SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No.
December 31, 1998 0-15586
GHS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1373960
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2400 Research Boulevard, Suite 325, Rockville, Maryland 20850
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (301) 208-8998
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None Not Applicable
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed in Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K.
The aggregate market value of Registrant's Common Stock held by
non-affiliates was approximately $8,426,000 on March 29, 1999, based upon the
average of the bid and asked prices as reported on the OTC Bulletin Board.
The number of shares of Registrant's Common Stock, par value $.01 per
share, outstanding as of March 29, 1999, was 6,979,160.
DOCUMENTS INCORPORATED BY REFERENCE - None
1
<PAGE>
Part I
ITEM 1. BUSINESS
GHS, Inc. (the Company) provides management and financing services to the
health care industry. The Company provides these services via its subsidiary
U.S. NeuroSurgical, Inc.(R) (USN). As used herein, unless the context indicates
otherwise, the term "Company", "Registrant" and "GHS, Inc." means GHS, Inc. and
its subsidiaries. The Company, a Delaware corporation, was formed in December
1984. The Company's executive offices are located at 2400 Research Boulevard,
Suite 325, Rockville, Maryland 20850, and its telephone number is (301)
208-8998.
U. S. NeuroSurgical, Inc.
General
USN of which the Company owns 100%, was organized in July 1993 to own and
operate stereotactic radiosurgery centers, utilizing the Gamma Knife technology.
USN currently owns and operates two Gamma Knife centers, one on the premises of
Research Medical Center (RMC) in Kansas City, Missouri and one on the premises
of New York University Medical Center (NYU) in New York, New York. The Company,
through USN, intends to continue to explore opportunities to open additional
Gamma Knife Centers. USN's business strategy is to provide a mechanism whereby
hospitals, physicians, and patients can have access to Gamma Knife treatment
capability, a high capital cost item. USN provides the Gamma Knife to medical
facilities on a "cost per treatment" basis. USN owns the Gamma Knife units, and
is reimbursed by the facility where it is housed, based on utilization.
USN's principal target market is medical centers in major health care
catchment areas that have physicians experienced with and dedicated to the use
of the Gamma Knife. USN seeks cooperative ventures with these facilities. USN
believes that, as of December 31, 1998, there were approximately forty Gamma
Knife treatment centers in the United States.
2
<PAGE>
Gamma Knife Technology
The Leksell Gamma Knife is a unique stereotactic radiosurgical device used
to treat brain tumors and other malformations of the brain without invasive
surgery. The Gamma Knife delivers a single, high dose of ionizing radiation
emanating from 201 cobalt-60 sources positioned about a hemispherical, precision
machined cavity. The lesion is first targeted with precision accuracy using
advanced imaging and three dimensional treatment planning techniques such as CT
Scans, MR Scans, conventional X-rays, or angiography. Each individual beam is
focused on a common target producing an intense concentration of radiation at
the target site, destroying the lesion while spreading the entry radiation dose
uniformly and harmlessly over the patient's skull . The mechanical precision at
the target site is +/- 0.1mm (1/10 of 1 millimeter). Because of the steep
fall-off in the radiation intensity surrounding the target, the lesion can be
destroyed, while sparing the surrounding tissue.
The procedure, performed in a single treatment, sharply reduces hospital
stay times and eliminates post-surgical bleeding and infection. When compared
with conventional neurosurgery, Gamma Knife treatment is less expensive.
However, not all patients are candidates for radiosurgery since the decision to
use the Gamma Knife depends on the type, size, and location of the lesion.
Kansas City and New York Centers
In July 1993, USN purchased its first Leksell Gamma Knife from Elekta
Instruments, Inc. (Elekta), for the purpose of installing it at RMC in Kansas
City, Missouri. USN paid approximately $3,000,000 for the Gamma Knife through a
capital lease financing.
USN opened its first Gamma Knife Center on the premises of RMC in
September 1994. RMC is part of Health Midwest, a consortium of eleven hospitals
and numerous affiliates. USN formed a cooperative venture with RMC in September,
1993. Per an agreement with RMC, GHS sold 500,000 shares of its common stock
(the "Common
3
<PAGE>
Stock") for $500,000 to RMC to secure additional working capital in order to
enable USN to develop and construct a Gamma Knife Facility. USN installed the
Gamma Knife in the facility, where it is being utilized by neurosurgeons
credentialled by RMC. USN is reimbursed for use of the Gamma Knife by RMC based
on a percentage of the fees collected by RMC for Gamma Knife procedures.
Pursuant to a ground lease agreement, RMC leased to USN the land on which to
build the Gamma Knife facility.
USN opened its second treatment center in July 1997 on the campus of NYU
in New York, New York. Construction of the Gamma Knife suite was completed in
July 1997. The Gamma Knife cost and the cost of the facility improvements
totaled approximately $4,700,000. In July 1997 the Company commenced its lease
for the NYU Gamma Knife. DVI Financial Services, Inc. (DVI) provided the capital
lease financing for the NYU facility. The term is six years with incremental
payments for the first year and fixed payments thereafter. The interest rate for
such capital lease is 12%. The Company has retained a marketing representative
to help introduce the technology to neurosurgeons in the New York tri-state
region.
In March 1997, USN refinanced the lease on the RMC Gamma Knife 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 for working capital of $188,000 to finance the
remainder of the buildout. The terms of these loans are three years and they
bear interest between 12% and 12.9% per annum.
Regulatory Environment
The levels of revenues and profitability of companies involved in the
health services industry, such as USN, may be affected by the continuing efforts
of governmental and third party payors to contain or reduce the costs of health
care through various means. Although the Company does not believe that the
business activities of USN will be materially affected by changes in the
regulatory environment, it is uncertain what
4
<PAGE>
legislative proposals will be adopted or what actions federal, state or private
payors for healthcare goods and services may take in response to any healthcare
reform proposals or legislation. The Company cannot predict the effects
healthcare reform may have on USN's business, and no assurance can be given that
any such reforms will not have a material effect on USN.
In addition, the provision of medical services in the United States is
dependent on the availability of reimbursement to consumers from third party
payors, such as government and private insurance companies. Although, patients
are ultimately responsible for services rendered, the Company expects that the
majority of USN's revenues will be derived from reimbursements by third party
payors. Medicare has authorized reimbursement for Gamma Knife treatment. Over
the last several years, such third party payors are increasingly challenging the
cost effectiveness of medical products and services and taking other
cost-containment measures. Therefore, although treatment costs using the Gamma
Knife compare favorably to traditional invasive brain surgery, it is unclear how
this trend among third party payors and future regulatory reforms affecting
governmental reimbursement will affect procedures in the higher end of the cost
scale.
In the future, the Company may establish additional Gamma Knife centers.
Completion of future centers would require approvals and arrangements with
hospitals, health care organizations, or other third parties, including certain
regulatory authorities. The Food and Drug Administration has issued the
requisite pre-market approval for the Gamma Knife 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 the
Company 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 the Company
believes that it can obtain a NRC permit for each Gamma Knife machine, there is
no assurance that it will.
5
<PAGE>
Liability Insurance
Although the Company does not directly provide medical services, it has
obtained professional medical liability insurance, and has general liability
insurance as well. The Company believes that its insurance is adequate for
providing treatment facilities and non-medical services although there can be no
assurance that the coverage limits of such insurance will be adequate or that
coverage will not be reduced or become unavailable in the future.
