors out of
funds legally available therefor. In the event of a liquidation, dissolution or
winding up of USN, holders of USN Common Stock will be entitled to share ratably
in all remaining assets after payment of liabilities and the liquidation
preference of any then-outstanding USN Preferred Stock.
USN PREFERRED STOCK
Pursuant to its Certificate of Incorporation, USN will be authorized to
issue 1,000,000 shares of USN Preferred Stock, which may be issued from time to
time in one or more classes or series or both upon authorization by USN's Board
of Directors. USN's Board of Directors, without further approval of the
stockholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences and
any other rights, preferences, privileges and restrictions applicable to each
class or series of USN Preferred Stock. The issuance of USN Preferred Stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely affect the voting power
of the holders of USN Common Stock and, under certain circumstances, make it
more difficult for a third party to gain control of USN, discourage bids for USN
Common Stock at a premium or otherwise adversely affect the market price of the
USN Common Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
USN is subject to the provisions of Section 203 of the Delaware General
Corporation Law ("DGCL"). Subject to certain exceptions, Section 203 of the DGCL
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three years
did own, 15% or more of the corporation's voting stock. A "business combination"
includes
(1) mergers, consolidations and sales or other dispositions of 10% or
more of the assets of a corporation to or with an interested stockholder,
(2) certain transactions resulting in the issuance or transfer to an
interested stockholder of any stock of such corporation or its
subsidiaries, and
(3) other transactions resulting in a disproportionate financial
benefit to an interested stockholder.
The restrictions of Section 203 of the Delaware General Corporation Law do
not apply where:
(1) the business combination or the transaction in which the
stockholder becomes interested is approved by the corporation's Board of
Directors prior to the date the interested stockholder acquired its shares;
(2) the interested stockholder acquired at least 85% of the
outstanding voting stock of the corporation in the transaction in which the
stockholder became an interested stockholder excluding, for determining the
number of shares outstanding, shares owned by persons who are directors as
well as officers and by employee stock plans in which participants do not
have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or
(3) the business combination is approved by the Board of Directors and
the affirmative vote of two-thirds of the outstanding voting stock not
owned by the interested stockholder at an annual or special meeting.
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<PAGE> 33
The business combinations provisions of Section 203 of the DGCL may have the
effect of deterring merger proposals, tender offers or other attempts to effect
changes in control of USN that are not negotiated with and approved by the Board
of Directors.
TRANSFER AGENT
The transfer agent and registrar for the USN Common Stock and the GHS
Common Stock is American Stock Transfer & Trust Company, New York, New York.
MARKET PRICE OF GHS COMMON STOCK
The High/Low prices of GHS Common Stock on June 24, 1999 were $14.38 and
$13.75, respectively.
LISTING AND TRADING OF GHS COMMON STOCK AND USN COMMON STOCK
After the Spin-off, the GHS Common Stock will continue to be traded on the
OTC Bulletin Board under the symbol GHSI. GHS expects that the USN Common Stock
will also be traded on the OTC Bulletin Board. The combined trading prices of
GHS Common Stock and USN Common Stock may be greater than, less than or equal to
the trading price of GHS Common Stock immediately prior to the Spin-off.
USN initially will have approximately 77 stockholders of record based upon
the number of stockholders of record of GHS as of June 30, 1999. The prices at
which the USN Common Stock will trade will be determined by the marketplace and
may be influenced by many factors, including, among others, the depth and
liquidity of the market for the USN Common Stock, investor perception of USN and
the healthcare industry, USN's dividend policy and general economic and market
conditions.
Shares of USN Common Stock distributed to GHS stockholders in the Spin-off
will be freely transferable, except for securities received by persons who may
be deemed to be "affiliates" of USN pursuant to the Securities Act. Persons who
may be deemed to be "affiliates" of USN after the Spin-off generally include
individuals or entities that control, are controlled by, or are under common
control with, USN and may include certain officers and directors of USN as well
as principal stockholders of USN. Persons who are affiliates of USN will be
permitted to sell their shares of USN Common Stock only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Because the Spin-off will be on the basis of one share of USN Common Stock
for each share of GHS Common Stock owned on the Record Date, each GHS
stockholder will own, following the Spin-off, the same percentage of the issued
and outstanding USN Common Stock as such stockholder owns of GHS Common Stock.
In connection with the Spin-off, no options or warrants will be issued to
holders of GHS options or warrants as of the Record Date. In addition, although
the holders of GHS's Preferred Stock have the right to vote such shares on an as
converted basis, they will not be entitled to receive the Spin-off dividend of
USN common stock.
The following table sets forth certain information regarding the
anticipated beneficial ownership of USN Common Stock following the Spin-off by
(i) each person anticipated by GHS to own beneficially 5% or more of the USN
Common Stock; (ii) each director of USN; (iii) each executive officer USN; and
(iv) all directors and officers of USN as a group. The information in the table
is based upon the actual holdings of GHS Common Stock as of June 30, 1999 and
such information is derived based upon the hypothetical assumption that the
Record Date and the Spin-off Payment Date were June 30, 1999, so as to inform
the reader what the beneficial ownership of USN Common Stock would have been at
that time. Actual ownership on the Spin-off Payment Date may vary from that
shown in the table.
Unless otherwise indicated, all persons listed have sole voting power and
investment power with respect to such shares, subject to community property
laws, where applicable, and the information contained in the notes to the table.
<TABLE>
<CAPTION>
SHARES OF USN PERCENT TO BE
COMMON STOCK TO BE BENEFICIALLY
BENEFICIALLY OWNED OWNED
FOLLOWING FOLLOWING
NAME AND ADDRESS THE SPIN-OFF(1) THE SPIN-OFF(1)
---------------- ------------------ ---------------
<S> <C> <C>
Alan Gold................................................. 630,246(2) 8.6%
President, Chief Executive
Officer and Director
2400 Research Blvd
Rockville, MD 20850
William F. Leimkuhler..................................... 0 0%
Director
711 Fifth Avenue
New York, NY 10022
Charles H. Merriman III................................... 30,672 *
Director
C/O Scott & Stringfellow
PO Box 1575
Richmond, VA 23218
Howard Grunfeld........................................... 40,900 *
Vice President - Finance,
Treasurer, and Chief
Financial Officer
2400 Research Blvd
Rockville, MD 20850
Stanley S. Shuman......................................... 2,743,000(3) 37.5%
711 Fifth Avenue
New York, NY 10022
</TABLE>
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<TABLE>
<CAPTION>
SHARES OF USN PERCENT TO BE
COMMON STOCK TO BE BENEFICIALLY
BENEFICIALLY OWNED OWNED
FOLLOWING FOLLOWING
NAME AND ADDRESS THE SPIN-OFF(1) THE SPIN-OFF(1)
---------------- ------------------ ---------------
<S> <C> <C>
Allen & Company Incorporated.............................. 1,902,000 26.0%
711 Fifth Avenue
New York, NY 10022
Research Medical Center................................... 375,000 5.1%
2316 East Meyer Blvd
Kansas City, MO 64132
All Directors and Executive Officers of USN as a group 701,818 9.6%
(four persons) (2)......................................
