<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ................ to .................
Commission File Number: 000-26740
AMERICAN HEALTHCHOICE, INC.
(Name of small business issuer in its charter)
New York
(State or other jurisdiction of 11-2931252
incorporation or organization I.R.S. Employer 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 Act:
Title of each class Name of each exchange 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 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. [X]
State issuer's revenues for its most recent fiscal year: $7,226,113
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity, as
of a specified date within the past 60 days. (See definition of affiliate in
Rule 12b-2 of the Exchange Act). $650,000 as of December 31, 1998*.
(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 December 31, 1998, the
Registrant had 14,519,632 shares outstanding of common stock.
* Based on the last reported price of an actual transaction in Registrant's
common stock on December 31, 1998 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.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure
Format (Check one)
Yes [ ] No [X]
<PAGE> 2
AMERICAN HEALTHCHOICE, INC.
FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C> <C>
Item 1. Description of Business............................................................... 1
Item 2. Description of Property............................................................... 9
Item 3. Legal Proceedings .................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders................................... 11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.............................. 12
Item 6. Management's Discussion and Analysis or Plan of Operation............................. 13
Item 7. Financial Statements.................................................................. 17
Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.. 34
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act........................................... 35
Item 10. Executive Compensation................................................................ 37
Item 11. Security Ownership of Certain Beneficial Owners and Management........................ 40
Item 12. Certain Relationships and Related Transactions........................................ 42
Item 13. Exhibits and Reports on Form 8-K...................................................... 43
Signatures .................................................................... 45
</TABLE>
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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 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,
diagnostic 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 owns, operates and manages sixteen clinics. Twelve are
primary care clinics, of which five are medical clinics and seven are
chiropractic clinics. The Company also has four physical therapy facilities at
or close to the chiropractic clinics. The clinics are located in Texas,
Louisiana and Georgia. The clinic locations are leased except for one clinic in
San Antonio. See Item 2 "Description of Property." At September 30, 1998 the
Company had a total of 109 employees. Of this number, 71 were employed by the
Company's medical clinics, 29 by the chiropractic and physical therapy clinics,
and 9 at the Company's corporate office.
All key employee/providers serve pursuant to employment contracts
covering compensation, benefits, one year or more term and, in some cases,
agreements not to compete upon termination. All compensation is based upon fixed
salaries as set forth in employment contracts for identifiable services. Some of
these employee/providers are eligible for a bonus; however, bonuses are tied
directly to the employee's performance within the clinic and are not based on
referrals.
The Company depends upon third party payors for reimbursement of
approximately 95% of patient services. The Company believes that this percentage
is comparable to other organizations providing comparable patient services. The
Company receives reimbursement for medical services from many managed care
companies including Health Maintenance Organizations (HMOs), Preferred Provider
Organizations (PPOs), other healthcare plans, and to a lesser extent from
Medicare and Medicaid. A substantial percentage of reimbursements for
chiropractic and physical therapy services are received from patient insurance
settlements administered by attorneys representing the patients.
The Company, in the last three fiscal years, has sustained significant
operating losses and faces an uncertain future. During fiscal 1998, the Company
has attempted to restructure its long-term debt, evaluate its operations and
business strategy, reduce operating costs, and divest unprofitable clinics.
Notwithstanding its efforts, the Company incurred a $3,778,000 net loss,
suffered a drastic decline in the value of its common stock, was delisted from
the Nasdaq SmallCap Market and received a going concern opinion from its
independent auditors for the year ended September 30, 1998. See Item
6."Management's Discussion and Analysis or Plan of Operations."
1
<PAGE> 4
The Company's strategy is to complete the divestiture of unprofitable
clinics, restructure long-term debt, raise capital to support its continuing
operations and potential acquisitions, and continue to provide quality medical
services to its patients. The Company has executed a letter of intent to divest
the Norcross clinic, which has been unprofitable. See "Recent Developments."
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 fax number is (972) 751-1901.
HEALTH CARE INDUSTRY
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 (self-pay) 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.
This has placed small 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.
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 that provide for fixed payments (capitation) for patient care over
a specified period of time.
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 services that do not impose any requirements that would
violate the ethics applicable to the practice of medicine or violate any law.
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
2
<PAGE> 5
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.
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. The Anti-Kickback statute was amended
in 1996 to simply exclude all risk-sharing arrangements from the scope of the
statute. In July 1998, the Office of Inspector General ("OIG") issued a final
rule establishing a process allowing entities to obtain formal guidance
regarding the application of the Anti-Kickback statute, the safe harbor
provisions, and other OIG health care fraud and abuse sanctions. The Company
does not believe it is in violation of the Anti-Kickback Statute, even though
its operations do not fit within any of the existing or proposed safe harbors.
To help ensure compliance, the Company owns its clinics and contractually sets
forth terms of provider (employee) compensation, severely limits its providers'
investment and ownership in related companies, and prohibits referrals for
compensation.
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 because
it has no referral relationships for the small amount of Medicaid/Medicare work
that is does. However, the Stark legislation is broad and ambiguous and
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.
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.
3
<PAGE> 6
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 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. Because
reimbursements from government programs are not material to the Company, the
1997 Balanced Budget Act will not effect revenues.
BUSINESS STRATEGY
The Company's business strategy is as follows:
Current Profitability. Given the financial losses over the past three
years, the Company will continue its efforts to get all of its clinics
profitable and sell or close those that continue to show losses.
Integrated Physician Network. The Company intends to continue its
development of its physician base thereby creating an Integrated Physician
Network with an emphasis in primary care. In addition, the Company will continue
to vertically integrate medical services through acquisitions or by contracting
with providers to deliver services such as clinic management services.
Emphasize Primary Care Physicians. The Company believes that the use of
primary care physicians provides improved patient access to cost-effective,
quality health care services in its market area. The Company's strategy is to
affiliate with primary care physicians that the Company believes are
increasingly the focal point 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.
Growth. The Company's goal is to become a significant provider of
primary care in each of its market areas by increasing its penetration of
managed care, government-sponsored programs (Medicare and Medicaid), commercial
employer groups and individuals. The Company plans to add new primary care
clinics to its network through acquisitions and/or management agreements.
PRIMARY SOURCES OF COMPANY REVENUE
The Company derives its revenue from several different sources,
including managed care plans e.g. HMOs, PPOs, Medicaid/Medicare, indemnity
plans, insurance settlements from third party payors and self-pay. The company
strives to diversify its patient base and hence its revenue sources to see any
one clinic is not dependent upon one source of revenue. In the past, this has
caused problems for the Company from loss of Medicaid claims, change in
marketing laws, and clinics dependent on one doctor. To correct these problems,
the Company has made concerted efforts to diversify its patient base at each
clinic. Where the patient base could not be diversified and was incurring
ongoing losses, the Company divested the clinic through sale or closure. The
Company now believes each clinic is not as susceptible to changes in one revenue
source. The primary sources of revenue for the Company are as follows:
4
<PAGE> 7
Health Plans. These plans traditionally market health benefit coverage
to employer groups, who provide such benefits to their employees such as HMOs
or PPOs or other health care plans. 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 through a health plan. 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.
Currently, the Company contracts with a number of managed care
companies to provide patient care for the employees who enroll under their
health care plans. All of the Company's medical clinics derive a significant
amount of revenue from these plans. Under many of these plans, the clinics'
agree to accept predetermined fees for corresponding services rendered. None of
the medical clinics are dependent on any one plan because each clinic has
patients enrolled in a variety of plans.
Once services are rendered to the patient, the clinic generates a bill
for the patient and his/her insurance company. The patient usually makes a
nominal co-payment and then the clinic files the remaining claim with the
applicable insurance company. Payments from the insurance company usually take
less than thirty days. Due to patient registration procedures and set fees
predetermined by the insurance company, the Company can predict the revenue
earned for the services rendered. If the clinic's service fees exceed the
amounts set by the insurance companies, then the excess amount is either paid by
the patient or written off as bad debt.
If the provider, usually a physician, is not enrolled (credentialed) in
the managed care plan, then the plan may not pay for the services performed for
their patient. If a particular clinic experiences turnover of physicians, it
must get the new provider (physician) credentialed with each patient's plan.
This process takes time, and in the interim, the clinic may treat the patient
for no charge as a courtesy until the new provider (physician) receives
credentials from the various plans.
Medicare/Medicaid. The federal government, through the Health Care
Financing Administration ("HCFA"), allows federally qualified medical
organizations to enter into agreements to provide all covered medical services
to Medicare/Medicaid beneficiaries who choose to enroll in the program. None of
the Company's clinics are solely dependent on payments from Medicare/Medicaid,
nor does any one clinic derive a material portion of its revenue from
Medicare/Medicaid.
Patient Insurance Settlements. The Company's chiropractic clinics and
physical therapy clinics derive a significant portion of their revenue from
insurance settlements to injured patients treated by the clinic. The medical
clinics receive revenue from some patient insurance settlements but are not
necessarily dependent on these types of settlements. Typically, a patient seeks
treatment from a clinic based on representations by his/her attorney or
insurance company that payment for treating the patient will be forth coming
upon proof the patient is entitled to the patient's medical claims. The
representations are usually in the form of a Letter of Protection (LOP) or a
Personal Injury Payment (PIP) from the patient/insured's insurance policy.
Based on these representations, the clinic will treat the patient without
requiring payment at the time services are rendered.
Due to the nature of proving and documenting the patient claims, the
patient's medical bill may not be paid at the time services are rendered. The
delay in payment is usually under one year but can be significantly extended
past one year if the attorney and insurance company go to trial over the
patient's claims. Upon an agreement to pay the patient's claims, the clinic is
then paid.
Since many insurance settlements are a compromise between the insurance
company and the patient, often the Company must take a lesser amount than the
original fees for services rendered. In some instances, if the patient is under
a LOP and their attorney decides not to pursue the claim, then the clinic may
have to write the account off as bad debt. The Company believes that accounts
receivable from patient settlements have been adequately reserved to account for
the reduced collections. See Item 6-"Management Discussion and Analysis or Plan
of Operation."
Self-pay. All of the Company's clinics involve some level of self-pay.
Self-pay is simply that the patient is responsible for payment at the time the
services are rendered. The amount of self-paying patients varies widely
depending on the specifics of a clinic, its location, and the patient base.
5
<PAGE> 8
MEDICAL SERVICES
The Company currently owns and operates five primary care medical
clinics, however the Norcross, Georgia clinic is under a letter of intent for
purchase and the sale is expected to close on or before January 31, 1999. The
medical clinics are located in suburban areas and serve the general population
in their surrounding communities. The medical clinics' services are based on a
general family medical care. Most of the medical clinics have at least two
medical providers, usually primary care physicians, that are complemented with
the appropriate support staff.
The medical clinics have a significant number of patients who are
enrolled with a variety of different managed care plans. The Company seeks to
hire providers who are board certified and can be easily credentialed or
approved by managed care companies to treat their enrolled patients. The more
plans a provider is credentialed under, the larger the patient base is to draw
from for the clinics to treat patients.
If the provider (physician) treating the patient is not credentialed on
the managed care plan, then the managed care company may not pay for the
services provided to their enrolled patient. If the Company experiences a sudden
change in providers, it must get the provider credentialed with each patient's
health plan. Credentialing a provider is a time consuming process and the
amount of time depends on many different factors such as the actual plan and the
provider's history. To maintain the clinic's patient base, the Company usually
will have to trade off treating the patient for no charge in order to retain the
patient as a client while it credentials the new provider. In the past the
Company has experienced problems with the need for a sudden change in providers
and resulting in a significant reduction of revenue at the corresponding clinic.
The patient source or patient base for the medical clinics' comes
primarily from people familiar with the clinic locations, the provider's
reputation, managed care plans, commercial contracts, referrals from other
providers, and general advertising.
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, including other primary care
practices. The Company also competes with traditional providers and managers of
health care services for the recruitment of employed or managed physicians.
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.
Although the Company believes that 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 competitors on terms beneficial to the Company.