Competition
The health care industry, in general, is highly competitive and the
Company expects to have substantial competition from other independent
organizations, as well as from hospitals in establishing future Gamma Knife
centers. There are other companies that provide the Gamma Knife on a "cost per
treatment basis". In addition, larger hospitals may be expected to install Gamma
Knife technology as part of their regular inpatient services. Some of these
competitors have greater financial and other resources than the Company.
Principal competitive factors include quality and timeliness of test results,
ability to develop and maintain relationships with referring physicians,
facility location, convenience of scheduling and availability of patient
appointment times. The Company believes that cost containment measures will
encourage hospitals to seek companies that are providing the technology, instead
of incurring the capital cost of establishing their own Gamma Knife centers.
Gamma Knife Supply and Servicing
Currently the only company that manufactures, sells, and services the
Gamma Knife is Elekta Instruments, Inc., a subsidiary of AB Elekta of Stockholm,
Sweden. Any interruption in the supply or services from Elekta would adversely
affect USN's ability to maintain its Gamma Knife treatment centers.
6
<PAGE>
Gamma Knife Financing
The Company has secured capital lease financing from FSI for the first
Gamma Knife installation at the RMC site, and for its second Gamma Knife in New
York from DVI. The lease at RMC was refinanced in the spring of 1997 with DVI.
The Gamma Knife is an expensive piece of equipment presently costing
approximately $3,000,000. Therefore, the Company's development of new Gamma
Knife centers is dependent on its ability to secure favorable financing. The
Company believes that it will continue to be successful in obtaining financing
but can give no absolute assurance that it will.
New Technology/Possible Obsolescence
Gamma Knife technology may be subject to technological change.
Consequently, the Company will have to rely on the Gamma Knife's manufacturer,
Elekta, to introduce improvements or upgrades in order to keep pace with
technological change. Any such improvements or upgrades which the Company may be
required to introduce will require additional financing. In addition, newly
developed techniques and devices for performing brain surgery may render the
Gamma Knife less competitive or obsolete.
Employees
GHS, Inc. has five full-time employees and one part-time employee. Of
these employees, three are engaged in sales and marketing, one technical, and
two in administration and office support.
ITEM 2. PROPERTIES
The Company's base facility, from which it conducts substantially all of
its operations, 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
7
<PAGE>
City, Missouri. USN also occupies about 2,000 square feet at the NYU Medical
Center in New York, New York.
ITEM 3. LEGAL PROCEEDINGS
As described below under Item 13 - CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, the Company, USN and the Company's Chairman and President, Alan
Gold, are involved in certain legal proceedings in several actions filed in
federal and state court arising out of the events also described under Item 13.
The Company does not expect that the proposed settlement of these cases will
have a material adverse effect on the Company's financial statements. In the
event the settlement of such proceedings described in Item 13 does not become
final, because such proceedings are in their initial stages, the Company cannot
currently predict the likelihood of a favorable or unfavorable outcome or the
time frame in which these cases will be ultimately resolved. In the absence of
the settlement being finalized, the Company intends to vigorously pursue its
rights and defend itself in such proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
8
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock traded in the over-the-counter market, NASDAQ
symbol GHSI, until January 30, 1997 and has traded since on the OTC Bulletin
Board. The range of high and low bid quotations as reported by NASDAQ System for
the two years ended December 31, 1998 are set forth below.
Period High Bid Low Bid
------ -------- -------
January 1 - March 31, 1997 $ .45 $ .19
April 1 - June 30, 1997 .50 .20
July 1 - September 30, 1997 .56 .44
October 1 - December 31, 1997 1.00 .25
Period High Bid Low Bid
------ -------- -------
January 1 - March 31, 1998 $ .50 $ .25
April 1 - June 30, 1998 .88 .75
July 1 - September 30, 1998 .94 .63
October 1 - December 31, 1998 2.88 .50
The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
As of March 31, 1999, there were approximately 300 holders of record of
the Company's Common Stock.
To date the Company declared no dividends on its Common Stock and does not
anticipate declaring dividends in the foreseeable future.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is the selected financial data pertaining to the financial
condition and operations of the Company for the years ended December 31, 1994
through 1998. The latest financial statements of the Company are included in
Item 14 in Part IV of this report. The information set forth should be read in
conjunction with such financial statements and the notes thereto.
<TABLE>
<CAPTION>
Year Ended
December 31,
(in thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Operating Revenue $ 2,332 1,830 1,452 1,283 381
Income (loss) from continuing operations $ (909) (11) 545 (40) (408)
Basic and diluted income (loss) per common share (0.14) 0.00 0.07 (0.01) (0.06)
from continuing operations
Total assets $ 9,974 10,712 8,001 7,339 5,885
Long-term obligations $ 6,350 6,511 5,904 3,347 2,776
</TABLE>
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes set forth elsewhere in this report.
Results of Operations
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
completion of activities related to the sale of the Company's software business
(the "Systems Business") which was sold in 1997 and legal expenses described in
Items 3 and 13 hereof. 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 Items 3 and 13. 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. The Company earned $166,000 in
interest income in 1998, compared to $64,000 in 1997. The increase was due to
money received from the sale of its Systems Business in 1997. The Company had an
income tax benefit of $451,000 in 1998 as compared to an income tax benefit of
$8,000 in 1997. As a result of these factors the Company had a loss from
continuing operations of $909,000 in 1998 and a loss of $11,000 in 1997.
Income from discontinued operations was $332,000 as compared to $2,083,000
in 1997. The 1998 income was primarily due to a gain of $298,000, net of income
tax of $197,000, to release CMSF, Inc. from an earnout and escrow provision that
was previously entered into at the time of the sale of the Company's interest in
Florida Specialty Networks, Ltd. (FSN) in December 1997. This was treated as an
adjustment to
11
<PAGE>
the selling price of FSN. For the year ended 1998 the Company had a net loss of
$463,000 as compared to income of $2,072,000 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 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 Items 3 and
13 hereof.
For the year ended 1997, income from operations was $402,000 as compared
to income from operations of $461,000 in 1996. There was a 60% increase in
interest expense to $485,000 in 1997 from $302,000 in 1996. The increase in
interest expense was expected due to the opening of the second Gamma Knife
Center at NYU in July 1997. Prior to the opening, interest on the progress
payments of the Gamma Knife and the demand loan for the leasehold improvements
at NYU had been capitalized. Interest capitalized was $178,000 for 1997 and
$249,000 for 1996. With the commencement of the NYU Gamma Knife Center, the
second equipment lease started replacing the progress payments, leasehold
improvements of $487,000 were financed over three years and the capitalized
interest cost began to be amortized over seven years. The Company earned $64,000
in interest income in 1997. The Company had an income tax benefit of $8,000 in
1997 as compared to an income tax benefit of $402,000 in 1996. As a result of
these transactions the Company has a loss from continuing operations of $11,000
in 1997 and income from continuing operations of $545,000 in 1996.
Income from discontinued operations was $2,083,000 in 1997 as compared to
a loss of $377,000 in 1996. This was due to the Company's sale in 1997 of the
Systems Business which resulted in a gain of $1,311,000, net of income tax of
$565,000, and the
12
<PAGE>
sale of its interest in Florida Specialty Networks, Ltd (FSN) resulting in a
gain of $1,389,000, net of income tax of $916,000. In addition, the Company had
a loss in 1997 from its 20% equity in FSN of $97,000 as compared to net income
of $136,000 in 1996. For the year ended 1997 the Company had net income of
$2,072,000 as compared to net income of $168,000 in 1996.