</TABLE>
- ---------------
* Less than one percent.
(1) Unless otherwise indicated, all shares are beneficially owned and sole
voting and investment power is held by the person named above.
(2) Includes 630,246 shares held jointly by Mr. Gold and his wife, Susan Gold,
as joint tenants with right of survivorship.
(3) Includes 1,902,000 shares owned by Allen & Company Incorporated. Mr. Shuman,
who is a Managing Director of Allen & Company Incorporated, disclaims
beneficial ownership in such shares, except to the extent of his pecuniary
interest therein.
INDEPENDENT ACCOUNTANTS
The Board of Directors of USN has selected Richard A. Eisner & Company, LLP
to audit USN's financial statements for the year ending December 31, 1999.
Richard A. Eisner & Company, LLP has served as independent accountants for USN
(and GHS) for the calendar years covered by the financial statements included in
this Information Statement.
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation law empowers a Delaware
corporation to indemnify its officers and directors and certain other persons to
the extent and under the circumstances set forth therein.
The form of the Amended and Restated Certificate of Incorporation of USN
and the Amended and Restated By-laws of USN provide for indemnification of
officers and directors of the Registrant and certain other persons against
liabilities and expenses incurred by any of them in certain stated proceedings
and under certain stated conditions.
The above discussion of the Amended and Restated Certificate of
Incorporation, Amended and Restated By-Laws and Section 145 of the Delaware
General Corporation Law is not intended to be exhaustive and is qualified in its
entirety by the forms of such Amended and Restated Certificate of Incorporation,
Amended and Restated By-Laws, and statute.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed with the Securities and Exchange Commission
(the "SEC") by GHS (SEC File No. 0-15586) are incorporated by reference in this
Information Statement:
1. GHS's Annual Report on Form 10-K for the year ended December 31,
1998.
2. GHS's Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
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<PAGE> 36
3. GHS's Current Reports on Form 8-K, as amended on Form 8-K/A, dated
April 26, 1999 and May 27, 1999.
All documents filed by GHS pursuant to Sections 13(a), 13(c), 14, or 15(d)
of the Exchange Act subsequent to the date of this Information Statement and
prior to the completion of the Spin-off shall be deemed to be incorporated by
reference into this Information Statement and to be a part hereof from the date
of filing of such document. Any statement contained herein or in a document all
or a portion of which is incorporated or deemed incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Information
Statement to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Information Statement.
GHS hereby undertakes to provide without charge to each person to whom this
Information Statement has been delivered, upon the written or oral request of
any such person, a copy of any and all of the foregoing documents incorporated
herein by reference (other than exhibits to such documents which are not
specifically incorporated by reference in such documents). GHS shall deliver the
requested information by first class mail or other equally prompt means within
one business day of receipt of such request. Written or telephone requests
should be directed to Investor Relations Department, GHS, Inc., 65 Broadway, New
York, New York 10006, at telephone number (212) 430-6430 or Investor Relations
Department, U.S. NeuroSurgical, Inc., 2400 Research Boulevard, Rockville,
Maryland 20850, at telephone number (301) 208-8998.
ADDITIONAL INFORMATION
GHS is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). In accordance with the Exchange
Act, GHS files reports, proxy statements and other information with the SEC. The
reports, proxy statements and other information can be inspected and copied at
the public reference facilities that the SEC maintains at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices located
at 7 World Trade Center, 13th Floor, New York, New York 10048 and Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of
these materials can be obtained at prescribed rates from the Public Reference
Section of the SEC at the principal offices of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such material may also be accessed electronically by
means of the SEC's home page on the Internet at http://www.sec.gov.
33
<PAGE> 37
INDEX TO COMBINED FINANCIAL STATEMENTS
USN AND USNP COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Report of Independent Accountants........................... F- 2
Combined Balance Sheet as of December 31, 1998 and 1997..... F- 3
Combined Statement of Operations for the fiscal years ended
December 31, 1998, 1997 and 1996.......................... F- 4
Combined Statement of Cash Flows for the fiscal years ended
December 31, 1998, 1997 and
1996...................................................... F- 6
Combined Statement of Stockholders' Equity for the fiscal
years ended December 31, 1998, 1997 and 1996.............. F- 5
Notes to Combined Financial Statements...................... F- 7
UNAUDITED FINANCIAL STATEMENTS:
Unaudited Combined Balance Sheet as of June 30, 1999 and
1998...................................................... F-13
Unaudited Combined Statement of Operations for the six
months ended June 30, 1999 and 1998....................... F-14
Unaudited Combined Statement of Cash Flows for the six
months ended June 30, 1999 and 1998....................... F-15
Notes to Unaudited Combined Financial Statements............ F-16
</TABLE>
F-1
<PAGE> 38
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
U.S. NeuroSurgical, Inc. and U.S. Neurosurgical Physics, Inc.
Rockville, Maryland
We have audited the accompanying combined balance sheets of U.S.