CHIROPRACTIC SERVICES
The Company currently owns and operates seven primary care chiropractic
clinics. The chiropractic clinics are located in suburban areas and serve the
general population for their surrounding communities.. The chiropractic clinics'
services are based on preventative treatment and treatment of the nerve system
and body structure, such as the spinal column. Most of the chiropractic clinics
have a chiropractor that is complemented with the appropriate support staff.
The Company's patient base is developed through its reputation for
quality treatment, patient referrals, printed advertisements, and special
promotion such as discounts, free initial examinations, open houses, circulars,
community participation, etc. The Company obtains significant referrals due to
its willingness to work with patients and their insurance company or attorney to
provide treatment during the pendency of the patient's injury settlement.
6
<PAGE> 9
Chiropractic service is a highly competitive business in which the
Company competes with numerous chiropractors in the same suburban areas. Most,
if not all of the Company's competition comes from privately owned chiropractic
clinics, usually owned by the treating doctor.
In recent years, there have been significant changes in the health care
industry affecting chiropractic services. Pressures to reduce costs and show
profits has forced some managed care plans to exclude chiropractic treatment or
institute procedures that can discourage a patient to utilize their health care
plan. Now as self-pay patient, who otherwise would have sought treatment, he/she
chooses to forgo treatment. Additionally, in September 1997 the State of Texas
implemented new regulations that govern marketing of medical services. The
Company adjusted its marketing efforts to ensure compliance with the changes in
the new marketing laws. Specifically, the Company ceased telemarketing of
chiropractic services and strengthened its audit procedures to ensure any new
patient referrals meet the requirements of the new law. These type of changes
continues to erode the patient base and increase competition.
The marketing services offered by the Company are designed to assist
the clinics in developing a patient base through promoting the clinics'
services. The Company provides advice and assistance to the clinics for
marketing and advertising. The Company believes that marketing must be
integrated into all aspects of the clinic operations including finance and
office administration. The Company's patient base is developed through its
reputation for quality treatment, patient referrals, printed advertisements,
and special promotion such as discounts, free initial examinations, open
houses, circulars, community participation, etc. The Company obtains
significant referrals due to its willingness to work with patients and their
insurance company or attorney to provide treatment during the pendency of the
patient's injury settlement. As a result, the Company believes the total
management of the clinics provides the economies of scale to develop the clinic
and provides the best use of these services, therefore, giving it a competitive
advantage over a privately owned clinic.
Although the Company believes that the services and benefits it offers
to providers make the Company an attractive purchaser of such practices, there
can be no assurance that the Company will be able to compete effectively with
competitors on terms beneficial to the Company.
ANCILLARY SERVICES
The Company also captures additional revenue by providing ancillary
services for its patient base including:
Urgent Care. The Company has three clinics that provide urgent care
treatment. They are the Norcross and Conyers, Georgia clinics, and the
Southcross Clinic in San Antonio. These centers provide acute medical
treatment.
Physical Therapy. The company operates four physical therapy clinic and
has physical therapy center in its Norcross clinic. Three clinics are located in
San Antonio, Texas and one location in Katy, Texas. The clinics/center provide
physical therapy services as primary and secondary treatment. The locations of
these clinics are strategically placed near other Company primary care clinics.
This makes treatment convenient for the patient and integrates the Company
resources to control expenses and capture revenue.
Diagnostics Testing. In addition to the medical services provide at the
Company's primary care clinics, the Company provides other diagnostic services
such as X-rays, mammography, ultrasound, fluoroscopy, and electro-neurological
testing. The Company owns and operates a CT (Cat Scan) in San Antonio, Texas.
Additionally, most of the Company's medical clinics do basic on-site laboratory
work rather than outsourcing to a third party. The on-site lab provides the
provider with quicker results and better service to the patient.
7
<PAGE> 10
RECENT DEVELOPMENTS
In August 1998 the Company sold 8% Cumulative Convertible Debentures in
the aggregate amount of $3,385,000 in a Regulation D offering to four limited
partnerships not affiliated with the Company. Approximately $1,600,000 of the
proceeds were used to pay down an earlier Regulation S convertible debenture
leaving approximately $650,000 outstanding. The August 1998 debentures are
convertible at a conversion price equal to eighty (80%) of the average of the
closing bid price of the shares of common stock of the Company as quoted on the
Nasdaq SmallCap Market for the five (5) trading days preceding the date of
conversion, provided no holder may covert an amount of debentures which would
result in the holder and its affiliates beneficially owning more than 4.9% of
the outstanding shares of common stock of the Company. The debentures are
payable in full on August 24, 2001 (the "Maturity Date"), and may be partially
converted from time to time into common stock until the Maturity Date. The
Company may prepay the debentures at any time, and any debentures remaining
unpaid at the Maturity Date will automatically be converted into shares of
Common Stock at the conversion rate, regardless whether any holder or its
affiliates would then own more than 4.9% of the outstanding shares of common
stock. The Company has pledged all of its tangible and intangible personal
property as security for repayment of the debentures. In December 1998 the
Company initiated negotiations with both the Regulation S and Regulation D
debenture holders to restructure the agreement to be more favorable to the
Company.
On October 28, 1998, notification was received from The Nasdaq Stock
Market, Inc. that a Nasdaq Listing Qualifications Panel had determined to delist
the Company's securities from The Nasdaq SmallCap Market effective with the
opening of business October 29, 1998. The Panel was of the opinion that the
Company failed to present a plan which would enable it to comply with the
minimum bid price and market value of public float requirements, as set forth in
NASD Marketplace Rules. Specifically, the bid price of $0.0625 on October 28,
1998 failed to meet the $1.00 minimum bid price requirement and the market value
of public float based on 11,117,524 shares was $694,845, which failed to meet
the minimum $1,000,000 requirement. The common stock of the Company is currently
traded on the OTC Bulletin Board under the symbol "AHIC".
On November 20, 1998, the Company executed a letter of intent to sell
certain assets of the Norcross, Georgia clinic for $1,075,000; payable $950,000
in cash and a note for $125,000, subject to the execution of an asset purchase
agreement. The book value of the assets to be sold is approximately $885,000 as
of December 31, 1998. The proceeds will be used to pay down the convertible
debentures and for working capital purposes. Tangible assets comprise $300,000
in account receivable less than six months old, and $365,000 in inventory and
equipment. The Company has approximately $220,000 of unamortized goodwill
attributable to the purchase of the clinic in 1996. The Company will retain
approximately $300,000 in account receivable less than six months old and all
account receivable older than six months. Proceeds from collection of the
retained account receivable are estimated to be approximately $500,000. Subject
to execution of an asset purchase agreement, the closing is scheduled on or
before January 31, 1999.
8
<PAGE> 11
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 3,500 square feet in an office
building in Irving, Texas at a monthly rent $5,300 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 owns, operates and manages sixteen clinics. Twelve are
primary care clinics, of which five are medical and seven are chiropractic
clinics. The Company also has four physical therapy facilities at or close to
the chiropractic clinics. The clinics are located in Texas, Louisiana and
Georgia. This is a decrease of five clinics from the prior fiscal year, which
are noted with asterisks. The following table lists the clinics, locations,
monthly rents, services provided, and date acquired or commenced operation by
the Company.
<TABLE>
<CAPTION>
CLINICS IN OPERATION IN FISCAL 1998 LOCATION MONTHLY RENT SERVICES PROVIDED DATE ACQUIRED
- ------------------------------------ -------- ------------ ----------------- -------------
<S> <C> <C> <C> <C>
North East Clinic* San Antonio, TX closed primary medical care December 1995
Nationwide Sports & Injury Katy, TX $3,400 physical therapy October 1994
United Health Services Katy, TX see above chiropractic October 1994
Nationwide Sports & Injury (Wurzbach) San Antonio, TX $2,300 physical therapy July 1994
United Health Services (Wurzbach) San Antonio, TX see above chiropractic July 1994
Nationwide Sports & Injury (San Pedro) San Antonio, TX $3,000 physical therapy October 1994
United Health Services (San Pedro) San Antonio, TX see above chiropractic October 1994
Nationwide Sports & Injury (Bandera) San Antonio, TX $1,000 physical therapy October 1994
United Health Services (Bandera) San Antonio, TX $1,900 chiropractic October 1994
Corpus Christi Rehab* Corpus Christi, TX closed chiropractic May 1996
San Pedro Clinic San Antonio, TX $2,100 primary medical care October 1994
Southcross Clinic San Antonio, TX owned urgent & primary medical care December 1995
United Chiropractic (New Orleans East) New Orleans, LA $1,600 chiropractic July 1994
United Chiropractic (Uptown) New Orleans, LA $1,200 chiropractic July 1994
Peachtree Corners Medical Center*** Norcross, GA pending sale urgent & primary medical care July 1995
Peachtree Medical Center of Conyers Conyers, GA $1,500 urgent & primary medical care February 1996
Peachtree Medical Center of McDonough McDonough, GA $4,900 primary medical care February 1996
Valley Family Health Center McAllen, TX $2,500 chiropractic January 1996
ACME Brownsville Chiropractic** Brownsville, TX sold chiropractic July 1996
Southmost Medical Clinic* Brownsville, TX closed primary medical care September 1996
Disability Medicine* McAllen, TX closed primary medical care July 1996
Total rent $25,400
</TABLE>
* Clinics closed in fiscal 1998.
** Clinic sold in third quarter of fiscal 1998.
*** January 1999 clinic sale pending
9
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS
On April 14, 1998, the American Arbitration Association, Atlanta Ga.,
issued an award to the Company concerning its Northside clinic located in
Atlanta, Georgia, against the doctor who was the original seller of that clinic.
The doctor alleged contract default by the Company and was claiming all rights
to this clinic. The Company contended that there was a valid settlement
agreement concerning the alleged breach of contract. The arbitrator found there
was a valid settlement agreement and issued a ruling in accordance with the
reported terms of the settlement agreement. In sum, the award makes the doctor
responsible for all sums and accounts due for operating expenses after March 10,
1996. Further, the award bars the doctor from making any claims against the
Company for the Promissory Note and Guarantee given by the Company, and the
doctor's employment contract. In exchange, the Company returns the clinic and
any account receivable collected by the Company after February 1, 1997 for work
done prior to February 1, 1997 by the doctor.
The Company is engaged in litigation with a service supplier over
unpaid invoices. There are two suits filed November 1997 and September 1997,
respectively. The Company believes that a substantial portion of one claim is
associated with the Northside clinic litigation. The case is: SmithKline Beecham
Clinical Labs v. American HealthChoice, Inc., filed in the County Court of Bexar
County at Law No. 5, San Antonio, Texas, and State District Court, 162nd
Judicial District, Dallas County, Texas.
The Company is engaged in litigation with a service supplier over
unpaid invoices. The suit was filed April 1, 1998. The Company has retained a
law firm and is currently evaluating the allegations. The case is: McKesson
General Medical v. American HealthChoice, Inc., filed in the County Court of
Dallas County at Law No. 2, Dallas, Texas.
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 in
July 1997 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 Malcolm P. Dulock v. AHC
Physicians Corporation, Inc., filed in the Superior Court of Gwinnett County,
Georgia.
The Company is engaged in litigation with an equipment lessor. The suit
was filed October 14, 1998. The plaintiff alleges that the Company is the
guarantor for a company called Corrective Vision Center that went out of
business. The case is: Advanta Business Services Corp., v. American
HealthChoice, Inc., filed in the County Civil Court of Harris County at Law No.
4, Harris County, Texas.
The Company is engaged in litigation with an equipment lessor. The suit
was filed October 6, 1998. The plaintiff alleges default for nonpayment of a
lease and is claiming rights under the lease. The case is: CIT Group/Equipment
Financing, Inc., v. American HealthChoice, Inc., filed in the State District
Court, 68th Judicial District, Dallas County, Texas.
The Company is engaged in litigation with an equipment lessor for a
prefab trailer used as an office at a clinic in San Antonio, Texas. The suit was
filed December 3, 1998. The plaintiff alleges default for nonpayment of a lease
and is claiming rights under the lease. The case is: Sanwa Business Credit
Corp., v. American HealthChoice, Inc., filed in the State District Court, 125th
Judicial District, Harris County, Texas.