Liquidity and Capital Resources
The Company had a working capital ratio of 1.6 to 1 in 1998, as compared
to 3.1 to 1 in 1997. For the year ended December 31, 1998 net cash provided by
operating activities amounted to $788,000 as compared to net cash used of
$96,000 in 1997. Depreciation and amortization was $1,130,000 in 1998, a 44%
increase from the $784,000 in 1997. The increase was due to the NYU Gamma Knife
being in service for a full calendar year. Accounts payable and accrued expenses
increased by $967,000 as a result of an accrual of $934,000 made for settlement
of a lawsuit, discussed in Items 3 and 13.
The Company's net cash used in investing activities was $996,000 in 1998
compared to $3,789,000 net cash provided by investing activities in 1997. There
were purchases of property and equipment of $85,000 in 1998 as compared to
$1,102,000 in 1997 when USN completed construction of the NYU Gamma Knife
facility. The Company purchased certificates of deposit of $905,000 in 1998. In
1997 the Company received $2,100,000 for the sale of its System Business, and
$2,330,000 from the sale of its investment in Florida Specialty Networks.
Net cash used in financing activities was $1,195,000 in 1998 compared to
$386,000 in 1996. USN made lease repayments of $1,195,000 in 1998 versus
$486,000 in 1997.
The annual lease payments for the Gamma Knife at RMC in Kansas City total
$827,000. At December 31, 1998 USN had one and a half years remaining on this
capital lease. The leases for the NYU equipment and improvements require annual
payments of $792,000 and $221,000 respectively. As a result of all of the above,
there was a decrease of cash and cash equivalents of $1,403,000 in 1998 as
compared to an increase of $3,307,000 in 1997. Management believes that the
capital resources derived through
13
<PAGE>
internally generated funds from operations and current cash balances will be
sufficient to satisfy the Company's operating and capital needs for the
forseeable future.
Year 2000 Compliance
The Company relies significantly on computer technology throughout its
business to effectively carry out its day-to-day operations. The Company has
assessed all of its computer systems to ensure that they are "Year 2000"
compliant. The Company is in the process of completing its Year 2000 project.
This process should be completed in a timely manner. However, there can be no
assurance that the systems of other companies on which the Company may rely also
will be converted in a timely manner or that such failure to convert by another
company would not have an adverse effect on the Company's systems. The cost to
the Company of such changes is difficult to estimate but is not expected to have
a material financial impact. Actual results could differ materially from the
Company's expectations due to unanticipated technological difficulties, vendor
delays and vendor cost overruns.
Disclosure Regarding Forward Looking Statements
Statements contained in this Annual Report on Form 10-K that are not
historical facts are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Investors are cautioned that
forward-looking statements are inherently uncertain. Actual performance and
results may differ materially from that projected or suggested herein due to
certain risks and uncertainties including, without limitation, the outcome of
the Company's legal proceedings, 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
14
<PAGE>
materially from that projected or suggested may be identified from time to time
in the Company filings with the Securities and Exchange Commission (SEC) and the
Company's public announcements, copies of which are available from the SEC or
from the Company upon request.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are listed under Item 14
in this Annual Report of Form 10-K and attached hereto.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
15
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Alan Gold 54 President & Chairman
William F. Leimkuhler 46 Director
Charles H. Merriman, III 64 Director
Alan Gold has served as President and a director since the Company's
formation. He was one of the founders of Global Health Systems, the predecessor
of the Company, serving as its President since its formation in July 1983. From
1981 to 1983 he served as Executive Vice-President of Libra Group, a company
located in Rockville, Maryland, engaged in health care automation, where he was
President of Global Health Foundation and Libra Research and Executive Vice
President of Libra Technology. From July 1997 through March 1998 Mr. Gold was
also an employee of Health Management Systems.
William F. Leimkuhler has served as director of the Company since its
incorporation in 1984. Since January 1994, Mr. Leimkuhler 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 the Company on various matters since
the Company's formation.
Charles H. Merriman, III is a Managing Director of the Investment Banking
and Corporate Finance Department of Scott & Stringfellow, an investment banking
firm where
16
<PAGE>
he has been employed since 1972. Mr. Merriman has extensive knowledge of the
Company's primary focus on healthcare and technology.
Pursuant to the Company's Bylaws, the Company's Board of Directors is
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 do 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. During the year ended December 31, 1998, the Board of
Directors held six meetings, which were attended by all incumbent directors. The
Company does not have a standing audit, nominating or compensation committee.
Pursuant to the Company's Bylaws, officers of the Company hold office
until the first meeting of directors following the next annual meeting of
stockholders and until their successors are chosen and qualified.
Section 16 (a) Beneficial Ownership Reporting Compliance
Based solely upon a review of the copies of the forms furnished to the
Company, or written representations from certain reporting persons, the Company
believes that during the year ended December 31, 1998, except as set forth
below, all filing requirements applicable to its officers and directors were
complied with by such individuals.
ITEM 11 EXECUTIVE COMPENSATION
The information below sets forth the compensation for the year ended
December 31, 1998, for each executive officer of the Company:
Summary Compensation Table
Name and Annual Compensation Long Term Compensation
- -------- ------------------- ----------------------
17
<PAGE>
Principal Position Year Salary($) Options/ SARs
- ------------------ ---- --------- -------------
Alan Gold, 1998 $207,500
President & Director 1997 $115,000 100,000
1996 $150,000
The Company and Mr. Gold are parties to an employment agreement giving
either the Company or Mr. Gold the option to terminate the agreement by giving
the other party 6 months written notice.
Stock Option Plan
Effective October 23, 1997 the Company adopted a 1997 Stock Option Plan ("the
1997 Plan") for officers, directors, consultants and other key personnel of the
Company. This plan replaces the 1986 Stock Option Plan which had expired. There
remain 99,000 options outstanding from the 1986 Stock Option Plan. The 1997 Plan
authorizes the granting of incentive stock options ("ISO") and non qualified
stock options to purchase up to 750,000 shares of the Company's common stock at
a price not less than 100% (110% in the case of ISO's granted a person who owns
stock possessing more than 10% of the voting power of the Company) of the fair
market value of the common stock on the date of grant and provided that no
portion of the option may be exercised beyond ten years from that date (five
years in the case of ISO's granted to 10% shareholder). During 1998 options for
35,000 shares were granted and at December 31, 1998, 360,000 options were
outstanding under the 1997 plan and 390,000 options were available for grants.
Aggregate Unexercised Options & Option Values at December 31, 1998
The following table sets forth, as of December 31, 1998 the number of options
and the value of unexercised options held by Alan Gold.
Value of Unexercised In-The
Number of Unexercised Options Money Options at December
at December 31, 1998 (#) 31, 1998 ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
Alan Gold 149,000 / 0 $391,870/ 0 (1)
(1) Based on average of closing bid and asked prices ($2.63) of the
Company's common stock on December 31, 1998.