NeuroSurgical, Inc. and U.S. Neurosurgical Physics, Inc. as of December 31, 1998
and 1997, and the related combined statements of operations, changes in
stockholders' equity (deficiency) and cash flows for each of the years in the
three-year period ended December 31, 1998. 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 combined financial position of U.S. NeuroSurgical,
Inc. and U.S. Neurosurgical Physics, Inc. as of December 31, 1998 and 1997, and
the combined results of their operations and their combined cash flows for each
of the years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
RICHARD A. EISNER & COMPANY, LLP
New York, New York
January 20, 1999
With respect to Note A[1]
May 31, 1999
With respect to Note G
June 9, 1999
F-2
<PAGE> 39
U.S. NEUROSURGICAL, INC. AND U.S. NEUROSURGICAL PHYSICS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 21,000 $ 60,000
Accounts receivable....................................... 238,000 209,000
Deferred tax asset........................................ 80,000
Other current assets...................................... 27,000 24,000
----------- ----------
Total current assets.............................. 366,000 293,000
----------- ----------
Property and equipment:
Gamma Knives (net of accumulated depreciation of
$2,560,000 in 1998 and $1,636,000 in 1997)............. 3,906,000 4,830,000
Leasehold improvements (net of accumulated amortization of
$395,000 in 1998 and $198,000 in 1997)................. 1,447,000 1,624,000
----------- ----------
Total property and equipment...................... 5,353,000 6,454,000
----------- ----------
Cash held in escrow......................................... 92,000 89,000
----------- ----------
$ 5,811,000 $6,836,000
=========== ==========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses..................... $ 66,000 $ 59,000
Accrued litigation settlement............................. 200,000
Obligations under capital lease and loans
payable -- current portion............................. 1,423,000 1,195,000
Due to GHS, Inc........................................... 1,651,000 1,572,000
----------- ----------
Total current liabilities......................... 3,340,000 2,826,000
Accrued litigation settlement............................... 450,000
Deferred tax liability...................................... 270,000 450,000
Obligations under capital lease and loans payable -- net of
current portion........................................... 2,794,000 4,217,000
----------- ----------
6,854,000 7,493,000
----------- ----------
Commitments, litigation and other matters
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock -- U.S. NeuroSurgical, Inc. par value $.01;
3,000 shares authorized; 100 shares issued and
outstanding...............................................
Common stock -- U.S. Neurosurgical Physics, Inc. -- par
value $1; 30,000 shares authorized; 100 shares issued and
outstanding...............................................
Additional paid-in capital.................................. 734,000 109,000
Accumulated deficit......................................... (1,777,000) (766,000)
----------- ----------
(1,043,000) (657,000)
----------- ----------
$ 5,811,000 $6,836,000
=========== ==========
</TABLE>
See notes to financial statements
F-3
<PAGE> 40
U.S. NEUROSURGICAL, INC. AND U.S. NEUROSURGICAL PHYSICS, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Patient revenue....................................... $ 2,332,000 $1,830,000 $1,452,000
----------- ---------- ----------
Costs and expenses:
Patient expenses...................................... 1,221,000 843,000 574,000
Selling, general and administrative................... 1,148,000 585,000 417,000
Litigation settlement................................. 934,000
----------- ---------- ----------
3,303,000 1,428,000 991,000
----------- ---------- ----------
Income (loss) from operations........................... (971,000) 402,000 461,000
----------- ---------- ----------
Interest expense........................................ (555,000) (485,000) (302,000)
Interest income......................................... 4,000 22,000
----------- ---------- ----------
(551,000) (463,000) (302,000)
----------- ---------- ----------
Income (loss) before income tax......................... (1,522,000) (61,000) 159,000
Income tax (benefit) provision.......................... (511,000) (8,000) 64,000
----------- ---------- ----------
NET INCOME (LOSS)....................................... $(1,011,000) $ (53,000) $ 95,000
=========== ========== ==========
PRO FORMA BASIC AND DILUTED NET INCOME (LOSS) PER
SHARE................................................. $ (.16) $ (.01) $ .01
=========== ========== ==========
PRO FORMA WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.... 6,479,160 6,479,160 6,479,160
=========== ========== ==========
</TABLE>
See notes to financial statements
F-4
<PAGE> 41
U.S. NEUROSURGICAL, INC. AND U.S. NEUROSURGICAL PHYSICS, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
U.S. U.S.
NEUROSURGICAL, NEUROSURGICAL
INC. PHYSICS, INC.
--------------- ---------------
COMMON STOCK COMMON STOCK
--------------- ---------------
NUMBER NUMBER ADDITIONAL
OF OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------ ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE -- JANUARY 1, 1996.......... 100 $0 100 $0 $ 1,000 $ (808,000) $ (807,000)
Net income for the year ended
December 31, 1996................. 95,000 95,000
--- -- --- -- -------- ----------- -----------
BALANCE -- DECEMBER 31, 1996........ 100 0 100 0 1,000 (713,000) (712,000)
Selling, general and administrative
services contributed by GHS,
Inc............................... 108,000 108,000
Net loss for the year ended December
31, 1997.......................... (53,000) (53,000)
--- -- --- -- -------- ----------- -----------
BALANCE -- DECEMBER 31, 1997........ 100 0 100 0 109,000 (766,000) (657,000)
Selling, general and administrative
services contributed by GHS,
Inc............................... 341,000 341,000
Portion of litigation settlement
paid by GHS, Inc.................. 284,000 284,000
Net loss for the year ended December
31, 1998.......................... (1,011,000) (1,011,000)
--- -- --- -- -------- ----------- -----------
BALANCE -- DECEMBER 31, 1998........ 100 $0 100 $0 $734,000 $(1,777,000) $(1,043,000)
=== == === == ======== =========== ===========
</TABLE>
See notes to financial statements
F-5
<PAGE> 42
U.S. NEUROSURGICAL, INC. AND U.S. NEUROSURGICAL PHYSICS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(1,011,000) $ (53,000) $ 95,000
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization..................... 1,121,000 784,000 450,000
Deferred income tax (benefit) provision........... (260,000) 106,000
Changes in:
Accounts receivable............................. (29,000) (115,000) 95,000
Other current assets............................ (3,000) 40,000 27,000
Accounts payable and accrued expenses........... 7,000 (268,000) (25,000)
Accrued litigation settlement................... 650,000
----------- ----------- ----------