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 account 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: Susan Johnson, Gilberto
Martorell, and Henry Heard v. American HealthChoice, Inc., dba Peachtree Corners
Medical Center, and Malcolm Dulock, filed in the Superior Court of Gwinnett
County, Georgia.
The Company was served a Complaint on January 26, 1998 alleging
unspecified damages arising from trademark
10
<PAGE> 13
infringement and related claims. The Company has retained a law firm and is
currently evaluating the allegations. The case is: Unihealth v. American
HealthChoice, Inc., filed in the United States District Court, Southern District
of Texas, Houston Division.
A person claiming to have performed certain services in formation of
the Company has sued claiming he is due a larger percentage of the Company stock
than what he received. The Company was served notice on March 29, 1998 and has
retained a law firm to seek a dismissal or in the alternative a change of venue.
The case is Stewart v. American HealthChoice, Inc. filed in the United States
District Court, Middle District of Florida, Tampa Division.
The Company is engaged in litigation with the group that the Company
purchased four Atlanta Georgia area clinics. The claim alleges failure to pay on
the promissory note for the purchase of the clinics and to enforce stock pledge
obligations. The suit was filed April 14, 1998 and the Company is currently
evaluating this claim. The case is Metropolitan Health Care v. American
HealthChoice, Inc. filed in the United States Bankruptcy Court, Northern
District of Georgia, Atlanta Division.
The Company is engaged in litigation filed on February 23, 1998 with a
former landlord at a location where the Company closed a clinic for breach of
lease. The Company answered and counter claimed against landlord for landlord's
failure to perform under the agreement. The case is: Assist, Inc., v. American
HealthChoice, Inc., filed in State District Court, 285th Judicial District,
Bexar County, Texas.
The Company is engaged in litigation filed on May 14, 1998 with a
former landlord at a location where the Company closed a clinic for breach of
lease. The Company answered and counter claimed against landlord for landlord's
failure to perform under the agreement. The case is: Dale Baldauf and Marylyn D.
Frank v. American HealthChoice, Inc., and Trevino, Roman & Assoc., filed in
State District Court, 138th Judicial District, Cameron County, Texas.
On November 9, 1998, an Involuntary Chapter 11 Petition was filed
against AHC Physicians Corporation, Inc., a wholly owned subsidiary of the
Company, in the United States Bankruptcy Court for the Northern District of
Georgia, Atlanta Division. The petition was filed by three trade creditors and
two former employees, one of which is the doctor who managed the Norcross,
Georgia clinic that the Company is engaged in litigation. At a December 15, 1998
hearing in the Bankruptcy Court, the petition was dismissed based on evidence
presented by the Company, which showed an insufficient number of qualified
creditors and that the Company was paying its obligations in a timely manner.
In respect to litigation with service suppliers and equipment lessors,
the disputed obligation is included in accounts payable or capital lease
obligations. The Company is not involved in any other material litigation.
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,
1998.
11
<PAGE> 14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Sale of securities without registration under the Securities Act. In
August 1998, the Company sold 8% Cumulative Convertible Debentures in the
aggregate amount of $3,385,000 offering to four limited partnerships not
affiliated with the Company. Following are the names of the limited partnerships
to which the debentures were sold:
<TABLE>
<S> <C>
Sovereign Partners, L.P. $1,000,000
Dominion Capital Fund, Ltd. 1,985,000
Canadian Advantage Limited Partnership 200,000
Atlantis Capital Fund, Ltd. 200,000
</TABLE>
The debentures were sold for cash. The total offering price was
$3,385,000 and commissions were $135,400. The Company claims exemption under
Section 4(2) of the Securities Act of 1933 for a private transaction to
sophisticated investors not involving any public offering or solicitation.
The debentures are convertible at a conversion price equal to eighty
(80%) of the average of the closing bid price of the shares of common stock of
the Company as quoted on the Nasdaq SmallCap Market for the five (5) trading
days preceding the date of conversion, provided no holder may covert an amount
of debentures which would result in the holder and its affiliates beneficially
owning more than 4.9% of the outstanding shares of common stock of the Company.
Market Information. During the eight quarters ended September 30, 1998,
the Company's common stock was listed on The Nasdaq SmallCap Market under the
symbol "AHIC". The following table presents the high and low bid prices for each
quarter:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH BID LOW BID
------------- ---------- ----------
<S> <C> <C>
December 31, 1996 $ 10.75 $ 8.75
March 31, 1997 $ 10.375 $ 2.25
June 30, 1997 $ 4.875 $ 2.00
September 30, 1997 $ 6.062 $ 4.75
December 31, 1997 $ 6.125 $ 4.00
March 31, 1998 $ 4.625 $ 0.375
June 30, 1998 $ 0.50 $ 0.125
September 30, 1998 $ 0.94 $ 0.063
</TABLE>
The common stock was delisted by The Nasdaq Stock Market on October 29,
1998 and is currently traded on the OTC Bulletin Board under the symbol "AHIC".
Holders. Based on information provided by the Company's transfer agent,
the Company has approximately 100 holders of record of its common stock at
September 30, 1998.
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. There are no dividend restrictions in any creditor or other
agreement to which the Company is a party.
12
<PAGE> 15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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,
------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net Patient Revenues $ 10,187,000 $ 9,756,000 $ 7,226,000
Operating Expenses:
Compensation and benefits 7,489,000 9,161,000 6,009,000
Advertising and promotion 946,000 640,000 323,000
General and administrative 3,274,000 2,752,000 2,393,000
Rent 980,000 1,084,000 880,000
Other 371,000 1,488,000 248,000
------------ ------------ ------------
Total Operating Expenses 13,060,000 15,125,000 9,853,000
Other Income (Expense):
Interest expense and other costs of borrowing (328,000) (2,668,000) (732,000)
Other income (expense), net (1,035,000) 949,000 (419,000)
------------ ------------ ------------
Total Other Income (Expenses) (1,363,000) (1,719,000) (1,151,000)
============ ============ ============
Loss Before Income Taxes $ (4,236,000) $ (7,088,000) $ (3,778,000)
============ ============ ============
</TABLE>
Twelve Months Ended September 30, 1998 Compared to Twelve Months Ended September
30, 1997
Net Patient Revenues. For the twelve months ended September 30, 1998,
net patient revenues decreased 26% from $9,756,000 for the same period in 1997
to $7,226,000 in 1998. The decrease was a result of the closure or sale of five
clinics in fiscal 1998 and reductions in revenues from chiropractic clinics due
to new regulations in the State of Texas that govern marketing of medical
services. Approximately $1,000,000 of the decrease was attributable to reduced
volume of patient insurance settlements as a result of the changes in Texas
marketing laws.
Compensation and Benefits. For the twelve months ended September 30,
1998, compensation and benefits decreased 34% from $9,161,000 in 1997 to
$6,009,000 in 1998. The decrease, which exceeded the comparable percentage
decrease in revenues, was due primarily to personnel reductions related to
closure of unprofitable clinics in the second half of fiscal 1997 and additional
closures in fiscal 1998.
Advertising and Promotion. For the twelve months ended September 30,
1998, advertising and promotion decreased $317,000 from $640,000 in 1997 to
$323,000 in 1998. The decrease was attributable to reductions in advertising and
promotion of the chiropractic clinics due to new regulations by the State of
Texas that govern marketing of medical services.
General and Administrative. For the twelve months ended September 30,
1998, general and administrative decreased 13% from $2,752,000 for fiscal year
1997 to $2,393,000 in 1998. The decrease of $359,000 was primarily attributable
to reduced legal and professional expenses due to fewer pending suits and more
legal projects assigned to in-house counsel.
Rent. For the twelve months ended September 30, 1998, rent decreased
$204,000 from $1,084,000 in 1997 to $880,000 in 1998. The decrease was primarily
due to clinic closures in the second half of fiscal 1997.
Other Operating Expense. For the twelve months ended September 30,
1998, other operating expenses decreased $1,240,000 from $1,488,000 in fiscal
1997 to $247,000 in 1998. This classification includes depreciation and
amortization of $248,000 in 1998 and $236,000 in 1997. In addition, fiscal year
1997 included $1,252,000 for loan acquisition costs and loss on settlement of
debt.
13
<PAGE> 16
Other Income and Expense. In fiscal year 1998, interest expense and
other costs of borrowing were $732,000 compared to $2,668,000 in fiscal year
1997. The decrease of $1,936,000 is primarily due to the reduction of one-time
financing costs from $2,138,000 in 1997 to $300,000 in 1998. New proceeds from
debentures and notes payable were approximately $11,000,000 in 1997 compared to
approximately $2,000,000 in 1998. Other expense of $419,000 in fiscal 1998 is
primarily attributable to establishment of a 100% reserve for a note receivable
in the amount of $225,000 related to the Company's investment in an eye care
clinic.
Twelve Months Ended September 30, 1997 Compared to Twelve Months Ended September
30, 1996
Net Patient Revenues. For the twelve months ended September 30, 1997,
net patient revenues decreased 4% from $10,187,000 for the same period in 1996
to $9,756,000 in 1997. The decrease was a result of the closure of five
unprofitable clinics as part of the Company's cost reduction efforts.
Compensation and Benefits. For the twelve months ended September 30,
1997, compensation and benefits increased 22% from $7,489,000 in 1996
to $9,161,000 in 1997. 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.
Advertising and Promotion. For the twelve months ended September 30,
1997, advertising and promotion decreased $306,000 from $946,000 in 1996 to
$640,000 in 1997. This decrease was attributable to a reduction in advertising
and promotion of the chiropractic clinics, primarily for telemarketing services.
General and Administrative. For the twelve months ended September 30,
1997, general and administrative decreased 16% from $3,274,000 for fiscal year
1996 to $2,752,000 for 1997. The decrease was the result of overall reductions
in expenses including medical supplies, insurance, travel, utilities and
acquisition costs.
Rent. For the twelve months ended September 30, 1997, rent increased
$104,000 from $980,000 in 1996 to $1,084,000 in 1997. The increase was primarily
due to more clinics in operation in fiscal 1997 than 1996.
Other Operating Expense. For the twelve months ended September 30,
1997, other operating expenses increased $1,117,000 from $371,000 in fiscal 1996
to $1,488,000 in 1997. This classification includes depreciation and
amortization of $236,000 in 1997 and $371,000 in 1996. In addition, fiscal year
1997 included $1,252,000 for loan acquisition costs and loss on settlement of
debt.
Other Income and Expense. In fiscal year 1997, interest expense and
other costs of borrowing were $2,668,000 compared to $328,000 in fiscal year
1996. The increase of $2,340,000 is primarily due to one-time financing costs
increasing from $100,000 in 1996 to $2,138,000 in 1997. Other income of $949,000
in fiscal 1997 is the result of the Company recovering previously written-off
accounts receivable, including $400,000 in State of Texas Medicaid
reimbursements.
LIQUIDITY AND CAPITAL RESOURCES
For the twelve months ended September 30, 1998, net cash used in
operating activities was $1,951,000 as compared to $4,273,000 for the twelve
months ended September 30, 1997. The decrease of $2,322,000 is primarily
attributable to an $800,000 reduction in corporate operating expenses and a
decrease in net accounts receivable of $900,000 in fiscal 1998 versus an
increase of $800,000 in fiscal 1997 resulting in a net positive improvement of
$2,500,000 in net cash from operations. The net cash used in operating
activities for 1998 was funded from the proceeds of new debentures issued in
August 1998.
Approximately $800,000 of net cash used in operating activities in 1998
was attributable to operating losses at the Company's medical clinic in
Norcross, Georgia. The Company entered into an agreement to sell the clinic in
January 1999. See
14
<PAGE> 17
Item 1.-"Description of Business-Recent Developments." In addition to the
positive impact from the clinic sale, further anticipated reductions in
corporate operating expenses and improved profitability from the chiropractic
clinics in Texas should continue the trend to improve operating results in
fiscal year 1999.
Accounts receivable is the most significant operating asset of the
Company. Accounts receivable declined approximately $900,000 in fiscal year
1998. The Company expects this trend to continue in fiscal 1999. Funds generated
from further reductions in accounts receivable will be used to reduce accounts
payable.
