<PAGE> 1
ANNUAL REPORT FOR SMALL BUSINESS ISSUERS SUBJECT
TO THE 1934 ACT REPORTING REQUIREMENTS
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER: 000-26740
AMERICAN HEALTHCHOICE, INC.
---------------------------
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEW YORK 11-2931252
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1300 W. WALNUT HILL LANE, SUITE 275
IRVING, TEXAS 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Issuer's telephone number: (972) 751-1900
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's gross revenues for its most recent fiscal year: $15,763,445
($9,755,786 net).
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State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act).
Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes____ No____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of January 7, 1998, the Registrant had issued and outstanding
9,870,614 shares of the Registrant's Common Stock. The aggregate market
value of the voting stock held by non-affiliates of the Registrant as of
September 30, 1997, was $380,912,282.*
* Based on the last reported price of an actual transaction in
Registrant's common stock on September 30, 1997, and reports of
beneficial ownership filed by directors and executive officers of
Registrant and by beneficial owners of more than 5% of the outstanding
shares of Common Stock of Registrant; however, such determination of
shares owned by affiliates does not constitute an admission of
affiliate status or beneficial interest in shares of Registrant's
Common Stock.
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AMERICAN HEALTHCHOICE, INC.
FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C>
PART I
Item 1. Business ........................................................................................ 4
Item 2. Description of Property.......................................................................... 13
Item 3. Legal Proceedings ............................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 14
PART II
Item 5. Market for Common Equity and Related Stockholder Matters......................................... 14
Item 6. Management's Discussion and Analysis of Results
of Operations ................................................................................... 15
Item 7. Financial Statements............................................................................. 20
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure ............................................................. 39
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act ...................................... 40
Item 10. Executive Compensation........................................................................... 42
Item 11. Security Ownership of Certain Beneficial Owners
and Management .................................................................................. 44
Item 12. Certain Relationships and Related Transactions................................................... 45
Item 13. Exhibits and Reports on Form 8-K................................................................. 46
SIGNATURES ............................................................................................... 48
</TABLE>
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PART I
ITEM 1. BUSINESS
THE COMPANY
HISTORY
American HealthChoice, Inc., a New York corporation formerly known as
Paudan, Inc. (together with its subsidiaries, the "Company"), was incorporated
on September 14, 1988 and was initially formed with the intent of acquiring a
suitable business that management determined had potential for future growth.
Until March 1995 the Company had no operations. On March 31, 1995, the Company
underwent a comprehensive reorganization by acquiring American HealthChoice,
Inc., a Delaware corporation ("American HealthChoice (DE)"), formed in 1993 to
organize and acquire primary care medical clinics and to provide, on an ongoing
basis, comprehensive management services. At the time of this transaction
American HealthChoice (DE) operated six clinics which provided medical,
chiropractic and physical therapy services in Texas and Louisiana. The Company
acquired American HealthChoice (DE) in a reverse acquisition in exchange for
4,962,000 shares of the Company's $0.001 par value common stock. In connection
with the reorganization, the stockholders of American HealthChoice (DE) acquired
91.6 % of the voting shares of the Company. The Company changed its name from
Paudan, Inc. to American HealthChoice, Inc. during fiscal year 1995.
GENERAL
The Company is a medical management organization that acquires, organizes
and manages primary care medical clinics and other physician groups. The Company
currently owns and provides broad-based management and marketing services to 22
clinics located in Texas, Louisiana and Georgia (4 clinics combine physical
therapy clinics at or close to the same location). The Company has primary care
clinics in the San Antonio and the Rio Grande Valley (McAllen and Brownsville),
Texas, New Orleans, Louisiana, and Atlanta, Georgia metropolitan areas.
Additionally, the Company owns one center that provides diagnostic services. The
Company plans to expand its existing clinics and add new clinics either through
new start-up clinics or the acquisition of existing primary care clinics. The
Company will continue to explore expansion of its markets, particularly in areas
of existing clinic locations or where networks can be easily developed. See
"Management's Discussion and Analysis of Results of Operations."
At September 30, 1997 the Company had a total of 118 employees. Of this
number 74 were employed by the Company's medical clinics, 38 by the chiropractic
clinics, and 6 at the Company's corporate office. At September 30, 1996, the
Company employed 193 people of which 125 were employed by the medical clinics,
57 by the chiropractic clinics, and 11 by the corporate office.
Concerns over the accelerating cost of health care have resulted in the
increasing prominence of managed care. Managed care involves a third party
assuming responsibility for ensuring that health care is provided in a high
quality, cost effective manner. The focus on cost-containment has placed small
to mid-sized groups and sole medical practices at a significant disadvantage.
This results typically from higher operating costs and little purchasing power
with suppliers, requiring overhead costs to be spread over a relatively small
revenue base. In addition, these practices often lack: (i) the capital to
purchase new technologies that can improve quality and reduce costs; (ii) the
accounting and quality management systems necessary to allow these physicians to
enter into sophisticated managed care risk-sharing contacts with payors; and
(iii) the ability to stay current with federal and state regulations covering
such items as hazardous waste and laboratory certifications. Additionally, small
to mid-sized groups and sole medical practices often do not have formal ties
with other medical providers or the ability to offer coordinated care across a
variety of specialties, thus reducing their competitive position relative to
larger provider organizations.
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As a result of these changes in the marketplace, physicians are
increasingly abandoning traditional private practice in favor of affiliations
with larger organizations, such as the Company, which offer skilled management,
information systems, managed care contracting, and the integration of ancillary
medical services. Many payors and their intermediaries, including governmental
entities, health maintenance organizations ("HMOs") and preferred provider
organizations ("PPOs"), are increasingly looking to outside primary care
providers of health care services to develop and maintain quality management
programs and patient care data. In addition, such payors and intermediaries look
to share the risk of providing services through arrangements which provide for
fixed payments (capitation) for patient care over a specified period of time.
As the Company develops its primary care network of providers in each of
its markets, it plans to provide a variety of services to primary care
physicians' practices, insurance carriers, hospitals, health care alliances and
other health care providers for the purposes of maximizing revenues and services
to the health care markets. Management believes that being able to supply more
services in a given market provides the Company with a strong competitive edge
when bidding on a contract basis. The Company focuses on providing improved
health care at reduced costs, and ensuring that each patient receives
appropriate and necessary quality care.
The Company, in the last two fiscal years, sustained significant operating
losses. Consequently, the Company (i) evaluated its operations; (ii) began cost
cuts; (iii) refocused on profitability of its existing clinics; and (iv) changed
its acquisition strategy. See "Management's Discussion and Analysis of Results
of Operations."
The Company's future business strategy is to: (i) become a significant
provider of primary health care in each of its market areas by increasing its
penetration of HMOs, PPOs, government-sponsored programs, commercial employer
groups and individuals; (ii) expand into new geographic markets through a
combination of development projects and acquisition efforts, thus providing a
network of primary care clinics; (iii) continue its expansion and development of
its primary care physician base, thereby creating an integrated provider network
with primary care physicians as the centerpiece; (iv) continue vertical
integration of primary care medical services to deliver an increasing proportion
of covered benefits; and (v) emphasize the use of primary care physicians and
Company-owned clinics as critical determinants in providing improved access to
cost-effective, quality health care services in its market areas.
The Company believes that primary care clinics provide the most economies
of scale in delivering quality care at the lowest price. A network of 5 to 6 of
these types of clinics in a defined geographical area has a substantial
advantage over the single autonomous clinic. Such a network of clinics
("Network") would be well positioned to accept full risk contracts from various
HMOs in the geographical area.
The Network is organized to contract with HMOs and other managed care plans
(collectively, "Health Plans") to provide a wide range of medical services to
members who enroll in programs offered by the Health Plans. Future contracts
would also entail capitation contracts. The capitation contracts allow the
Network to receive a negotiated fixed fee per Health Plan member to cover all
costs of covered services to members assigned to the Network, regardless of the
amount or level of services rendered. The Network plans to contract with Health
Plans to provide care for members covered under a Medicare Risk Contract, as
well as for commercial (under 65 years of age) members. In addition to the
capitation revenue, the Network will usually share in surpluses or deficits for
other services not covered under the capitation payment. The budgets for
hospital and other non-capitated services will be negotiated by the Company on
behalf of the Network with Health Plans.
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In order to service the Health Plan contracts, the Network enters into
agreements with physicians and other health care providers (collectively,
"Providers") to provide medical services to assigned members. These future
contracts will generally call for reimbursement to the Provider on a capitated
or discounted fee-for-service basis.
MEDICARE RISK CONTRACTS
The federal government, through the Health Care Financing Administration
("HCFA"), allows federally qualified HMOs to enter into agreements to provide
all covered Medicare services to Medicare beneficiaries who choose to enroll
with the Health Plan. Health Plans receive a capitation equal to ninety-five
percent (95%) of the average per member costs to HCFA of providing services to
Medicare beneficiaries in the same county. This amount is adjusted to reflect
differences in the demographic mix of the population enrolled with the HMO
compared to the average mix for the county.
The Health Plan is responsible for providing all Medicare covered services
to beneficiaries who enroll with the HMO. Generally, the Health Plan is able to
control medical expenses through Provider contracts, utilization review and
other means to allow for payment of all medical expenses, administration and
marketing expenses. Frequently, the Health Plan, by contract, will delegate many
functions to organized groups of health care providers. The Company expects to
perform most of these functions for the Network.
In addition, sufficient savings may be generated to allow the HMO to reduce
or eliminate Medicare co-payments and deductibles and to provide additional
services in excess of those covered by Medicare. These benefit enhancements
provide incentives to beneficiaries to join the HMO, as they reduce
out-of-pocket expenses normally incurred under standard Medicare programs.
The 1998 Medicare Physician Fee Schedule shows a 2.6% increase in primary
care services, which is the focus of the Company. Further, non-surgical services
will increase by 8.4%. Notably, fees for surgical services will drop by 10.4%.
Also, effective January 1, 1998, Medicare will allow payment for services
performed by nurse practitioners (Nps), physician assistants (PAs), and clinical
nurse specialists (CNSs) in all setting permitted by state law. Payment would be
equal to 80% of the lessor of the actual charge or 85% of the physician fee
schedule.
COMMERCIAL PLANS
Health Plans traditionally market health benefit coverage to employer
groups who provide such benefits to their employees. Premium per member is
typically one-half to one-third of the premium for a Medicare Risk Contract
enrollee. This is because nearly all commercial enrollees are under age 65, and
the average health care costs for these members are much lower than for Medicare
beneficiaries. Generally, there are more competing Health Plans offering
commercial coverage than Medicare coverage.
Typically in the case of large employers, employees can choose among one or
more HMO plans as well as a traditional indemnity plan. Employees can usually
enroll their spouses and dependents as well. Many times employers will pay for
all or nearly all of the cost of covering the employee. Some employers will pay
for all of the cost of dependent coverage, while others require the employee to
pay for some or all of dependent coverage.
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Employees may enroll in or change Health Plans at the time they become
employed, or during an annual "open enrollment" period. At the time an employee
chooses a Health Plan, the employee will choose a primary care physician for him
or herself and his or her dependents. The primary care physician is responsible
for coordinating all the health care needs of members who select such provider,
including referrals to specialists and hospitalization. The Health Plan is
responsible to provide a full range of health care services to members who
choose its plan. The Health Plan controls medical expenses using the same
techniques as for Medicare members.
The Company believes that the future of health care starts with the primary
care physician, a main focus of the Company. Upon establishing the patient
foundation, a large part of the Company's future success will depend on the
Network's profitability, which, in turn, will depend, in large part, on the
Company's ability to maximize the Network's revenues and manage the Network's
expenses. The Company's strategies that will enable it to achieve these goals
are:
First, continue to establish clusters of primary care clinics that support
the Network. Second, one of the Network's major sources of future revenue will
be capitation payments from Health Plans. Capitation amounts are subject to
negotiation with the Health Plans, and revenues can be enhanced by marketing of
the Network to Health Plans that have significant enrollment in the geographic
area served by the Network.
Another significant source of future revenue for the Network will be a
share of any surplus that the Health Plan generates in certain non-capitated
services, such as hospital fund savings. In this area, revenue can be directly
enhanced by active utilization management.
Finally, the Network is planning to generate investment income, the amount
of which can be enhanced by cash management strategies developed by the Company.
The Company is and will utilize a number of strategies to minimize the
Network's expenses. These strategies include capitating specialists to the
extent feasible, close management of claims processing, monitoring performance
and referral patterns of primary care providers and utilization review which
requires prior approval for referral to non-capitated specialists and for
procedures that are not covered by capitation payments. The ultimate thrust of
all of these strategies is to minimize the Network's obligations for referral
costs, which can create significant uncertainties and expense for the Network if
not closely managed.
One of the Company's most significant future strategies to contain Network
expenses is to capitate not only primary care physicians but also a large number
of specialists, who, historically have been compensated on a fee-for-service
basis. While a few specialties might resist capitation, most specialists can be
capitated, which enables the management of an Network to budget effectively. In
addition, the Company plans to have provider contracts that will include
financial incentives designed to encourage providers to deliver medically
appropriate services in a cost-effective manner. These future incentives may be
in the form of capitation or bonuses, or a portion of the allowed reimbursement
may be withheld and repaid only if total Network medical expenses stay within
budgeted guidelines. Most providers will also share in surpluses generated by
the Network. The Company believes that making providers aware of costs and
encouraging them to keep costs low significantly reduces Network expenses.
The address of the Company's principal office is 1300 West Walnut Hill
Lane, Suite 275, Irving, Texas 75038. The Company's telephone number is (972)
751-1900 and its telecopy number is (972) 751-1901.
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RECENT DEVELOPMENTS
Due to the Company's financial problems, the Company has spent much of its
efforts over the past year reorganizing, strengthening management, improving
clinic revenues, reducing expenses, and reducing short and long term debt. See
"Management's Discussion and Analysis of Results of Operations."
In March 1997, the Company entered into a new investor agreement with
Wingate, L.L.C. See Exhibit 10.10 Wingate Agreement. The material portions of
the agreement with Wingate called for Wingate to raise a minimum of $2,000,000
dollars and assist with the Company's plan for profitability. Wingate did raise
$2.6 million. See "Management's Discussion and Analysis of Results of
Operations." In exchange, the Company expanded its board to seven, allowed four
board seats for outside directors and issued 1,000,000 warrants at $2.75 to
Wingate.
Four of the board seats are now occupied by outside directors with
knowledge of investment banking, management, law, and accounting. Additionally,
under the Company's plan for profitability, the Board established a new
management team. In March 1997, Dr. J.W. Stucki remained as the Chief Executive
Officer. The Chief Financial Officer (CFO), Dean York, and the Chief Operations
Officer (COO), Jon Sommerhauser, resigned. In December 1996, Jay R. Stucki, was
hired as legal counsel for the Company. Jay R. Stucki then stepped in as interim
CFO and in June 1997 he accepted the additional responsibility of the CFO
position on a permanent basis. The COO position is still vacant. In August 1997,
a new controller, Elena M. Knight, was hired and the former controller was
terminated. See "Item 9. Directors, Executive Officers, Promoters and Control
Persons."
In May 1997, the Texas Department of Health notified the Company that it
would process claims that were previously rejected. In June of 1997 the Company
estimated the gross claims were approximately $700,000 for approximately 13,000
claims. The Company has thus far collected in excess of $400,000.
In June, the Board authorized the Company to seek new auditors. The Company
believed they had retained BDO Seidman as auditors and filed the required 8-K.
BDO Seidman felt the Company prematurely filed the 8-K and as a result and prior
to any work being conducted, the Company and BDO Seidman agreed not pursue the
engagement. In November 1997, the Company then engaged the accounting firm of
Lane Gorman Trubitt, LLP, as Company auditors.
Part of the Company's cost reductions involved closing five primary care
clinics in the first and second quarters of fiscal year 1997. These locations
were in Weslaco, Bryan College Station, Corpus Christi, San Antonio, Marietta
Ga.
As of September of 1997 the State of Texas implemented new regulations that
govern marketing of medical services. Anticipating such changes, the Company
adjusted its marketing efforts to ensure compliance and began efforts to
diversify its patient base to ensure long term stability.
In November and December 1996, the Company obtained $2,200,000 in a private
placement of promissory notes. The notes bore interest at 10% and were due the
earlier of twelve months after the final closing of the private placement or the
closing of a public offering of the Company's equity securities which produces
gross proceeds of at least $10 million. The Company issued approximately 200,000
shares of its common stock to the note holders at a cost of $.001 per share. The
notes were collateralized by accounts receivable, furniture, fixtures and
equipment, and all other assets of the Company to the extent not encumbered.
These notes were paid in full in September 1997.
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In December 1996, the Company completed a $1.5 million revolving credit
facility with a financial institution. The Company drew down $600,000 of this
line of credit. As part of the Wingate agreement, the investors purchased the
balance due on the revolving line of credit and the line of credit was
eliminated. The Company paid down the note each month and in September 1997 the
Company paid the balance of the note in full from proceeds of debentures sold
under a Regulation S offering.
In April and September of 1997, the Company sold convertible debentures
under a Regulation S offering. The conversion rate is 80% of the last five day
trading average of the Company's shares on The Nasdaq SmallCap Market, with a
10% interest rate. The proceeds from these offerings were used for operations
and to retire debt including a first quarter $2.2 million private placement of
notes and a $600,000 revolving line of credit. See "Management's Discussion and
Analysis of Results of Operations."
PENDING ACQUISITIONS
The Company continually has groups approach the Company about the
possibility of merging or being acquired by the Company. Though the Company's
efforts are geared towards the current operations, the Company is now looking
for opportunities for growth. The Company has entered into letters of intent to
acquire various companies from time to time. These potential acquisitions are
subject to due diligence, further negotiations, execution of definitive
agreements and the success of the Company to obtain additional funds (total or
partial) for the acquisition price. Currently, there are no pending acquisitions
because management's attention over the last fiscal year was directed at the
Company's financial performance.
HEALTH CARE INDUSTRY
The HCFA estimated that national health care spending in 1994 was
approximately $1 trillion, with approximately $200 billion directly attributable
to physician services and another $612 billion under physician direction. Health
care in the United States historically has been delivered through a fragmented
system of health care providers, including individual or small groups of primary
care physicians and specialists. According to the American Medical Association
("AMA"), approximately 565,000 physicians are actively involved in patient care
in the United States. A 1993 AMA study estimated there are over 86,000
physicians practicing in 3,600 multi-specialty group practices (three or more
physicians) and over 82,000 physicians practicing in 12,700 single specialty
group practices in the United States.
In recent years, there have been significant changes in the health care
industry affecting both primary care and specialty practices. The traditional
fee-for-service payment model has provided few incentives for the efficient
utilization of resources and has contributed to increases in health care costs
at rates significantly higher than inflation. Concerns over the accelerating
cost of health care have resulted in the increasing prominence of managed care.
Managed care involves a third party assuming responsibility for ensuring that
health care is provided in a high quality, cost effective manner. The focus on
cost-containment has placed small to mid-sized groups and sole medical practices
at a significant disadvantage because they typically have higher operating costs
and little purchasing power with suppliers, and must spread overhead costs over
a relatively small revenue base. In addition, these practices often lack both
the capital to purchase new technologies that can improve quality and reduce
costs and the information and management systems necessary to allow these
physicians to enter into sophisticated managed care risk-sharing contacts with
payors. Additionally, small to mid-sized groups and sole medical practices often
do not have formal ties with other medical providers nor the ability to offer
coordinated care across a variety of specialties, thus reducing their
competitive position relative to larger provider organizations.
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As a result of these changes in the marketplace, physicians are
increasingly abandoning traditional private practice in favor of affiliations
with larger organizations, such as the Company, which offer skilled management,
information systems and managed care contracting. Many payors and their
intermediaries, including governmental entities, HMOs and PPOs, are increasingly
looking to outside primary care providers of physician services to develop and
maintain quality management programs and patient care data. In addition, such
payors and intermediaries look to share the risk of providing services through
arrangements which provide for fixed payments (capitation) for patient care over
a specified period of time.