Net cash provided by operating activities.... 475,000 494,000 642,000
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment............................... (20,000) (1,102,000)
Refundable deposits.................................. 43,000 290,000
(Increase) decrease in cash held in escrow........... (3,000) 818,000 (880,000)
Refunds on Gamma Knife............................... 22,000
----------- ----------- ----------
Net cash used in investing activities........ (23,000) (241,000) (568,000)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease and loan obligations...... (1,195,000) (486,000) (522,000)
Cash received on refinancing of capital lease........ 100,000
Selling, general and administrative services
contributed by GHS, Inc........................... 341,000 108,000
Portion of litigation settlement paid by GHS, Inc.... 284,000
Increase in due to GHS, Inc.......................... 79,000 67,000 41,000
Repayment of notes payable........................... (100,000)
Proceeds from loan payable -- Gamma Knife............ 525,000
----------- ----------- ----------
Net cash used in financing activities........ (491,000) (211,000) (56,000)
----------- ----------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS... (39,000) 42,000 18,000
Cash and cash equivalents -- beginning of year......... 60,000 18,000
----------- ----------- ----------
CASH AND CASH EQUIVALENTS -- END OF YEAR............... $ 21,000 $ 60,000 $ 18,000
=========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest.......................................... $ 555,000 $ 485,000 $ 316,000
Income taxes...................................... $ 290,000 $ 13,000
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING
ACTIVITIES:
Property acquired under capital lease obligations and
through loans payable............................. $ 3,327,000
Progress payments and related loans payable for Gamma
Knife............................................. $(2,610,000) $1,450,000
Refinancing of loans payable and capital lease
obligation with new capital lease obligation...... $ 2,172,000
Refinancing of progress payment obligation with
capital lease..................................... $ 3,139,000
Loans payable to finance property acquisitions....... $ 188,000
</TABLE>
See notes to financial statements
F-6
<PAGE> 43
U.S. NEUROSURGICAL, INC. AND U.S. NEUROSURGICAL PHYSICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE A -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
[1] BASIS OF PREPARATION:
U.S. NeuroSurgical, Inc. ("U.S. Neuro") owns and operates stereotactic
radiosurgery centers, utilizing the Gamma Knife technology. U.S. Neurosurgical
Physics, Inc. ("USNP") administers the billing and collection of the fees
charged by the Physicist who operates the Kansas City gamma knife. U.S. Neuro
and USNP are wholly owned subsidiaries of GHS, Inc. ("GHS"), a publicly owned
company. U.S. Neuro and USNP are collectively referred to herein as the Company.
Effective May 27, 1999, GHS transferred its investment in USNP to US Neuro. On
May 20, 1999 the Board of Directors of US Neuro authorized a stock split of US
Neuro's common stock which would result in the number of outstanding shares of
U.S. Neuro common stock equaling the number of shares of GHS common stock
outstanding on the date of the spin-off, and the Board of Directors of GHS
resolved to distribute such common shares to its own stockholders on a
one-for-one basis in a spin-off transaction. Immediately following the spin-off,
U.S. Neuro will be a publicly held company.
The combined financial statements include the accounts of U.S. Neuro and
USNP. All intercompany transactions and balances have been eliminated. During
the three years ended December 31, 1998, GHS incurred operating expenses on
behalf of U.S. Neuro, principally officers salaries, rent, professional fees and
insurance. Such costs were allocated 100% to U.S. Neuro after the sale by GHS of
GHS's investments in two former operating subsidiaries in July 1997. Prior to
July 1997 operating expenses were allocated among GHS's operating entities based
on the nature of the expense such as based on time spent by salaried
individuals, and use of rented space. Management considers such allocation to be
reasonable.
Prior to the spin-off the Company was financed by GHS. As of December 31,
1998 the Company had a working capital deficit of $2,974,000. In 1999, GHS paid
the Company's $200,000 current litigation settlement liability, contributed
$375,000 in cash to the Company and contributed its entire receivable from the
Company (amounting to approximately $1,300,000 at May 31, 1999) to the capital
of the Company. In addition, the Company assumed a $400,000 liability of GHS,
payable $100,000 in August 1999 and $300,000 in three equal installments from
August 2000 to October 2000. In addition, U.S. agreed to indemnify GHS with
respect to liabilities and claims attributable to any events occurring before
May 27, 1999. Management of the Company believes that its cash from operations
plus cash on hand as of the date of the spin-off will be sufficient to fund its
cash requirements through at least January 1, 2000, although there can be no
assurances that this will be the case.
[2] REVENUE RECOGNITION:
Patient revenue is recognized when the Gamma Knife procedure is rendered.
[3] LONG-LIVED ASSETS:
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 121 ("FAS 121"), "Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of." FAS 121 requires
that long-lived assets to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Adoption of this statement
had no impact on the Company's financial position, results of operations, or
liquidity.
F-7
<PAGE> 44
U.S. NEUROSURGICAL, INC. AND U.S. NEUROSURGICAL PHYSICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[4] DEPRECIATION AND AMORTIZATION:
The Gamma Knives are being depreciated on the straight-line method over an
estimated useful life of seven years. Leasehold improvements are being amortized
on the straight-line method over 7 to 20 years, the life of the leases.
[5] PRO FORMA NET LOSS PER SHARE:
Pro forma net loss per share is calculated assuming that the proposed stock
split and spin-off had occurred as of January 1, 1996.
[6] STATEMENTS OF CASH FLOWS:
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
[7] ESTIMATES AND ASSUMPTIONS:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
[8] FAIR VALUES OF FINANCIAL INSTRUMENTS:
The estimated fair value of financial instruments has been determined based
on available market information and appropriate valuation methodologies. The
carrying amounts of cash, certificates of deposit, accounts receivable, other
current assets and accounts payable approximate fair value at December 31, 1998
and 1997 because of the short maturity of these financial instruments. The
carrying value of the obligations under capital leases and loans payable
approximate fair value because the interest rates on these instruments
approximate the market rates at December 31, 1998 and 1997. The fair value
estimates were based on information available to management as of December 31,
1998 and 1997.