The 1997 changes in Texas marketing laws significantly reduced the
Company's ability to market chiropractic services, particularly in the Rio
Grande Valley area of the state where the Company operated two clinics at the
time of the change in the laws. Since many patient insurance settlements are
administered by insurance companies or attorneys representing the patients often
results in remitting the chiropractic services portion of the settlement at a
later date and often a lesser amount than the fees for services rendered. In
response to this situation, the Company sold one clinic and reduced operating
expenses at the remaining clinic in the Rio Grande Valley. The Company has
adjusted its chiropractic marketing efforts to ensure compliance with the new
marketing laws. The primary change involved ceasing telemarketing services and
strengthening its audit procedures to ensure any patient referrals meet the
requirements of the new laws. In addition, the Company intends to only have
relationships with attorneys who also comply with the new laws. The Company
believes that accounts receivable from patient insurance settlements as of
September 30, 1998 have adequate reserves and will be collected in the ordinary
course of business.
Net cash used in investing activities for the year ended September 30,
1998, included a $247,000 increase in notes receivable, which was offset by a
$153,000 decrease in property and equipment resulting from the closure of
clinics, resulting in a net of $102,000 used in investing activities.
Net cash provided by financing activities for the year ended September
30, 1998 was $1,100,000, resulting primarily from $1,801,000 proceeds from
debentures less $851,000 in payments for notes and capital leases.
After the sale of the Norcross clinic and planned improvements in the
profits from chiropractic clinics, operating profits from the clinics will not
cover planned corporate expenses, debt service and working capital requirements.
Management of the Company is actively searching for acquisitions that are
currently profitable and have minimal working capital requirements. The Company
intends to fund new acquisitions through the issuance of common stock and
proceeds from new convertible debentures.
Management intends to complete at least one acquisition and obtain new
debt financing by March 31, 1999. Future profitability and growth are dependent
on the successful completion of these transactions.
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. Required
upgrades will not be material and will be in place by September 30, 1999.
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
15
<PAGE> 18
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, or should underlying assumptions prove incorrect,
actual results or outcomes may vary materially from those described herein as
anticipated, believed, estimated, expected, or intended.
16
<PAGE> 19
'
ITEM 7. FINANCIAL STATEMENTS
AMERICAN HEALTHCHOICE, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Independent Auditor Report 18
Consolidated Balance Sheet - September 30, 1998 19
Consolidated Statements of Operations - Years Ended 20
September 30, 1997 and 1998
Consolidated Statement of Stockholders' Equity - Years 21
Ended September 30, 1997 and 1998
Consolidated Statements of Cash Flows - Years Ended 22
September 30, 1997 and 1998
Notes to Consolidated Financial Statements 23
</TABLE>
17
<PAGE> 20
REPORT OF INDEPENDENT AUDITOR
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, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended September 30,1998. 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 audits.
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 audits provide 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, 1998, and the
results of their operations and their cash flows for each of the two years in
the period ended September 30, 1998 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements as of and for the year ended
September 30, 1998 have been prepared assuming that American HealthChoice, Inc.
will continue as a going concern. As more fully described in Note 2, the Company
has incurred recurring losses. This condition raises substantial doubt about the
Company's ability to continue as a going concern. Management's resolution in
regard to this matter is also described in Note 2. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Lane Gorman Trubitt, L.L.P.
Dallas, Texas
November 18, 1998
18
<PAGE> 21
AMERICAN HEALTHCHOICE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash $ 169,895
Accounts receivable, less allowance for doubtful accounts of $ 8,354,930 7,787,687
Advances and notes receivable 293,840
Other current assets 73,847
------------
Total current assets 8,325,269
Property and equipment, net 1,290,577
Goodwill, net 420,588
Other assets 23,868
------------
Total assets $ 10,060,302
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable $ 701,341
Current portion of capital lease obligations 205,864
Accrued payroll and payroll taxes 289,697
Accounts payable and accrued expenses 1,168,852
------------
Total current liabilities 2,365,754
Convertible debentures 4,105,594
Notes payable, less current portion 240,809
Capital lease obligations, less current portion 179,055
------------
Total liabilities 6,891,212
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;
14,519,632 shares issued and outstanding 14,520
Options to acquire common stock 685,664
Additional paid-in capital 12,875,040
Accumulated deficit (10,406,134)
------------
Total stockholders' equity 3,169,090
------------
Total liabilities and stockholders' equity $ 10,060,302
============
</TABLE>
See accompanying notes to these consolidated financial statements.
19
<PAGE> 22
AMERICAN HEALTHCHOICE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Net Patient Revenues $ 9,755,786 $ 7,226,113
Operating Expenses:
Compensation and benefits 9,160,742 6,009,141
Advertising and promotion 639,698 322,726
Depreciation and amortization 236,226 247,392
General and administrative 2,752,459 2,393,018
Loan acquisition costs and loss on settlement of debt 1,251,946 --
Rent expense 1,083,711 880,301
------------ ------------
Total operating expenses 15,124,782 9,852,578
Other Income (Expense):
Interest expense and other costs of borrowing (2,667,708) (731,796)
Other expense -- (477,757)
Other income 948,716 58,500
------------ ------------
Total other expenses (1,718,992) (1,151,053)
------------ ------------
Loss Before Income Taxes (7,087,988) (3,777,518)
Income Tax Expense (Benefit):
Currently payable 47,629 --
Deferred (807,783) --
------------ ------------
Total income tax benefit (760,154) --
------------ ------------
Net Loss $ (6,327,834) $ (3,777,518)
============ ============
Basic and Diluted Net Loss Per Share $ (0.78) $ (0.33)
Weighted Average Common Shares Outstanding 8,082,426 11,554,428
</TABLE>
See accompanying notes to these consolidated financial statements.
20
<PAGE> 23
AMERICAN HEALTHCHOICE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1998
<TABLE>
<CAPTION>
OPTION TO COMMON ADDITIONAL
COMMON STOCK ACQUIRE STOCK PAID-IN ACCUMULATED
SHARES AMOUNT COMMON SUBSCRIBED CAPITAL DEFICIT
------------ ------------ ------------
STOCK
<S> <C> <C> <C> <C> <C> <C>
Balances at September 30,1996 7,232,692 $ 7,232 $ 100,000 $ 78,527 $ 5,327,256 $ (300,782)
Common stock issued in
connection with acquisition 12,940 13 -- -- 63,394 --
Sale of common stock at
prices ranging 135,953 136 -- -- 469,451 --
from $2.00 to $5.00 per
share
Common stock issued in
lieu of note payment 117,964 118 -- (78,527) 277,920 --
Common stock issued for
settlement of litigation 2,500 2 -- -- 6,953 --
Common stock issued in
connection 240,000 240 -- -- 581,120 --
with consulting contracts
Common stock issued in
connection 358,113 358 -- -- 1,613,995 --
with employment incentives
Common stock issued in
connection 1,778,762 1,779 -- -- 3,715,642 --
with financing provided
Common issued to board
members for service 2,500 3 -- -- 12,248 --
Director options -- -- 95,627 -- -- --
Director options -- -- 197,019 -- -- 197,019
Financing warrants -- -- 56,073 -- -- --
Financing warrants -- -- 236,945 -- -- --
Return to company (8,040) (8) -- -- (64,721) --
Miscellaneous (2,770) (2) -- -- --
Net loss -- -- -- -- -- (6,327,834)
------------ ------------ ------------ ------------ ------------ ------------
Balances at September 30,1997 9,870,614 9,871 685,664 -- 12,003,258 (6,628,616)
Common stock issued in
connection 3,218,296 3,218 -- -- 1,286,717 --
with debenture conversion
Common stock issued in
connection with bridge loan 1,500,000 1,500 -- -- 186,000 --
Common stock issued in
connection 89,487 90 -- -- 24,044 --
with employment incentives
Return to company (158,765) (159) -- -- (624,979) --
Net loss -- -- -- -- -- (3,777,518)
------------ ------------ ------------ ------------ ------------ ------------
Balances at September 30,1998 14,519,632 $ 14,520 $ 685,664 $ -- $ 12,875,040 $(10,406,134)
============ ============ ============ ============ ============ ============
<CAPTION>
TOTAL
<S> <C>
Balances at September 30,1996 $ 5,212,233
Common stock issued in
connection with acquisition 63,407
Sale of common stock at
prices ranging 469,587
from $2.00 to $5.00 per
share
Common stock issued in
lieu of note payment 199,511
Common stock issued for
settlement of litigation 6,955
Common stock issued in
connection 581,360
with consulting contracts
Common stock issued in
connection 1,614,353
with employment incentives
Common stock issued in
connection 3,717,421
with financing provided
Common issued to board
members for service 12,251
Director options 95,627
Director options
Financing warrants 56,073
Financing warrants 236,945
Return to company (64,729)
Miscellaneous (2)
Net loss (6,327,834)
------------
Balances at September 30,1997 6,070,177
Common stock issued in
connection 1,289,935
with debenture conversion
Common stock issued in
connection with bridge loan 187,500
Common stock issued in
connection 24,134
with employment incentives
Return to company (625,138)
Net loss (3,777,518)
------------
Balances at September 30,1998 $ 3,169,090
============
</TABLE>
See accompanying notes to these consolidated financial statements.
21
<PAGE> 24
AMERICAN HEALTHCHOICE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $(6,327,834) $(3,777,518)
Adjustments to reconcile net loss to
net cash used in operating activities:
Allowance for doubtful accounts 1,758,888 3,204,031
Deferred taxes (807,783) --
Depreciation and amortization 255,804 247,392
Stock transactions:
Stock issued in connection with
financing transactions 2,304,357 232,435
Director compensation-stock and options 304,897 --
Employee compensation-stock 273,320 24,134
Lawsuit settlement-stock 6,955 --
Consulting fees-stock 581,360 --
Loss on settlement of debt 250,000 --
Write-off of stockholder note payable (176,719) --
Write-off of notes receivable -- 292,770
Fees deducted from debenture proceeds -- 607,491
Change in operating assets and liabilities, net:
Accounts receivable-trade (2,533,922) (2,290,075)
Other current assets (28,275) 51,601
Income tax receivable 22,000 --
Accounts payable and accrued expenses (187,785) 95,752
Income taxes payable 31,629 (31,625)
----------- -----------
Net cash used in operating activities (4,273,108) (1,343,612)
Cash Flows From Investing Activities:
Advances and notes receivable, net 139,649 (246,551)
Property and equipment, net (330,610) 153,261
Other assets (511) (8,408)
----------- -----------
Net cash used in investing activities (191,472) (101,698)
Cash Flows From Financing Activities:
Proceeds from notes payable 5,356,261 150,000
Proceeds from debentures 5,590,646 1,193,103
Payments on notes payable and capital leases (5,967,745) (850,899)
Proceeds from sale of stock 449,253 --
----------- -----------
Net cash provided by financing activities 5,428,415 492,204
----------- -----------
Net (Decrease) Increase In Cash 963,835 (953,106)
Cash At Beginning Of Year 159,166 1,123,001
=========== ===========
Cash At End Of Year $ 1,123,001 $ 169,895
=========== ===========
Supplemental Disclosure Of Cash Flow Information:
Income taxes paid $ 16,000 $ 31,629
Interest paid 2,603,697 278,684
Supplemental Disclosure Of Non-cash Transactions:
Offset note receivable against note payable 189,710 --
Acquisition of equipment via stock or note payable 71,156 --
Write-off note payable to goodwill 165,310
Capital lease additions 258,868 --
Payoff of old debenture with proceeds
from new debenture -- 1,584,406
Conversion of debenture into stock -- 1,245,000
Reinstate notes payable to directors
in connection with return of stock to company -- 625,138
</TABLE>
See accompanying notes to these consolidated financial statements.
22
<PAGE> 25
AMERICAN HEALTHCHOICE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - American HealthChoice, Inc. and subsidiaries (the Company)
consists of a parent company and sixteen clinics providing medical, physical
therapy, and chiropractic services in San Antonio, McAllen, and Houston, Texas,
New Orleans, Louisiana and in the metro area of Atlanta, Georgia. Four of the
physical therapy clinics are strategically 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.