BUSINESS STRATEGY
The Company's business strategy is as follows:
Current Profitability. Given the financial losses over the past two years,
the Company will continue its efforts to get all of its clinics profitable.
Additionally, a planned increase in revenues of profitable clinics will help
cover corporate overhead.
Continued Growth. The Company's goal is to become a significant provider of
primary medical care in each of its market areas by increasing its penetration
of HMOs, PPOs, government-sponsored programs (Medicare and Medicaid), commercial
employer groups and individuals. In addition, the Company intends to expand into
new geographic markets through a combination of development projects and
acquisition efforts, thus providing a cluster of clinics and related services
that provide a single network of primary care for such market areas.
Increase Integration of Services. The Company intends to continue its
expansion and development of its physician base thereby creating an integrated
provider network with a specialty in primary care. In addition, the Company will
continue to vertically integrate medical services and through acquisitions or by
contracting with providers to deliver an increasing proportion of covered
benefits.
Emphasize Primary Care Physicians. The Company believes that the use of
primary care physicians and Company-owned clinics are critical determinants in
providing improved access to cost-effective, quality health care services in its
market area. The Company's strategy is to affiliate with primary care physicians
which the Company believes are increasingly the principal determinants of the
location of patient care. As a result, the Company believes that in the managed
care environment primary care physicians are in the best position to coordinate
and control the cost of a patient's overall care.
MANAGEMENT AND MARKETING SERVICES
The management and marketing services offered by the Company are designed
to assist the clinics in managing, promoting and containing the costs of
practices. The Company provides advice and assistance regarding office design,
equipment acquisition, marketing and advertising, office management, assistance
training, accounting and billing procedures, budgeting, standardized
correspondence, and signage.
The Company believes that the importance of marketing, finance, office
administration, and other non-medical activities to the successful primary care
practice of medicine has greatly increased in recent years. As a result, the
Company believes primary care physician provider clinics have the best economies
of scale in delivering quality care at the lowest price. A Network has a
substantial advantage over the single autonomous clinic and would have strong
potential to accept full risk contracts from various HMO's in the geographical
area.
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GOVERNMENT REGULATION
As a participant in the health care industry, the Company's operations are
subject to extensive and increasing regulation by a number of governmental
entities at the federal, state and local levels. The Company is also subject to
laws and regulations relating to business corporations in general. The Company
believes its operations are in material compliance with applicable laws.
Nevertheless, because of the uniqueness of the structure of the Company's
relationship with physicians and clinics, many aspects of the Company's business
operations have not been the subject of state or federal regulatory
interpretation and there can be no assurance that the health care regulatory
environment will not change so as to restrict or otherwise adversely affect the
Company's or the affiliated physician's existing operations or possible
expansion.
The laws of many states prohibit business corporations such as the Company
from practicing medicine and employing physicians to practice medicine. The
Company performs only non-medical administrative services, does not represent to
the public or its clients that it offers medical services, and does not exercise
influence or control over the practice of medicine by the physicians with whom
it contracts. Accordingly, the Company believes that it is not in violation of
applicable state laws relating to the practice of medicine. The laws in most
states regarding the corporate practice of medicine have been subjected to
limited judicial and regulatory interpretation and, therefore, no assurance can
be given that the Company's activities will be found to be in compliance, if
challenged.
In addition to prohibiting the practice of medicine, numerous states
prohibit entities like the Company from engaging in certain health care related
activities such as fee-splitting with physicians. For example, Florida enacted
its Patient Self-Referral Act in April 1992 that severely restricts patient
referrals for certain services, prohibits mark-ups of certain procedures,
requires disclosure of ownership in businesses to which patients are referred
and places other regulations on health care providers. The Company believes it
is likely that other states will adopt similar legislation. Accordingly,
expansion of the Company's operations into Florida and other states could lead
to structural and organizational modifications of the Company's form of
relationships with physician groups. Such changes, if any, could have an adverse
effect on the Company.
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Statute," prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare state health
program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. The Anti-Kickback Statute is
broad in scope and has been broadly interpreted by courts in many jurisdictions.
Read literally, the statute places at risk many legitimate business
arrangements, potentially subjecting such arrangements to lengthy, expensive
investigations and prosecutions initiated by federal and state governmental
officials. Many states have adopted similar prohibitions against payments
intended to induce referrals of Medicaid and other third party payor patients.
The Company believes that it is not in a position to make or influence the
referral of patients of services reimbursed under government programs to the
physician groups and, therefore, believes its operations do not violate the
Anti-Kickback Statute. The Company also is not a separate provider of Medicare
or state health program reimbursed services. To the extent the Company is deemed
to be either a referral source or a separate provider and to receive referrals
from physicians, the financial arrangements under these agreements could be
subject to scrutiny and prosecution under the Anti-Kickback Statute. A violation
of the Anti-Kickback Statute is a felony, punishable by fines up to $25,000 per
violation and imprisonment for up to five years. In addition, the federal
Department of Health and Human Services may impose civil penalties excluding
violators from participation in Medicare or state health programs.
11
<PAGE> 12
In July 1991, in part to address concerns regarding the Anti-Kickback
Statute, the federal government published regulations that provide exceptions,
or "safe harbors," for transactions that will be deemed not to violate the
Anti-Kickback Statute. Among the safe harbors included in the regulations were
provisions relating to the sale of practitioner practices, management and
personal services agreements, and employee relationships. Additional safe
harbors were published in September 1993 offering new protections under the
Anti-Kickback Statute to eight activities, including referrals within group
practices consisting of active investors. Proposed amendments to clarify these
safe harbors were published in July 1994 which, if adopted, would cause
substantive retroactive changes to the 1991 regulations. Although the Company
believes that it is not in violation of the Anti-Kickback Statute, its
operations do not fit within any of the existing or proposed safe harbors.
Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions,
commonly known as "Stark II," amended prior physician self-referral legislation
know as "Stark I" by dramatically enlarging the field of physician owned or
physician interested entities to which the referral prohibitions apply.
Effective January 1, 1995, Stark II prohibits, subject to certain exemptions, a
physician or a member of his immediate family from referring Medicare or
Medicaid patients to an entity providing "designated health services" in which
the physician has an ownership or investment interest, or with which the
physician has entered into a compensation arrangement including the physician's
own group practice. The designated health services include radiology and other
diagnostic services, radiation therapy services: physical and occupational
therapy services, durable medical equipment, parenteral and enteral nutrients,
equipment, and supplies, prosthetics, orthotics, outpatient prescription drugs,
home health services, and inpatient and outpatient hospital services. The
penalties for violating Stark II include a prohibition on payment by these
government programs and civil penalties of as much as $15,000 for each violative
referral and $100,000 for participation in a "circumvention scheme." The Company
believes that its activities are not in violation of Stark I or Stark II.
However, the Stark legislation is broad and ambiguous. Interpretative
regulations clarifying the provisions of Stark II have not been issued. While
the Company believes it is in compliance with the Stark legislation, future
regulations could require the Company to modify the form of its relationships
with physicians and clinics. Moreover, violation of Stark I or II by the
Company's affiliated physician groups could result in significant fines and loss
of reimbursement which would adversely affect the Company.
There are also state and federal civil and criminal statutes imposing
substantial penalties, including civil and criminal fines and imprisonment, on
health care providers which fraudulently or wrongfully bill governmental or
other third party payors for health care services. The federal law prohibiting
false billings allows a private person to bring a civil action in the name of
the United States government for violations of its provision. The Company
believes it is in material compliance with such laws, but there is no assurance
that the Company's activities will not be challenged or scrutinized by
governmental authorities. Moreover, technical Medicare and other reimbursement
rules affect the structure of physician billing arrangements. The Company
believes it is in material compliance with such regulations, although regulatory
authorities may differ and in such event the Company may have to modify its
relationship with physicians and clinics. Noncompliance with such regulations
may adversely affect the operation of the Company and subject it to penalties
and additional costs.
Laws in all states regulate the business of insurance and the operation of
HMOs. Many states also regulate the establishment and operation of networks of
health care providers. While these laws do not generally apply to the hiring and
contracting of physicians by other health care providers or to companies which
participate in capitated arrangements, there can be no assurance that regulatory
authorities of the states in which the Company operates would not apply these
laws to require licensure of the Company's operations as an insurer, as an HMO
or as a provider network. The Company believes that it is in compliance with
these laws in
12
<PAGE> 13
the states in which it does business, but there can be no assurance that future
interpretations of insurance laws and health care network laws by the regulatory
authorities in these states or in the states into which the Company may expand
will not require licensure or a restructuring of some or all of the Company's
operations.
Although the Company cannot predict whether other reductions in the
Medicare or Medicaid programs will be enacted, the enactment of such proposals
could have a material adverse impact on the Company's business.
COMPETITION
The provision of health care services and physician management services are
both highly competitive businesses in which the Company competes with numerous
entities in the health care industry. The Company also competes with traditional
providers and managers of health care services for the recruitment of employed
or managed physicians. In addition, the Company, in pursuing its growth
strategy, faces competitive pressures for the acquisition of the assets of, and
the provision of management services to, additional primary care practices.
Several companies, both publicly and privately held, that have longer
operating histories and greater resources than the Company are pursuing the
acquisition of the assets of primary care and specialist physician practices and
the management of such practices. A recent trend in health care is the
acquisition of existing medical practices with the purpose of securing HMO and
PPO contracts for such acquired medical practices.
The experience of these companies cannot be taken as any assurance of
success by the Company. The Company's strategic focus differs from a traditional
managed care company. The Company seeks to reduce costs through integration and
coordination of primary care services with ancillary medical services, while
leaving the physicians generally in control of their individual practices.
Managed care companies have sought to achieve certain economics of scale through
overall control of physicians' practices. Although the Company believes that its
strategic focus and the services and benefits it offers to physicians make the
Company an attractive purchaser of such physicians' practices, there can be no
assurance that the Company will be able to compete effectively with such
competitors, that additional competitors will not enter the market, or that such
competition will not make it more difficult to acquire the assets of, and
provide management services to, physician practices on terms beneficial to the
Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 3,500 square feet in an office building in
Irving, Texas at a monthly rent $5,289 for use as its principal headquarters.
The Company currently owns a parcel of land in San Antonio, Texas, on which the
Company's Southcross clinic is located. The Company anticipates that it may
purchase real property incident to the acquisition of clinics in the future.
The Company also leases, subleases or occupies such clinic facilities for
its clinics. The leases have varying terms ranging from month to month to five
years with monthly rents from $1,200 to $25,000. Management believes that as
practices grow and add services, expanded facilities may be required.
The Company's monthly rental liability is approximately $85,000 per month.
13
<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS
The seller of Peachtree Medical Center Northside clinic has alleged
contract default by the Company and is claiming all rights to this clinic. The
seller has taken possession of the clinic to the exclusion of the Company. A
suit was filed in federal court by the seller, Dr. Bailey. The Company filed a
counterclaim which, among other claims, asks the Court to compel arbitration.
Mediation did not prove fruitful and as of December 1997 the Company is seeking
arbitration. Arbitration is with the American Association of Arbitration,
Atlanta Ga., and the case was filed in the United States District Court,
Northern District of Georgia, Atlanta Division.
The Company is engaged in litigation with a service supplier over unpaid
invoices. The suit was filed December 31, 1997. The Company believes that a
substantial portion of this claim is associated with the Northside clinic
litigation. The Company is still researching the merits of this claim. The case
is filed in the State District Court, 162nd Judicial District, Dallas County,
Tx.
The Company is engaged in litigation with the doctor who managed the
Norcross, Georgia clinic. The Company found it necessary to terminate the
managing doctor. The managing doctor then filed a claim against the Company for
breach of contract and sought an injunction to prevent the Company from
enforcing its non-compete clause. The Court declined to enter a temporary
restraining order against enforcement of the non-compete clause. The Company
filed a counter claim against the doctor primarily for losses the Company
sustained while he managed the clinic. The case is filed in the Superior Court
of Gwinnett County, Ga.
One former doctor and two physicians assistants who worked at the Norcross,
Georgia clinic have filed a law suit naming the Company as a codefendant. The
one doctor and one of the physician assistants worked at the clinic prior to the
Company purchasing the clinic. The other physicians assistant left the clinic
within one year of the Company's purchase. The claim alleges a right to the
accounts receivable for patients the doctors treated at the clinic that were
collected after the doctors' employment ended with the clinic. The Company
denies any liability and intends to cross claim against the former managing
doctor of the clinic. The case is filed in the Superior Court of Gwinnett
County, Ga.
The Company is not involved in any other material litigation nor is
management aware of any pending litigation that would substantially impact the
Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Price of Common Stock. As of September 30, 1997, there were
9,870,614 shares of Common Stock outstanding, held by approximately 116 holders
of record. The Company is obligated to issue approximately 750,000 shares of
Common Stock in connection with the September Regulation S offering of capital,
however, given that this offering of capital is a convertible debenture based on
current market rate, the actual amount of shares issued may change
substantially.
Prior to February 1, 1996, the Common Stock was quoted in the National
Quotation Bureau's interdealer system through the NASD "Bulletin Board" under
the symbol AHIC. From February 1, 1996, the Common Stock has been listed on The
Nasdaq SmallCap Market under the symbol AHIC. According to the National
Quotation Bureau, Inc., there are no published quotations for the Common Stock
in 1994 and the first
14
<PAGE> 15
quarter of 1995. The following table shows the high and low quotations for
Common Stock for each quarter for the period June 30, 1995 through September 30,
1997 based upon information received from the National Quotation Bureau or the
Nasdaq Stock Market. Such quotations may represent prices between dealers and
may not necessarily include retail markups, markdowns or commissions, and do not
represent actual transactions.
<TABLE>
<CAPTION>
BID PRICE BID PRICE
QUARTER ENDED HIGH LOW
- ------------- ---- ---
<S> <C> <C>
June 30, 1995 $ 2 $1 3/4
September 30, 1995 $ 3 1/2 $3 1/4
December 31, 1995 $ 3 1/2 $3 1/8
March 31, 1996 $10 5/8 $5 5/8
June 30, 1996 $11 1/4 $9 3/8
September 30, 1996 $10 5/8 $8 3/8
December 31, 1996 $10 3/4 $8 3/4
March 31, 1997 $10 3/8 $2 1/4
June 30, 1997 $ 4 7/8 $2
September 30, 1997 $ 6 1/16 $4 3/4
</TABLE>
Dividends. The Company has paid no cash dividends since its inception, and
it is unlikely that any cash dividend will be paid in the future. The
declaration in the future of any cash or stock dividends will be at the
discretion of the Board depending upon the earnings, capital requirements and
financial position of the Company, general economic conditions and other
pertinent factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
GENERAL
The Company owns 22 clinics, four of which have combined physical therapy
clinics in the same location. Additionally, the Company owns one center that
provides diagnostic services. The clinics are located in three states: Texas,
Louisiana, and Georgia. This is a decrease of five clinics over the prior fiscal
year and are noted with an asterisk. The following chart details the clinics,
locations, metropolitan areas served, services provided, and date acquired or
commenced operation by the Company.
<TABLE>
<CAPTION>
METROPOLITAN AREA
CLINIC LOCATION SERVED SERVICES PROVIDED DATE ACQUIRED
- ------ -------- ------ ----------------- -------------
<S> <C> <C> <C> <C>
North East MediClinic San Antonio, TX San Antonio primary medical care 12/95
Nationwide Sports & Injury Katy, TX. Houston physical therapy 10/94
United Health Services Katy, TX Houston chiropractic 10/94
Nationwide Sports &
Injury San Antonio, TX San Antonio physical therapy 7/94
United Health Services San Antonio, TX San Antonio chiropractic 7/94
Nationwide Sports &
Injury San Antonio, TX San Antonio physical therapy 10/94
United Health Services San Antonio, TX San Antonio chiropractic 10/94
Nationwide Sports &
Injury San Antonio, TX San Antonio physical therapy 10/94
United Health Services San Antonio, TX San Antonio chiropractic 10/94
Corpus Christi Rehab Corpus Christi, TX Rio G. Valley Chiropractic 5/96
San Pedro MediClinic San Antonio, TX San Antonio primary medical care 10/94
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C> <C> <C>
South Bexar MediClinic* San Antonio, TX San Antonio primary medical care, 1/95
urgent care
Southcross MediClinic San Antonio, TX San Antonio urgent care, primary 12/95
medical care
United Chiropractic New Orleans, LA New Orleans chiropractic 7/94
New Orleans East
United Chiropractic
Uptown New Orleans, LA New Orleans chiropractic 7/94
Peachtree Medical Center Atlanta, GA Atlanta internal medicine 2/96
of Northside**
Peachtree Corners Norcross, GA Atlanta primary medical care, 9/95
Medical Center urgent care
Peachtree Medical Center Marietta, GA Atlanta internal medicine 2/96
of Windy Hill *
Peachtree Medical Center Conyers, GA Atlanta primary medical care 2/96
of Conyers
Peachtree Medical Center McDonough, GA Atlanta primary medical care 2/96
of McDonough
Valley Family Health McAllen, TX McAllen chiropractic 1/96
Center
Valley Family Health Weslaco, TX Weslaco primary medical care 7/96
Center *
University MediClinic * College Station, TX College Station primary medical care 7/96
ACME Brownsville Brownsville, TX Rio G. Valley chiropractic 7/96
Chiropractic
Corpus Christi Medical * Corpus Christi, TX Rio G. Valley primary medical care 8/96
Southmost Medical Clinic Brownsville, TX Rio G. Valley primary medical care 9/96
Disability Medicine McAllen, TX McAllen primary medical care 7/96
</TABLE>
* Clinics closed in second quarter of 1997.
** Clinic still operating but see "Item 3. Legal Proceedings".
FORWARD-LOOKING INFORMATION
This report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in the report, words such as "anticipate,"
"believe," "estimate," "expect," "intend," "should," and similar expressions, as
they relate to the Company or its management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties, and
assumptions relating to the operations, results of operations, liquidity, and
growth strategy of the Company, including competitive factors and pricing
pressures, changes in legal and regulatory requirements, interest rate
fluctuations, and general economic conditions, as well as other factors
described in this report. Should one or more of the risks materialize,
16
<PAGE> 17
or should underlying assumptions prove incorrect, actual results or outcomes may
vary materially from those described herein as anticipated, believed, estimated,
expected, or intended.
RESULTS OF OPERATIONS
The following summary of earnings and related discussion of the results of
operations should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this document.
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
NET PATIENT REVENUES $ 6,168,000 $ 10,187,000 $ 9,755,786
OPERATING EXPENSE
Compensation and benefits 2,567,000 7,489,000 9,160,742
Advertising and promotion 233,000 946,000 639,698
Depreciation and amortization 81,000 371,000 236,226
Other expense, net 1,008,000 4,562,000 6,807,108
Goodwill impairment -- 1,055,000 --
------------ ------------ ------------
TOTAL OPERATING EXPENSES 3,899,000 14,423,000 16,843,774
------------ ------------ ------------
Income/(loss) before income taxes (1) 2,279,000 (4,236,000) (7,087,988)
Income tax benefit/(expense) (1) (855,000) 1,589,000 760,154
------------ ------------ ------------
Net income/(loss) (1) $ 1,424,000 $ (2,647,000) $ (6,327,834)
============ ============ ============
Net income/(loss) per share (1) $ 0.25 $ (0.41) $ (0.78)
============ ============ ============
</TABLE>
(1)Pro forma income taxes were provided in fiscal years 1995 and 1996 to present
certain entities that were non-taxable during parts of 1995 and 1996 as if they
had been taxable for such years. For presentation purposes, actual and pro forma
income taxes (benefit) have been combined.