NOTE B -- AGREEMENTS WITH RESEARCH MEDICAL CENTER ("RMC")
[1] GAMMA KNIFE NEURORADIOSURGERY EQUIPMENT AGREEMENT:
U.S. Neuro entered into a neuroradiosurgery equipment agreement (the
"equipment agreement") with RMC for a period of 21 years which commenced with
the completion of the neuroradiosurgery facility (the "facility") in September
1994. The equipment agreement, among other matters, requires U.S. Neuro to
provide (i) the use of the Gamma Knife equipment (the "equipment") to RMC, (ii)
the necessary technical personnel for the proper operation of the equipment,
(iii) sufficient supplies for the equipment, (iv) the operation, maintenance and
repair of the equipment, (v) all basic hardware and software updates to the
equipment and, (vi) an uptime guarantee. In return, RMC pays U.S. Neuro 80% of
RMC's fees for the use of the equipment and the facility. The agreement also
provides for U.S. Neuro to establish for the benefit of RMC an escrow account
funded with an amount equal to one month's average of the compensation payable
to U.S. Neuro. U.S. Neuro is the owner of and entitled to the income from the
escrow account so long as no event of default has occurred. As of December 31,
1998, the escrow account had a balance of $92,000. The equipment agreement
terminates automatically upon termination of the ground lease agreement (see
Note B[2]) and may be terminated by mutual agreement in the sixth year of the
ground lease term.
F-8
<PAGE> 45
U.S. NEUROSURGICAL, INC. AND U.S. NEUROSURGICAL PHYSICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- AGREEMENTS WITH RESEARCH MEDICAL CENTER ("RMC") (CONTINUED)
[2] GROUND LEASE AGREEMENT:
U.S. Neuro constructed a facility in Kansas City, Missouri on property
which the Company leases from RMC. The lease term is for a period of 21 years
commencing September 1994. Rental expense is $3,600 per annum. The terms of the
lease include escalation clauses for increases in certain operating expenses and
for payment of real estate taxes and utilities. Title to all improvements upon
the land vests in RMC.
NOTE C -- AGREEMENT WITH NEW YORK UNIVERSITY ON BEHALF OF NEW YORK UNIVERSITY
MEDICAL CENTER ("NYU")
During November 1996, U.S. Neuro entered into a neuroradiosurgery equipment
agreement ("NYU agreement") with NYU for a period of seven years ("the term"),
which gives NYU the option of extending the term for successive three year
periods or purchasing the Gamma Knife equipment at an appraised market value
price. U.S. Neuro may negotiate the purchase price and upon failure of the
parties to agree may request that the facility be closed. All costs associated
with closing and restoring the facility to its original condition will be the
liability of U.S. Neuro. The equipment agreement, among other matters, requires
U.S. Neuro to provide (i) the use of the Gamma Knife equipment to NYU, (ii)
training necessary for the proper operation of the Gamma Knife equipment, (iii)
sufficient supplies for the equipment, (iv) the repair and maintenance of the
equipment, (v) all basic hardware and software upgrades to the equipment and,
(vi) an uptime guarantee. In return, NYU will pay U.S. Neuro a scheduled fee
based on the number of patient procedures performed.
NOTE D -- OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE
In a prior year, U.S. Neuro acquired a Gamma Knife ("Knife 1") from Elekta
Instruments ("Elekta") for $2,900,000. The acquisition was financed by Financing
for Science International ("FFSI") under a five year capital lease, bearing
interest at approximately 12.7% per annum. During September 1996, Finova Capital
Corp. ("Finova") bought out FFSI and became the lessor. During March 1997, U.S.
Neuro refinanced this lease with DVI Financial Services, Inc. ("DVI") for
$2,272,000 under a 39 month capital lease which bears interest at approximately
10.4%. In connection with the refinancing, DVI paid to Finova $1,647,000 in
settlement of the lease obligations, the Company's demand loan of $525,000
payable to DVI was repaid, and DVI paid U.S. Neuro $100,000.
On December 6, 1994, U.S. Neuro entered into an additional agreement with
Elekta to acquire a second Gamma Knife ("Knife 2") for $2,900,000 for which it
made a deposit of $290,000 in 1994. The construction of the knife initially was
financed by FFSI through funding of progress payments made to Elekta; however,
during 1996, the Company refinanced the progress payments with DVI at which time
the Company's deposit was returned. In July 1997, upon completion of
construction, the progress payments were converted into a capital lease
obligation for $3,139,000. The lease payments provide for interest at the higher
of 12.0% or that rate adjusted for any increase in the thirty month Treasury
Note rate.
In addition, the Company entered into two (2) three-year loans with DVI in
the amounts of $325,000 and $163,000 to finance the leasehold improvements
required to install the Gamma Knife at New York University Medical Center. The
loans bear interest at 12.0% to 12.9% per annum. The leases and loans payable
are collateralized by all the assets of U.S. Neuro and subsidiaries.
F-9
<PAGE> 46
U.S. NEUROSURGICAL, INC. AND U.S. NEUROSURGICAL PHYSICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE (CONTINUED)
The obligations under the capital lease and loans payable are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Capital leases -- Gamma Knife........................ $3,983,000 $4,999,000
Loans payable -- leasehold improvements.............. 234,000 413,000
---------- ----------
4,217,000 5,412,000
Less current portion................................. 1,423,000 1,195,000
---------- ----------
$2,794,000 $4,217,000
========== ==========
</TABLE>
Future payments as of December 31, 1998 on the equipment leases and loans
are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASE LOANS PAYABLE
YEAR ENDING ----------------------- -------------------------
DECEMBER 31, KNIFE 1 KNIFE 2 LEASEHOLD 1 LEASEHOLD 2 TOTAL
------------ ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1999................................ $ 827,000 $ 792,000 $156,000 $65,000 $1,840,000
2000................................ 482,000 792,000 32,000 1,306,000
2001................................ 792,000 792,000
2002................................ 792,000 792,000
2003................................ 462,000 462,000
---------- ---------- -------- ------- ----------
1,309,000 3,630,000 156,000 97,000 5,192,000
Less interest....................... 106,000 850,000 10,000 9,000 975,000
---------- ---------- -------- ------- ----------
Present value of net minimum
obligation........................ $1,203,000 $2,780,000 $146,000 $88,000 $4,217,000
========== ========== ======== ======= ==========
</TABLE>
During the years ended December 31, 1997 and 1996, the Company capitalized
interest cost amounting to approximately $177,000 and $249,000, respectively,
relating to the construction of the Gamma Knife project.
NOTE E -- CONCENTRATIONS
For the years ended December 31, 1998 and 1997, the Company derived
substantially all its patient revenue from two hospitals, one of which accounted
for 60% and 90%, respectively of the Company's revenue. For the year ended
December 31, 1996 one hospital accounted for all of the Company's patient
revenue.
The Company has been dependent on one manufacturer who sells, supplies and
services the Gamma Knife.