18
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1999, certain information
with respect to each beneficial owner of more than 5% of the Company's Common
Stock and each director and executive officer of the Company:
Number of Shares
Name and Address Beneficially Percent of
of Beneficial Owner Owned (1) Class
- ------------------- --------- -----
Alan Gold (2) 641,928 9.1%
2400 Research Blvd
Rockville, MD 20850
William F. Leimkuhler (3) 100,000 1.4%
711 Fifth Avenue
New York, NY 10022
Charles H. Merriman III (4) 107,000 1.4%
C/O Scott & Stringfellow
PO Box 1575
Richmond, VA 23218
Stanley S. Shuman (5) 1,071,250 15.3%
711 Fifth Avenue
New York, NY 10022
Allen & Company Incorporated (6) 2,022,000 28.5%
711 Fifth Avenue
New York, NY 10022
Research Medical Center 375,000 5.4%
2316 East Meyer Blvd
Kansas City, MO 64132
All Directors and Officers (7) 848,928 12.0%
as a group (three persons) (2) (3) (4)
- ----------
(1) Unless otherwise indicated, all shares are beneficially owned and sole
voting and investment power is held by the person named above.
(2) Includes 422,928 shares held jointly by Mr. Gold and his wife, Susan Gold,
as joint tenants with right of survivorship and 149,000 exercisable stock
options. Also includes 70,000 exercisable stock options issued to Ms.
Gold.
19
<PAGE>
(3) Includes 100,000 exercisable stock options held by Mr. Leimkuhler.
(4) Includes 100,000 exercisable stock options held by Mr. Merriman.
(5) Includes 210,250 shares held in certain trusts for the benefit of Mr.
Shuman's children, of which shares Mr. Shuman disclaims beneficial
interest. Also includes warrants to purchase 20,000 shares of Common Stock
beneficially owned by Mr. Shuman. Does not include shares owned by Allen &
Company Incorporated ("Allen"), of which Mr. Shuman is a Managing
Director, and as to which shares Mr. Shuman disclaims beneficial
ownership.
(6) Does not include outstanding shares of Common Stock and warrants to
purchase Common Stock owned by persons, including Mr. Shuman, who are
officers and directors of Allen or relatives of the foregoing, as to which
shares Allen disclaims beneficial ownership. In addition, Allen's shares
include warrants to purchase 120,000 shares beneficially owned by Allen.
20
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1993, pursuant to an agreement (the "USN Agreement") between the Company and
A. Hyman Kirshenbaum, M.D. ("Kirshenbaum") and Jerry Brown, Ph.D ("Brown") , the
Company, among other things, granted an aggregate 20% interest in USN to Brown
and Kirshenbaum. In addition, following the execution of the USN agreement,
Kirshenbaum was appointed as an officer of USN and Brown was appointed to the
Company's Board of Directors and executed an employment agreement with USN.
Under the terms of the USN Agreement, the Company possessed the right to
repurchase for cash or Common Stock such 20% interest during each of the third
through sixth full fiscal years of the USN Agreement at a value to be calculated
by the Company in accordance with the terms of the USN Agreement. The Company
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, the Company instituted an action (the "Declaratory Action")
in the United States District Court of Maryland, Southern Division against
Kirshenbaum and Brown seeking a declaration from the Court that its repurchase
of Brown's and Kirshenbaum's 20% interest in USN for $38,781.40 was fair and
equitable. Because of the dispute between the Company and Brown and Kirshenbaum
on the valuation of their 20% in USN, the Company filed the Declaratory Action
to determine: (1) whether the Company's repurchase is proper; (2) whether the
valuation of Brown's and Kirshenbaum's 20% interest in USN is just and fair; (3)
whether Brown's and Kirshenbaum's valuation of their 20% interest in USN is
improper.
In response to the Declaratory Action, Brown and Kirshenbaum filed a
counterclaim and third party claim against the Company, USN, Alan Gold and
Allen. The counterclaim against the Company and third party claim against USN
and the other parties is purported for (1) violation of the RICO statutes (18
U.S.C. ss1962(c) and (d)); (2) various causes of action for fraud; and (3)
various causes of action for breach of contract. The RICO and fraud counts seek
damages of not less than $9 million per count and also seek the imposition of
treble damages for RICO and punitive damages for the fraud counts. The breach of
contract counts range from $250,000 to $600,000. The claims of RICO and fraud
arise out of an alleged conspiracy between the Company and
21
<PAGE>
other parties to missappropriate a business concept allegedly created by Brown
and Kirshenbaum. The remainder of Brown's and Kirshenbaum's claims are in the
nature of a breach of contract between the Company, USN and Brown and
Kirshenbaum.
USN filed a counterclaim against Brown and Kirshenbaum alleging various
torts claims arising out of the business relationship. On September 4, 1998 the
Court dismissed Brown and Kirshenbaum's counterclaim for RICO actions brought
against GHS and USN.
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. Brown seeks
approximately $381,000.00 for lost salary and $36,000.00 for unreimbursed
expenses in addition to the consequential damages and treble damages he seeks
under his various counts of the Complaint.
On September 8, 1998 the Circuit Court for Montgomery County entered a
Stipulation for stay of action for Brown to pursue his claims in the federal
action. Subsequently Brown and Kirshenbaum filed an amended Complaint in the
federal action to include Brown's state court allegations.
On January 14, 1999 the parties executed a Term Sheet for settlement of
all actions involving the parties to the litigation including GHS, USN and Alan
Gold. On January 19, 1999 the Court entered an order administratively closing
the case and that order was extended on March 18, 1999 allowing any party
without prejudice to move for good cause to reopen the case if final settlement
had not been achieved or consummated by April 19, 1999.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed
as part of this report:
Page No.
--------
Consolidated Financial Statements of the Company
Independent Auditors' Report F-1
Balance Sheet as of December 31, 1998 and 1997 F-2
Statements of Operations for the years ended
December 31, 1998, 1997, and 1996 F-3
Statements of Changes in Stockholders' Equity
for the period January 1, 1996 through
December 31, 1998 F-4
Statements of Cash Flows for the year ended
December 31, 1998, 1997, and 1996 F-5
Notes to Financial Statements F-6
Report of Independent Auditors with respect to
Supplementary Schedules S-1
Valuation and Qualifying Accounts S-2
All other schedules have been omitted as the conditions requiring their
filing are not present or the information required therein has been included in
the notes to the financial statements.
(b) Reports on Form 8-K
None
(c) Exhibits
3 Articles of Incorporation and By-laws
(a) Restated Certificate of Incorporation and by-laws of the Company
(incorporated by reference to exhibits 3.1 and 3.2 of the Company's
Registration Statement No. 33-4532-W on Form S-18)
(b) Certificate of Amendment dated June 18, 1987 (incorporated by
reference to exhibit 3(b) of the Company's 1987 Annual Report on
Form 10-K).
(c) Certificate of Amendment dated November 17, 1989 (pursuant to
which the Company changed its name to GHS, Inc.) (incorporated by
reference to exhibit 3(c) of the Company's 1988 Annual Report on
Form 10-K).
10 Material Contracts
23
<PAGE>
(a) Employment Agreement dated December 14, 1984 between the Company
and Alan Gold, as amended March 7, 1986 (incorporated by reference
to Exhibit 10.3 of the Company's Registration Statement No.
33-4532-W on form S-18).