NET PATIENT REVENUES
For the twelve months ended September 30, 1997, net revenues were decreased
11.2% to $9,755,786 from $10,187,000 for the same period in 1996. During the
first half of fiscal year 1996, the Company acquired five primary care medical
clinics in Atlanta, Georgia and one in San Antonio, Texas, which accounts for
the increase in fiscal 1996 from fiscal 1995. The Company also formed in 1996
five start-up medical clinics in south Texas. Also, during fiscal year 1996 the
Company acquired one chiropractic clinic and opened one new clinic in south
Texas. This decrease in net patient revenues from 1996 was a result of the
closure of five unprofitable clinics as part of the Company's cost reduction
efforts over the past year. The total expenses for the year did not show a
decrease due to the high operating costs in the first half of fiscal year 1997.
COMPENSATION AND BENEFITS
For 1997, compensation and benefits were $9,160,742 compared to $7,489,000
for 1996 or an increase of $1,671,742 or 22.3%. Of such increase, approximately
$1,100,000 resulted from full versus partial year operating expenses of clinics
acquired in 1996. The balance of the increase relates principally to adoption of
FAS 123 for non employee stock options plus normal cost of living increases for
existing employees. Fiscal year 1996's compensation and benefits were $7,489,000
compared to $2,567,000 for 1995 or an increase of $4,922,000. Of such increase,
approximately $4,300,000 relates to the primary care medical clinics that were
acquired in 1996 and the new start-up medical clinics. The balance of the
increase related principally to the addition of the two chiropractic clinics in
south Texas plus normal cost of living increases for existing employees.
17
<PAGE> 18
ADVERTISING AND PROMOTION
For fiscal year 1997, advertising and promotion expense amounted to
$639,698 as compared to $946,000 for 1996, representing a decrease of $306,302.
This decrease was attributable to a reduction in advertising and promotion of
the chiropractic clinics, primarily for telemarketing services. The increase
from fiscal 1995 to fiscal 1996 of $713,000 is attributable to an increase in
advertising and promotion of the chiropractic clinics, primarily for
telemarketing services
DEPRECIATION AND AMORTIZATION
For fiscal year 1997, depreciation was $236,226 compared to $371,000 for
1996 or a decrease of $134,774. This decrease is attributable to reassessment of
the furniture, fixtures and equipment acquired through clinic acquisitions. For
fiscal year 1996, depreciation was $371,000 compared to $81,000 for 1995 or an
increase of $290,000. This increase is attributable to the purchase of
furniture, fixtures and equipment through clinic acquisitions and new start-up
formations in 1996. Also included is approximately $60,000 of goodwill
amortization for 1996
OTHER OPERATING EXPENSE
For fiscal year 1997, other operating expense was $6,807,110 as compared to
fiscal year 1996 of $4,562,000, for an increase of $2,245,110. The major
increase relates to financing costs of $2,138,328. The other expense category
includes such cost as: rental expense, medical supplies, insurance, telephone,
utilities, legal, travel and acquisition expenses. For fiscal year 1996, other
expense was $4,562,000 as compared to fiscal year 1995 of $1,008,000, for an
increase of $3,554,000. Approximately $2,500,000 relates to the acquired and
newly formed clinics. The balance relates to expense of the new chiropractic
clinics acquired and general cost increases.
GOODWILL IMPAIRMENT
Several of the Company's acquisitions and start-up clinics were
unprofitable in 1996 and 1997 and required significant cash to operate.
During 1996, new members were added to the Company's management team. Based
on their review of the Company's operations, particularly its recent
acquisitions and newly formed clinics, it was apparent that certain of the new
clinics should be closed. In connection with its acquisitions, the Company had
recorded goodwill of $1,700,000. Based on current management's assessment, the
Company believed it was necessary to write down the goodwill by approximately
$1,055,000 in fiscal year 1996. No additional goodwill impairment was required
in fiscal year 1997.
OPERATING UNITS OF BUSINESS
The Company has three primary operating units or cost centers, primary care
medical clinics, chiropractic clinics and physical therapy clinics, and the
corporate office. The pre-tax profits (losses) of these individual units for
1997 are as follows:
<TABLE>
<S> <C>
Primary medical $(1,683,412)
Chiropractic and physical therapy 1,004,711
Corporate office:
Financing & interest costs (2,667,708)
Loss on debt extinguishment (250,000)
Amortization of loan acquisition fee (970,192)
Operating expenses (2,521,389)
-----------
Total pre-tax loss $(7,087,990)
===========
</TABLE>
18
<PAGE> 19
Given the Company's fiscal 1996 and 1997 financial results, the Company
must continue its efforts to turn around its clinical operations and streamline
corporate overhead to a level where the Company's consolidated operations are
profitable.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997 the Company had working capital of $4,707,449. For
fiscal year 1997, the Company required cash for operations of $4,273,108. This
negative cash flow occurred as a result of negative cash flow at the clinics and
an increase in cash requirements of the corporate office. The Company currently
has a liquidity problem because of the operational cash short-fall in fiscal
year 1997. In addition, the Company has been inadequately capitalized from
inception to meet its current operational requirements and to fund its
acquisition strategy.
As of September 30, 1997, the Company had trade payables outstanding of
approximately $962,386. As of December 31, 1997, the trade payables decreased to
approximately $858,455. Of such amount approximately $691,547 was 90 days or
more past due. Approximately half of this amount is tied to three problem
vendors that the Company disputes the legitimacy of the amount owed.
The Company is addressing its cash flow and liquidity problems as follows:
o Reducing all debt as much as possible. With the two capital infusions
done this year the Company has paid off all bridge loans, revolving
lines of credit, expensed related financing charges, and decreased the
accounts payable.
o Closed certain unprofitable clinics.
o Instituted a budgetary process for all clinics and corporate
management.
o Continued reduction of costs at the corporate office and at the clinic
levels.
o Brought in house, legal counsel for the Company and utilized Jay
Stucki's law firm, Stucki & Associates, to the extent possible to
collect amounts owed to the Company.
o Began changing clinics over to a new computer system that provides
better data management for accounts receivables. Hired three outside
agencies to assist in collections.
o Budget includes hiring of an internal auditor and a collections
administrator to stream line cash flow.
o Terminated the Georgia Clinical Director and hired a professional
management company to manage the Company's Norcross clinic.
o Revamping marketing efforts to ensure compliance and increase patient
services.
YEAR 2000 ISSUE
The Company is mindful of the need to insure its information systems are
compliant with the Year 2000 Issue. As the Company upgrades and changes its
information systems, the Year 2000 Issue will be a part of the Company's
evaluation process. The Company expects in its next fiscal year to do a formal
review of its information systems to check compliance with the Year 2000 Issue
and plan according for any needed adjustments prior to the year 2000.
19
<PAGE> 20
ITEM 7. FINANCIAL STATEMENTS
AMERICAN HEALTHCHOICE, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Independent Auditor Reports 21
Consolidated Balance Sheet - September 30, 1997 23
Consolidated Statements of Operations - Years Ended
September 30, 1996 and 1997 24
Consolidated Statement of Stockholders' Equity - Years
Ended September 30, 1996 and 1997 25
Consolidated Statements of Cash Flows - Years Ended
September 30, 1996 and 1997 27
Notes to Consolidated Financial Statements 28
</TABLE>
20
<PAGE> 21
INDEPENDENT AUDITORS' REPORTS
To the Board of Directors
American HealthChoice, Inc.
and subsidiaries
We have audited the accompanying consolidated balance sheet of American
HealthChoice, Inc. and subsidiaries as of September 30, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American HealthChoice, Inc. and subsidiaries as of September 30, 1997, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
Lane Gorman Trubitt, L.L.P.
Dallas, Texas
December 24, 1997
21
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
American HealthChoice, Inc.
We have audited the accompanying consolidated statement of operations of
American HealthChoice, Inc. and subsidiaries and the related consolidated
statements of stockholders' equity and cash flows for the year ended September
30, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of American HealthChoice, Inc., for the year ended September 30,
1996, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company incurred a loss of $2,932,230 during fiscal
1996 and the Company has been unable to generate sufficient cash flow from
operations to fund its operating requirements. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regards to these matters are described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
HEIN + ASSOCIATES LLP
Houston, Texas
January 17, 1997
22
<PAGE> 23
AMERICAN HEALTHCHOICE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash $ 1,123,001
Accounts receivable, less allowance for doubtful accounts of
$7,239,277 8,701,643
Advances and notes receivable 340,059
Other current assets 125,448
------------
Total current assets 10,290,151
Property and equipment, net 1,683,706
Goodwill, net 448,112
Other assets 15,460
------------
Total assets $ 12,437,429
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 506,827
Current portion of capital lease obligations 133,453
Accrued payroll and payroll taxes 266,464
Accounts payable and accrued expenses 1,096,329
Income taxes 31,629
Convertible Debenture 3,550,000
------------
Total current liabilities 5,584,702
Long-term debt, less current portion 471,465
Capital lease obligations, less current portion 311,085
------------
Total liabilities 6,367,252
Commitments
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000 shares authorized;
none issued -
Common stock, $.001 par value; 115,000,000 shares authorized;
9,870,614 shares issued and outstanding 9,871
Options to acquire common stock 685,664
Additional paid-in capital 12,003,258
Accumulated deficit (6,628,616)
------------
Total stockholders' equity 6,070,177
------------
Total liabilities and stockholders' equity $ 12,437,429
============
</TABLE>
See accompanying notes to these consolidated financial statements.
23
<PAGE> 24
AMERICAN HEALTHCHOICE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1996 1997
---- ----
<S> <C> <C>
NET PATIENT REVENUES $ 10,186,857 $ 9,755,786
OPERATING EXPENSES:
Compensation and benefits 7,488,898 9,160,742
Advertising and promotion 945,992 639,698
Depreciation and amortization 371,053 236,226
General and administrative 3,274,116 2,752,459
Loan acquisition costs and loss on
settlement of debt -- 1,251,946
Rent expense 979,741 1,083,711
------------ ------------
Total operating expenses 13,059,800 15,124,782
------------ ------------
OTHER INCOME (EXPENSE):
Goodwill impairment (1,054,829) --
Other income 19,918 948,716
Interest expense and other costs of borrowing (328,376) (2,667,708)
------------ ------------
Total other expenses (1,363,287) (1,718,992)
------------ ------------
LOSS BEFORE INCOME TAXES AND PRO FORMA
INCOME TAXES (4,236,230) (7,087,988)
INCOME TAX EXPENSE(BENEFIT):
Currently payable (179,783) 47,629
Deferred (1,124,217) (807,783)
------------ ------------
Total income tax benefit (1,304,000) (760,154)
------------ ------------
NET LOSS BEFORE PRO FORMA INCOME TAXES (2,932,230) (6,327,834)
Pro forma income tax benefit (285,000) --
------------ ------------
NET LOSS AFTER PRO FORMA INCOME TAXES $ (2,647,230) $ (6,327,834)
============ ============
NET LOSS PER SHARE AFTER PRO FORMA
INCOME TAXES $ (0.41) $ (0.78)
============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 6,515,248 8,082,426
============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
24
<PAGE> 25
AMERICAN HEALTHCHOICE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
OPTION TO RETAINED
ACQUIRE COMMON ADDITIONAL EARNINGS
COMMON STOCK COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT STOCK SUBSCRIBED CAPITAL (DEFICIT) TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, OCTOBER 1,
1995 5,797,000 $ 5,797 $ -- $ 75,000 $ 1,722,524 $ 2,775,456 $ 4,578,777
Common stock issued in
connection with
acquisition 25,000 25 -- (75,000) 74,975 -- --
Sale of shares of
common stock at prices
ranging from $2.00
to $4.90 per share 1,402,652 1,402 -- -- 3,422,532 -- 3,423,934
Common stock issued in
lieu of note
payment 8,040 8 -- -- 64,721 -- 64,729
Warrants issued in
connection with
financing provided -- -- -- -- 42,504 -- 42,504
Proceeds from sale of
option to acquire
shares of common stock -- -- 100,000 -- -- -- 100,000
Common stock to be
issued in connection
with financing provided -- -- -- 78,527 -- -- 78,527
Distribution to members
of Valley Family
Health Center, L.L.C -- -- -- -- -- (144,008) (144,008)
Net loss -- -- -- -- -- (2,932,230) (2,932,230)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCES, SEPTEMBER 30,
1996 7,232,692 7,232 100,000 78,527 5,327,256 (300,782) 5,212,233
Common stock issued in
connection with
acquisition 12,940 13 -- -- 63,394 -- 63,407
Sale of shares of
common stock at prices
ranging from $2.00
to $4.90 per share 135,953 136 -- -- 469,451 -- 469,587
Common stock issued in
lieu of note
payment 117,964 118 -- (78,527) 277,920 199,511
Common stock issued
for settlement of
litigation 2,500 2 -- -- 6,953 -- 6,955
Common stock issued
in connection with
consulting contracts 240,000 240 -- -- 581,120 -- 581,360
Common stock issued
in connection with
employment incentives 358,113 358 -- -- 1,613,995 -- 1,614,353
Common stock issued
in connection with
financing provided 1,778,762 1,779 -- 3,715,642 -- 3,717,421
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock issued
to board members
for serving on board 2,500 3 -- -- 12,248 -- 12,251
Director Options -- -- 95,627 -- -- -- 95,627
Director Options -- -- 197,019 -- -- -- 197,019
Financing Options -- -- 56,073 -- -- -- 56,073
Financing Options -- -- 236,945 -- -- -- 236,945
Return to treasury (8,040) (8) -- -- (64,721) -- (64,729)
Miscellaneous (2,770) (2) -- -- -- -- (2)
Net loss -- -- -- -- -- (6,327,834) (6,327,834)
---------- ------------ ------------ ------------ ------------ ------------ ------------
BALANCES, SEPTEMBER 30,
1997 9,870,614 $ 9,871 $ 685,664 $ 0 $ 12,003,258 $ (6,628,616) $ 6,070,177
========== ============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
26
<PAGE> 27
AMERICAN HEALTHCHOICE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1996 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,932,230) $(6,327,834)
Adjustments to reconcile net loss to
net cash from operating activities:
Allowance for doubtful accounts 3,159,351 1,758,888
Deferred taxes (1,124,217) (807,783)
Depreciation and amortization 371,053 236,226
Goodwill impairment and amortization 1,054,829 19,578
Stock transactions:
Common stock and warrants issued in connection
with financing transactions 121,031 2,304,357
Director compensation-stock & options -- 304,897
Loss on settlement of debt -- 250,000
Employee compensation-stock -- 273,320
Write-off of stockholder note payable -- (176,719)
Lawsuit settlement-stock -- 6,955
Consulting fees-stock -- 581,360
Change in operating assets and liabilities, net
Accounts receivable-trade (4,461,218) (2,533,922)
Other current assets 44,289 (28,275)
Income tax receivable -- 22,000
Accounts payable and accrued expenses 683,552 (187,785)
Income taxes payable (232,000) 31,629
Other 191,140 --
----------- -----------
Net cash used in operating activities (3,124,420) (4,273,108)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Amounts paid for acquisitions (214,603) --
Advances and notes receivable, net (282,091) 139,649
Purchases of property and equipment (407,812) (330,610)
Cash advances to stockholders, net (230,438) --
Other assets -- (511)
----------- -----------
Net cash used in investing activities (1,134,944) (191,472)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 763,912 5,356,261
Proceeds from Debentures -- 5,590,646
Payments on notes payable and capital leases (309,492) (5,967,745)
Proceeds from sale of common stock 3,423,934 449,253
Proceeds from sale of stock option 100,000 --
Distributions paid to members of Valley Family
Health Center, L.L.C (144,008) --
----------- -----------
Net cash provided by financing activities 3,834,346 5,428,415
----------- -----------
INCREASE (DECREASE) IN CASH (425,018) 963,835
CASH, beginning of year 584,184 159,166
----------- -----------
CASH, end of year $ 159,166 $ 1,123,001
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ 22,000 $ 16,000
Interest paid 95,056 2,603,697
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Net assets (liabilities) purchased (See Note 3) 1,076,791 --
Offset note receivable against note payable -- 189,710
Acquisition of equipment via stock or note payable -- 71,156
Common stock issued in lieu of debt payment 64,729 --
Write off of note payable to goodwill -- 165,310
Capital lease additions 69,518 258,868
</TABLE>
See accompanying notes to these consolidated financial statements.
27
<PAGE> 28
AMERICAN HEALTHCHOICE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BUSINESS AND OPERATING LOSSES
American HealthChoice, Inc. and subsidiaries (the Company) consists of a parent
company and twenty-two clinics providing medical, physical therapy, and
chiropractic services in San Antonio, McAllen, Brownsville and Houston, Texas,
New Orleans, Louisiana and in the metro area of Atlanta, Georgia. Additionally,
the Company owns one center that provides diagnostic services. Four of the
physical therapy clinics are statically located next to a corresponding
chiropractic clinic. Substantially all of the Company's revenues are derived
from chiropractic, physical therapy and medical services provided to individuals
living in the vicinity of the clinics.
During fiscal 1997, the Company incurred a net loss of $6,327,834. The loss
primarily resulted from increased working capital requirements associated with
the clinics acquired during fiscal years 1996 and 1995 and due to the costs of
raising capital for ongoing operations. As a result, the Company has been unable
to generate sufficient cash flow from operations to fund its operating
requirements. Though monthly losses have been greatly reduced, the Company must
improve its account receivable management, increase services, and maintain costs
to reach profitability in the short term. The progress and trend to reduce
monthly operating losses and stream line the Company's operations are expected
to continue.
Management of the Company recognizes the Company must generate additional cash
flow while further reducing operating costs. In addition to the changes already
made, Management plans to increase the accounts receivable collections and
further reduce overall operating costs to get to profitability. Further,
Management continues to market and improve services at the clinic level to boost
revenues. Also, at the clinic level, many of the clinics make money prior to the
overhead costs. Though not the end solution, the Company recognizes that with a
profitable acquisition, the overhead costs are spread among more clinics and
thus should help with overall profitability.
Management has already seen improvements in the cash flows and profit/loss
statements. Though more work needs to be done, management expects these
continued efforts will result in improved operating results and net working
capital. Management believes with these continued efforts, the Company
operations will be able to grow and allow the Company to proceed with new
acquisitions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy - The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
material inter-company accounts and transactions have been eliminated in
consolidation.
Net Patient Revenues - Revenue is recognized upon performance of services.
Substantially all of the Company's revenues are derived from personal injury
claims and claims filed on major medical policies, worker's compensation
policies, Medicare or Medicaid. Allowances for discounts on services provided
are recognized in the periods the related revenue is earned. Allowances are
maintained at levels considered appropriate by management based upon historical
charge-off experience and other factors deemed pertinent by management. Fiscal
1997 and 1996 net patient revenues; as a percentage of total revenues, for
medical, chiropractic and physical therapy services amounted to 51% and 54%, 41%
and 37%, and 8% and 9%, respectively.
28
<PAGE> 29
Cash Equivalents - 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. The Company maintains its accounts at
financial institutions located in Texas, Louisiana, and Georgia. The bank
accounts are insured by the Federal Deposit Insurance Corporation up to
$100,000.
Capital Leases - The assets and related obligations for property and equipment
under capital leases are initially recorded at an amount equal to the present
value of future minimum lease payments. Assets under capital leases are
amortized over the life of the lease or useful life of the assets. Interest
expense is accrued on the basis of the outstanding obligations under capital
leases.
Advertising Costs - The Company's policy is to expense all advertising costs in
the period in which advertising first takes place. Advertising expense was
approximately $946,000 and $640,000 for the years ended September 30, 1996 and
1997 respectively.
Property and Equipment, net - Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided over the estimated useful
lives of the related assets, primarily using straight line methods.
Income taxes - Certain of the entities included in the accompanying consolidated
financial statements were non-taxable entities during a portion of fiscal 1996.
As such, federal income taxes relating to these entities were the responsibility
of the members or stockholders for such period. Pro forma income taxes have been
provided in the accompanying consolidated financial statements as though these
entities had been taxable for all of fiscal 1996.