F-10
<PAGE> 47
U.S. NEUROSURGICAL, INC. AND U.S. NEUROSURGICAL PHYSICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- TAXES
The components of the income tax provision (benefit) are the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Current:
Federal............................................ $(201,000) $(112,000) $50,000
State.............................................. (50,000) (2,000) 14,000
--------- --------- -------
(251,000) (114,000) 64,000
--------- --------- -------
Deferred:
Federal............................................ (208,000) 106,000
State.............................................. (52,000)
--------- ---------
(260,000) 106,000
--------- ---------
Income tax (benefit) provision....................... $(511,000) $ (8,000) $64,000
========= ========= =======
</TABLE>
A reconciliation of the tax provision (benefit) calculated at the statutory
federal income tax rate with amounts reported follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
Income tax benefit at the federal statutory rate....... $(517,000) $(6,000) $54,000
State income tax benefit, net of federal taxes......... (80,000) (2,000) 10,000
Permanent difference for portion of accrued litigation
settlement........................................... 114,000
Other.................................................. (28,000)
--------- ------- -------
Income tax provision (benefit)......................... $(511,000) $(8,000) $64,000
========= ======= =======
</TABLE>
Items which give rise to deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax asset:
Litigation settlement accrued for financial reporting
purposes............................................... $ 260,000 $ 0
Deferred tax liability:
Excess of tax depreciation over book depreciation......... (450,000) (450,000)
--------- ---------
Net deferred tax liability.................................. $(190,000) $(450,000)
========= =========
</TABLE>
In 1998, no valuation allowance was provided for the deferred tax asset
because management believes that it is more likely than not that the benefit
will be realized through future taxable income.
NOTE G -- LITIGATION
In 1993, pursuant to an agreement (the "USN Agreement") between GHS and A.
Hyman Kirshenbaum, M.D. ("Kirshenbaum") and Jerry Brown, Ph.D ("Brown"), GHS,
among other things, granted an aggregate 20% interest in U.S. Neuro to Brown and
Kirshenbaum. In addition, following the execution of the USN Agreement,
Kirshenbaum was appointed as an officer of U.S. Neuro and Brown was appointed to
GHS's Board of Directors and executed an employment agreement with U.S. Neuro.
Under the terms of the USN Agreement, the Company possessed the right to
repurchase for cash or common stock such
F-11
<PAGE> 48
U.S. NEUROSURGICAL, INC. AND U.S. NEUROSURGICAL PHYSICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- LITIGATION (CONTINUED)
20% interest during each of the third through sixth full fiscal years of the USN
Agreement. GHS exercised its right to repurchase the 20% interest in U.S. Neuro
in September 1996 at a value of $38,781 which value was calculated by GHS in
accordance with the terms of the USN Agreement and in 1997, GHS paid the
purchase price through the issuance of shares of its common stock valued at
$31,332 plus offsetting a receivable of $7,450 from Brown against the purchase
price. Such valuation was disputed by Brown and Kirshenbaum.
In June 1997, GHS instituted an action (the "Declaratory Action") in the
United States District Court of Maryland, Southern Division against Kirshenbaum
and Brown seeking a declaration from the Court that its repurchase of Brown's
and Kirshenbaum's 20% interest in U.S. Neuro for $38,781 was fair and equitable.
Because of the dispute between GHS and Brown and Kirshenbaum on the valuation of
their 20% interest in U.S. Neuro, GHS filed the Declaratory Action to determine:
(1) whether GHS's repurchase is proper; (2) whether the valuation of Brown's and
Kirshenbaum's 20% interest in U.S. Neuro is just and fair; and (3) whether
Brown's and Kirshenbaum's valuation of their 20% interest in U.S. Neuro is
improper.
In response to the Declaratory Action, Brown and Kirshenbaum filed a
counterclaim and third party claim against GHS, U.S. Neuro and others. The
counterclaim against GHS and third party claim against U.S. Neuro and the other
parties was purportedly for violations of: (1) the RICO statutes; (2) various
causes of action for fraud; and (3) various causes of action for breach of
contract. The United States District Court of Maryland dismissed the RICO claims
against U.S. Neuro and GHS. The fraud counts sought damages of not less than $9
million per count and the imposition of treble damages for punitive damages for
the fraud counts. The breach of contract counts ranged from $250,000 to
$600,000. The claims of fraud arose out of an alleged conspiracy between GHS and
other parties to misappropriate a business concept allegedly created by Brown
and Kirshenbaum. The remainder of Brown's and Kirschenbaum's claims were in the
nature of a breach of contract between GHS, U.S. Neuro and Brown and
Kirshenbaum.
In addition to the above-described federal court action, Brown filed a
state court action in the District Court in and for Montgomery County, Maryland
against U.S. Neuro and other parties seeking breach of contract damages for lost
salary, unreimbursed expenses and for consequential damages and costs arising
out of what he claimed to be an improper termination from U.S. Neuro. Brown
sought approximately $381,000 for lost salary and $36,000 for unreimbursed
expenses in addition to the consequential damages and treble damages under the
various counts of his compliant.
On May 25, 1999, the parties to the above-described actions settled all of
above-described legal proceedings pursuant to an agreement and plan of
settlement dated March 22, 1999. As part of the closing of such settlement, GHS
issued in the aggregate 68,688 additional shares of GHS common stock to Brown
and Kirshenbaum and delivered $200,000 in cash to them. In addition, USN
delivered to Brown and Kirshenbaum promissory notes (the "Settlement Notes") in
the aggregate amount of $450,000, bearing interest at the rate of 6% per annum,
and payable over a four-year period as follows: $100,000 on the first, third and
fourth anniversaries of such closing and $150,000 on the second anniversary of
such closing. USN will be solely responsible for the payment of the Settlement
Notes. The Settlement Notes are secured by a second-priority security interest
in USN's receivables from its Kansas City and New York Gamma Knife centers.
$934,000 was charged to expense in 1998 for this settlement including the value
of the stock issued by GHS.
On June 9, 1999 the Declaratory Action was dismissed with prejudice by the
parties.
F-12
<PAGE> 49
U.S. NEUROSURGICAL, INC. AND U.S. NEUROSURGICAL PHYSICS, INC.