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
1998 and 1997 net patient revenues; as a percentage of total revenues, for
medical, chiropractic and physical therapy services amounted to 55% and 51%, 39%
and 41%, and 6% and 8%, respectively.
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 $323,000 and $640,000 for the years ended September 30, 1998 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 - 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.
23
<PAGE> 26
Recent Accounting Pronouncements - 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.
The Financial Accounting Standards Board has also released FAS 130, "Reporting
Comprehensive Income," FAS 131, "Disclosures about Segments of an Enterprise and
Related Information," FAS 132, "Employer's Disclosures About Pensions and Other
Postretirement Benefits," and FAS 133, "Accounting for Derivative Instruments
and Hedging Activities." The Company believes that the impact of these new
standards will not have a material effect on the Company's consolidated
financial position, results of operations or disclosures.
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.
Earnings per Share - Effective October 1, 1997, the Company adopted FASB
Statement No. 128 (FAS 128), "Earnings Per Share." FAS 128 requires the
presentation of basic earnings per share and, for companies with potentially
dilutive securities such as convertible debt, stock options and warrants,
diluted earnings per share.
Basic earnings per share are computed using the weighted-average number of
common shares outstanding. Diluted earnings per share are computed using the
weighted-average common shares outstanding after giving effect to potential
common stock from stock options based on the treasury stock method, plus other
potentially dilutive securities outstanding. If the result of assumed
conversions is dilutive, net earnings are adjusted for the interest expense on
the convertible debt, while the average shares of common stock outstanding are
increased.
The potentially dilutive securities held at September 30, 1998 and 1997 were
convertible debentures and stock options, discussed in footnotes 9 and 13,
respectively. For both years presented, to effect of the assumed conversion of
these securities was antidilutive.
2. RECURRING LOSSES
For the twelve months ended September 30, 1998, the Company incurred a net loss
of $3,777,518 compared to a net loss of $6,327,834 for the twelve months ended
September 30, 1997. Although the fiscal 1998 loss represents a significant
improvement over fiscal 1997, the Company has been unable to generate sufficient
cash flow from operations to fund its operating requirements.
The Company's largest medical clinic, located in Norcross, Georgia, incurred
losses of approximately $560,000 in fiscal 1998. In November 1998, the Company
entered into an agreement to sell the clinic. See Note 18. In addition to the
positive impact from the clinic sale, Management of the Company intends to
continue its efforts to reduce operating costs at the clinics and the corporate
office. Also, the Company intends to improve profitability at its Texas
chiropractic clinics through marketing programs, which will comply with the new
regulations implemented by the State of Texas in September 1997.
After the sale of the Norcross clinic and planned improvements in the profits
from chiropractic clinics, operating profits from the clinics will not cover
planned corporate expenses, debt service and working capital requirements.
Management of the Company is actively searching for acquisitions that are
currently profitable and have minimal working capital requirements. The Company
intends to fund new acquisitions through the issuance of common stock and
proceeds from new convertible debentures.
Management intends to complete at least one acquisition and obtain new debt
financing by March 31, 1999. Future profitability and growth are dependent on
the successful completion of these transactions.
24
<PAGE> 27
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
USEFUL LIFE 1998
----------- --------------
<S> <C> <C>
Land -- $ 120,000
Building and leasehold improvements 2-39 years 313,060
Furniture and equipment, including equipment under capital leases 5-15 years 2,015,284
Less accumulated depreciation and amortization (1,157,767)
-------------
$ 1,290,577
=============
The following is a summary of equipment under capital leases:
Equipment $ 627,910
Less accumulated amortization (225,707)
-------------
$ 402,203
=============
</TABLE>
Substantially all assets leased are pledged as collateral under the existing
capital lease agreements.
4. DIVESTITURES
In June 1998, as the result of an arbitration settlement, the Company returned
the assets of the Peachtree Medical Center Northside Clinic to the original
seller. Operating assets of approximately $188,000 were offset by a note payable
of approximately $172,000 resulting in a loss on settlement of $16,000.
In June 1998 the Company sold the assets of the ACME Brownsville Chiropractic
Clinic to an unrelated entity for a $250,000 note receivable. The transaction
resulted in loss on sale of $18,000. In August 1998 the purchaser was issued
1,000,000 shares of common stock of the Company as consideration for a bridge
loan of $100,000.
5. ADVANCES AND NOTES RECEIVABLE
At September 30, 1998, the Company had advances due of $52,546 including $32,389
from stockholders.
In September 1998, as the result of a bankruptcy filing, the Company elected to
provide a 100% reserve against a note receivable of $225,000 related to the
Company's investment in an eye care clinic. The charge is included in other
expenses for 1998.
The $250,000 note received as consideration for the assets of the ACME
Brownsville Chiropractic Clinic bears interest at 8% and is payable in 60
monthly installments of $5,069 and is secured by the assets of the clinic. The
principal due at September 30, 1998 was $241,294.
25
<PAGE> 28
6. NOTES PAYABLE
A summary of notes payable at September 30, 1998 is as follows:
<TABLE>
<S> <C>
Notes payable to two directors in connection with the return of 158,765 shares
of common stock.
Interest on the notes is 8%. The notes are payable on demand. $ 375,138
Notes payable 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. 353,878
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
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. 10,175
---------
942,150
Less: Current maturities (701,341)
---------
Long-term notes payable $ 240,809
=========
Scheduled future maturities of notes payable are as follows:
1999 $ 701,341
2000 94,033
2001 101,873
2002 44,903
---------
$ 942,150
=========
</TABLE>
7. 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 party's claim was
offsetting and neither party owed the other. This note was written off against
the related receivable.
Certain stockholders had advances totaling $32,389 outstanding from the Company
at September 30, 1998. The Company believes that all amounts due from these
stockholders will be repaid in full.
26
<PAGE> 29
8. COMMITMENTS
Rent expense for the years ended September 30, 1997 and 1998 amounted to
approximately $1,084,000 and $880,000 respectively. The Company also leases
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>
1999 $ 530,690 $ 267,456
2000 307,309 93,528
2001 57,662 86,631
2002 -- 38,243
2003 -- 6,374
--------- ---------
Total minimum lease payments $ 895,661 492,232
========= =========
Future interest (107,313)
---------
384,919
Less current portion (205,864)
---------
Non-current portion $ 179,055
=========
</TABLE>
The Company has a three-year employment agreement ending June 1, 2000 with its
chief executive officer. In the event of termination of the agreement for any
reason, he will be entitled to a severance pay equal to six months of his full
salary. After a change of control of the Company, as defined in the employment
agreement, if the chief executive officer's employment is terminated, he
terminates his employment, his duties are changed or certain other specified
events take place, he will be entitled to a severance payment equal to twice his
effective annual compensation, together with a continuation of all employee
benefits for two years.
9. CONVERTIBLE DEBENTURES
The Company sold two 8% Cumulative Convertible Debentures dated April 22, 1997
and April 25, 1997 in the aggregate amount of $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 the Nasdaq SmallCap Market 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 of fiscal 1997.
In September 1997, the Company sold two 8% Cumulative Convertible Debentures all
dated September 12, 1997 in the aggregate amount of $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 the Nasdaq SmallCap Market 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. Financing costs including interest for the debentures was
recorded in the fourth quarter of fiscal 1997. Between February 16, 1998 and
August 14,1998 $1,245,000 of Debentures and $44,935 in accrued interest were
converted for 3,218,296 shares of common stock. The conversion price per share
ranged from $1.25 to $0.0625 per share.
27
<PAGE> 30
In August 1998 the Company sold 8% Cumulative Convertible Debentures in the
aggregate amount of $3,385,000 in a Regulation D offering to four limited
partnerships not affiliated with the Company. The debentures are convertible at
a conversion price equal to eighty (80%) of the average of the closing bid price
of the shares of common stock of the Company as quoted on the Nasdaq SmallCap
Market for the five (5) trading days preceding the date of conversion, provided
no holder may covert an amount of Debentures which would result in the holder
and its affiliates beneficially owning more than 4.9% of the outstanding shares
of common stock of the Company. The Debentures are payable in full on August 24,
2001 (the "Maturity Date"), and may be partially converted from time to time
into Common Stock until the Maturity Date. The Company may prepay the debentures
at any time, and any debentures remaining unpaid at the Maturity Date will
automatically be converted into shares of Common Stock at the conversion rate,
regardless whether any holder or its affiliates would then own more than 4.9% of
the outstanding shares of Common Stock. The Company has pledged all of its
tangible and intangible personal property as security for repayment of the
Debentures. Following is a summary of Debenture activity for the twelve months
ended September 30, 1998:
<TABLE>
<CAPTION>
REG. S REG. D TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Principal balance at September 30, 1997 $ 3,550,000 $ -- $ 3,550,000
Conversion for common shares (1,245,000) -- (1,245,000)
Proceeds from Regulation D offering (1,584,406) 3,385,000 1,800,594
----------- ----------- -----------
Principal balance at September 30, 1998 $ 720,594 $ 3,385,000 $ 4,105,594
=========== =========== ===========
</TABLE>
10. STOCKHOLDERS' EQUITY
During the first quarter of fiscal year 1997 the Company issued 12,940 shares of
common stock at $4.90 per share in connection with acquisitions.
In fiscal year 1997, the Company issued 135,953 shares of common stock in
connection with the exercise of stock options at prices ranging from $2.00 to
$5.00 per share.
In fiscal year 1997, the Company issued 117,964 shares of common stock in lieu
of note payments including 87,964 shares issued to the president and CEO of the
Company to extinguish a note of $125,981 and accrued interest of $4,867.
In September 1997, the Company issued 2,500 shares of common stock at $2.78 per
share for settlement of litigation.
In April 1997 the Company issued 200,000 shares of common stock for consulting
services at a share price of $2.19. In September 1997, the Company issued 40,000
shares of common stock for consulting services at a share price of $3.59.
In fiscal year 1997 the Company issued 358,113 shares of common stock to
employees for employment bonuses and incentive awards including 167,609 shares
to the president and CEO. The price per share ranged from $1.17 to $5.25.
On June 4, 1997 two 8% Cumulative Convertible Debentures dated April 22, 1997
and April 25, 1997 in the aggregate amount of $2,600,000 and accrued interest of
$35,616 were converted into 1,414,890 shares of common stock. After deducting
unamortized bond issuance costs of $646,333, the credit to stockholders' equity
was $1,989,283. An additional 363,872 shares of common stock were issued in
fiscal year 1997 in connection with other private placements. The credit to
stockholders equity was $1,728,138.
An outside director was issued 2,500 shares of common stock in September 1997
for services.
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.
28
<PAGE> 31
In fiscal year 1997, stockholders' equity was credited for the fair value of
options granted to directors in the amount of $292,646. Also, stockholders'
equity was credited for the fair value of warrants issued in the amount of
$293,018.
Between February 16, 1998 and August 14, 1998, the Company issued 3,218,296
shares of common stock for the conversion of $1,245,000 of debentures and
$44,935 in accrued interest. The conversion price per share ranged from $1.25 to
$0.0625 per share.
In July 1998 the Company obtained a $50,000 bridge loan from a stockholder and a
$100,000 bridge loan from an unrelated company. The Company issued 500,000 and
1,000,000 shares of common stock, respectively, as partial consideration for the
loan. The price per share was $0.125. The loan was paid off in August 1998 from
the proceeds of the 8% convertible debentures.
In fiscal year 1998 the Company issued 89,487 shares of common stock to
employees for employment bonuses and incentive awards including 50,000 shares to
the president and CEO. The price per share ranged from $0.0625 to $0.2812.
In fiscal year 1998, the President and CEO, and a principal shareholder and
board member, returned 111,739 and 47,026 shares of common stock to treasury,
respectively, in consideration for the reinstatement of notes payable in the
amounts payable of $439,973 and $185,165, respectively. $250,000 of the proceeds
from the 8% convertible debentures was used to repay $175,950 and $74,050,
respectively.
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.