(b) Gamma Knife Neuroradiosurgery Equipment Agreement dated August,
1993 between Research Medical Center and US NeuroSurgical
(incorporated by reference to Exhibit 10h to the Company's Quarterly
Report or Form 10-Q for the quarter ended September 30, 1993).
(c) Agreement for Issuance and Sale of Stock dated August, 1993
between Research Medical Center and GHS, Inc. (incorporated by
reference to Exhibit 10i to the Company's Quarterly Report or Form
10-Q for the quarter ended September 30, 1993).
(d) Ground Lease Agreement dated August, 1993 between Research
Medical Center and US NeuroSurgical (incorporated by reference to
Exhibit 10j to the Company's Quarterly Report or Form 10-Q for the
quarter ended September 30, 1993).
(e) LGK Agreement dated July 12, 1993 between Elekta Instruments,
Inc. and US NeuroSurgical (incorporated by reference to Exhibit 10k
to the Company's Quarterly Report or Form 10-Q for the quarter ended
September 30, 1993).
(f) Agreement dated July 23, 1993 between GHS, Inc., and A. Hyman
Kirshenbaum, M.D., and Jerry M. Brown, Ph.D., (incorporated by
reference to Exhibit 10n to the Company's Quarterly Report or
Form 10-Q/A for the quarter ended September 31, 1993.)
(g) Agreement dated October 28, 1994 between U.S. NeuroSurgical,
Inc. and Financing for Science and Industry, Inc. (incorporated by
reference 10n to the Company's 1994 Annual Report on Form 10-K).
(h) Agreement dated December 29, 1993, between U.S. NeuroSurgical,
Inc. and Elekta Instruments, Inc. (incorporated by reference 10o to
the Company's 1994 Annual Report on Form 10-K).
(i) Asset Purchase Agreement dated March 10, 1997 between Health
Management Systems, Inc. and GHS, Inc. (incorporated by reference
10i to the Company's 1997 Annual Report on Form 10-K).
(j) Agreement dated August 1, 1996 between U. S. Neurosurgical, Inc
and DVI, Inc. (incorporated by reference 10j to the Company's 1997
Annual Report on Form 10-K).
24
<PAGE>
(k) 1997 Stock Option Plan (incorporated by reference 10k to the
Company's 1997 Annual Report on Form 10-K).
(m) Asset Purchase Agreement dated October 16, 1997 between Florida
Specialty Network, Ltd. and CMSF, Inc. (incorporated by reference
10m to the Company's 1997 Annual Report on Form 10-K).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 12, 1999
GHS, Inc.
(Registrant)
By /s/ Alan Gold
------------------------------------------
Alan Gold
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
April 12, 1999 /s/ Alan Gold
------------------------------------------
Alan Gold
President and Director
(Chief Executive, Financial Officer)
April 12, 1999 /s/ William F. Leimkuhler
------------------------------------------
William F. Leimkuhler
Director
April 12, 1999 /s/ Charles H. Merriman III
------------------------------------------
Charles H. Merriman III
Director
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
GHS, Inc.
Rockville, Maryland
We have audited the accompanying consolidated balance sheets of GHS, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 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 consolidated financial position of GHS, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the consolidated results of
their operations and their consolidated cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
January 20, 1999
F-1
<PAGE>
GHS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,063,000 $ 3,466,000
Certificates of deposit - at cost which approximates market 1,305,000 400,000
Accounts receivable 238,000 209,000
Receivable from sale of discontinued operation 494,000
Other current assets 110,000 51,000
Net current assets - discontinued operations 43,000
----------- -----------
Total current assets 4,210,000 4,169,000
----------- -----------
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
Furniture and equipment (net of accumulated depreciation
of $9,000 in 1998) 56,000
----------- -----------
Total property and equipment 5,409,000 6,454,000
----------- -----------
Deferred tax asset 260,000
Deposits 3,000
Cash held in escrow 92,000 89,000
----------- -----------
355,000 89,000
----------- -----------
$ 9,974,000 $10,712,000
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 182,000 $ 149,000
Accrued litigation settlement 934,000
Obligations under capital lease and loans payable -
current portion 1,423,000 1,195,000
Income taxes payable 67,000
----------- -----------
Total current liabilities 2,606,000 1,344,000
Deferred tax liability 450,000 450,000
Obligations under capital lease and loans payable -
net of current portion 2,794,000 4,217,000
Common stock - par value $.01; 500,000 shares issued
with put option 500,000 500,000
----------- -----------
6,350,000 6,511,000
----------- -----------
Commitments, litigation and other matters
STOCKHOLDERS' EQUITY
Preferred stock - 1,000,000 shares authorized;
none issued
Common stock - par value $.01; 25,000,000 shares authorized;
6,479,160 issued and outstanding 65,000 65,000
Additional paid-in capital 3,114,000 3,114,000
Retained earnings 445,000 1,022,000
----------- -----------
3,624,000 4,201,000
----------- -----------
$ 9,974,000 $10,712,000
=========== ===========
</TABLE>
See notes to financial statements
F-2
<PAGE>
GHS, INC. AND SUBSIDIARIES
Consolidated 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 166,000 64,000
----------- ----------- -----------
(389,000) (421,000) (302,000)
----------- ----------- -----------
Income (loss) from continuing operations before income tax
provision (benefit) and minority interest (1,360,000) (19,000) 159,000
Income tax (benefit) (451,000) (8,000) (402,000)
----------- ----------- -----------
Income (loss) from continuing operations before minority interest (909,000) (11,000) 561,000
Minority interest (16,000)
----------- ----------- -----------
Income (loss) from continuing operations (909,000) (11,000) 545,000
----------- ----------- -----------
Discontinued operations:
Income (loss) from operations of discontinued subsidiaries less
applicable income tax expense (benefit) of $22,000 in 1998,
($225,000) in 1997 and ($82,000) in 1996 34,000 (520,000) (513,000)
Equity in income (loss) of investee less applicable income tax
(benefit) of ($65,000) in 1997 and $21,000 in 1996 (97,000) 136,000
Gain on sale of equity investee less applicable income tax
of $197,000 in 1998 and $916,000 in 1997 298,000 1,389,000
Gain on sale of assets of subsidiaries less applicable income
taxes of $565,000 in 1997 1,311,000
----------- ----------- -----------
Income (loss) from discontinued operations 332,000 2,083,000 (377,000)
----------- ----------- -----------
Net income (loss) $ (577,000) $ 2,072,000 $ 168,000
=========== =========== ===========
Basic and diluted income (loss) per share:
Continuing operations $ (0.14) $ 0.00 $ 0.07
Discontinued operations 0.05 0.30 (0.05)
----------- ----------- -----------
Net income (loss) per share $ (0.09) $ 0.30 $ 0.02
=========== =========== ===========
Weighted average common shares outstanding 6,479,160 6,967,786 6,947,828
=========== =========== ===========
</TABLE>
See notes to financial statements
F-3
<PAGE>
GHS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock*
---------------------------
Number Additional Retained
of Paid-in Earnings
Shares Amount Capital (Deficit) Total
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1996 6,447,828 $ 65,000 $ 3,082,000 $(1,218,000) $ 1,929,000
Net income for the year ended
December 31, 1996 168,000 168,000
--------- ----------- ----------- ----------- -----------
Balance - December 31, 1996 6,447,828 65,000 3,082,000 (1,050,000) 2,097,000
Purchase of minority interest 31,332 32,000 32,000
Net income for the year ended
December 31, 1997 2,072,000 2,072,000
--------- ----------- ----------- ----------- -----------
Balance - December 31, 1997 6,479,160 65,000 3,114,000 1,022,000 4,201,000
Net loss for the year ended
December 31, 1998 (577,000) (577,000)
--------- ----------- ----------- ----------- -----------
Balance - December 31, 1998 6,479,160 $ 65,000 $ 3,114,000 $ 445,000 $ 3,624,000
========= =========== =========== =========== ===========
</TABLE>
* Excluding shares with put option
See notes to financial statements
F-4
<PAGE>
GHS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ (909,000) $ (11,000) $ 545,000