UNAUDITED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 585,000 $ 21,000
Accounts receivable....................................... 502,000 238,000
Other current assets...................................... 24,000 27,000
----------- -----------
Total current assets.............................. 1,111,000 366,000
----------- -----------
Furniture and Equipment (net of accumulated depreciation of
17,000
in 1999).................................................. 51,000 --
Gamma Knife (net of accumulated depreciation of 3,021,000 in
1999 and 2,560,000 in 1998)............................... 3,444,000 3,906,000
Leasehold improvements (net of accumulated amortization of
493,000 in 1999 and 395,000 in 1998)...................... 1,349,000 1,447,000
----------- -----------
Total property and equipment...................... 4,844,000 5,353,000
----------- -----------
Cash held in escrow......................................... 94,000 92,000
Deferred tax asset.......................................... 80,000 80,000
Deposits.................................................... 3,000 --
----------- -----------
Total............................................. $ 6,132,000 $ 5,811,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 369,000 $ 66,000
Accrued litigation settlement............................. 100,000 200,000
Obligations under capital lease and loans
payable -- current portion............................. 1,544,000 1,423,000
Due to GHS, Inc........................................... -- 1,651,000
----------- -----------
Total current liabilities......................... 2,013,000 3,340,000
Accrued litigation settlement............................... 350,000 450,000
Other long term debt........................................ 300,000 --
Deferred tax liability...................................... 270,000 270,000
Obligations under capital lease and loans payable Net of
current portion........................................... 1,986,000 2,794,000
----------- -----------
4,919,000 6,134,000
----------- -----------
Stockholders' equity:
Common stock
Additional paid-in capital................................ 2,863,000 734,000
Accumulated deficit....................................... (1,650,000) (1,777,000)
----------- -----------
Total stockholders' equity (deficiency)........... 1,213,000 (1,043,000)
----------- -----------
Total............................................. $ 6,132,000 $ 5,811,000
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-13
<PAGE> 50
U.S. NEUROSURGICAL, INC. AND U.S. NEUROSURGICAL PHYSICS, INC.
UNAUDITED COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenue:
Patient Revenue........................................... $ 755,000 $ 675,000
--------- ---------
Expenses:
Patient Expenses.......................................... 316,000 328,000
Selling, General and Administrative....................... 288,000 346,000
--------- ---------
Total............................................. 604,000 674,000
--------- ---------
Income (loss) before items listed below..................... 151,000 1,000
Interest expense............................................ (107,000) (143,000)
Interest income............................................. 4,000 1,000
--------- ---------
Income (loss) before income taxes........................... 48,000 (142,000)
Income tax provision........................................ 19,000 --
--------- ---------
Net Income (loss)........................................... $ 29,000 $(142,000)
========= =========
Pro forma basic and diluted income (loss) per share......... $ -- $ (.02)
========= =========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-14
<PAGE> 51
U.S. NEUROSURGICAL, INC. AND U.S. NEUROSURGICAL PHYSICS, INC.
UNAUDITED COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenue:
Patient Revenue........................................... $1,695,000 $1,263,000
---------- ----------
Expenses:
Patient Expenses.......................................... 659,000 631,000
Selling, General and Administrative....................... 611,000 527,000
---------- ----------
Total............................................. 1,270,000 1,158,000
---------- ----------
Income (loss) before items listed below..................... 425,000 105,000
Interest expense............................................ (223,000) (295,000)
Interest income............................................. 6,000 2,000
---------- ----------
Income (loss) before income taxes........................... 208,000 (188,000)
Income tax provision........................................ 81,000 --
---------- ----------
Net Income (loss)........................................... $ 127,000 $ (188,000)
========== ==========
Pro forma basic and diluted income (loss) per share......... $ .02 $ (.03)
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-15
<PAGE> 52
U.S. NEUROSURGICAL, INC. AND U.S. NEUROSURGICAL PHYSICS, INC.
UNAUDITED COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations.................. $ 127,000 $(188,000)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization:......................... 562,000 562,000
Changes in operating assets and liabilities:
(Increase) in cash held in escrow.................... (2,000) (2,000)
(Increase) in receivables............................ (264,000) (7,000)
(Decrease) increase in accounts payable and accrued
expenses............................................ 403,000 185,000
Increase in due to GHS, Inc. ........................ -- 111,000
--------- ---------
Net cash provided by operating activities......... 826,000 665,000
--------- ---------
Cash flows from investing activities:
Acquired Furniture & Equipment............................ 51,000 --
Cost Incurred with Leasehold improvements................. -- (21,000)
--------- ---------
Net cash provided by (used in) investing activities......... 51,000 (21,000)
Cash flows from financing activities:
Cash received from GHS, Inc............................... 374,000
Payment of capital lease obligations...................... (687,000) (644,000)
--------- ---------
Net cash (used in) financing activities..................... (313,000) (644,000)
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 564,000 --
Cash and cash equivalents -- beginning of period............ 21,000 60,000
--------- ---------
CASH AND CASH EQUIVALENTS -- END OF PERIOD.................. $ 585,000 $ 60,000
========= =========
Supplemental disclosures of cash flow information:
Cash paid for
Interest............................................... 223,000 295,000
Income Taxes........................................... 3,000 --
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-16
<PAGE> 53
U.S. NEUROSURGICAL, INC. AND U.S. NEUROSURGICAL PHYSICS, INC.
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
NOTE A -- BASIS OF PREPARATION
The accompanying financial statements at June 30, 1999, and for the three
and six months ended June 30, 1999 and 1998, are unaudited. However, in the
opinion of management, such statements include all adjustments necessary for a
fair statement of the information presented therein. The balance sheet at
December 31, 1998 has been derived from the audited financial statements at that
date appearing in this Information Statement.
Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to interim financial statements, the accompanying
financial statements and these notes do not include all disclosures required by
generally accepted accounting principles for complete financial statements.
Accordingly, these statements should be read in conjunction with the Company's
most recent annual financial statements.
Results of operations for interim periods are not necessarily indicative of
those to be achieved for full fiscal years.
Pro forma basic and diluted income (loss) per share is calculated assuming
that the proposed stock-split and spin-off had occurred as of January 1, 1998.
F-17
<PAGE> 54
APPENDIX A
June 17, 1999
The Board of Directors
GHS, Inc.
1350 Piccard Drive, Suite 360
Rockville, Maryland 20850
Gentlemen:
This will serve to respond to your request that we appraise the Fair Market
Value of U.S. NeuroSurgical, Inc. ("USN" or the "Company") as of today's date.