The Company accounts for income taxes under Financial Accounting Standards Board
(FASB) Statement No. 109, "Accounting for Income Taxes." FASB Statement No. 109
requires that deferred income taxes be recorded on a liability method for
temporary differences between the financial reporting and tax bases of a
company's assets and liabilities, as adjusted when new tax rates are enacted.
Goodwill - Goodwill arose from the Company's acquisitions of various clinics and
is being amortized using the straight-line method over 20 years.
Recent Accounting Pronouncements - The Financial Accounting Standards Board
("FASB") issued SFAS No. 121 entitled, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" which is
effective for fiscal years beginning after December 15, 1995. SFAS No. 121
specifies certain events and circumstances which indicate the cost of an asset
or assets may be impaired and, the method by which write downs, if any, of the
asset or assets are to be determined and recognized. The Company adopted SFAS
No. 121 in fiscal 1997. Management of the Company does not believe the adoption
of the new standard has a significant effect on the Company's financial position
or results of operations.
Effective October 1, 1996, the Company adopted the disclosure requirements of
FASB Statement No. 123 (FAS 123), "Accounting for Stock-Based Compensation" for
employee stock options. With respect to accounting for its stock options, as
permitted under FAS 123, the Company has retained the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25 (APB 25), "Accounting
for Stock Issued to Employees," and related Interpretations.
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share," (FAS
128) which requires the Company to disclose both basic and diluted earnings per
share. FAS 128 is effective for fiscal years ending after December 15, 1997. FAS
128 would have an immaterial impact on the reported earnings per share for the
Company for the year ended September 30, 1997.
29
<PAGE> 30
In November 1997 the Emerging Issue Task Force (EITF) finalized EITF 97-2 which
provides guidance on consolidation of physician practices and enhances related
disclosures of physician practice management companies. This EITF 97-2 is
effective for fiscal years ending after December 15, 1998. The Company is in the
process of evaluating any potential effect on its reporting format.
Use of Estimates- In preparing the Company's consolidated financial statements,
management is required to make estimates and assumptions that effect the amounts
reported in these financial statements and accompanying notes. Actual results
could differ from those estimates. The accounts receivable allowance is a
significant estimate.
Net Income Per Share - Net income per share is based upon the weighted average
number of common shares outstanding during the years presented.
3. ACQUISITIONS
The Company acquired Peachtree Corners Medical Center (Peachtree) on September
22, 1995 in exchange for cash, common stock, the assumption of certain
liabilities, and promissory notes due the seller. Peachtree is a medical,
clinical, and urgent care center located in Atlanta, Georgia. The amount paid
for Peachtree totaled $1,113,000 as follows: Cash - $100,000; 25,000 shares of
common stock - $75,000; liabilities assumed - $287,000; and notes due the seller
totaling $651,000. The acquisition was accounted for under the purchase method
of accounting and resulted in goodwill of $651,000, which is being amortized or
20 years using the straight-line method. During fiscal 1996, the Company wrote
down the goodwill related to the Peachtree acquisition by $376,000.
During the second quarter of fiscal 1996, the Company acquired 100% of the
ownership interest of Valley Family Health Center, L.L.C. (a chiropractic
clinic) for 360,000 shares of its common stock. This acquisition was accounted
for under the pooling of interest method of accounting. Accordingly, the
historical financial statements of the Company were restated in fiscal 1995 as
if the acquisition had occurred on October 1, 1994, the date Valley Family
Health Center, L.L.C. began operations.
The following is a summary of selected unaudited historical operating
information of the Company and Valley Family Health Center, L.L.C. for the year
ended September 30, 1995 and the six months ended March 31, 1996:
<TABLE>
<CAPTION>
Valley
Family
American Health
HealthChoice, Center
Year Ended September 30, 1995 (unaudited): Inc. L.L.C. Combined
- ------------------------------------------ ------------- ------ --------
<S> <C> <C> <C>
Revenues $5,247,693 $ 920,417 $6,168,110
Income before income taxes $1,697,126 $ 581,378 $2,278,504
Net income before pro forma income taxes $ 694,167 $ 554,378 $1,203,545
Net income after pro forma income taxes $1,060,704 $ 363,361 $1,424,065
</TABLE>
<TABLE>
<CAPTION>
Valley
Family
American Health
HealthChoice, Center
Six Months Ended March 31, 1996 (unaudited): Inc. L.L.C. Combined
- -------------------------------------------- ------------- ------ --------
<S> <C> <C> <C>
Revenues $4,964,340 $ 719,847 $5,684,187
Income before income taxes $ 674,834 $ 518,406 $1,193,240
Net income before pro forma income taxes $ 22,873 $ 509,406 $ 532,279
Net income after pro forma income taxes $ 427,396 $ 318,379 $ 745,775
</TABLE>
30
<PAGE> 31
The Valley Family Health Center, L.L.C. was owned by an individual who became a
consultant to the Company and a limited liability company, equally owned by the
Company's chief executive office and an individual who also became a consultant
to the Company.
In March 1996, the Company acquired substantially all of the assets and
liabilities of four medical clinics located in and around Atlanta, Georgia
(Metropolitan) for $1,564,516, consisting of various trade liabilities and notes
payable due physicians assumed by the Company and direct acquisition. This
acquisition was accounted for on the purchase method of accounting and gave rise
to goodwill of $908,225, which is being amortized over 20 years. During fiscal
year 1996, the Company wrote down the goodwill related to the Metropolitan
acquisition by $495,166. The following is a summary of the assets acquired and
liabilities assumed:
<TABLE>
<S> <C>
Current assets $ 498,791
Furniture, fixtures and equipment 157,500
-----------
Total assets acquired 656,291
-----------
Trade liabilities (402,246)
Notes payable to physicians (1,162,270)
-----------
Total liabilities acquired (1,564,516)
-----------
$ (908,225)
===========
</TABLE>
In December 1995, the Company acquired a medical clinic in San Antonio
(Southcross) for $315,000 consisting of cash of $100,000, and a note for
$200,000, and direct acquisition costs of $15,000. This acquisition was
accounted for on the purchase method of accounting and gave rise to goodwill of
$55,000. During fiscal 1996, the Company wrote down the amount of goodwill
related to the Southcross Joint Venture by $55,000. The following is a summary
of the assets acquired:
<TABLE>
<S> <C>
Accounts receivable and inventory $ 45,000
Land and buildings 165,000
Furniture and fixtures 50,000
-------
$260,000
========
</TABLE>
4. GOODWILL IMPAIRMENT
The poorer than expected 1996 operating results for the Peachtree, Metropolitan,
and Southcross clinics resulted in an evaluation of related goodwill for
possible impairment. The Company evaluated the clinics and determined based on
their expected future revenues and cash flows that the goodwill relating to
these clinics was impaired. Additionally, the Company determined two of the
Metropolitan clinics were no longer in the Company's long-term plan and closed
them during fiscal 1997. Based on this analysis, the Company wrote down goodwill
in fiscal 1996 by $1,054,829. Management believes the remaining carrying value
of goodwill will be supported by the anticipated cash flows of the remaining
clinics with associated goodwill. Therefore, no further adjustments to goodwill
were made for fiscal year 1997.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
USEFUL LIFE 1997
----------- ----
<S> <C> <C>
Land - $ 120,000
Building and leasehold improvements 2-39 years 212,109
Furniture and equipment, including equipment
held under capital lease 5-15 years 2,375,337
Less accumulated depreciation and amortization (1,023,740)
----------
$1,683,706
==========
</TABLE>
31
<PAGE> 32
The following is a summary of furniture, fixtures and equipment under capital
leases:
<TABLE>
<S> <C>
Equipment $ 627,910
Less accumulated amortization (154,367)
---------
$ 473,543
=========
</TABLE>
Substantially all assets leased are pledged as collateral under the existing
capital lease agreements.
6. ADVANCES AND NOTE RECEIVABLE
The Company had $77,195 in advances including $29,500 due from stockholders' at
September 30, 1997. The Company also had $262,863 in notes receivable bearing
interest at 0% to 8%, due on demand, and unsecured. The Company believes that
the balances due on these advances and notes receivable will be repaid in full.
7. NOTES PAYABLE
A summary of notes payable at September 30, 1997 is as follows:
<TABLE>
<S> <C>
Notes payable due to physicians in connection with the Metropolitan acquisition.
Interest on the notes range from 8% to 10%. Monthly payments, including
interest, range from $2,133 to $9,161 over periods ranging from five to seven
years. The notes are collateralized by accounts receivable and furniture,
fixtures and equipment. $ 628,453
Unsecured notes payable to former stockholder of Peachtree.
Interest on the note is 8%. The remaining principal of $93,290
was due October 1, 1997. The Company intends to take an equitable
set off against the note holder as part of the litigation.
See Item "Legal Proceedings" involving Dr. Malcolm Dulock.
Accordingly, the entire balance of this note is classified as
current in the accompanying balance sheet. 93,290
Note payable due to former owner of the Southcross clinic.
Interest on the note is 10% and is due quarterly. Principal is
due in eight quarterly installments of $25,000 beginning
March 1996. The note is collateralized by the clinic and an
office building. 25,000
Unsecured non interest-bearing note payable. Monthly payments
totaling $6,118 beginning in May 1996 and continue for through
April 1998. 85,649
Unsecured note payable due in monthly payments of $1,587,
including interest at 8%, through June 1999. 60,340
Non interest-bearing note payable to former owner of one of the
Metropolitan clinics. Principal is due in monthly payments
of $5,481 through June 1997. The note is collateralized
by shares of the Company's common stock. 49,329
Other notes payable with interest rates ranging from 0% to
9.95% and monthly payments ranging from $-0- to $1,000 through
July 1999. 36,231
---------
978,292
Less: Current maturities (506,827)
---------
Long-term notes payable $ 471,465
=========
</TABLE>
32
<PAGE> 33
Scheduled future maturities of notes payable are as follows:
<TABLE>
<CAPTION>
Year ended September 30, 1997
- -----------------------------
<S> <C>
1998 $ 506,827
1999 192,246
2000 132,443
2001 101,873
2002 44,903
---------
$ 978,292
=========
</TABLE>
8. RELATED PARTY TRANSACTIONS
The Company had an unsecured note payable to a major stockholder in the
principal amount of $153,753. The note bears interest at 7.5% and was due, along
with the principal amount outstanding, on January 31, 1996. The note originated
as a result of the acquisition of equipment by the Company from such stockholder
for common stock and a note of $125,067. Subsequent advances increased the note
to $153,753. Conversely the stockholder claimed offsets to this note. In March
of 1997 the Board appointed a committee to reconcile the differences. In August,
1997 the board determined and passed a resolution that each parties claims were
offsetting and neither party owed the other. This note was written off against
the related receivable.
In October 1993, the Company began to rent equipment from a stockholder of the
Company. There is no formal document related to this arrangement. Rent expense
was $3,600 and $0 for the years ended September 30, 1996 and 1997 respectively.
Valley Family Health Center, L.L.C. was acquired from a group which included a
limited liability company in which the Company's chief executive office was a
50% owner. This limited liability company owned 50% of Valley Family Health
Center, L.L.C..
Certain stockholders had advances totaling $29,500 outstanding from the Company
at September 30, 1997. The Company believes that all amounts due from these
stockholders will be repaid in full.
9. COMMITMENTS
Rent expense for the years ended September 30, 1996 and 1997 amounted to
approximately $980,000 and $1,084,000 respectively. The Company also leases
furniture, fixtures and equipment under capital leases with interest rates
ranging from 9.2% to 19.2%. Future minimum lease payments under operating leases
with terms in excess of one year and capital leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, OPERATING CAPITAL
- ------------------------ --------- -------
<S> <C> <C>
1998 $ 786,782 $ 191,013
1999 692,816 169,325
2000 367,303 93,709
2001 57,662 87,295
2002 -- 38,243
Thereafter -- 6,374
----------- -----------
Total minimum lease payments $ 1,904,563 585,959
=========== -----------
Future interest (141,421)
-----------
444,538
Less current portion (133,453)
-----------
Noncurrent portion $ 311,085
===========
</TABLE>
The Company has one two-year employment agreement and one three-year employment
agreement with two of its officers under which the Company must pay any amounts
due under the remaining term of the agreements if they are terminated without
cause. In certain other circumstances they would be due limited compensation
upon termination. The Company had consulting arrangements with two individuals
to provide assistance in
33
<PAGE> 34
locating acquisition candidates and performing due diligence in connection with
any such acquisitions. The Company terminated both of these agreements in fiscal
1997. One of the parties protested the termination but has yet to file a claim.
The Company has another consulting agreement for managing the marketing for its
chiropractic clinics. This agreement expired July 1997, and is currently
operating on a month to month basis. Due to the changes in the Texas marketing
laws, the Company is currently renegotiating this contract. Total monthly
payments under the month to month agreement are $6,000. The former contracts
amount to $21,000 per month.
10. STOCKHOLDERS' EQUITY
The Company granted an investment group the right to acquire an option to
acquire the Company's common stock at specified prices over a defined period of
time. The agreement provides for each option to be issued in exchange for
$100,000, which amount will be applied to the purchase of common stock, when and
if the option is exercised. The following is a summary of the terms of the
transaction:
<TABLE>
<CAPTION>
LAST NONREFUNDABLE POSSIBLE
OPTION FEE TO TOTAL EXERCISE
PURCHASE ACQUIRE EXERCISE PRICE
DATE OPTION PRICE PER SHARE
---- ------ ----- ---------
<S> <C> <C> <C>
March 18, 1996 $ 100,000 $ 750,000 $ 2.25
June 18, 1996 $ 100,000 $ 750,000 $ 4.90
September 18, 1996 $ 100,000 $ 750,000 $ 4.90
December 18, 1996 $ 100,000 $ 750,000 $ 4.90
</TABLE>
As of September 30, 1997, the investment group has exercised all options under
the first three options. Under the terms of the fourth options, the investment
group has the right to purchase an additional 233,854 shares of the Company's
common stock at $4.90 per share. The Company has granted registration rights to
all of the shares issued and to be issued in connection with this transaction.
In fiscal year 1996, the Company issued 768,001 shares of common stock in
connection with a private placement of its stock. Under the terms of the private
placement agreement, the Company agreed to file a registration statement with
the Securities and Exchange Commission within a specified period of time
following the private placement for the purpose of registering such shares. The
Company failed to file a registration statement within the period specified and,
as a result, in February 1997, issued each holder of the shares sold in the
private placement, one share of common stock for every ten shares held by such
stockholder for a total amount of 142,222 shares.
The Company sold two 8% Cumulative Convertible Debentures dated April 22, 1997
and April 25, 1997 in the aggregate amount of two million six hundred thousand
dollars ($2,600,000) in a Regulation S offering. The Debentures are convertible
after 41 days at a conversion price equal to eighty percent (80%) of the average
closing bid price of the shares of common stock of the Company as quoted on
NASDAQ for the five (5) trading days preceding the date of conversion. The
interest on the note is payable in cash or in kind as shares. The investment
banking firm received $338,000 for all fees and in addition, 400,000 two year
warrants at an option price of $3.00. During the interim a bridge loan of
$750,000 was advanced to the Company by an investor group. The loan was at a
rate of 10% annually and as additional compensation for brokering the placement
the group received 1,000,000 warrants at $2.375. A consultant of the group
received 200,000 shares of the Company's common stock as compensation. On June
4, 1997, the Debentures were converted including the accrued interest of $36,000
for 1,414,890 shares of common stock. The average bid price of the shares for
the five preceding trading days was $2.31875. The conversion price was $1.855
resulting in an additional financing cost for the third quarter of $530,000.
Unamortized prepaid financing costs associated with the Debentures of $646,000
were also recognized in the third quarter.
34
<PAGE> 35
In September 1997 the Company sold two 8% Cumulative Convertible Debentures all
dated September 12, 1997 in the aggregate amount of three million five hundred
fifty thousand dollars ($3,550,000) in a Regulation S offering. The Debentures
are convertible after 82 days at a conversion price equal to eighty (80%) of the
average closing bid price of the shares of common stock of the Company as quoted
on NASDAQ for the five (5) trading days preceding the date of conversion. The
interest on the note is payable in cash or in kind as shares. The investment
banking firm received $461,500 for all fees. As of December 24, 1997, the
Debentures had not been converted. Financing costs including interest for the
Debentures was recorded in the fourth quarter.
The president and CEO of the Company loaned $125,981 to the Company on May 12,
1997. The loan bears interest at 10% and is convertible in 90 days at a 15%
discount fixed, on date of execution. On September 30, 1997, the Debenture was
converted including the accrued interest of $4,867 for 87,964 shares of common
stock.
The Company received back from a shareholder in fiscal 1997 8,040 shares of its
common stock (issued during the third quarter of fiscal 1996 in lieu of a note
payable payment). The Company instead paid the principal and interest which
totaled $64,729.
The Company issued 328,113 shares in fiscal 1997 among six employee doctors for
employment bonuses and incentive awards. Two officers of the Company received
80,000 shares in accordance with their employment contracts and one employee
received a 1,000 shares in accordance with her contract.
In November and December 1996, the Company obtained $2,200,000 in a private
placement of promissory notes. The notes bear interest at 10% and were due the
earlier of twelve months after the final closing of the private placement or the
closing of a public offering of the Company's equity securities which produces
gross proceeds of at least $10 million. The Company issued approximately 200,000
shares of its common stock to the note holders at a cost of $.001 per share.
These notes were paid in full in September 1997, eliminating this debt.
The Company issued shares in fiscal 1997 involving: 40,000 shares for legal
consulting services; 12,940 shares associated with the purchase of two clinics
in fiscal year 1996; 2,500 shares for a director award for serving on the board;
2,500 shares for settlement of a law suit; and 1,000 shares to a former officer
of the Company as set forth in his employment contract.
The Company issued 109,167 shares in fiscal 1997 to optionees who exercised
their options. All options were exercised at $3.00 each except for 2,500
optioned at $2.50.
The Company issued 100,000 shares of its common stock during the second quarter
of fiscal year 1996 for $2.00 per share under Regulation S of the Securities Act
of 1933. Total proceeds from this transaction amounted to $200,000. The company
has granted registration rights to the holders of these shares.
The holders of any preferred stock which might be issued shall have such rights,
preferences and privileges as may be determined by the Company's board of
directors. Currently there are no holders of preferred stock.
11. CONCENTRATION OF CREDIT RISK
In the normal course of providing health care services, the Company may extend
credit to patients without requiring collateral. Each individual's ability to
pay balances due the Company is assessed and reserves are established to provide
for management's estimate of uncollectible balances.
Future revenues of the Company are largely dependent on third-party payors and
private insurance companies, especially in instances where the Company accepts
assignment.
35
<PAGE> 36
The Company's trade receivables at September 30, 1996 and 1997 consist of the
following, stated as a percentage of total accounts receivable:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Personal injury claims 62% 51%
Medical claims filed with insurance companies 18 27
Medicare/Medicaid 9 7
Workman's compensation claims 5 7
Other 6 8
--- ---
100% 100%
=== ===
</TABLE>
The Company maintains deposits in banks which may exceed the amount of federal
deposit insurance available. The Company believes that the risk of material loss
is minimal.
12. INCOME TAXES
There are two components of income tax provision, current and deferred. Current
income tax provisions approximate taxes to be paid or refunded for the
applicable period. Balance sheet amounts of deferred taxes are recognized on the
temporary differences between the bases of assets and liabilities as measured by
tax laws and their bases as reported in the financial statements. The
measurement of deferred tax assets is reduced if necessary, by the amount of any
tax benefits that, based on available evidence, are not expected to be realized.
Deferred tax expense or benefit is then recognized for the change in deferred
tax liabilities or assets between periods.
The principle differences resulting in deferred taxes are the financial
statement bases versus the tax base of allowance for doubtful accounts,
amortization of goodwill, vacation accrual, employee stock options, and section
481 adjustment due to a change from cash to accrual for tax purposes in fiscal
year 1997.