The Company's trade receivables at September 30, 1997 and 1998 consist of the
following, stated as a percentage of total accounts receivable:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Personal injury claims 51 23
Medical claims filed with insurance companies 27 34
Medicare/Medicaid claims 7 4
Workman's compensation claims 7 19
Other claims 8 20
------ ------
100% 100%
====== ======
</TABLE>
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 principal 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.
29
<PAGE> 32
The deferred tax assets and liabilities in the consolidated balance sheet at
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Assets: CURRENT NON-CURRENT
----------- -----------
<S> <C> <C>
Vacation accrual $ 37,488 $ --
Goodwill 372,533 --
Contributions carry-forwards -- 8,883
Net operating loss carry-forwards -- 4,760,429
----------- -----------
410,021 4,769,312
Liabilities:
Employee stock options -- (204,497)
Section 481 adjustment (574,265) (574,265)
----------- -----------
(574,265) (778,762)
----------- -----------
Deferred tax assets, net (164,244) 3,990,550
Less valuation allowance 164,244 (3,990,550)
=========== ===========
$ -- $ --
=========== ===========
</TABLE>
At September 30, 1998, the Company has net operating loss and contribution carry
forwards of approximately $12,694,000 and $24,000, respectively, to offset
future taxable income. These carry forwards expire through the year 2013.
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
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 OPTIONS AND WARRANTS
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 to directors
of up to 250,000 shares that do not qualify as "incentive stock options" under
the Internal Revenue Code of 1986.
30
<PAGE> 33
The following schedule summarizes the changes in the Employee Plan and the
Director Plan for the two years ended September 30, 1998:
<TABLE>
<CAPTION>
Option Price
-----------------------------------
Number of Per Share Total Option
Shares Price
------------------------------ --------------
<S> <C> <C> <C> <C>
Outstanding at September 30, 1996 297,500 $2.00 - $3.00 $ 609,000
(297,500 exercisable)
For the year ended September 30,1997:
Granted 450,000 $2.34 1,054,800
Exercised (9,667) $3.00 (29,000)
---------- -----------
Outstanding at September 30, 1997 737,833 $2.00 - $3.00 1,634,800
(737,833 exercisable)
For the year ended September 30, 1998:
Granted 200,000 $0.28 56,200
Exercised -- -- --
========== ===========
Outstanding at September 30, 1998 937,833 $0.28 - $3.00 $ 1,691,000
========== ===========
(937,833 exercisable)
</TABLE>
The Company granted an investment group the right to acquire an option to
acquire common stock at specified prices over a defined period of time. The
agreement provided 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, 1998, the investment group has exercised all options under
the first option, 128,827 options under the second option, and 99,277 under the
third option. The remaining options available under the second and third options
expired during the year ended September 30, 1998. Under the terms of the fourth
option, the investment group has the right to purchase 153,061 shares of the
Company's common stock at $4.90 per share. This option will expire on December
18, 1988. The Company has granted registration rights to all of the shares
issued and to be issued in connection with this transaction.
On December 15, 1995, the Company issued an option to acquire 100,000 shares of
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, all
100,000 options were exercised at $3.00 each
31
<PAGE> 34
On March 19, 1997, the Company issued 1,000,000 warrants to purchase common
stock at $2.375 per share. On April 22, 1997, an additional 400,000 warrants to
purchase common stock at $3.00 per share. The warrants were issued in connection
with the issuance of $2,600,000 of 8% convertible debentures. The warrants
expire April 14, 1999. As of September 30, 1998, none of the warrants have been
exercised by the holders.
In compliance with SFAS No. 123, the Company recognizes and measures
compensation costs related to the Employee Plan utilizing the intrinsic value
based method. Accordingly, no compensation cost has been recorded. Had
compensation expense been determined on the fair value of awards granted, net
loss and loss per share would have been as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
As Reported Pro forma As Reported Pro forma
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $ (3,777,518) $ (3,832,495) $ (6,327,834) $ (6,873,159)
Loss per share $ (0.33) $ (0.33) $ (0.78) $ (0.85)
</TABLE>
The fair value of all options and warrants are estimated using the Black-Scholes
option-pricing model with the following assumptions: risk free interest rate
5.35%; expected life 3 years; expected volatility 260% for 1998 and 53.3% for
1997; dividend yield 0%. The fair values generated by the Black-Scholes model
may not be indicative of the future benefit, if any, which may be received by
the holders. The weighted average exercise price for all options outstanding was
$2.61 and $2.81 as of September 30, 1998 and 1997, respectively. Since certain
options have an indeterminable expiration, the weighted average expiration date
could not be determined.
14. STOCK PURCHASE PLANS
In August 1995, 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 under the
Stock Purchase Plan. As of September 30, 1998, no employees were participating
in the Stock Purchase Plan. In July 1997, the Company adopted its 1997 Executive
Stock Bonus Plan ("Executive Stock Bonus Plan") under which options to purchase
shares of common stock may be issued to employees of the Company. The Company
reserved 260,870 shares of Common Stock for issuance under the Executive Bonus
Plan. As of September 30, 1998, 190,475 shares have been issued under the
Executive Stock Bonus Plan.
15. CONSULTANT STOCK PLANS
In March 1997, the Company authorized for issuance 200,000 shares of Common
Stock pursuant to a consulting agreement ("Consultant Plan 1"). In August 1997,
the Company reserved 250,000 shares of Common Stock for issuance to other
consultants ("Consultant Plan 2"). Consultant Plan 2 expires December 31, 1999.
As of September 30, 1998, 200,000 shares have been issued under Consultant Plan
1 and 40,000 shares under Consultant Plan 2. The Company issued two consultant
stock plans under an S-8 SEC registration.
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
$942,150 and $942,000 and capital lease obligations were $384,919 and $394,000,
respectively, at September 30, 1998.
32
<PAGE> 35
17. LEGAL PROCEEDINGS
On April 14, 1998, the American Arbitration Association, Atlanta Ga., issued an
award to the Company concerning its Northside clinic located in Atlanta,
Georgia, against the doctor who was the original seller of that clinic. The
doctor alleged contract default by the Company and was claiming all rights to
this clinic. The Company contended that there was a valid settlement agreement
concerning the alleged breach of contract. The arbitrator found there was a
valid settlement agreement and issued a ruling in accordance with the reported
terms of the settlement agreement. In sum, the award makes the doctor
responsible for all sums and accounts due for operating expenses after March 10,
1996. Further, the award bars the doctor from making any claims against the
Company for the Promissory Note and Guarantee given by the Company, and the
doctor's employment contract. In exchange, the Company returns the clinic and
any account receivable collected by the Company after February 1, 1997 for work
done prior to February 1, 1997 by the doctor.
The Company is engaged in litigation with a service supplier over unpaid
invoices. There are two suits filed November 1997 and September 1997,
respectively. The Company believes that a substantial portion of one claim is
associated with the Northside clinic litigation. The case is: SmithKline Beecham
Clinical Labs v. American HealthChoice, Inc., filed in the County Court of Bexar
County at Law No. 5, San Antonio, Texas, and State District Court, 162nd
Judicial District, Dallas County, Texas.
The Company is engaged in litigation with a service supplier over unpaid
invoices. The suit was filed April 1, 1998. The Company has retained a law firm
and is currently evaluating the allegations. The case is: McKesson General
Medical v. American HealthChoice, Inc., filed in the County Court of Dallas
County at Law No. 2, Dallas, Texas.
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 in July 1997 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 Malcolm P. Dulock v. AHC
Physicians Corporation, Inc., filed in the Superior Court of Gwinnett County,
Georgia.
The Company is engaged in litigation with an equipment lessor. The suit was
filed October 14, 1998. The plaintiff alleges that the Company is the guarantor
for a company called Corrective Vision Center that went out of business. The
case is: Advanta Business Services Corp., v. American HealthChoice, Inc., filed
in the County Civil Court of Harris County at Law No. 4, Harris County, Texas.
The Company is engaged in litigation with an equipment lessor. The suit was
filed October 6, 1998. The plaintiff alleges default for nonpayment of a lease
and is claiming rights under the lease. The case is: CIT Group/Equipment
Financing, Inc., v. American HealthChoice, Inc., filed in the State District
Court, 68th Judicial District, Dallas County, Texas.
The Company is engaged in litigation with an equipment lessor for a prefab
trailer used as an office at a clinic in San Antonio, Texas. The suit was filed
December 3, 1998. The plaintiff alleges default for nonpayment of a lease and is
claiming rights under the lease. The case is: Sanwa Business Credit Corp., v.
American HealthChoice, Inc., filed in the State District Court, 125th Judicial
District, Harris County, Texas.
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
account 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: Susan Johnson, Gilberto Martorell, and Henry
Heard v. American HealthChoice, Inc., dba Peachtree Corners Medical Center, and
Malcolm Dulock, filed in the Superior Court of Gwinnett County, Georgia.
33
<PAGE> 36
The Company was served a Complaint on January 26, 1998 alleging unspecified
damages arising from trademark infringement and related claims. The Company has
retained a law firm and is currently evaluating the allegations. The case is:
Unihealth v. American HealthChoice, Inc., filed in the United States District
Court, Southern District of Texas, Houston Division.
A person claiming to have performed certain services in formation of the Company
has sued claiming he is due a larger percentage of the Company stock than what
he received. The Company was served notice on March 29, 1998 and has retained a
law firm to seek a dismissal or in the alternative a change of venue. The case
is Stewart v. American HealthChoice, Inc. filed in the United States District
Court, Middle District of Florida, Tampa Division.
The Company is engaged in litigation with the group that the Company purchased
four Atlanta Georgia area clinics. The claim alleges failure to pay on the
promissory note for the purchase of the clinics and to enforce stock pledge
obligations. The suit was filed April 14, 1998 and the Company is currently
evaluating this claim. The case is Metropolitan Health Care v. American
HealthChoice, Inc. filed in the United States Bankruptcy Court, Northern
District of Georgia, Atlanta Division.
The Company is engaged in litigation filed on February 23, 1998 with a former
landlord at a location where the Company closed a clinic for breach of lease.
The Company answered and counter claimed against landlord for landlord's failure
to perform under the agreement. The case is: Assist, Inc., v. American
HealthChoice, Inc., filed in State District Court, 285th Judicial District,
Bexar County, Texas.
The Company is engaged in litigation filed on May 14, 1998 with a former
landlord at a location where the Company closed a clinic for breach of lease.
The Company answered and counter claimed against landlord for landlord's failure
to perform under the agreement. The case is: Dale Baldauf and Marylyn D. Frank
v. American HealthChoice, Inc., and Trevino, Roman & Assoc., filed in State
District Court, 138th Judicial District, Cameron County, Texas.
On November 9, 1998, an Involuntary Chapter 11 Petition was filed against AHC
Physicians Corporation, Inc., a wholly owned subsidiary of the Company, in the
United States Bankruptcy Court for the Northern District of Georgia, Atlanta
Division. The petition was filed by three trade creditors and two former
employees, one of which is the doctor who managed the Norcross, Georgia clinic
that the Company is engaged in litigation. At a December 15, 1998 hearing in the
Bankruptcy Court, the petition was dismissed based on evidence presented by the
Company, which showed an insufficient number of qualified creditors and that the
Company was paying its obligations in a timely manner.
In respect to litigation with service suppliers and equipment lessors, the
disputed obligation is included in accounts payable or capital lease
obligations. The Company is not involved in any other material litigation.
18. SUBSEQUENT EVENTS
On November 9, 1998, an Involuntary Bankruptcy Petition was filed against AHC
Physicians Georgia, Inc., a wholly owned subsidiary of the Company, in the
United States Bankruptcy Court for the Northern District of Georgia. The
petition was filed by three trade creditors and two former employees, one of
which is the doctor who managed the Norcross, Georgia clinic that the Company is
engaged in litigation. At a December 15, 1998 hearing in the Bankruptcy Court,
the petition was dismissed based on evidence presented by the Company, which
showed an insufficient number of qualified creditors and that the Company was
paying its obligations in a timely manner.