You have advised us that GHS, Inc. ("GHS") will distribute to its stockholders
its 100% interest in USN by distributing one share of USN Common Stock for each
share of GHS Common Stock owned by a stockholder (the "Spin-off"). It is our
understanding that our appraisal of USN will be one of the factors to be
considered in establishing the value for tax purposes of the capital stock of
USN distributed in the Spin-off.
After the Spin-off, USN will continue its business of owning and operating
sterotactic radiosurgery centers utilizing the Gamma Knife technology. USN
currently owns and operates two Gamma Knife centers, one on the premises of
Research Medical Center in Kansas City, Missouri, and one on the premises of New
York University Medical Center in New York, New York. The Company will own its
Gamma Knife centers subject to capital lease financing. The aggregate original
cost of the two centers was approximately $8.2 million. USN is paid by the
medical facilities where the Gamma Knives are housed based on utilization on a
"cost per treatment" basis. Development and maintenance of mutually satisfactory
relationships with referring physicians is essential to the utilization of the
units. Subject to the exercise of outstanding options and warrants, ownership of
USN will be represented by 7,047,828 shares of Common Stock, $.01 par value,
issued and outstanding as of the date of the Spin-off.
The term "Fair Market Value", as used herein, is defined as the amount at
which the USN capital stock in aggregate on a majority interest basis would
change hands between a willing buyer and willing sellers, all having reasonable
knowledge of all relevant facts, none being under any compulsion to act, with
equity to all. Furthermore, we have assumed that the USN capital stock has been
fully distributed to the Company's stockholders and that it is trading on an
established market and that information concerning USN has been widely
disseminated.
In appraising the fair market value of USN, we have reviewed and analyzed
the following unaudited internally generated financials of the Company:
- Operating statements and end of year balance sheets for the five (5)
years ended December 31, 1998;
- Operating statements for the four (4) months ended April 30, 1999 and
estimates of operations for 1999 through May 27;
- Proforma balance sheet of the Company as of May 27, 1999 reflecting
adjustments to be made in connection with the Spin-off; and,
- Management's plan and budget for the five (5) years to end December 31,
2003.
In addition, in connection with this appraisal, we have made such reviews,
analyses and inquiries as we have deemed necessary and appropriate under the
circumstances. Among other things, we have:
- Met with senior management of the Company to discuss the operations,
financial condition, future prospects and projected operations and
performance of USN;
- Reviewed the reports on Form 10-K filed with the Securities and Exchange
Commission ("SEC") by GHS for the five (5) years ended December 31, 1998
and GHS's report on Form 10-Q for the quarter ended March 31, 1999;
A-1
<PAGE> 55
- Reviewed the historical market prices and trading volumes of the publicly
traded Common Stock of GHS and of the publicly traded equity securities
of certain companies which we deem comparable to the Company;
- Reviewed certain publicly available financial data for certain companies
that we deem comparable to the Company;
- Reviewed the Information Statement pursuant to Section 14(C) of the
Securities Exchange Act of 1934 to be filed by GHS with the SEC with
respect to, among other things, the Spin-off; and,
- Conducted such other studies, analysis and inquiries as we have deemed
appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of USN, and that there has been no material change in the
assets, financial condition, business or prospects of USN since the date of the
most recent financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to USN and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets of USN.
In our analysis of USN, we have taken into consideration the income- and
cash-generating capability of the Company. Typically, an investor contemplating
an investment in a company with income- and cash-generating capability similar
to USN will evaluate the risks of and returns on its investment on a going-
concern basis. Accordingly, after due consideration of other appropriate and
generally accepted valuation methodologies, the value of the common stock of USN
has been determined primarily on the basis of capitalization of funds generated
from operations and discounted cash flow approaches.
Furthermore, we appraised USN as a going-concern, meaning that the
underlying tangible assets of the Company are presumed, in the absence of a
qualified appraisal of such assets, to attain their highest values as integral
components of a business entity in continued operation and that liquidation of
said assets would likely diminish the value of the whole to the shareholders and
creditors of USN.
All appraisal methodologies that estimate the worth of an enterprise as a
going-concern are predicated on numerous assumptions pertaining to prospective
economic and operating conditions. Our appraisal is necessarily based on
business, economic, market and other conditions as they exist and can be
evaluated by us as of today. Unanticipated events and circumstances may occur
and actual results may vary from those assumed. The variations may be material.
Based upon the investigation, premises, provisos, and analyses outlined
above, as of today we appraise the fair market value of the capital stock of USN
to be reasonably stated in the amount of $3,040,000 or $0.43 per share based on
7,047,828 shares of Common Stock issued and outstanding after the Spin-off.
Our appraisal is advisory in nature only and our fee for this service is
not contingent upon the findings of our appraisal. Scott & Stringfellow, Inc.,
as a customary part of its investment banking business, is regularly engaged in
the appraisal of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
appraisals for estate, corporate and other purposes. We will receive a fee upon
the delivery of this appraisal and the Company has agreed to indemnify us for
certain liabilities arising out of the rendering of it. In the ordinary course
of our business, we and our affiliates may actively trade or hold the securities
of the Company for our own account or for the account of our customers and,
accordingly, may at any time hold a long or short position in such securities. A
Managing Director of Scott & Stringfellow's Corporate Finance Department has
served as a director of GHS since October 1997 and was appointed a director of
USN in May 1999.
A-2
<PAGE> 56
This report is provided solely to the Board of Directors of the Company for
their use in connection with their review and evaluation of the Spin-off.
Neither this report nor the underlying financial analysis may be relied upon by
any person other than the members of the Board of Directors without our prior
written consent.
Very truly yours,
SCOTT & STRINGFELLOW, INC.
A-3
<PAGE> 57
PRINCIPAL EXECUTIVE OFFICES OF THE COMPANIES
GHS, INC.
65 Broadway
New York, New York 10006
U.S. NEUROSURGICAL, INC.
2400 Research Boulevard, Suite 325
Rockville, Maryland 20850
INDEPENDENT AUDITORS FOR THE COMPANIES
Richard A. Eisner & Company, LLP
575 Madison Avenue
New York, New York
TRANSFER AGENT FOR THE COMPANIES
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