The deferred tax assets and liabilities in the consolidated balance sheet at
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Assets: Current Noncurrent
------- ----------
<S> <C> <C>
Nonemployee stock options $ 219,625 $ --
Allowance for accounts receivable 2,710,325 --
Vacation accrual 17,336 --
Goodwill -- 405,366
Contributions carryforwards -- 8,971
Net operating loss carryforwards -- 3,092,195
---------- ----------
2,947,286 3,506,532
Liabilities:
Section 481 adjustment (574,265) (1,148,529)
--------- ----------
Deferred tax assets, net 2,373,021 2,358,003
Less valuation allowance (2,373,021) (2,358,003)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
At September 30, 1997, the Company has net operating loss and contribution carry
forwards of approximately $8,250,000 and $24,000, respectively, to offset future
taxable income. These carry forward expire through the year 2012.
A valuation allowance was established to reduce the net deferred tax asset for
the amounts that will more likely than not be realized. This reduction is
primarily necessary due to the uncertainty of the Company's ability to utilize
all of the net operating loss carry forwards.
36
<PAGE> 37
The income tax benefit reconciled to the tax computed at federal statutory rates
at September 30, 1997 is as follows:
<TABLE>
<S> <C>
Tax at statutory rates $ 47,629
Tax effect of nondeductible items --
Other-net --
---------
47,629
Deferred tax benefit $(807,783)
---------
$(760,154)
=========
</TABLE>
The deferred tax benefit of $807,783 included above represents the reversal of
the fiscal 1996 deferred tax liabilities. As previously discussed all net
deferred tax assets have been fully allowed for at September 30, 1997.
13. STOCK OPTION PLANS
Employee Stock Options
The Company has a stock option plan under which options to purchase a maximum of
1,000,000 shares of common stock may be issued to employees of the Company. The
stock option plan provides both for the grant of options intended to qualify as
"incentive stock options" under the Internal Revenue Code of 1986, as amended
(the "Code"), as well as options that do not so qualify. With respect to
incentive stock options, no option may be granted more than ten years after the
date of the grant (five years if the optionee owns more than 10% of the common
stock of the Company). The exercise price of incentive stock options may not be
less than 100% of the fair market value of the common stock on the date of grant
(110% if the optionee owns more than 10% of the common stock of the Company).
The exercise price of nonqualified stock options may not be less than 85% of the
fair market value of the Company's common stock on the date of grant. Subject to
certain limited exceptions, options may not be exercised unless, at the time of
exercise, the optionee is in the service of the Company. The following table is
a summary of stock options under this plan the Company's board of directors has
authorized to be granted as of September 30, 1997:
<TABLE>
<S> <C>
Outstanding at October 1, 1996 297,500
Granted 200,000
Exercised 9,667
Expired 0
-------
Outstanding at September 30, 1997 497,500
=======
</TABLE>
Substantially all of these options were exercisable at September 30, 1997 under
the terms authorized by the board of directors. As of September 30, 1997,
109,167 options were exercised. No other options had been exercised at that
date.
The Company applies APB Opinion 25 and related Interpretations in accounting for
stock options granted to employees.
In compliance with SFAS No. 123, the Company has elected to provied the pro
forma disclosure. As such, the Company's net loss and loss per share for 1997
adjusted to reflect pro forma amounts are indicated below:
<TABLE>
<S> <C>
Net loss
As reported $ (6,327,834)
Pro forma (6,873,159)
Loss per share
As reported $ (.78)
Pro forma (.85)
</TABLE>
37
<PAGE> 38
The fair value of stock options granted in 1997 was estimated on the date of
grant using the Black-Scholes option-pricing model. The weighted average fair
values and related assumptions were:
<TABLE>
<S> <C>
Weighted average fair value $ .89
Expected volatility 53.3%
Risk free interest rate 5.5%
Expected lives 3.0 years
</TABLE>
Dividend yield for all grants was assumed to be insignificant.
Non-Employee Stock Options
The Company has a non-employee director stock option plan (the "Director Plan")
which provides for the grant of options that do not qualify as "incentive stock
options" under the Code. Options granted under the Director Plan are to have an
exercise price equal to the fair market value of the Company's common stock on
the date of grant. Pursuant to the Director Plan, an option to purchase 10,000
shares of common stock is granted to each non-employee director upon their
election to the Board and an option to purchase 5,000 shares every year
thereafter is granted so long as they are re-elected to the Board of Directors.
On June 24,1997, the board authorized options of 50,000 options to each
non-employee director. Though authorized, issuance is conditioned upon a legal
opinion confirming compliance with the Plan. On December 15, 1995, the Company
issued an option to acquire 100,000 shares of its common stock at an exercise
price of $3.00 per share in connection with the private placement of 100,000
shares of common stock. On August 27, 1997, the optionee exercised his right
purchase all 100,000 options at $3.00 each. As of September 30, 1997, no other
options have been authorized.
The Company's board of directors authorized or issued the grant of options to
acquire a total of 20,000 shares of its common stock at an exercise price of
$3.00 per shares in connection with the Metropolitan transaction (see Note 3).
These options are exercisable for a three-year period ending February 28, 1998.
None of these options were executed as of September 30, 1997.
The Company granted options during fiscal year 1997 for services and financing
costs. The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<S> <C>
Expected volatility 53.3%
Risk free interest rate 5.5%
Expected lives 3.0 years
</TABLE>
Dividend yield for all grants was assumed to be insignificant.
14. STOCK PURCHASE PLAN
The Company has a stock purchase plan, which allows employees to acquire common
stock of the Company at 85% of its fair market value from payroll deductions
received from the employees. The Company has reserved a total of 250,000 shares
of its common stock to be sold to eligible employees in the plan. As of
September 30, 1997, no employees were participating in the plan.
15. CONSULTANT STOCK PLANS
The Company issued two consultant stock plans under an S-8 SEC registration. The
first was filed in April of 1997 for 200,000 shares for consulting services. All
shares were issued under this plan. The second S-8 was filed in August 1997 and
the Company reserved for 250,000 shares. This plan expires December 31, 1999. Of
these shares 40,000 shares were issued for consulting services. As of September
30, 1997, there are no further obligations to issue shares under this plan.
38
<PAGE> 39
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Generally, the fair value of financial instruments classified as current assets
or liabilities approximate carrying value due to the short-term maturity of the
instruments. The fair value of long-term debt and capital lease instruments was
based on current borrowing rates available for financing with similar terms and
maturities. The carrying amount and fair value amounts of long-term debt were
$978,292 and $950,000 and capital lease obligations were $444,537 and $430,000,
respectively, at September 30, 1997.
17. LEGAL PROCEEDINGS
The seller of Peachtree Medical Center Northside clinic has alleged contract
default by the Company and is claiming all rights to this clinic. The seller has
taken possession of the clinic to the exclusion of the Company. A suit was filed
in federal court by the seller, Dr. Bailey. The Company filed a counterclaim
which, among other claims, asks the Court to compel arbitration. Mediation did
not prove fruitful and as of December 1997 the Company is seeking arbitration.
Arbitration is with the American Association of Arbitration, Atlanta Ga., and
the case was filed in the United States District Court, Northern District of
Georgia, Atlanta Division.
The Company is engaged in litigation with a service supplier over unpaid
invoices. The suit was filed December 31, 1997. The Company believes that a
substantial portion of this claim is associated with the Northside clinic
litigation. The Company is still researching the merits of this claim. The case
is filed in the State District Court, 162nd Judicial District, Dallas County,
Tx.
The Company is engaged in litigation with the doctor who managed the Norcross,
Georgia clinic. The Company found it necessary to terminate the managing doctor.
The managing doctor then filed a claim against the Company for breach of
contract and sought an injunction to prevent the Company from enforcing its
non-compete clause. The Court declined to enter a temporary restraining order
against enforcement of the non-compete clause. The Company filed a counter claim
against the doctor primarily for losses the Company sustained while he managed
the clinic. The case is filed in the Superior Court of Gwinnett County, Ga.
One former doctor and two physicians assistants who worked at the Norcross,
Georgia clinic have filed a law suit naming the Company as a codefendant. The
one doctor and one of the physician assistants worked at the clinic prior to the
Company purchasing the clinic. The other physicians assistant left the clinic
within one year of the Company's purchase. The claim alleges a right to the
accounts receivable for patients the doctors treated at the clinic that were
collected after the doctors' employment ended with the clinic. The Company
denies any liability and intends to cross claim against the former managing
doctor of the clinic. The case is filed in the Superior Court of Gwinnett
County, Ga.
The Company is not involved in any other material litigation nor is management
aware of any pending litigation that would substantially impact the Company's
financial position.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In June the Board authorized the Company to seek new auditors. The Company
believed they had retained BDO Seidman as auditors and filed the required 8-K.
BDO Seidman felt the Company prematurely filed the 8-K and as a result and prior
to any work being conducted, the Company and BDO Seidman agreed not to pursue
the engagement. In November of 1997, the Company then engaged the accounting
firm of Lane Gorman Trubitt, LLP, as Company auditors. There are no
disagreements between the Company and its Auditors.
39
<PAGE> 40
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth information regarding the executive officers and
directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION SINCE
- ---- --- -------- -----
<S> <C> <C> <C>
Joseph W. Stucki, D.C. 39 President, Chief Executive March 1995
Officer and Chairman of
the Board of Directors
Jay R. Stucki 37 Chief Financial Officer
and Vice President, March 1997
General Counsel December 1996
Jeffrey Jones, D.C. 35 Director March 1995
Michael R. Smith, M.D. 39 Director December 1996
Mandel Sherman 59 Director April 1997
David Love 62 Director April 1997
Peter Leach 35 Director April 1997
Robert DePalo 42 Director June 1997
</TABLE>
Joseph W. Stucki, D.C. Dr. Stucki is Chairman of the Board of Directors,
Chief Executive Officer and President of the Company. Dr. Stucki has been a
licensed chiropractor for approximately 16 years. In May 1983, he founded United
Chiropractic Clinics, Inc. and, as its Chairman and President, purchased or
developed and opened approximately 84 multi-disciplined clinics (chiropractor,
physical therapist, massage therapist, etc.) clinics. From 1988 through 1995,
Dr. Stucki has served as Chairman and Chief Executive Officer of United Health
Services. United Health Services developed approximately 150 franchises through
out the United States. Dr. Stucki has been a consultant to health care
organizations on various issues including practice management, strategic
development, and mergers and acquisitions. Dr. Stucki has authored several
papers and manuals on practice management and is often sought after as a guest
speaker on healthcare related issues. Dr. Stucki is a member of various
national, state, and local organizations. Dr. Stucki maintains an investment
apart from the Company in six chiropractic clinics that do not compete with the
Company's clinics. Dr. Stucki intends to divest ownership of such clinics.
Jay R. Stucki. Mr. Stucki, brother of Dr. J.W. Stucki, became Chief
Financial Officer and Vice President of Finance in June 1997. Prior to June of
1997, he was acting CFO for the Company. Mr. Stucki was first employed by the
Company in December of 1996 as General Counsel. Mr. Stucki was in public
administration for approximately 13 years, last serving as the Director of
Aviation for the Jacksonville Port Authority, Florida. Mr. Stucki obtained his
Juris Doctor from Oklahoma City School of Law. He also has a masters in business
administration from the University of Texas - Odessa, and a bachelor of business
administration from the University of Albuquerque.
40
<PAGE> 41
Jeffrey Jones, D.C. Dr. Jones is a Director of the Company. He is the
Clinic Director of the United Chiropractic Uptown clinic. He obtained his
Louisiana Doctor of Chiropractic license in July 1985, and began his association
with the United Chiropractic Uptown clinic shortly thereafter. In the past, Dr.
Jones has acted as Regional Manager of other United Clinics in the greater New
Orleans area. He is a member of the Chiropractic Association of Louisiana, The
Union of Chiropractic Physicians and the American Chiropractic Association.
Mandel Sherman. He has been President, Chief Executive Officer and Director
of Westbury since July 1996. From 1993 to 1995, Mr. Sherman acted as an
independent consultant to various investment firms. From 1983 to 1993, Mr.
Sherman participated in numerous real estate ventures exceeding $30 million in
value. From 1975 to 1983 Mr. Sherman, as founder, served as the Chief Financial
Officer and President of Refinement International Company which had sales in
excess of $350 million. Mr. Sherman received his BSBA in business administration
from Boston University in 1959.
Dave Love. Mr. Love is a certified public accountant and attorney. He is a
graduate of Wharton School of Finance and Commerce at the University of
Pennsylvania. Mr. Love obtained his Juris Doctor from Harvard Law School. Mr.
Love was the managing partner of the Boston office of Laventhol & Horwarth, an
international CPA firm until 1990. Since then, he has been in independent
practice, primarily as a consultant, and has also served as a mediator and
arbitrator in many cases administered by the American Arbitration Association,
the NASD, the New York Stock Exchange, and other similar organizations. Mr. Love
is a member of the Board of U.S. Automotive Manufacturing, Inc., which is a
publicly traded company.
Robert DePalo. Mr. DePalo has been an investment banker specializing in
Initial Public Offerings, mergers, acquisitions, and turn around projects on
public entities. Mr. DePalo serves as a director for Electronics Communications
Corp., a publicly traded company. He is a member of NASD. Mr. DePalo has served
as a consultant to brokerage houses needing help in management, strategic
development, and mergers and acquisitions. Mr. DePalo holds a B.S. in accounting
and a MBA in management.
Peter Leach. Mr. Leach became a Director of the Company in May of 1997. Mr.
Leach is a Partner in Giannini, Craven, Leach, Vieira and DiGianfilippo, a law
firm based in Providence, Rhode Island. Mr. Leach received his J.D. Antioch
School of Law. He was former managing partner and head of the litigation
department in the affiliated Providence office Updick, Kelly and Spellacy. Mr.
Leach also served as Assistant Attorney General in Rhode Island for six years.
Member of the American and Rhode Island Bar Associations.
Michael R. Smith, M.D. Dr. Smith became a Director of the Company in
December, 1996. Dr. Smith, a practicing physician board certified in family
practice, has been employed by the Company since September 1994. He provides
medical services at certain of the Company's clinics and serves as the Medical
Director for the Company's Texas clinics. He also serves on the Board of
Directors of AHC Physicians Corporation, Inc., a subsidiary of the Company. From
June 1992 through August 1994, Dr. Smith was an employee and then partner at the
Texas Trauma Rehabilitation Association. Dr. Smith graduated from the University
of Texas Medical Branch in 1984.
Dr. J.W. Stucki and Jay R. Stucki are brothers. Mr. Peter Leach is the
son-in-law of Mr. Mandel Sherman.
Members of the Company's Board of Directors are elected to hold office
until the next meeting of shareholders and until their successors are elected
and qualified. Officers are elected to serve subject to the discretion of the
Board of Directors until their successors are appointed and have qualified.
41
<PAGE> 42
The committees of the Company's Board of Directors are as follows:
Audit Committee. Chairman - Dave Love, Manny Sherman, Dr. Stucki
Compensation Committee: Chairman - Robert DePalo, Dr. Stucki, Dr. Jones
Legal Committee: Chairman - Peter Leach, Dave Love.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's officers and directors, and persons who own more than ten percent
(10%) of a registered class of the Company's equity securities file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC") and with the exchange on which the Company's securities are traded. Such
reporting persons are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms so filed.
Based solely on review of the copies of such forms furnished to the Company
by any such reporting person and, if appropriate, representations made to the
Company by any such reporting person concerning whether a Form 3 or 4 were
required to be filed, the Company has determined that of the required section
16(a) filings applicable to the Company's officers, directors and "greater than
ten percent" stockholders, all have been made except for Dr. J.W. Stucki and
Peter Leach.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by, or paid to the Company's Chief Executive
Officer for the last four fiscal years. No other executive officer of the
Company who was serving at the end of fiscal year 1997 earned more than $115,000
of annual base compensation for services in all capacities to the Company and
its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
FISCAL ANNUAL COMPENSATION
NAME AND YEAR ENDING COMPENSATION/ AWARDS/SECURITIES
PRINCIPAL POSITION SEPTEMBER 30 SALARY UNDERLYING OPTIONS
- ------------------ ------------ ------ ------------------
<S> <C> <C> <C>
Joseph W. Stucki(1)
Chairman of the Board 1997 $250,000.00 50,000 shares
President and Chief 1996 $211,938.33 --
Executive Officer 1995 $192,000.00 150,000 options
1994(2) $317,822.00 --
</TABLE>
(1) The Company is renegotiating an employment agreement with Dr. Stucki. The
shares were given as incentive for Dr. Stucki to stay with the Company. The
new employment agreement anticipates incentives of up to 500,000 options
that may be awarded based on performance. Currently he is operating under
his existing contract.
(2) The compensation reported for fiscal year 1994 and the first quarter of
fiscal year 1995 includes amounts paid by a predecessor to the Company.
42
<PAGE> 43
STOCK OPTION AND STOCK PURCHASE PLANS
50,000 options were granted in fiscal year 1997 to the named individual set
forth in the Summary Compensation Table above for serving on the board of
directors. The following table provides information as to the value of
outstanding options held by the Company's Chief Executive Officer.
AGGREGATED OPTIONS EXERCISED IN FISCAL YEAR 1997
AND FISCAL 1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN THE
UNDERLYING UNEXERCISED MONEY OPTIONS AT FISCAL
SHARES OPTIONS AT FISCAL YEAR-END(#) YEAR-END ($)(1)
ACQUIRED ON VALUE ----------------------------- ---------------
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joseph W. Stucki 0 0 200,000 0 $1,212,400(2) 0
</TABLE>
(1) Value is based on a $6.062 per share closing price as quoted on The Nasdaq
SmallCap Market on September 30, 1997.
(2) Amounts represent options to acquire 150,000 shares of Common Stock in the
aggregate at $2.00 per share and 50,000 shares at $2.34 per share.
EMPLOYEE BENEFIT PLANS
In August 1995 the Company adopted its 1995 Employee Stock Option Plan (the
"Employee Plan") under which options to purchase shares of Common Stock may be
issued to employees and consultants of the Company. The Company reserved
1,000,000 shares of Common Stock for issuance under the Employee Plan. Also in
August 1995, the Company adopted the 1995 Non-Employee Director Stock Option
Plan (the "Director Plan") which provides for the grant of options that do not
qualify as "incentive stock options" under the Internal Revenue Code of 1986. In
addition, the Company adopted its 1995 Employee Stock Purchase Plan (the "Stock
Purchase Plan"), effective October 1, 1995, which allows employees to acquire
Common Stock of the Company at 85% of its fair market value from payroll
deductions received from the employees. The Company has reserved a total of
250,000 shares of its Common Stock to be sold to eligible employees in the plan.
In October 1996, the Board of Directors amended each of the Employee Plan, the
Director Plan, and the Stock Purchase Plan to clarify various matters concerning
the administration of such plans. In July 1997, the Company adopted an Executive
Bonus Plan under which options to purchase shares of Common Stock may be issued
to employees of the Company. The Company reserved 260,000 shares of Common Stock
for issuance under the Executive Bonus Plan.
COMPENSATION OF DIRECTORS
The Company pays its Directors $1,500 for each Board of Director meeting
attended in person and $250 for each telephonic Board meeting. The Company
reimburses all Directors for reasonable out-of-pocket expenses incurred in
connection with attending Board of Director meetings. Pursuant to the Director
Plan, any new Director elected to the Board of Directors will receive a 10-year
option to purchase 10,000 shares of Common Stock at an exercise price determined
by the Board of Directors at the time of grant. If a non-employee Director is
re-elected, such Director will receive, upon such re-election, a 10-year option
to purchase 5,000 shares of Common Stock at an exercise price determined by the
Board of Directors at the time of grant. At the June 24, 1997 Board meeting, the
plan was amended to allowing the Board of Directors a 5-year option to purchase
50,000 shares of Common Stock at an exercise price as of June 1, 1997 ($2.344).