On November 20, 1998, the Company executed a letter of intent to sell certain
assets of the Norcross, Georgia clinic for $1,075,000; payable $950,000 in cash
and a note for $125,000, subject to the execution of an asset purchase
agreement. The book value of the assets to be sold is approximately $885,000 as
of December 31, 1998. The proceeds will be used to pay down the convertible
debentures and for working capital purposes. Tangible assets comprise $300,000
in account receivable less than six months old, and $365,000 in inventory and
equipment. The Company has approximately $220,000 of unamortized goodwill
attributable to the purchase of the clinic in 1996. The Company will retain
approximately $300,000 in account receivable less than six months old and all
account receivable older than six months. Proceeds from collection of the
retained account receivable are estimated to be approximately $500,000. Subject
to execution of an asset purchase agreement, the closing is scheduled on or
before January 31, 1999.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In June 1997, 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.
34
<PAGE> 37
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. 40 President, Chief Executive Officer and March 1995
Chairman of the Board of Directors
Jay R. Stucki 38 Chief Financial Officer, Vice President, December 1996
Secretary and General Counsel
Jeffrey Jones, D.C. 37 Director March 1995
Michael R. Smith, M.D. 40 Director December 1996
John V. Mansfield 51 Director June 1998
James Roberts 39 Director June 1998
</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
(chiropractic, medical, physical therapist, massage therapist, etc.). From 1988
through 1995, Dr. Stucki served as Chairman and Chief Executive Officer of
United Health Services. United Health Services developed approximately 150
franchises throughout 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 has been a guest speaker
on health care issues. Dr. Stucki is a member of various national, state, and
local organizations.
Jay R. Stucki. Mr. Stucki became Chief Financial Officer, Vice
President of Finance and Secretary of the Company in June 1997. Mr. Stucki was
first employed by the Company in December 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.
Jeffrey Jones, D.C. Dr. Jones is a Director of the Company. He is the
Clinic Director of the United Chiropractic Uptown Clinic, New Orleans,
Louisiana, owned by a subsidiary of the Company. 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.
35
<PAGE> 38
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.
John V. Mansfield. Mr. Mansfield became a Director of the Company in
June 1998. He has been the President and Chief Executive Officer of Harland
Properties, Inc. since February 1992, and of Axis Care Group, Inc. since May
1997, two privately owned companies located in London, Ontario. Harland
Properties, Inc. is engaged in the business of real property management,
development and consulting, and Axis Care Group, Inc. is engaged in the business
of medical services management.
James Roberts. Mr. Roberts became a Director of the Company in June
1998. He has been the President of Health Dental Plus, Inc. since September
1993. Health Dental Plus, Inc. is engaged in the marketing of dental benefits
plans to employer groups and individuals.
Dr. Joseph W. Stucki and Jay R. Stucki are brothers.
Members of the Company's Board of Directors are elected to hold office
until the next meeting of stockholders 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.
The committees of the Company's Board of Directors are as follows:
Audit Committee John V. Mansfield, Chairman
James Roberts
Compensation Committee James Roberts, Chairman
John V. Mansfield
Dr. Joseph W. Stucki
The Company does not have a Nominating Committee.
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 a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company pursuant to Rule 16a-3(e) promulgated under the
Securities Exchange Act of 1934, or upon written representations received by the
Company, the Company is not aware of any failure by an officer, director or
beneficial owner of more than 10% of the Company's common stock to file timely
with the Securities and Exchange Commission any Forms 3, 4 or 5 relating to the
fiscal year ended September 30, 1998.
36
<PAGE> 39
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 and the other named executive officer for the last three
fiscal years. No other executive officer of the Company who was serving at the
end of fiscal 1998 earned more than $100,000 of annual base compensation for
services in all capacities to the Company and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
FISCAL ANNUAL -----------------------------------------
NAME AND YEAR ENDING COMPENSATION/ RESTRICTED STOCK SECURITIES UNDERLYING
PRINCIPAL POSITION SEPTEMBER 30, SALARY ($) AWARDS($) OPTIONS(#)
------------- ------------ -------------- ---------------------
<S> <C> <C> <C> <C>
Dr. Joseph W. Stucki 1998 $ 262,950 $ 14,050(1) --
Chairman of the Board, 1997 235,815 117,000(1) --
President and Chief 1996 211,938 -- --
Executive Officer
Jay R. Stucki 1998 169,717 70,200(3) 200,000
Chief Financial Officer, 1997 83,109 8,430(3) 200,000
Vice President, Secretary 1996 -- (4) -- --
and General Counsel
</TABLE>
(1) Dr. Stucki is entitled to a stock bonus of 50,000 shares on June 1 of each
year of his employment agreement. The closing bid prices per share on June
1, 1997 and 1998 were $2.34 and $0.281, respectively. The employment
agreement also gives him the right to receive an option for 500,000 shares,
at an exercise price of $2.34 per share, upon the Company achieving three
consecutive quarters of profit or upon termination of employment for any
reason in connection with a change of control. See "- Employment
Agreements", below.
(2) Includes $47,817 and $3,487 in 1998 and 1997, respectively, for payment of
student loans pursuant to his employment agreement.
(3) Mr. Stucki is entitled to a stock bonus of 30,000 shares on June 1 of each
year of his employment agreement. The closing bid prices per share on June
1, 1997 and 1998 were $2.34 and $0.281, respectively. The employment
agreement also gives him the right to receive an option for 200,000 shares
on each June 1.
(4) Mr. Stucki was not employed by the Company in fiscal 1996.
37
<PAGE> 40
STOCK OPTION AND STOCK PURCHASE PLANS
The following tables set forth the number of options granted to the
Company's Chief Executive Officer and the other named executive officer during
fiscal 1998 and the value of the unexercised options held by them at September
30, 1998.
OPTION/SAR GRANTS TABLE
(OPTION/SAR GRANTS IN LAST FISCAL YEAR)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/SARS GRANTED TO EXERCISE OR
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION
NAME # FISCAL YEAR ($/SH) DATE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Dr. Joseph W. Stucki -- -- $ -- --
Jay R. Stucki 200,000 100% 0.281 6/1/03
</TABLE>
AGGREGATE OPTION/SAR EXERCISES IN FISCAL YEAR 1998
AND FISCAL 1998 YEAR-END OPTION/SAR 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 ($)
ACQUIRED ON VALUE ----------------------------- ---------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ---------------- ----------- -------------
<S> <C> <C> <C>
Dr. Joseph W. Stucki None None 150,000 -- $ -- (1) --
Jay R. Stucki None None 400,000 -- -- (1) --
</TABLE>
(1) All options are vested. Value is based on the closing price per share
on December 31, 1998 as quoted on the OTC Bulletin Board of $0.0625.
None of the options were in-the-money on December 31, 1998.
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 to directors
of up to 250,000 shares 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 under the Stock Purchase 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 March 1997, the Company authorized for issuance 200,000 shares of
Common Stock pursuant to a consulting agreement ("Consultant Plan 1"). In July
1997, the Company adopted its 1997 Executive Stock Bonus Plan ("Executive Stock
Bonus Plan") under which options to purchase shares of Common Stock may be
issued to employees of the Company.
38
<PAGE> 41
The Company reserved 260,8700 shares of Common Stock for issuance under the
Executive Bonus Plan. In August 1997, the Company reserved 250,000 shares of
Common Stock for issuance to other consultants ("Consultant Plan 2"). The
following table presents the number of shares issued or options granted under
each of the Plans as of September 30, 1998:
<TABLE>
<CAPTION>
PLAN OPTIONS GRANTED/SHARES ISSUED OPTION SHARES EXERCISED
---- ----------------------------- -----------------------
<S> <C> <C>
Employee Plan 497,500 9,667
Director Plan 250,000 0
Stock Purchase Plan 0 0
Executive Stock Bonus Plan 190,475 0
Consultant Plan 1 200,000 0
Consultant Plan 2 40,000 0
</TABLE>
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 is to 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 is to 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. As of September 1,
1998, no options have been granted under the Director Plan except for a one-time
grant of options to purchase 100,000 shares granted to a former Director. See
"-Employment Agreements" for a discussion of the compensation paid to Dr.
Jeffrey Jones as an employee of the Company. Dr. Michael R. Smith was paid a
salary of $140,000 as an employee of the Company for the fiscal year ended
September 30, 1998.
EMPLOYMENT AND CONSULTING CONTRACTS
Effective June 1, 1997, the Company entered into a three-year
employment agreement with Dr. Joseph W. Stucki to serve as President and Chief
Executive Officer of the Company for an annual base salary of $250,000. In
addition, he is entitled to a stock bonus of 50,000 shares at the beginning of
each year of the employment agreement and has the right to receive an option for
500,000 shares of Common Stock, at an exercise price of $2.34 per share, upon
the Company achieving three consecutive quarters of profit or upon termination
of employment for any reason in connection with a change of control. Dr. Stucki
is also entitled to a car allowance of $1,000 per month and reimbursement of up
to $1,500 per year for continuing professional education. In the event of
termination of the agreement for any reason by the Company or Dr. Stucki, he
will be entitled to a severance pay equal to six months of his full salary.
After a change of control of the Company, as defined in the employment
agreement, if Dr. Stucki's employment is terminated, he terminates his
employment, his duties are changed or certain other specified events take place,
he will be entitled to a severance payment equal to twice his effective annual
compensation, together with a continuation of all employee benefits for two
years.
The Company had two agreements with respect to Jay R. Stucki, one for
legal services and one as Chief Financial Officer (CFO). Mr. Stucki agreed to
forgo the base salary as general counsel while operating in the combined
positions. The CFO agreement expires June 1, 1999, subject to automatic renewal
for successive one year periods unless either party provided 90-day notice of
cancellation prior to expiration of the then current term, and the legal
services agreement expired September 30, 1998, subject to automatic renewal for
successive one year periods unless either party gave notice of cancellation.
Under the CFO agreement, Mr. Stucki receives $120,000 in annual compensation and
is entitled to receive 30,000 shares of common stock and options to purchase
200,000 shares of common stock on each June 1 anniversary date of the Agreement.
He is also entitled to standard employee benefits and reimbursement for
continuing professional
39
<PAGE> 42
education expenses. Under the legal services agreement, Mr. Stucki was entitled
to annual base compensation of $75,000 (foregone while serving as CFO), and the
Company agreed to pay his student loans in the amount of approximately $58,570,
which was treated as compensation in fiscal 1997 and 1998. Under the CFO
agreement, Mr. Stucki is entitled to his base salary for the remainder of the
term if the agreement is terminated by the Company without cause. The parties
intend to phase Mr. Stucki out of the CFO position at the end of the current
contract.
Effective July 1, 1994, United Chiropractic Clinic of Uptown, Inc., a
subsidiary of the Company, entered into an employment agreement with Dr. Jeffrey
Jones as a clinic director providing chiropractic services at the New Orleans
Uptown clinic. The agreement was for an initial term of three years, and is
automatically renewed for consecutive one year terms unless the Company provides
written notice of nonrenewal not less than 90 days prior to the expiration of
the then current term. Dr. Jones also may terminate the agreement at any time
upon 30 days' written notice, and the Company can terminate the agreement for
cause, as defined in the agreement. Dr. Jones gave notice in March 1997 that he
was not renewing the employment agreement, although the Company and he have
continued to perform under the terms of the employment agreement, and the
Company believes the agreement is in effect. In December 1998 both parties
agreed to renegotiate the contract. A one year covenant not to compete commences
upon the effective date of termination. Under the agreement, Dr. Jones received
compensation of $255,200 in fiscal 1997 and $500,038 in fiscal 1998. He is also
entitled to standard employee benefits and a term life insurance policy of
$500,000.