Adjustments to reconcile income (loss) from continuing operations
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,130,000 784,000 450,000
Deferred income tax (benefit) (260,000) (402,000)
Other 32,000
Minority interest in net loss of consolidated subsidiary 16,000
Changes in:
Accounts receivable - net (28,000) (115,000) 104,000
Other current assets (59,000) 13,000 26,000
Accounts payable and accrued expenses 967,000 (96,000) (41,000)
Income taxes payable (152,000)
Cash provided by (used in) discontinued operations 99,000 (703,000) 37,000
----------- ----------- -----------
Net cash provided by (used in) operating activities 788,000 (96,000) 735,000
----------- ----------- -----------
Cash flows from investing activities:
Property and equipment (85,000) (1,102,000)
Refundable deposits (3,000) 43,000 290,000
(Increase) decrease in cash held in escrow (3,000) 818,000 (880,000)
Refunds on Gamma Knife 22,000
Proceeds from the sale of discontinued operation 2,100,000
Proceeds from the sale of equity investee 2,330,000
Purchase of certificates of deposit (905,000) (400,000)
Cash used in discontinued operations (89,000)
----------- ----------- -----------
Net cash (used in) provided by investing activities (996,000) 3,789,000 (657,000)
----------- ----------- -----------
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
Loan payable - officer (20,000)
Notes payable - other (100,000)
Loan payable - Gamma Knife 525,000
----------- ----------- -----------
Net cash used in financing activities (1,195,000) (386,000) (117,000)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (1,403,000) 3,307,000 (39,000)
Cash and cash equivalents - beginning of period 3,466,000 159,000 198,000
----------- ----------- -----------
Cash and cash equivalents - end of period $ 2,063,000 $ 3,466,000 $ 159,000
=========== =========== ===========
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
Issuance of common stock for purchase of minority interest $ 32,000
Increase (decrease) in 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 statement
F-5
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
[1] Basis of preparation:
GHS, Inc. (the "Company") through its subsidiary, U.S. Neuro Surgical,
Inc. ("U.S. Neuro") owns and operates stereotactic radiosurgery centers,
utilizing the Gamma Knife technology. During 1995, the Company formed a
subsidiary, U.S. Neurosurgical Physics, Inc. ("USNP") to administer the
billing and collection of the Physicist's fee for operating the Gamma
Knife.
In July 1997 the Company sold substantially all the assets except accounts
receivable of two of its subsidiaries, Web Health Inc. (formerly Global
Health Systems, Inc.) and Kachina Ventures, Inc. (formerly GHS Management
Services, Inc.) to Health Management Systems, Inc. The sales price was
$2,100,000 subject to certain closing adjustments. These subsidiaries
develop, install and maintain computerized processing systems for managed
care, public health and ambulatory care facilities.
In December 1997 the Company sold its 20% investment in Florida Specialty
Network ("FSN"), a computerized processing systems provider which operates
in the United States to CMSF, Inc. ("Buyer") and Magellan Health Services,
Inc., parent of the Buyer. The Company received proceeds of approximately
$2,330,000 net of expenses and recorded a gain on sale of $2,143,000. In
addition, the Company had the opportunity to earn additional consideration
upon the achievement by FSN of certain performance milestones. In December
1998 the Company agreed to accept $494,000 in exchange for this right.
The consolidated financial statements include the accounts of GHS, Inc.
and its wholly owned subsidiaries. The results of operations of Web
Health, Inc. and Kachina Ventures Inc. and the equity in the operating
results of FSN have been reported separately as discontinued operations.
In addition, the net assets of such entities have been segregated in the
accompanying balance sheets.
[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.
[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. Furniture and equipment are being depreciated on the straight-line
method over an estimated useful life of five years.
F-6
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[5] Income (loss) per share:
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" ("Statement No. 128"). Statement No. 128
replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share is based on the weighted average number of
common shares outstanding and excludes any dilutive effects of options and
warrants. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts
for all years have been presented to conform to the Statement No. 128
requirements.
Outstanding options and warrants were not included in the computation of
diluted earnings per share because to do so would have been antidilutive
for the years presented.
[6] 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.
[9] Stock-based compensation:
Pursuant to Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), companies can
either expense the estimated fair value of employee stock options or
continue to follow the intrinsic value method set forth in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), but disclose the pro forma effects on net loss and
net loss per share had the fair value of the options been expensed. The
Company has elected to continue to apply APB 25 in accounting for its
employee stock option incentive plans (see Note F[1]).
F-7
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
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.
[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 7 years ("the term") with
the option of NYU extending the term for successive three year periods or
purchasing the Gamma Knife equipment at an appraised market value price. U.S.
Neuro may negotiate the purchase price and upon failure of the parties to agree
may request the facility be closed. All costs associated with closing and
restoring the facility to its original condition will be the liability of U.S.
Neuro. The equipment agreement, among other matters, requires U.S. Neuro to
provide (i) the use of the Gamma Knife equipment to NYU (ii) training necessary
for the proper operation of the Gamma Knife equipment (iii) sufficient supplies
for the equipment, (iv) the repair and maintenance of the equipment (v) all
basic hardware and software upgrades to the equipment and, (vi) an uptime
guarantee. In return, NYU will pay U.S. Neuro a scheduled fee based on the
number of patient procedures performed.
NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE
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.
F-8
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE (CONTINUED)
On December 6, 1994, U.S. Neuro entered into an additional agreement with Elekta
to acquire a second Gamma Knife ("Knife 2") for $2,900,000 for which it made a
deposit of $290,000 in 1994. The construction of the knife initially was
financed by FFSI through funding of progress payments made to Elekta, however,
during 1996 the Company refinanced the progress payments with DVI at which time
the Company's deposit was returned. In July 1997, upon completion of
construction, the progress payments were converted into a capital lease
obligation for $3,139,000. The lease payments provide for interest at the higher
of 12.0% or that rate adjusted for any increase in the thirty month Treasury
Note rate.
In addition, the Company entered into two (2) three year loans with DVI in the
amounts of $325,000 and $163,000 to finance the leasehold improvements required
to install the Gamma Knife at New York University Medical Center. The loans bear
interest at 12.0% - 12.9% per annum. The leases and loans payable are
collateralized by all the assets of GHS, Inc. and subsidiaries.
The obligations under the capital lease and loans payable are as follows:
December 31,
--------------------------
1998 1997
---------- ----------
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
========== ==========
Future payments 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 year ended December 31, 1997, the Company capitalized interest cost
amounting to approximately $177,000 relating to the construction of the Gamma
Knife project.