EMPLOYMENT AND CONSULTING CONTRACTS
The Company (or its subsidiaries) has entered into employment contracts
with Mr. Jay R. Stucki and is renegotiating a contract with Dr. Stucki. Dr.
Jeffrey Jones is currently being renegotiated and is operating month to month on
the prior contract. The employment contracts for Mr. York and Mr. Sommerhauser
where terminated upon their resignation.
43
<PAGE> 44
The employment agreement with respect to Dr. Stucki commenced October 1,
1994 and in May 1997, the Company and Dr. Stucki agreed to renegotiate the terms
of the existing employment agreement(incorporated by reference to Exhibit 10.1
to Form 10-KSB, file number 000-26740, filed for the fiscal year ended September
30, 1996). Prior to this, in April 1997 the Board of Directors negotiated a step
aside contract with Dr. Stucki where he would step down as Chief Executive
Officer but remain as Chairman. Four days later the Board asked Dr. Stucki to
return to the position of CEO. Upon finalizing Dr. Stucki's and Dr. Jones's
contracts, the Company will file the appropriate 8-Ks.
There are two agreements with respect to Jay R. Stucki. One for legal
services and one as Chief Financial Officer (CFO). Mr. R. Stucki agreed to forgo
the base salary as general counsel while operating in the combined positions.
The Board negotiated a new contract for the CFO to be effective June 1, 1997 for
a two year period. The CFO agreement provides for annual compensation of
$110,000. The Company is obligated to issue Mr. Stucki 30,000 shares of Common
Stock and options to purchase 200,000 shares of Common Stock the effective date
of this agreement. In addition, Mr. Stucki will be entitled to the same shares
and options, at the then fair market value price, in year two and shall vest
upon the anniversary date of his employment agreement.
Under the legal services agreement, Mr. Jay R. Stucki's annual base
compensation is $75,000 (base forgone while CFO). The Company is also obligated
to pay the Employees student loans (treated as compensation). This agreement can
be canceled at any time by either party but sets forth penalties under certain
conditions. Additionally, Mr. Stucki is entitled to operate a law firm to engage
in legal services that are not related to the Company if there is no conflict of
interest, time permits, and the firm pays for non-Company costs. As general
Counsel for the Company, there are no attorney fees billed to the Company. In
June of 1997, Jay R. Stucki, formed a Legal Professional Limited Liability
Company called Stucki & Associates, PLLC.
The agreement with respect to Mr. Sommerhauser commenced on June 10, 1996
and terminated with his resignation in March 1997. It provides for annual
compensation of $84,000. Furthermore, Mr. Sommerhauser received 1,000 shares of
Common Stock and all compensation was canceled with his resignation.
The term of Mr. York's employment with the Company commenced December 2,
1996 and terminated with his resignation in March 1997. Mr. York's employment
agreement provides for annual compensation of $120,000. All compensation was
canceled with his resignation.
Dr. Jeffrey Jones is employed by United Chiropractic Clinic of Uptown,
Inc., a subsidiary of the Company, as a clinic director providing chiropractic
services at the New Orleans Uptown clinic. Dr. Jones' prior contract provides
for an annual salary of $200,000 or 50% of the Clinic Net Revenue, which ever is
greater. See Exhibit 10.4 of the 1996 Form KSB.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the ownership of the
Company's Common Stock as of December 31, 1997, by (i) each known beneficial
owner of more than five percent (5%) of the outstanding Common Stock, (ii) each
current Director, (iii) the Chief Executive Officer, and (iv) the executive
officers and Directors as a group. All share numbers are provided based on
information supplied to management of the Company by the respective individuals
and members of the group. Unless otherwise indicated, each of the stockholders
has sole voting and investment power with respect to the shares beneficially
owned.
44
<PAGE> 45
<TABLE>
<CAPTION>
PERCENT
NUMBER OF SHARES OF CLASS
---------------- --------
<S> <C> <C>
Joseph W. Stucki(1) 2,530,559 25.65%
1300 W. Walnut Hill Lane
Suite 275
Irving, Texas 75038
Jay R. Stucki (2) 35,000 *
1300 W. Walnut Hill Lane
Suite 275
Irving, Texas 75038
Jeffrey Jones(3) 1,015,957 10.29%
807 S. Carrollton Avenue
New Orleans, LA 70118
Officers and Directors as a group (3 persons) 3,581,516 36.31%
</TABLE>
* less than (1%)
(1) Dr. Stucki is the Chief Executive Officer, President and Chairman of the
Board of Directors of the Company. The number of shares reported does not
include 150,000 and 50,000 shares issuable upon exercise of options at
$2.00 and 2.34 respectively, per share which options are currently
exercisable and expire August 15, 1998, and May 30, 2002.
(2) Jay R. Stucki is the Chief Financial Officer, Vice President, and General
Counsel of the Company. The number of shares reported does not include
200,000 options issuable upon exercise of options at $2.34 per share which
options are currently exercisable and expire May 30, 2002.
(3) Dr. Jones is a Director of the Company. The number of shares reported
includes (i) 60,000 shares issuable upon exercise of options at $2.00 per
share which options are currently exercisable and expire August 15, 1998
and (ii) 13,750 shares issuable upon exercise of warrants at $5.00 per
share which warrants are currently exercisable and 6,250 of which expire
May 3, 1998 and 7,500 of which expire October 1, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company received an unsecured bridge loan, represented by two notes,
from Pangloss International, S.A. in the aggregate principal amount of $700,000.
Mr. Ronald Potts, a Director of the Company from June through December 1996,
owns a significant interest in Pangloss International, S.A. The notes bore
interest at 10% and were repaid in November 1996. Further, Mr. Potts was granted
100,000 options at $3.00 each. Mr. Potts exercised these options in August of
1997.
The Company had an unsecured note payable to Dr. Stucki in the principal
amount of $153,753 (see Note 7). The note bears interest at 7.5% and was due,
along with the principal amount outstanding, on January 31, 1996. The note
originated as a result of the acquisition of equipment by the Company from such
stockholder for common stock and a note of $125,067. Subsequent advances
increased the note to $153,753. Conversely the stockholder claimed offsets to
this note. In March of 1997 the Board appointed a committee to reconcile the
differences. In August 1997, the board determined and passed a resolution that
each parties claims were offsetting and neither party owed the other. This note
was written off.
Certain stockholders of the Company had advances totaling $29,500
outstanding from the Company at September 30, 1997. Of this amount $22,000
belongs to employee/stockholder Dr. Jeff Jones and was added to his compensation
in calendar year 1997 eliminating this note. The Company believes that all
amounts due from the other stockholder will be repaid in full.
45
<PAGE> 46
The four new board members were appointed in April of 1997, in accordance
with the Wingate Agreement and are affiliated with Wingate. See Exhibit 10.12.
See also footnote 8 to the Notes to Consolidated Financial Statements.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Required by Item 601
(1) The following financial statements are filed herewith in Item 7
(i) Consolidated Balance sheet as of September 30, 1997
(ii) Consolidated Statements of Operations for the years ended
September 30, 1997 and 1996.
(iii) Consolidated Statement of Stockholders' Equity for the years
ended September 30, 1997 and 1996.
(iv) Consolidated Statements of Cash Flows for the years ended
September 30, 1997 and 1996.
(v) Notes to Consolidated Financial Statements.
(2)
3.1 Certificate of Incorporation of American HealthChoice, Inc.
(incorporated by reference to Exhibit 4.1 to Registration
Statement on Form SB-2, Registration Number 33-09311, filed on
July 31, 1996)
3.2 Certificate of Amendment to Certificate of Incorporation of
American HealthChoice, Inc. (incorporated by reference to Exhibit
3.2 to Form 10-KSB, file number 000-26740, filed for the fiscal
year ended September 30, 1996).
3.3 Bylaws of American HealthChoice, Inc. (incorporated by reference
to Exhibit 3.3 to Form 10-KSB, file number 000-26740, filed for
the fiscal year ended September 30, 1996).
10.1 Employment Agreement for General Counsel dated December 16, 1996,
between American HealthChoice, Inc. and Jay R. Stucki.*
10.2 Employment Agreement for Chief Financial Officer dated June 1,
1997 between American HealthChoice, Inc. and Jay R. Stucki.*
10.3 1995 Non-Employee Director Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Form 10-QSB, file number
33-30677-NY, filed for the quarter ended June 30, 1995).
10.4 1995 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.3 to Form 10-QSB, file number 33-30677-NY, filed for
the quarter ended June 30, 1995).
10.5 1995 Employee Stock Option Plan Amendment 1996-1. (incorporated
by reference to Exhibit 10.8 to Form 10-QSB, file number
000-26740, filed for the quarter ended June 30,1995).
10.6 1995 Non-Employee Director Plan Amendment 1996-1. (incorporated
by reference to Exhibit 10.9 to Form 10-KSB, file number
000-26740, filed for the fiscal year ended September 30, 1996).
46
<PAGE> 47
10.7 1995 Employee Stock Purchase Plan Amendment 1996-1.(incorporated
by reference to Exhibit 10.10 to Form 10-KSB, file number
000-26740, filed for the fiscal year ended September 30, 1996).
10.8 1997 Consultant Stock Plan, (incorporated by reference file
number 333-26065, filed for the quarter ended March 31, 1997).
10.9 1997 Consultant Stock Plan, (incorporated by reference file
number 333-35581, filed for the quarter ended September 30,
1997).
10.10 1997 Executive Bonus Plan, (incorporated by reference file
number 333-36475, filed for the quarter ended September 30,
1997).
10.11 Loan and Security Agreement dated December 30, 1996 between DVI
Business Credit Corporation and American HealthChoice, Inc.
(incorporated by reference to Exhibit 10.11 to Form 10-KSB, file
number 000-26740, filed for the fiscal year ended September 30,
1996).
10.12 Investor Agreement dated March 19, 1997 between Wingate LLC and
American HealthChoice, Inc.*
21 List of Subsidiaries of American HealthChoice, Inc.
27 Financial Data Schedule
* Filed herewith
(b) The Company filed three (3) reports on Form 8-K during the quarter ended
September 30, 1997. One report filed September 30, 1997 relating to the raise of
capital through a Regulation "S" offering. Two reports dated August 5, 1997 and
September 5, 1997, involved the changing of auditors. Since September 30, 1997,
the Company filed a report on Form 8-K on November 26, 1997 involved the
changing of auditors.
<PAGE> 48
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN HEALTHCHOICE, INC.
Date: January 12, 1998 By: /s/ Dr. J.W. Stucki
Dr. J.W. Stucki, Chief Executive
Officer and President
In accordance with 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Dr. J.W. Stucki Chief Executive Officer, President
Dr. J.W. Stucki and Chairman of the Board
(Principal Executive Officer) January 12, 1998
/s/ Jay R. Stucki Chief Financial Officer and
Jay R. Stucki Vice President - Finance
(Principal Financial and
Accounting Officer) January 12, 1998
/s/ David Love Director, Chairman of Audit
David Love Committee January 12, 1998
/s/ Mandel Sherman Director
Mandel Sherman January 12, 1998
/s/ Dr. Jeff Jones Director
Dr. Jeff Jones January 12, 1998
/s/ Dr. Michael Smith Director
Dr. Michael Smith January 12, 1998
/s/ Robert DePalo Director
Robert DePalo January 12, 1998
</TABLE>
48
<PAGE> 49
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
3.1 Certificate of Incorporation of American HealthChoice, Inc.
(incorporated by reference to Exhibit 4.1 to Registration
Statement on Form SB-2, Registration Number 33-09311, filed on
July 31, 1996)
3.2 Certificate of Amendment to Certificate of Incorporation of
American HealthChoice, Inc. (incorporated by reference to Exhibit
3.2 to Form 10-KSB, file number 000-26740, filed for the fiscal
year ended September 30, 1996).
3.3 Bylaws of American HealthChoice, Inc. (incorporated by reference
to Exhibit 3.3 to Form 10-KSB, file number 000-26740, filed for
the fiscal year ended September 30, 1996).
10.1 Employment Agreement for General Counsel dated December 16, 1996,
between American HealthChoice, Inc. and Jay R. Stucki.*
10.2 Employment Agreement for Chief Financial Officer dated June 1,
1997 between American HealthChoice, Inc. and Jay R. Stucki.*
10.3 1995 Non-Employee Director Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Form 10-QSB, file number
33-30677-NY, filed for the quarter ended June 30, 1995).
10.4 1995 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.3 to Form 10-QSB, file number 33-30677-NY, filed for
the quarter ended June 30, 1995).
10.5 1995 Employee Stock Option Plan Amendment 1996-1. (incorporated
by reference to Exhibit 10.8 to Form 10-QSB, file number
000-26740, filed for the quarter ended June 30,1995).
10.6 1995 Non-Employee Director Plan Amendment 1996-1. (incorporated
by reference to Exhibit 10.9 to Form 10-KSB, file number
000-26740, filed for the fiscal year ended September 30, 1996).
</TABLE>
<PAGE> 50
<TABLE>
<S> <C>
10.7 1995 Employee Stock Purchase Plan Amendment 1996-1.(incorporated
by reference to Exhibit 10.10 to Form 10-KSB, file number
000-26740, filed for the fiscal year ended September 30, 1996).
10.8 1997 Consultant Stock Plan, (incorporated by reference file
number 333-26065, filed for the quarter ended March 31, 1997).
10.9 1997 Consultant Stock Plan, (incorporated by reference file
number 333-35581, filed for the quarter ended September 30,
1997).
10.10 1997 Executive Bonus Plan, (incorporated by reference file
number 333-36475, filed for the quarter ended September 30,
1997).
10.11 Loan and Security Agreement dated December 30, 1996 between DVI
Business Credit Corporation and American HealthChoice, Inc.
(incorporated by reference to Exhibit 10.11 to Form 10-KSB, file
number 000-26740, filed for the fiscal year ended September 30,
1996).
10.12 Investor Agreement dated March 19, 1997 between Wingate LLC and
American HealthChoice, Inc.*
21 List of Subsidiaries of American HealthChoice, Inc.*
27 Financial Data Schedule*
</TABLE>
* Filed herewith
<PAGE> 1
EXHIBIT 10.1
CONTRACT TO EMPLOY ATTORNEY
Agreement made, effective as of December 16, 1996, by and between American
HealthChoice, Inc., a professional corporation organized and existing under the
laws of the State of New York, with its principal place of business at 1300 W.
Walnut Hill Lane, Suite 275, Irving, Texas, 75038, County of Dallas, State of
Texas, referred to as Corporation, and Jay R. Stucki, of 1317 Greenfield Drive,
Edmond, Oklahoma, 73003, County of Oklahoma, State of Oklahoma, referred to as
Attorney.
In consideration of the mutual promises and covenants herein contained, the
parties agree:
SECTION ONE
ATTORNEY'S DUTIES
In consideration for Attorney's employment by Corporation, Attorney shall devote
Attorney's attention to the practice of law on behalf of Corporation. All other,
if any, legal interest by Attorney will take secondary priority.
Corporation shall have the power to determine the corporate legal matters to be
assigned to Attorney, the specific corporate legal duties to be performed by
Attorney, and the standards of performance to be maintained by Attorney.
If no conflict exists with in-house responsibilities, Attorney has the right to
retain clients not related to Company activities.
SECTION TWO
GENERAL POWERS OF CORPORATION
Subject to the Code of Professional Responsibility of the American Bar
Association, and all applicable laws, regulations, and rules of court,
Corporation shall have the power to assign corporate clients to Attorney; to
review all corporate work performed by Attorney and to modify, cancel, or
require Attorney to revise such work or work product; to determine the time and
the manner of the performance of all corporate work; and to determine the
standards of performance and, within reason, the necessary hours of corporate
work.
SECTION THREE
ETHICS OF ATTORNEY
Attorney shall abide by and perform Attorney's duties under and pursuant to this
contract in accordance with the ethics of the legal profession and all federal,
state, and municipal laws, regulations, and ordinances regulating the practice
of law.
SECTION FOUR
TERM
Subject to the provisions for termination as provided in this contract, the
initial term of this contract shall begin as of December 16, 1996, an go through
September 30, 1998, renewable annually in accordance with the terms of this
contract.
<PAGE> 2
SECTION FIVE
RENEWAL
This contract shall automatically renew each year, for a period of one year
beginning each October first for the renewal year.
SECTION SIX
TERMINATION
Corporation or Attorney reserve the right to terminate this contract on thirty
(30) days' written notice to the other party. Should Corporation elect to
terminate Attorney, Corporation agrees to pay the then remaining portion of the
contract term plus one year's worth of salary. Should Attorney elect to
terminate employment, Corporation would not be obligated to pay compensation
past the termination effective date.
SECTION SEVEN
REVENUE/COSTS
Attorney shall reimburse Corporation the pro rata share of company's legal
department expenses if Attorney receives revenue from legally representing any
parties unrelated to the Corporation. Rate of reimbursement shall not exceed
more than fifty percent (50%) of net fees collected by Attorney in any one case.
For purposes of this section "net revenue" shall mean any amount due to attorney
after all other expenses reasonably allocated to the case have been paid,
including but not limited to Dr. bills, court costs, additional attorneys,
consultants, etc. but shall not include any expenses provided for by Corporation
that is the subject of reimbursement.
Corporation and Attorney recognize that the legal department will provide
separate identification, to the extent practicable, for all non-corporate
representation. Corporation further acknowledges that mere employment of a
corporate employee is not sufficient to justify Corporate business in that the
primary legal issue must relate to Corporate business.
SECTION EIGHT
BASE COMPENSATION
For corporate services rendered by Attorney under and pursuant to this contract,
Attorney shall be paid a base salary of seventy-five thousand dollars ($75,000)
annually, payable in equal bimonthly installments.
SECTION NINE
BONUSES
In addition to the compensation provided for in Section Eight of this contract,
Attorney shall receive a bonus annually, the amount of which shall be determined
annually in the discretion of the board of directors of Corporation. In
determining the amount of such bonus, the board of directors shall consider the
reasonable value of the services rendered to Corporation by Attorney.
Upon execution of this contract, Attorney is entitled to a sign on bonus, that
in place of similar bonuses given to other hired executive level employees,
Company agrees to pay off in total all student loans within six (6) months of
executing this contract.
<PAGE> 3
SECTION TEN
RECORDS
Attorney shall keep accurate records in the form prescribed by Corporation of
all time spent on the Corporation's matters and affairs. These records must be
turned in to Corporation's bookkeeper at least once a month together with any
special billing instructions that Attorney shall think necessary or desirable.
All legal billing for legal service provided by Attorney on behalf of the
Corporation shall be rendered through Corporation's bookkeeping department
unless otherwise directed.
Attorney may be required to render to Corporation a true account of all
activities engaged in during the course of Attorney's employment. Corporation
shall render to Attorney an annual statement of the income generated by
Attorney's corporate activities.
SECTION ELEVEN
REIMBURSEMENT FOR EXPENSES
Corporation shall reimburse Attorney for all expenses reasonably and necessarily
incurred in the performance of Attorney's duties under and pursuant to this
contract. These reimbursed expenses shall include, but shall not be limited to,
travel expenses, the expense of furnishing an automobile, entertainment expenses
for the promotion of Corporation's business, professional and other dues,
attendance at forums, bar courses, lectures, and other meetings conducted for
the continuing education of members of the legal profession.
SECTION TWELVE
RELOCATION
Should Corporation relocate their home office, Corporation agrees to pay all
moving costs to relocate Attorney, including but not limited to transaction
costs for selling and purchasing a new home. Company agrees to reimburse
Attorney up to two thousand ($2,000) dollars to relocate Attorney from Edmond,
Oklahoma to Dallas, Texas area.
SECTION THIRTEEN
OFFICE
Corporation shall furnish Attorney with a private office, all necessary
secretarial and/or paralegal assistance, and such other facilities and services
as are considered customary, suitable for a corporate Attorney's position, and
adequate for the performance of Attorney's duties to and for Corporation under
and pursuant to this contract.
Office shall be in a location chosen by Corporation, however the office shall
have a separate reception area from the main corporate offices.
SECTION FOURTEEN
LIFE INSURANCE
Corporation shall provide a plan of life insurance for Attorney. The general
purpose of this life insurance is to provide to the beneficiary or beneficiaries
named by Attorney the equivalent of the Attorney's annual salary at the time of
Attorney's death. The cost of such life insurance shall be borne by Corporation
and remain in force for the full term of this contract.
At the end of one month of service, Attorney shall be furnished a life insurance
policy contract evidencing the above-stated coverage. Corporation reserves the
right to change such life insurance and its life insurance carrier at its sole
discretion.
<PAGE> 4
SECTION FIFTEEN
PARTICIPATION
Attorney shall be eligible to participate in all plans or arrangements or
distributions by Corporation pertaining to any pensions, profit-sharing,
bonuses, or similar benefits provided for executive level employees. Nothing
contained in this contract shall be construed to give Attorney any interest in
the tangible or intangible assets of Corporation.
SECTION SIXTEEN
VACATIONS
Attorney shall be entitled to a paid vacation of two (2) weeks per year. After
each five year period of service the paid vacation time shall increase by one
week, but at no time will the paid weeks exceed five in any one year. The time
of each annual vacation shall be mutually agreed on by Attorney and Corporation.
SECTION SEVENTEEN
LEAVES OF ABSENCE
Subject to the approval of each request by Corporation, Attorney may be granted
leaves of absence with full payment of salary for attendance at conventions of
professional organizations, continuing legal educational institutions, and
meetings of similar nature. Any expenses reasonably and necessarily incurred by
Attorney in connection with such activities shall be paid for or reimbursed by
Corporation. Total leave time for such above-stated activities shall not exceed
three (3) weeks in any one calendar year.
Corporation, from time to time, may approve leaves of absence with full or
partial payment of salary and expenses for other purposes in its sole
discretion.
SECTION EIGHTEEN
DISABILITY
If Attorney becomes unable to perform Attorney's duties fully by reason of
illness or incapacity of any kind and such condition continues for more than one
(1) month, Corporation, in its discretion, may reduce or terminate the salary
payments of Attorney. In such event, Attorney's full salary shall be reinstated
when Attorney is competent to return to full time employment.
SECTION NINETEEN
MEDICAL INSURANCE
Corporation shall maintain a policy of insurance for the payment of
hospitalization costs and certain medical expenses incurred by Attorney and
Attorney's immediate family similar to that for other executive level employees.
Attorney shall become eligible to participate in Corporation's insurance plan on
the completion of one (1) month of employment. Corporation shall pay for one
complete physical each year from a Doctor of Attorney's choice.
The cost of the above-stated medical insurance shall be borne by Corporation.
Corporation reserves the right to change carriers or plans provided that no new
plan after the commencement of Attorney's eligibility shall provide lower
benefits than those provided in the plan in effect on Attorney's date of
eligibility.
<PAGE> 5
SECTION TWENTY
LIABILITY OF CORPORATION
All matters of eligibility for coverage or benefits under any plan or plans of
health, life, hospitalization, or other insurance shall be determined in
accordance with provisions of the applicable insurance policies. Corporation
shall not be liable to Attorney, or Attorney's family, heirs, executors, or
beneficiaries, for any payment payable or claimed to be payable under any plan
of insurance.
Corporation will not be liable for any of Attorney's non-corporate related
activities. Attorney agrees to hold Corporation harmless and indemnify
Corporation for any claims arising from Attorney's non-corporate activities.
SECTION TWENTY-ONE
WAIVER OF BREACH
The waiver by either party to this contract of a breach of any provision of this
contract shall not operate or be construed as a waiver of any subsequent breach
of the same or any other provisions of this contract.
SECTION TWENTY-TWO
NOTICES
Any notice required to be given under this contract shall be sufficient, if in
writing, hand delivered, or sent by registered mail to the last known residence
of Attorney or from Attorney to the principal office of Corporation.
SECTION TWENTY-THREE
BINDING EFFECT
This contract shall be binding on the parties, their successors, and assigns,
and the estate, heirs, legatees, executors, administrators, and beneficiaries of
Attorney.
SECTION TWENTY-FOUR
GOVERNING LAW
This contract shall be governed by, construed, and enforced in accordance with
the laws of the State of Texas.
SECTION TWENTY-FIVE
EFFECT OF PARTIAL INVALIDITY
The invalidity of any portion of this contract will not and shall not be deemed
to affect the validity of any other provision. In the event any provision of
this contract is held to be invalid, the parties agree that the remaining
provisions shall be deemed to be in full force and effect as if they had been
executed by both parties subsequent to the expungement of the invalid provision.
SECTION TWENTY-SIX
ENTIRE AGREEMENT
This contract constitutes the entire contract between the parties, and any prior
understanding or representation of any kind preceding the date of this contract
shall not be binding on either party except to the extent incorporated in this
contract.
<PAGE> 6
SECTION TWENTY-SEVEN
MODIFICATION OF AGREEMENT
Any modification of this contract or additional obligation assumed by either
party in connection with this contract shall be binding only if in writing
signed by each party or an authorized representative of each party.
SECTION TWENTY-EIGHT
ATTORNEY FEES
In the event any action is filed in relation to this contract, the unsuccessful
party in the action shall pay to the successful party, in addition to all the
sums that either party may be called on to pay, a reasonable sum for the
successful party's attorney fees.
SECTION TWENTY-NINE
ASSIGNMENT OF RIGHTS
The rights of each party under this contract are personal to that party and may
not be assigned or transferred to any other person, firm, corporation, or other
entity without the prior, express, and written consent of the other party.
SECTION TWENTY-SIX
PARAGRAPH HEADINGS
The titles to the paragraphs of this contract are solely for the convenience of
the parties and shall not be used to explain, modify, simplify, or aid in the
interpretation of the provisions of this contract.
IN WITNESS WHEREOF, each party to this contract has caused it to be executed at
American HealthChoice, Inc., 1300 W. Walnut Hill Lane, Suite 275, Irving, Texas,
75038, on the date indicated below.
WITNESSES: /s/ Dr. J. W. Stucki AMERICAN HEALTHCHOICE, INC.
WITNESSES: /s/ Dr. Dave Voracek /s/ Jon Sommerhauser, Director, COO
WITNESSES: /s/ James Roberts /s/ Jay R. Stucki
<PAGE> 1
EXHIBIT 10.2
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement"), is made this 1st day
of June, 1997, by and between American HealthChoice, Inc. (AHI), a New York
corporation (the "Company"), with its principal offices at 1300 W. Walnut Hill
Lane, Irving, Texas 75038 and Jay R. Stucki (the "Executive"), an individual.
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Company has determined that it is in
the best interests of the Company to retain the services of the Executive in the
position set forth herein below and to enter into a written agreement embodying
the terms of such employment; and
WHEREAS, the Wingate Board Members specifically requested that Executive,
as the brother of the founder and Chief Executive Officer of the Company, stay
on board with the Company; and
WHEREAS, the Executive has a current contract to provide legal services for
which the Company wishes to add this Agreement for financial services; and
WHEREAS, the By-laws of the Company permit the Company to enter into
contracts for the employment of officers of the Company; and
WHEREAS, the Company wishes to assure itself of the financial services of
the Executive for the period provided in this Agreement, and the Executive
wishes to continue to serve in the employ of the Company in the capacity and on
the terms and conditions hereinafter provided.
NOW, THEREFORE, in consideration of the promises and the mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by each of the parties hereto, the
parties agree as follows:
ARTICLE I
EMPLOYMENT AND DUTIES
SECTION 1.1. EMPLOYMENT. The Company hereby continues to employ the
Executive, and the Executive hereby agrees to such continued employment with the
Company as an employee of the Company, upon the terms and subject to the
conditions hereinafter set forth.
SECTION 1.2. DUTIES. The Executive shall serve as the Chief Financial
Officer. The Executive shall devote substantially all of his business time and
energies to the business of the Company. The Executive agrees to perform such
services not inconsistent with his position, or his existing contract for legal
services, as shall from time to time be assigned to him by the Company's Board
of Directors or the President of the Company. The Company recognizes the duties
of the current legal agreement with Executive and agrees to keep such agreement
in full force and effect.
ARTICLE II
TERM OF EMPLOYMENT
SECTION 2.1. TERM. The Executive shall be employed by the Company for a
period commencing on June 1, 1997 and, except as otherwise provided herein,
ending two (2) years from such date. The term of this Agreement shall be
extended by twelve months from the then effective expiration date if either
party fails to give ninety (90) day notice of cancellation prior to the
expiration date of this Agreement. The
<PAGE> 2
period of the Executive's employment hereunder, including any extension or
extensions pursuant to the foregoing sentence, is referred to hereinafter as the
"Employment Term".
SECTION 2.2. TERMINATION. This Agreement, and the employment of the
Executive hereunder, shall terminate prior to the expiration of the Employment
Term in the following manner:
a. Retirement.
(1) This Agreement shall terminate automatically upon the Executive's
Retirement, as defined hereinafter.
(2) For purposes of this Agreement, "Retirement" means the termination
of the Executive's employment initiated by the Executive whereby the
Executive is entitled to receive an immediately payable benefit, including
an early retirement benefit, under the Company's retirement plan generally
applicable to its salaried employees or under any retirement arrangement
established with respect to the Executive with his consent, in either case,
whether or not the Executive commences to receive such benefit at the time
of such termination.
(3) Upon termination of the Executive's employment by reason of
Retirement, the Executive shall be entitled to benefits determined in
accordance with the Company's retirement, benefit and insurance programs in
effect at such time.
b. Termination for Cause.
(1) The Executive's employment under this Agreement may be terminated
for cause if Executive fails to cure such breach within thirty (30) days of
receiving written notice of said breach. If Executive fails to cure
default, the Board of Directors have the right to immediately terminate
Executive by holding a special meeting duly called for the purpose of
considering the termination of the Executive for cause and at said meeting
the Board of Directors decides to terminate for cause, as defined herein.
The Executive shall have the right to receive notice of and appear at such
meeting, at the Company's expense, to respond to any allegations made
against him concerning the contemplated termination.
(2) As used in this Agreement, "cause" shall be deemed to mean one or
more of the following:
(a) The Executive's embezzlement or misappropriation of funds;
(b) The Executive's conviction of a felony involving moral
turpitude;
(c) The Executive's commission of intentional material acts of
dishonesty or fraud;
(d) The Executive's breach of any material provision of this
Agreement;
(e) The Executive's habitual or willful neglect of his duties;
(f) The Executive's breach of fiduciary duty to the Company
involving personal profit; or
(g) The Executive's conviction of a duty to the Company or its
stockholders imposed by law.
<PAGE> 3
(3) In the event that the Board of Directors acts to terminate the
Executive for cause in accordance with paragraph (1), the Executive shall
be paid all compensation and other sums, in one lump sum, due to him
through the date of termination, including, without limitation,
reimbursements for allowable expenses incurred by the Executive, and shall
be entitled to receive other benefits herein provided at the Company cost
for the remaining term of this Agreement.
c. Termination Without Cause.
(1) The Company may, at any time, terminate this Agreement without
cause on ninety (90) days' written notice to the Executive.
(2) As used in this Agreement, the phrase "termination without cause"
means termination of employment other than:
(a) Termination pursuant to Section 2.2.b. of this Agreement; or
(b) Termination pursuant to Section 2.2.d. of this Agreement; or
(c) The Executive's voluntary termination of his employment
pursuant to Section 2.2.a.
(3) If the Executive's employment with the Company is terminated
without cause, then;
(a) Where the termination without cause occurs within six (6)
months of the date of employment, the Company will continue to pay as
liquidated damages his then current Base Salary (as defined herein)
for the next ninety (90) days immediately following the date of such
termination (the "Severance Period");
(b) Where the termination without cause occurs after six (6)
months of the date of employment, the Company will continue to pay as
liquidated damages his then current Base Salary for the remaining
contract term (the "Severance Period");
(4) If the Executive's employment with the Company is terminated
without cause:
(a) The Executive shall be deemed to be an "Executive" of the
Company for the applicable Severance Period with respect to any health
insurance plans maintained by the Company in which the Executive is
eligible and participating at the time of such termination and the
Executive shall be entitled to continued coverage, if applicable,
during such Severance Period.
d. Termination Upon Death or Disability.
(1) If the Executive dies or becomes permanently disabled to the
extent that he is unable to perform his duties under this Agreement, at
such time as he is determined to be permanently disabled or upon death, he
shall be deemed terminated and he, his heirs, or assigns, as applicable,
shall receive an amount equal to one hundred percent (100%) of his Base
Salary for two (2) months, plus any bonus compensation to which the
Executive would be entitled, pro rated to the date of death or permanent
disability; provided, however, that the payment of such Base Salary shall
be reduced by an amount equal to the sum of all benefits
<PAGE> 4
received by the Executive from (i) federal or state disability programs or
(ii) any private disability plan provided by the Company. Payment of such
sum shall be made in accordance with Section 3.1 hereof.
(2) For purposes of this Agreement, the term "permanently disabled"
shall mean the Executive's inability to perform services by reason of
illness or other incapacity for a period of more than two (2) months,
established by medical evidence satisfactory to the Company.
(3) All other benefits to which the Executive may be entitled
following the Executive's termination for death or disability shall be
determined in accordance with the plans, policies and practices of the
Company then in effect.
SECTION 2.3. OTHER OCCURRENCES UPON TERMINATION. Upon termination of this
Agreement:
a. The Company's obligation to provide the Executive with compensation
and benefits as provided herein shall discontinue after the expiration date
and any extensions of this Agreement except as otherwise required by law or
as herein set forth in this Section 2.
b. The Executive shall comply fully with the provisions of Section
4.4.e. hereof, including, without limitation, the surrender to the
Company's designated agent of all property of the Company belonging thereto
that is in the possession, custody or control of the Executive at the time
of termination, including, but not limited to, keys, files, furnishings,
reports, records, documents and the like; and
c. With respect to any stock options, restricted stock, incentive
plans, deferred compensation arrangements or other plans or programs in
which the Executive is participating at the time of termination of his
employment, the Executive's rights and benefits under each such plan shall
be determined in accordance with the terms, conditions, and limitations of
the plan and any separate agreement executed by the Executive which may
then be in effect.
SECTION 2.4. MITIGATION OF AMOUNTS PAYABLE UPON TERMINATION. The Executive
shall not be required to mitigate the amount of any payment provided for in this
Section 2 by seeking other employment or otherwise, nor shall the amount of any
payment provided for in this Section 2 be reduced by any compensation earned by
the Executive as the result of employment by another employer after the date of
the Executive's termination of employment, or otherwise.
ARTICLE III
COMPENSATION AND BENEFITS
SECTION 3.1. BASE SALARY.
a. For all services rendered by the Executive during his employment
under this Agreement, the Company shall pay the Executive as compensation a
salary at the rate of $110,000.00 per year, increased annually on June 1st
of each year by ten thousand dollars ($10,000), commencing June 1st, 1997.
Plus any additional increase in salary which the Board of Directors of the
Company may approve for the Executive. All taxes and governmentally
required withholdings shall be deducted in conformity with applicable laws.
b. During the Employment Term, the Executive's salary shall be
reviewed at least annually. Such review shall be conducted by the Board of
Directors of the Company, or a committee designated by the Board of
Directors, and such Board or committee may increase, but not decrease, said
salary.
<PAGE> 5
SECTION 3.2. BONUS. In addition to such compensation as is to be payable to
the Executive pursuant to the provisions of Section 3.1, the Executive shall be
entitled to receive bonuses defined as follows:
a. Signing: AHI will issue thirty thousand (30,000) shares of restricted
Company common stock, par value $0.001 as fully paid.
b. For each year this Agreement remains in effect the Company will issue
another thirty thousand (30,000) restricted shares to Executive, with
priority "piggy back" registration rights.
SECTION 3.3. STOCK OPTIONS.
a. The Company will grant to employee two hundred (200,000) options, at
the market price ($2.344) as confirmed at the June 24, 1997 board
meeting.
b. For each year this Agreement remains in effect the Company will issue
another two hundred thousand (200,000) options to Executive at the
then market price as determined by the anniversary date of this
Agreement.
c. For purposes of this section, said options shall be freely tradable
and issued, if necessary, under an S-8 registration. Said Options
shall not be exercised at a rate greater than 50,000 every four (4)
months, however Executive can sell immediately the amount of shares
needed to cover his tax liability. Executive shall have five (5) years
in which to exercise said options after Company grants said options.
SECTION 3.4. BENEFITS. In addition to, and not in lieu of, Base Salary,
bonus or other compensation payable to the Executive hereunder, the Executive
shall be entitled to the following benefits:
a. Employee Benefits. The Executive shall be entitled to participate
in the employee benefit programs generally available to employees of the
Company, and to receive such benefits for which his level of employment
makes him eligible, all in accordance with the Company's policies as in
effect from time to time during the Employment Term.
b. Health Insurance: Health insurance will be paid by the Company for
the employee, spouse, and children living at home effective with date of
employment.
c. Vacations. The Executive shall be entitled to three (3) weeks of
vacation (pro rated for periods of less than 12 months), or such greater
length of time as may be approved from time to time by the Board of
Directors of the Company during each full year of his employment hereunder,
with full pay in accordance with the vacation policy of the Company, such
vacation to be taken by the Executive at such time or times as are
consistent with the reasonable business needs of the Company. Vacation
shall accrue as of the date hereof with respect to the Company's fiscal
year 1997, and thereafter, any accrued vacation time not used during the
year in which it is available to be taken will be lost.
<PAGE> 6
d. Business Expenses. The Executive shall be reimbursed in accordance
with Company policies for any and all necessary and reasonable business
expenses incurred by the Executive during the Employment Term.
e. Holidays. The Executive shall be entitled to such holidays as the
Board of Directors may approve for all employees of the Company.
f. Sick Leave. The Executive shall be entitled to a maximum of five
(5) days paid sick leave per year because of sickness or accident.
g. Dues and Licenses. The Company will pay on behalf of the Executive
his annual licenses and dues to professional organizations directly tied to
his duties under this agreement.
h. Continuing Professional Education. The Company will support the
Executive's annual continuing professional education (CPE) requirements of
forty (40) hours per year. Accordingly, the Company will reimburse the
Executive to attend such professional meetings and seminars, to cover
expenses for materials, course fees, travel, lodging, meals, etc.
ARTICLE IV
MISCELLANEOUS PROVISIONS
SECTION 4.1. REDUCTION OF PAYMENTS. If any payment to or for the benefit of
the Executive under this Agreement, either alone or together with other payments
to or for the benefit of the Executive, would constitute a "parachute payment"
(as such term is defined in Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code"), the payments under this Agreement shall be reduced to
the largest amount that will minimize or eliminate both the imposition of the
excise tax imposed by Section 4999 of the Code and the disallowance of
deductions to the Company under Section 280G of the Code of any such payments.
The determination of any reduction in the payments under this Agreement pursuant
to this Section shall be made by the Company's independent accountants.
SECTION 4.2. INDEMNIFICATION. The Company will indemnify the Executive (and
his legal representative or other successors) to the fullest extent permitted,
including but not limited to payment of expenses in advance of final disposition
of a proceeding. The Executive shall be entitled to the protection of any
insurance policies the Company may elect to maintain generally for the benefit
of its directors and officers, and to the extent the Company maintains such an
insurance policy or policies, the Executive shall be covered by such policy or
policies, but not limited by said policies for the Company's obligation to
advanced legal fees regardless of the allegations made, and to the maximum
extent of the coverage available for any Company officer or director against all
costs, charges and expenses whatsoever incurred or sustained by him or his legal
representatives at the time such costs, charges and expenses are incurred or
sustained, in connection with any action, suit or proceeding to which he (or his
legal representatives or other successors) may be made a party by reason of his
being or having been a director, officer or employee of the Company, or any of
its subsidiaries or his serving or having served any other enterprise as a
director, officer or employee at the request of the Company.