F-9
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
NOTE E - COMMON STOCK ISSUED WITH PUT OPTION
In a prior year the Company issued 500,000 shares of its common stock for $1.00
per share to RMC. If the fair market value ("FMV") of the shares is equal to or
less than $1.25 per share, RMC has the right to resell the shares to GHS, Inc.
at $1.00 per share. If the FMV exceeds $1.25, GHS, Inc. has the right of first
refusal to repurchase the shares at a price equal to 80% of the FMV
("Transaction Price"). If GHS, Inc. elects not to exercise its right of first
refusal and RMC is unable to obtain a buyer for the shares at the Transaction
Price, RMC has the right to resell the shares to GHS, Inc. at a purchase price
equal to the greater of $1.00 per share or the Transaction Price.
However, in no event shall the Company be required to purchase shares of stock
after the earlier of 2003 or such time as U.S. Neuro, Inc. no longer occupies
the RMC premises (see Note B[2]).
NOTE F - STOCKHOLDERS' EQUITY
[1] Stock options:
Effective October 23, 1997, the Company adopted a 1997 Stock Option Plan
(the "Plan") for officers, directors, consultants and other key personnel
of the Company. This plan replaces the 1986 Stock Option Plan which had
expired. Options outstanding from the 1986 Option Plan are 99,000 at
December 31, 1998. The Plan authorizes the granting of incentive stock
options ("ISO") and nonqualified stock options to purchase up to 750,000
shares of the Company's common stock at a price not less than 100% (110%
in the case of ISO's granted a person who owns stock possessing more than
10% of the voting power of the Company) of the fair market value of the
common stock on the date of grant and provides that no portion of the
option may be exercised beyond ten years from that date (five years in the
case of ISO's granted to a 10% stockholder). At December 31, 1998, 390,000
options were available for grants.
All options outstanding granted to employees of the Company shall
terminate immediately upon the termination of employment of the employee
by the Company or its subsidiaries or its parent.
Listed below is information as to options granted and exercisable.
<TABLE>
<CAPTION>
Weighted
Average Period Ended Period Ended
Period Ended Remaining December 31, 1997 December 31, 1996
December 31, 1998 Life in --------------------- ----------------------
----------------------- Years at Average Average
Exercise December 31, Exercise Exercise
Shares Price 1998 Shares Price Shares Price
------- -------- ----------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of the year 491,500 $1.00 360,000 $1.00 430,000 $1.00
Granted 35,000 $1.00 325,000 $1.00
Cancelled (67,500) (8,500)
Expired (185,000) (70,000)
------- -------- -------
Options outstanding at
end of the period 459,000 $1.00 8.67 491,500 $1.00 360,000 $1.00
======= ======== =======
Options exercisable at
end of the year 459,000 $1.00 8.67 491,500 $1.00 338,375 $1.00
======= ======== =======
</TABLE>
No compensation expense relating to the stock option grants was recorded
in 1998 and 1997 as the option exercise prices were greater than the fair
market value of the stock at date of grant. There were no options granted
during 1996.
F-10
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
NOTE F - STOCKHOLDERS' EQUITY (CONTINUED)
[1] Stock options: (continued)
Pro forma information regarding net income (loss) and basic and diluted
income (loss) per share is required by SFAS No. 123, and has been
determined as if the Company had accounted for its employee stock options
under the fair value method of that statement. The following pro forma
information gives effect to fair value for those options issued during
1998 and 1997 and which was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions: dividend yield 0%, volatility of 60%, risk free interest
rates of 6.09% and 5.50% and expected life of 10 years.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Loss from continuing operations:
As reported $ (909,000) $ (11,000)
Pro forma (935,000) (210,000)
Basic and diluted loss per share from continuing operations:
As reported $ (.14) $ .00
Pro forma (.14) (.03)
</TABLE>
[2] Preferred stock:
The Company has authorized 1,000,000 shares of preferred stock, none of
which is issued. The rights and preferences of preferred stock are
established at the discretion of the Board of Directors upon issuance.
[3] Issuance of warrants:
On November 30, 1993, the Company granted warrants to a stockholder to
purchase 200,000 shares of the Company's common stock at a purchase price
of $1.00 per share, which equaled fair value at the date of grant. Such
warrants were granted as consideration for services rendered in connection
with a private placement of securities. The warrants contain registration
and certain anti-dilution rights and expire on November 30, 2003.
NOTE G - COMMITMENTS AND OTHER MATTERS
[1] Lease agreement:
On March 5, 1998 the Company entered into a lease for office premises
which expires March 31, 2003. The terms of the lease include an escalation
clause beginning January 1, 1999 for payment of a pro rata share of
certain operating expenses.
F-11
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
NOTE G - COMMITMENTS AND OTHER MATTERS (CONTINUED)
[1] Lease agreement: (continued)
Minimum future obligations under the operating lease are as follows:
Year Ending
December 31,
------------
1999 $32,000
2000 32,000
2001 32,000
2002 32,000
Thereafter 8,000
Rent expense was $21,000 for 1998. No rent was paid in connection with
continuing operations during 1997 or 1996.
[2] 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.
NOTE H - TAXES
The components of the income tax provision (benefit) applicable to continuing
operations is comprised of the following:
Year Ended December 31,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
Current:
Federal $(153,000) $(112,000) $ 0
State (38,000) (2,000) 0
--------- --------- ---------
(191,000) (114,000) 0
--------- --------- ---------
Deferred:
Federal (208,000) 106,000 (353,000)
State (52,000) 0 (49,000)
--------- --------- ---------
(260,000) 106,000 (402,000)
--------- --------- ---------
Income tax provision
(benefit) $(451,000) $ (8,000) $(402,000)
========= ========= =========
F-12
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
NOTE H - TAXES (CONTINUED)
A reconciliation of the tax provision (benefit) calculated at the statutory
federal income tax rate with amounts reported in the statements of operations
applicable to continuing operations follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Income tax provision (benefit) at the federal
statutory rate $(462,000) $ (6,000) $ 54,000
State income tax provision (benefit), net of federal
taxes (75,000) (2,000) 7,000
Permanent difference for portion of accrued
litigation settlement 114,000
Change in valuation allowance (463,000)
Other (28,000)
--------- --------- ---------
Income tax provision (benefit) $(451,000) $ (8,000) $(402,000)
========= ========= =========
</TABLE>
Items which give rise to deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Litigation settlement accrued for financial
reporting purposes $260,000
Net operating loss carryforward $ 1,013,000
Allowance for doubtful accounts 64,000
Excess of tax depreciation over book depreciation (450,000) $(450,000) (344,000)
Valuation allowance (270,000)
--------- --------- -----------
Deferred tax asset (liability) - net $(190,000) $(450,000) $ 463,000
========= ========= ===========
</TABLE>
The valuation allowance decreased by $270,000 in 1997 and $348,000 in 1996. The
1997 decrease was reflected as a tax benefit in discontinued operations. The
1996 decrease was reflected as a tax benefit of $463,000 in continuing
operations. The $115,000 net difference was related to the net operating loss
attributable to discontinued operations. 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 I - DISCONTINUED OPERATIONS
On July 15, 1997, the Company sold substantially all the assets of two of its
subsidiaries, Web Health Inc. (formerly Global Health Systems, Inc.) and Kachina
Ventures, Inc. (formerly GHS Management Services, Inc.) to Health Management
Systems, Inc. (see Note A[1]).