SECTION 4.3. COVENANT NOT TO COMPETE WITH THE COMPANY.
a. If this Agreement is terminated for any reason, the Executive, for
a period of one (1 ) year after the date of termination (the "Noncompete
Term"), shall not directly or indirectly own, manage, operate or control,
or be employed by or participate in or be connected in any manner with the
ownership, management, operation, or control of, any business or type of
business, located within a ten (10) mile radius of any facility owned or
operated by any member of the Company Group (as
<PAGE> 7
defined below), which renders medical, chiropractic or physical therapy
services competitive with those of such member.
b. In addition, the Executive agrees that for the duration of the
Noncompete Term, he will not, either directly or indirectly: (i) make any
use of or make known to any competing person, firm, or corporation the
names or addresses of any potential or pending acquisition and/or the names
of the patients of any member of the Company Group or any other information
pertaining to said businesses, acquisitions, and/or patients; (ii) call on,
solicit or take away, or attempt to call on, solicit or take away, any of
the business, acquisitions, and/or patients of any member of the Company
Group with whom the Executive became acquainted during his employment or
association with the Company or any other member of the Company Group, for
commercial or competitive purposes either for himself or for any other
person, firm, or corporation; or (iii) solicit or take away or attempt to
solicit or take away any person then employed (including any employee who
had been employed by the Company or any other member of the Company Group
within six (6) months prior to the time of the termination of this
Agreement) by the Company or any other member of the Company Group, for
purposes of employment by or any consulting relationship with himself or
any other person, firm or corporation.
c. As used herein, the phrase "Company Group" means the Company, and
any entity that directly or indirectly controls, is controlled by, or is
under common control with, the Company, and for purposes of this definition
"control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such
entity, whether through the ownership of voting securities, by contract or
otherwise.
d. Notwithstanding the provisions of paragraph a above this Section
4.3, the Executive may invest in the securities of any enterprise (but
without otherwise participating in the activities of such enterprise) if
(i) such securities are listed on any national or regional securities
exchange or have been registered under Section 12(9) of the Securities
Exchange Act of 1934 and (ii) the Executive does not beneficially own (as
defined in Rule 1 3d-3 promulgated under the Securities Exchange Act of
1934) in excess of 5% of the outstanding capital stock of such enterprise.
e. The Executive agrees that if a court of competent jurisdiction
determines that the length of time or any other restriction, or portion
thereof, set forth in this Section 4.3 is overly restrictive and
unenforceable, the court may reduce or modify such restrictions to those
which it deems reasonable and enforceable under the circumstances, and as
so reduced or modified, the parties hereto agree that if a court of
competent jurisdiction determines that any provision of this Section 4.3 is
invalid or against public policy, the remaining provisions of this Section
4.3 and the remainder of this Agreement shall not be affected thereby, and
shall remain in full force and effect.
f. The Executive acknowledges that the business of the Company and the
other members of the Company Group is national in scope and that the
restrictions imposed by this Agreement are legitimate, reasonable and
necessary to protect the Company's and the other members of the Company
Group's investment in their respective businesses and the goodwill thereof.
The Executive acknowledges that the scope and duration of the restrictions
contained herein are reasonable in light of the time that the Executive has
been engaged in the business of the Company, the Executive's reputation in
the markets for the businesses of the Company and the other members of the
Company-Group and the Executive's relationship with the patients of the
members of the Company Group. The
<PAGE> 8
Executive further acknowledges that the restrictions contained herein are
not burdensome to the Executive in light of the consideration paid therefor
and the other opportunities that remain open to the Executive. Moreover,
the Executive acknowledges that he has other means available to him for the
pursuit of his livelihood.
g. The Executive acknowledges and agrees that the Company's remedies
at law for a breach or threatened breach of any of the provisions of this
Section 4.3 would be inadequate and, in recognition of this fact, the
Executive agrees that, in the event of such a breach or threatened breach,
in addition to any remedies at law, the Company, without posting any bond,
shall be entitled to obtain equitable relief in the form of specific
performance, temporary restraining order, temporary or permanent injunction
or any other equitable remedy which may then be available.
SECTION 4.4. CONFIDENTIALITY; SPECIFIC PERFORMANCE.
a. The Executive will not at any time (whether during or after his
employment with the Company) disclose or use for his own benefit or
purposes, or the benefit or purposes of any other person, firm,
partnership, joint venture, association, corporation or other business
organization, entity or enterprise other than the Company and any other
member of the Company Group, any Trade Secrets (as defined below) of the
Company without first obtaining the written consent of the Company.
b. The Executive will not at any time during his employment with the
Company or for a period of two (2) years after termination of his
employment, disclose or use for his own benefit or purposes or the benefit
or purposes of any other person, firm, partnership, joint venture,
association, corporation or other business organization, entity or
enterprise other than the Company and any other member of the Company
Group, any Confidential Information (as defined below) of the Company or
any other member of the Company Group which is disclosed to or learned by
the Executive during employment with the Company. The Executive
acknowledges that Confidential Information and materials developed by the
Executive, or Confidential Information and materials received by the
Company in confidence from third parties, are also included within the
meaning and provisions of this Section.
c. As used herein, "Trade Secrets" means the whole or any portion or
phase of technical information, design, process, procedure, formula or
improvement known or used by the Company or any other member of the Company
Group that is valuable and secret (in the sense that it is not generally
known to competitors of the Company). To the extent consistent with the
foregoing, Trade Secrets include (without limitation) the specialized
information and technology that provide any member of the Company Group
with an advantage over competitors or potential competitors in its
industry.
d. As used herein, "Confidential Information" means, with respect to
any person, any data or information known by that person related to the
business of the person, other than Trade Secrets, that is of competitive
significance to the person and not generally known by or available to the
public or are maintained as confidential by such person. To the extent
consistent with the foregoing, Confidential Information" includes (without
limitation): patient records; cost data (such as labor or material costs
pertaining to services) of the Company; the identity and location of
vendors and the terms of sales (including prices) negotiated with such
vendors; data relating to sales - by patient, by location, by service
category, or by sales price; patient lists; financial information that has
not been released to the public; future business plans, marketing
strategies, or advertising campaigns; and personnel files.
<PAGE> 9
e. The Executive agrees that upon termination of his employment with
the Company for any reason, he will return to the Company immediately all
memoranda, books, papers, plans, information, letters and other data, and
all copies thereof or therefrom in any way relating to the business of the
Company and any other member of the Company Group, except that he may
retain personal notes, notebooks and diaries. The Executive further agrees
that he will not retain or use for his account at any time any trade names,
trademark or other proprietary business designation used or owned in
connection with the business of the Company or any other member of the
Company Group.
f. The Executive acknowledges and agrees that the Company's remedies
at law for a breach or threatened breach of any of the provisions of this
Section 4.4 would be inadequate and, in recognition of this fact, the
Executive agrees that, in the event of such a breach or threatened breach,
in addition to any remedies at law, the Company, without posting any bond,
shall be entitled to obtain equitable relief in the form of specific
performance, temporary restraining order, temporary or permanent injunction
or any other equitable remedy which may then be available.
SECTION 4.5. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas. Venue for all
claims, disputes and actions arising under or related to this agreement shall be
Irving, Texas. All parties to this agreement agree to submit to the jurisdiction
of the appropriate court for Irving, Texas.
SECTION 4.6. ENTIRE AGREEMENT: AMENDMENTS; EFFECTIVENESS. This Agreement
shall supersede any and all existing employment, change in control or severance
agreements between the Executive and the Company or any of its respective
affiliates and contains the entire understanding of the parties with respect to
the employment of the Executive by the Company. There are no restrictions,
agreements, promises, warranties, covenants or undertakings between the parties
with respect to the subject matter hereof other than those expressly set forth
herein. No provisions of this Agreement may be amended or modified unless such
amendment or modification is in writing and signed by each of the parties
hereto. This agreement and any amendment hereto shall not be effective unless
and until signed by the company and the executive.
SECTION 4.7. NO WAIVER. The failure of a party to insist upon strict
adherence to any term of this Agreement on any occasion shall not be considered
a waiver of such party's rights or deprive such party of the right thereafter to
insist upon strict adherence to that term or any other term of this Agreement.
SECTION 4.8. SEVERABILITY. In the event that any one or more of the
provisions of this Agreement shall be or become invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions of this Agreement shall not be affected thereby.
SECTION 4.9. SUCCESSORS. This Agreement shall inure to the benefit of and
be enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amount would still be payable to the Executive
hereunder if the Executive had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the Executive's devisee, legatee or other designee or, if there is
no such designee, to the Executive's estate. This Agreement shall not be
assignable by the Executive.
SECTION 4.10. NOTICE. For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when personally delivered or mailed by United
States registered or certified mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth in the opening of this
Agreement; provided
<PAGE> 10
that all notices to the Company shall be directed to the attention of the
President, or to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
SECTION 4.11. HEADINGS. The headings contained in this Agreement are for
convenience only and shall in no manner be construed as a part of this
Agreement.
SECTION 4.12. ENFORCEMENT. In the event either party resorts to legal
action to enforce the terms and provisions of this Agreement, the prevailing
party shall be entitled to recover the costs of such action so incurred,
including, without limitation, reasonable attorneys' fees.
SECTION 4.13. COUNTERPARTS. This Agreement (and any written amendment
thereto) may be executed in one or more counterparts, each of which shall be
deemed to be an original but all of which together will constitute one and the
same instrument.
SECTION 4.14. SURVIVAL OF THE EXECUTIVE'S OBLIGATIONS. The Executive's
obligations under this Agreement shall survive regardless of whether the
Executive's employment by the Company is terminated, voluntarily or
involuntarily, by the Company or the Executive, with or without cause.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
the day and year first above written.
EXECUTIVE: COMPANY:
/s/ Jay R. Stucki American HealthChoice, Inc.
By: /SIG/
President
and
Directors of Compensation Committee
By: /SIG/
President
<PAGE> 1
EXHIBIT 10.12
INVESTOR AGREEMENT
This agreement is made and entered into this 19th day of March 1997, by and
between Wingate Financial Associates, L.L.C. ("Investor"), a Delaware
Corporation, and American HealthChoice, Inc. ("Company"), a New York
Corporation.
WITNESSETH
WHEREAS, Company is engaged in the practice of operating medical clinics in
Texas, Georgia, and Louisiana:
WHEREAS, Investor desires to invest in Company and take certain
responsibilities relative to control of the Company's Board of Directors;
NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual covenants, promises
and conditions contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Investor and Company
hereby agree as follows:
BEST EFFORTS
Both parties agree to use best efforts to effectuate the intent and terms
of this agreement. Investor recognizes that Company is foregoing other
opportunities to fund the Company's needs. Further, both parties recognize time
is of the essence.
REPRESENTATIONS BY COMPANY
BOARD MEMBERS: The Company agrees to change its Board of Directors (Board) to
allow for seven (7) members. Upon the completion of the five hundred and fifty
thousand ($550,000.00) Bridge Loan, as defined below, to the Company, the
Company will agree to change the number of board members to seven (7). Further,
the Company will deliver the resignations of one (1) board member. Investor will
then have the right to appoint four members to the Company Board.
If a Raise of Capital (minimum of two million ($2,000,000), separate from bridge
loan), as described herein under Representations By Investor, is not
substantially complete within one hundred (100) days of the bridge loan, also
described herein under Representations By Investor, the Investor will provide
the Company with resignations of the four (4) board members appointed by the
Investors.
BRIDGE LOAN: The current Board will approve a bridge loan in the amount of five
hundred and fifty thousand dollars ($550,000.00) by Investor, at ten (10%)
percent annually, as senior debt subject to existing debt already perfected as
of the date of this agreement. Additional consideration for said loan is in the
form of one million (1,000,000) warrants at two and three-eight ($2 3/8) dollars
per share of Company common shares to be issued from "authorized but not issued"
Company common stock.
CONSULTANT: David Love, C.P.A., J.D., an affiliate of Investor, will be retained
by the board as a consultant for an initial period of one (1) year, subject to
the same terms as imposed upon the new board members. Compensation will be at
forty-eight thousand ($48,000.00) annually plus reasonable reimbursement
expenses, with the first amount being deducted as a non-refundable retainer of
ten thousand ($10,000.00) to be paid upon the closing of the bridge loan, with
the balance being accrued until the funding of the Raise of Capital as
represented by Investor below.
FOUNDER OPTIONS: Doctors J. W. Stucki, J. Jones, and J. Nelson, or other
founders will make available two million (2,000,000) shares of their common
stock to Investor to be optioned at two dollars and seventy-five cents ($2.75)
per share executable for the next eighteen months. Said shares will be held in
escrow by an escrow agent mutually agreed upon by both parties. The "Put" is as
follows:
<PAGE> 2
(a) after thirty (30) days, if the stock trades at five ($5.00) dollars
for five consecutive trading days, a Put call can be exercised for
three hundred thousand (300,000) shares.
(b) after ninety (90) days, if the stock trades at five and a half ($5.50)
dollars for five consecutive trading days, a Put call can be exercised
for three hundred thousand (300,000) shares.
(c) after one hundred twenty (120) days, if the stock trades at six
($6.00) dollars for five consecutive trading days, a Put call can be
exercised for three hundred thousand (300,000) shares.
(d) after one hundred eighty (180) days, if the stock trades at six and a
half ($6.50) dollars for five consecutive trading days, a Put call can
be exercised for three hundred thousand (300,000) shares.
(e) after two hundred and forty (240) days, if the stock trades at seven
($7.00) dollars for five consecutive trading days, a Put call can be
exercised for three hundred thousand (300,000) shares.
(f) after three hundred (300) days, if the stock trades at seven ($7.00)
dollars for five consecutive trading days, a Put call can be exercised
for five hundred thousand (500,000) shares.
FOUNDER LOCK-UP: Doctors J. W. Stucki, J. Jones, J. Nelson, and the majority of
shares belonging to doctors Webb, Bryant, and Hanks, will lock-up with Investor
the remaining portion of any shares that become freely tradable within eighteen
(18) months of this agreement. All shares shall become freely tradable eighteen
(18) months from the date of this agreement. All shares subject to the Investor,
and/or his assignee, lock-up can be rolled out after six (6) months from the
date of this agreement at a rate of one-eighteenth (1/18) per month subject to
Security Exchange Commission Rules. Warrants and Options previously granted are
not subject to this lock-up agreement. Company will use its best efforts to get
other shareholders to lock up under similar terms.
EMPLOYMENT AGREEMENT: Dr. Stucki will remain as CEO for three (3) years.
Compensation to be at a base rate of two hundred and fifty thousand ($250,000)
annually with milestone bonuses based on Company profitability. The employment
agreement will be substantially similar to Dr. Stucki's existing agreement.
DR. STUCKI'S BRIDGE LOAN: Dr. Stucki agrees to sell shares of his stock in an
amount equal to five hundred thousand ($500,000) dollars and loan the proceeds
to Company. As repayment, Dr. Stucki will receive a debenture of equal value,
convertible to common stock at a fifteen percent (15%) discount fixed on date of
execution, at ten percent (10%) interest, convertible in ninety (90) days. This
is in addition to the salary as enumerated above. To effectuate the proceeds,
Dr. Stucki will agree to lock up in a trust with Investor the amount of shares
necessary and Investor will fund the proceeds within seven (7) days of trust
agreement.
REPAYMENT OF BRIDGE LOAN: Company agrees to repay any loans made under this
agreement or these loans made by Galaxy Investment and/or its assignees from the
sale of the Raise of Capital contemplated herein.
CONSULTING AGREEMENTS: Other than the consulting agreement for Dr. Dave Voracek
and James Carter, the Company agrees all other consulting agreements are void.
REPRESENTATIONS BY INVESTORS
RAISE OF CAPITAL: Investor represents that it will use its best efforts to raise
a minimum of two million ($2,000,000.00) dollars net to the Company. Company
agrees to repay Galaxy and Investor the five hundred and fifty thousand
($550,000) dollar bridge loan from said Raise of Capital. The Raise of Capital
must be substantially complete within one hundred (100) days of this agreement.
Shares for raising the minimum net capital shall be from no more than one
million four hundred thirty thousand (1,430,000) of "authorized but unissued"
Company common stock.
<PAGE> 3
BOARD CONTROL: The new board members appointed by Investor will not agree to any
stock split, reverse merger, equity conversions, or take any action that is
dilutive to shareholders, except for the transactions that are expressly agreed
to in this agreement or without written approval from Stucki, which approval
will not be unreasonably withheld.
BRIDGE LOANS: Investor agrees to loan Company a minimum of five hundred and
fifty thousand ($550,000.00) secured by a note and security agreement perfected
against tangible and intangible assets of the Company. Investor acknowledges
that the intention of the parties is that the bridge loan be repaid by a
convertible debenture at a ten (10%) percent discount.
HOLD HARMLESS: Investor agrees to hold harmless any prior acts by the Company's
officers or directors, except those actions directly related to criminal
conduct.
APPROVALS: Investor agrees that DVI and Grovest Management ("Other Affiliates")
have agreed to the terms of this agreement and that by entering into this
agreement the Other Affiliates will not claim any default under their respective
agreements due to this agreement.
DISCLOSURE: Investor acknowledges that it has performed due diligence, reviewed
the Company's Form 10-KSB 1996, and Form 10-QSB for the first quarter of 1997,
and has received a copy of the Risk Factors prepared by the Company. Investor
represents that it has had an opportunity to request additional information and
receive such information to the satisfaction of Investor.
INVESTMENT EXPERIENCE: Investor acknowledges that it is an investor in
securities of developing companies and can bear the economic risk of its
investment. Investor represents that it is an accredited investor as that term
is defined under Regulation D promulgated under the Security Act of 1933.
IN WITNESS WHEREOF, Investor and Company have caused this agreement to be duly
executed and delivered this the 18th day of March 1997.
"INVESTOR" "COMPANY"
Wingate Financial Associates, L.L.C. American HealthChoice, Inc.
/s/ Mr. Mandel Sherman /s/ Dr. J. W. Stucki
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF AMERICAN HEALTHCHOICE, INC.
1. AHC Chiropractic Clinics, Inc., a Texas corporation
2. AHC Physicians Corporation, Inc., a Texas corporation
3. Total Medical Diagnostics, Inc., a Delaware corporation
4. Nationwide Sports and Injury, Inc., a Texas corporation
5. United Chiropractic Clinics of Uptown, Inc., a Louisiana corporation
6. New Orleans East Chiropractic Clinics, Inc., a Louisiana corporation
7. AHC Clinic Management, L.L.C., a Texas limited liability company
8. AHI Management, Inc., a Texas corporation
9. Diagnostic Services, Inc., a Texas corporation
10. Katy Sports Injury and Rehab, Incorporated, a Texas corporation
11. Pacific Chiropractic (San Pedro), Incorporated, d/b/a United Chiropractic
Clinic, a Texas corporation
12. Apple Chiropractic Clinic of Wurzbach, Incorporated, a Texas corporation
13. Valley Family Health Center, L.L.C., a Texas limited liability company
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 1,123,001
<SECURITIES> 0
<RECEIVABLES> 15,940,920
<ALLOWANCES> (7,239,277)
<INVENTORY> 77,250
<CURRENT-ASSETS> 851,829
<PP&E> 2,707,446
<DEPRECIATION> (1,023,740)
<TOTAL-ASSETS> 12,437,429
<CURRENT-LIABILITIES> 5,584,702
<BONDS> 0
0
0
<COMMON> 7,232
<OTHER-SE> 100,000
<TOTAL-LIABILITY-AND-EQUITY> 12,437,429
<SALES> 9,755,786
<TOTAL-REVENUES> 9,755,786
<CGS> 0
<TOTAL-COSTS> 16,314,396
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 529,380
<INCOME-PRETAX> (7,087,988)
<INCOME-TAX> (760,154)
<INCOME-CONTINUING> (6,327,834)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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