In addition, in December 1997 the Company sold its 20% investment in FSN to
CMSF, Inc. (see Note A[1]).
F-13
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
NOTE I - DISCONTINUED OPERATIONS (CONTINUED)
Net assets of discontinued operations included in the consolidated balance sheet
as of December 31, 1997 consist of accounts receivable of $43,000.
The condensed statement of loss from discontinued operations attributable to
subsidiaries whose net assets were sold is presented below.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenue $ 56,000 $ 1,202,000 $ 2,780,000
Costs and expenses 1,947,000 3,375,000
----------- ----------- -----------
Income (loss) from operations before income tax (benefit) 56,000 (745,000) (595,000)
----------- ----------- -----------
Income tax (benefit):
Current 22,000 (70,000)
Deferred (155,000) (82,000)
----------- ----------- -----------
22,000 (225,000) (82,000)
----------- ----------- -----------
Income (loss) from discontinued operations $ 34,000 $ (520,000) $ (513,000)
=========== =========== ===========
</TABLE>
NOTE J - PURCHASE OF MINORITY INTEREST AND RELATED LITIGATION
In 1993, pursuant to an agreement (the "USN Agreement") between the Company and
A. Hyman Kirshenbaum, M.D. ("Kirshenbaum") and Jerry Brown, Ph.D ("Brown"), the
Company, among other things, granted an aggregate 20% interest in USN to Brown
and Kirshenbaum. In addition, following the execution of the USN Agreement,
Kirshenbaum was appointed as an officer of USN and Brown was appointed to the
Company's Board of Directors and executed an employment agreement with USN.
Under the terms of the USN Agreement, the Company possessed the right to
repurchase for cash or common stock such 20% interest during each of the third
through sixth full fiscal years of the USN Agreement. The Company exercised its
right to repurchase the 20% interest in USN in September 1996 at a value of
$38,781.40, which value was calculated by the Company in accordance with the
terms of the USN Agreement and in 1997 the Company paid the purchase price
through the issuance of shares of common stock valued at $31,332 plus offsetting
a receivable of $7,450 from Brown against the purchase price. Such valuation was
disputed by Brown and Kirshenbaum.
In June 1997, the Company instituted an action (the "Declaratory Action") in the
United States District Court of Maryland, Southern Division against Kirshenbaum
and Brown seeking a declaration from the Court that its repurchase of Brown's
and Kirshenbaum's 20% interest in USN for $38,781.40 was fair and equitable.
Because of the dispute between the Company and Brown and Kirshenbaum on the
valuation of their 20% interest in USN, the Company filed the Declaratory Action
to determine: (1) whether the Company's repurchase is proper; (2) whether the
valuation of Brown's and Kirshenbaum's 20% interest in USN is just and fair; and
(3) whether Brown's and Kirshenbaum's valuation of their 20% interest in USN is
improper. If successful in this action, the Company will be entitled to purchase
Brown's and Kirshenbaum's 20% interest for $38,781.40. If unsuccessful, and
Brown's and Kirshenbaum's valuation is determined to be correct, the Company may
be required to purchase Brown's and Kirshenbaum's interests in USN for
approximately $584,497.
F-14
<PAGE>
GHS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
NOTE J - PURCHASE OF MINORITY INTEREST AND RELATED LITIGATION (CONTINUED)
In response to the Declaratory Action, Brown and Kirshenbaum filed a
counterclaim and third party claim against the Company, USN and others. The
counterclaim against the Company and third party claim against USN and the other
parties is purportedly for violations of: (1) the RICO statutes; (2) various
causes of action for fraud; and (3) various causes of action for breach of
contract. The United States District Court of Maryland dismissed the RICO claims
against USN and the Company. The fraud counts seek damages of not less than $9
million per count and also seek the imposition of treble damages for punitive
damages for the fraud counts. The breach of contract counts range from $250,000
to $600,000. The claims of fraud arise out of an alleged conspiracy between the
Company and other parties to misappropriate a business concept allegedly created
by Brown and Kirshenbaum. The remainder of Brown's and Kirschenbaum's claims are
in the nature of a breach of contract between the Company, USN and Brown and
Kirshenbaum.
In addition to the above-described federal court action, Brown has filed a state
court action in the District Court in and for Montgomery County, Maryland
against USN and other parties seeking breach of contract damages for lost
salary, unreimbursed expenses and for consequential damages and costs arising
out of what he claims to be an improper termination from USN. Brown seeks
approximately $381,000 for lost salary and $36,000 for unreimbursed expenses in
addition to the consequential damages and treble damages he seeks under his
various counts of his compliant. USN has and continues to vigorously defend this
action. Because the case is in the initial pleading stages, no evaluation of the
likelihood of an unfavorable outcome can be made at this time.
In January 1999 the parties participated in a settlement conference and reached
a tentative agreement to settle all of the claims currently pending between the
parties. While no formal settlement agreement has been signed to date, the
parties have agreed to administratively close the Declaratory Action,
counterclaim and third party claim for a period of sixty (60) days in order to
finalize the settlement documentation. A $934,000 liability was established at
December 31, 1998 for this proposed settlement.
NOTE K - EMPLOYEES' 401(K) PLAN
During 1997 the Company established a 401(k) plan covering substantially all its
employees, which includes employer participation, in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The plan allows
participants to make pretax contributions and the Company may, at its
discretion, match certain percentages of the employee contribution. All amounts
contributed to the plan are deposited into a trust fund administered by
independent trustees. The Company's discretionary matching 401(k) contributions
for 1998 and 1997 were $13,000 and $2,200, respectively.
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY SCHEDULE
Board of Directors and Stockholders
GHS, Inc.
Rockville, Maryland
The audits referred to in our report dated January 20, 1999 include Schedule II.
This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit. In our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Richard A. Eisner & Company, LLP
New York, New York
January 20, 1999
S-1
<PAGE>
GHS, INC. AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts
Column B
Balance Column C
at Additions
Beginning Charged to
Column A of Costs and
Description Period Expenses
- ----------------------------------------- --------- ----------
Allowance for doubtful accounts:
1998 $ 0
========
1997 $164,000
========
1996 $ 14,000 $150,000
======== ========
Reserve for inventory obsolescence:
1998 $ 0
========
1997 $ 0
========
1996 $ 15,000
========
(A) 1997 - Bad debt write-off
(B) 1996 - Liquidation of obsolete inventory
Amounts shown above relate to discontinued operations
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from GHS, Inc.
10K and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,063,000
<SECURITIES> 1,305,000
<RECEIVABLES> 732,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,210,000
<PP&E> 8,308,000
<DEPRECIATION> 2,955,000
<TOTAL-ASSETS> 9,974,000
<CURRENT-LIABILITIES> 2,606,000
<BONDS> 4,217,000
0
0
<COMMON> 65,000
<OTHER-SE> 3,559,000
<TOTAL-LIABILITY-AND-EQUITY> 9,974,000
<SALES> 2,332,000
<TOTAL-REVENUES> 2,332,000
<CGS> 1,221,000
<TOTAL-COSTS> 1,221,000
<OTHER-EXPENSES> 2,092,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 555,000
<INCOME-PRETAX> (1,360,000)
<INCOME-TAX> (451,000)
<INCOME-CONTINUING> (909,000)
<DISCONTINUED> 332,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (577,000)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