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, 1998, by (i) each known beneficial
owner of more than five percent (5%) of the outstanding Common Stock, (ii) each
Director, (iii) each 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.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF CLASS
---------------- ----------------
<S> <C> <C>
Joseph W. Stucki, D.C.(1) 2,632,320 16.7%
1300 West Walnut Hill Lane
Suite 275
Irving, Texas 75038
Jay R. Stucki(2) 466,382 3.1%
1300 West Walnut Hill Lane
Suite 275
Irving, Texas 75038
Jeffrey Jones, D.C.(3) 1,017,175 6.9%
807 S. Carrollton Avenue
New Orleans, Louisiana 70118
Michael R. Smith, M.D. 17,000 *
3930 E. Southcross
San Antonio, Texas 78222
James Roberts 9,500 *
1300 West Walnut Hill Lane
Suite 275
Irving, Texas 75038
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF CLASS
---------------- ----------------
<S> <C> <C>
John V. Mansfield -- --
471 Waterloo Street
London, Ontario N6B 2P4
Officers and Directors as a group (6 persons) 4,142,377 27.1%
</TABLE>
* Less than one percent.
(1) Dr. Stucki is the Chief Executive Officer, President and Chairman of
the Board of Directors of the Company. The number of shares reported
includes 150,000 shares issuable upon exercise of options at $2.00 per
share which options are currently exercisable and expire August 15,
2000.
(2) Jay R. Stucki is the Secretary and General Counsel of the Company. The
number of shares reported includes 400,000 shares issuable upon
exercise of options at $2.34 per share ( 200,000 shares) and $0.281 per
share (200,000 shares) which options are currently exercisable and
expire May 30, 2002 and June 1, 2003 respectively.
(3) Dr. Jones is a Director of the Company. The number of shares reported
includes 60,000 shares issuable upon exercise of options at $2.00 per
share which options are currently exercisable and expire August 15,
2000.
41
<PAGE> 44
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 19, 1997, the Company entered into an Investor Agreement with
Wingate Financial Associates, L.L.C. ("Wingate") pursuant to which $2.6 million
of 8% cumulative convertible debentures were issued by the Company. In
connection with these transactions, and as part of the Investor Agreement, Dr.
Joseph W. Stucki and Dr. Jeffrey Jones were required to grant options to Wingate
for 469,304 shares and 197,509 shares, respectively, at an initial exercise
price of $2.125, which increased over time. Wingate exercised these options, but
required Dr. Stucki and Dr. Jones to loan one-half of the proceeds, which
amounted to $439,973 and $185,165, respectively, to the Company. Notes
documenting these loans were executed in July 1997, bore interest at 8% per
annum and were payable in stock of the Company or cash, at the holder's
election. Dr. Stucki and Dr. Jones elected to take stock in payment of the notes
in September 1997, and Dr. Stucki was issued 111,739 shares in exchange for
$439,973 in principal and interest accrued under his note, and Dr. Jones was
issued 47,026 shares in exchange for $185,165 in principal and interest accrued
under his note. As a condition to receiving stock, the Company's Board required
that Dr. Stucki and Dr. Jones sell their shares through a designated broker.
When the shares were not sold as promised, Dr. Stucki and Dr. Jones threatened
legal action and the Company agreed to reverse the transaction, whereupon Dr.
Jones and Dr. Stucki returned the shares issued to them and the notes were
reinstated in the amounts of $439,973 and $185,165 for Dr. Stucki and Dr. Jones,
respectively. On August 24, 1998, the Company sold $3,385,000 of 8% convertible
debentures, and $250,000 of the proceeds from the debentures were used to repay
$175,950 to Dr. Stucki and $74,050 to Dr. Jones under these notes.
As part of the Wingate transaction, Dr. Joseph W. Stucki was also
required to sell shares of Common Stock in an amount equal to $125,981 and loan
the proceeds to the Company. On May 12, 1997, Dr. Stucki made this loan in
exchange for a convertible debenture bearing interest at 10% per annum
convertible in 90 days into Common Stock of the Company at a 15% discount to the
fair market value on date of execution. This debenture was converted on
September 30, 1997 by Dr.
Stucki, including the accrued interest of $4,867, for 87,964 shares of Common
Stock.
On May 3, 1996, Dr. Jeffrey Jones loaned $125,000 to the Company
bearing interest at an annual rate of 10% which was repaid in full (with
interest of $6,370) on November 5, 1996. He was granted a warrant to purchase
6,250 shares of Common Stock at any time prior to May 3, 1998 at an exercise
price of $5.00 per share as partial consideration for making such loan. Dr.
Jones also loaned $100,000 to the Company on December 17, 1996, bearing interest
at an annual rate of 57%, which loan was repaid in full (with interest of
$19,000) on April 29, 1997.
See also footnote 7 to the Notes to Consolidated Financial Statements.
42
<PAGE> 45
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, 1998
(ii) Consolidated Statements of Operations for the years
ended September 30, 1998 and 1997.
(iii) Consolidated Statement of Stockholders' Equity for
the years ended September 30, 1998 and 1997.
(iv) Consolidated Statements of Cash Flows for the years
ended September 30, 1998 and 1997.
(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).
4.1 Form of Debenture for $3,385,000 of 8% convertible
debentures due August 24, 2001 (incorporated by
reference to Exhibit (c)(ii) to Current Report on
Form 8-K dated August 24, 1998).
4.2 Form of Subscription Agreement between the Registrant
and the holders of the debentures referenced in
Exhibit 4.1 (incorporated by reference to Exhibit
(c)(ii) to Current Report on Form 8-K dated August
24, 1998).
4.3 Form of Security Agreement entered into between the
Registrant and the holders of the debentures
referenced in Exhibit 4.1 (incorporated by reference
to Exhibit (c)(ii) to Current Report on Form 8-K
dated August 24, 1998).
4.4 Form of Registrations Rights Agreement between the
Registrant and the holders of the debentures
referenced in Exhibit 4.1 (incorporated by reference
to Exhibit (c)(ii) to Current Report on Form 8-K
dated August 24, 1998).
10.1 Employment Agreement for General Counsel dated
December 16, 1996, between American HealthChoice,
Inc. and Jay R. Stucki. (incorporated by reference to
Exhibit 10.1 to Form 10-KSB, file number 000-26740,
filed for the fiscal year ended September 30, 1997).
10.2 Employment Agreement for Chief Financial Officer
dated June 1, 1997 between American HealthChoice,
Inc. and Jay R. Stucki. (incorporated by reference to
Exhibit 10.2 to Form 10-KSB, file number 000-26740,
filed for the fiscal year ended September 30, 1997).
10.3 1995 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.1 to
Form10-QSB, file number 33-30677-NY, filed for the
quarter ended June 30, 1995).
43
<PAGE> 46
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).
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.
(incorporated by reference to Exhibit 10.12 to Form
10-KSB, file number 000-26740, filed for the fiscal
year ended September 30, 1997).
10.13 Employment Agreement for Chief Executive Officer
dated June 1, 1997 between American HealthChoice,
Inc. and Dr. Wes Stucki*
21 List of Subsidiaries of American HealthChoice, Inc.*
27 Financial Data Schedule*
* Filed herewith
(b) The Company filed two (2) reports on Form 8-K during the quarter ended
September 30, 1998. One report filed July 20, 1998 relating to the resignation
of a director. A second report filed September 4, 1998, disclosing refinancing
of indebtedness and issuance of debentures.
44
<PAGE> 47
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 13, 1999 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 13, 1999
/s/ Jay R. Stucki Chief Financial Officer and
Jay R. Stucki Vice President-Finance
(Principal Financial and
Accounting Officer) January 13, 1999
/s/ John V. Mansfield Director, Chairman of Audit Committee
John V. Mansfield January 13, 1999
/s/ James Roberts Director
James Roberts January 13, 1999
/s/ Dr. Jeff Jones Director
Dr. Jeff Jones January 13, 1999
/s/ Dr. Michael Smith Director
Dr. Michael Smith January 13, 1999
</TABLE>
45
<PAGE> 48
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C> <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).
4.1 Form of Debenture for $3,385,000 of 8% convertible
debentures due August 24, 2001 (incorporated by
reference to Exhibit (c)(ii) to Current Report on
Form 8-K dated August 24, 1998).
4.2 Form of Subscription Agreement between the Registrant
and the holders of the debentures referenced in
Exhibit 4.1 (incorporated by reference to Exhibit
(c)(ii) to Current Report on Form 8-K dated August
24, 1998).
4.3 Form of Security Agreement entered into between the
Registrant and the holders of the debentures
referenced in Exhibit 4.1 (incorporated by reference
to Exhibit (c)(ii) to Current Report on Form 8-K
dated August 24, 1998).
4.4 Form of Registrations Rights Agreement between the
Registrant and the holders of the debentures
referenced in Exhibit 4.1 (incorporated by reference
to Exhibit (c)(ii) to Current Report on Form 8-K
dated August 24, 1998).
10.1 Employment Agreement for General Counsel dated
December 16, 1996, between American HealthChoice,
Inc. and Jay R. Stucki. (incorporated by reference to
Exhibit 10.1 to Form 10-KSB, file number 000-26740,
filed for the fiscal year ended September 30, 1997).
10.2 Employment Agreement for Chief Financial Officer
dated June 1, 1997 between American HealthChoice,
Inc. and Jay R. Stucki. (incorporated by reference to
Exhibit 10.2 to Form 10-KSB, file number 000-26740,
filed for the fiscal year ended September 30, 1997).
10.3 1995 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.1 to
Form10-QSB, file number 33-30677-NY, filed for the
quarter ended June 30, 1995).
</TABLE>
<PAGE> 49
<TABLE>
<S> <C> <C>
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).
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.
(incorporated by reference to Exhibit 10.12 to Form
10-KSB, file number 000-26740, filed for the fiscal
year ended September 30, 1997).
10.13 Employment Agreement for Chief Executive Officer
dated June 1, 1997 between American HealthChoice,
Inc. and Dr. Wes Stucki*
21 List of Subsidiaries of American HealthChoice, Inc.*
27 Financial Data Schedule*
</TABLE>
* Filed herewith
<PAGE> 1
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT CONTRACT AGREEMENT ("Agreement") is made effective as of the 1st
day of June, 1997, between American HealthChoice (Texas), Inc., a Texas
corporation, (hereinafter called the "Company"), and Dr. J. Wes Stucki
(hereinafter called the "Employee").
WITNESSETH
WHEREAS, the Company owns and operates various health care service
businesses (all such businesses hereinafter being referred to collectively as
the "Business"); and
WHEREAS, The company desires to employ the Employee upon the terms and
conditions hereinafter set forth, and the Employee desires to accept employment
with the Company and render services to the Company on such terms and
conditions;
NOW, THEREFORE, in consideration of the covenants and agreements herein
made, the parties hereto agree as follows:
A. Recitals: The above recitals are incorporated by reference herein and made
a part thereof as if set forth herein verbatim.
B. Employment: The Company hereby employs Employee, and Employee hereby
accepts employment with the Company, to serve as the Chief Executive
Officer of the Company. The Employee's duties shall include, but not be
limited to those duties of a Chief Executive and such other duties as the
Company may from time to time reasonably direct.
C. Term and Duties
1. The period of Employee's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall
continue for a period of three (3) years thereafter.
2. During the period of employment hereunder and except for illness,
reasonable vacation periods and reasonable leaves of absence, the
Employee shall devote the Employee's time, attention, skill and
efforts to the faithful performance of the Employee's duties
hereunder and the furtherance of the Company's business.
D. Compensation
1. For all services rendered by Employee hereunder, Employer shall
pay Employee base salary of two hundred and fifty thousand,
($250,000.00) per year, payable in equal installments at the same
intervals as other Company employees. Deductions shall be made
from Employee's compensation for social security, withholding tax
and such other taxes as may from time to time be required by
governmental authorities.
2. Employee at the beginning of each year of employment, shall
receive 50,000 shares of the Company common stock, issued with a
"Rule 144" restrictive legend.
3. Employee shall receive five hundred thousand (500,000) stock
options, with an exercise term of five years, of the Company
common stock, issued under a S-8 Company Executive Stock Bonus
Plan, at an exercise price of two dollars and thirty four cents
($2.34) per share, upon the occurrence of any of the following
events:
a. The Company reports three consecutive quarters of profit in
accordance with Generally Accepted Accounting Principles
(GAAP) less all financing costs associated with any
raise(s) of capital; or
<PAGE> 2
b. If any of the events take place under Section G herein.
4. Employee shall be considered for bonus compensation annually from
time to time based upon the overall performance and financial
condition of the Company and in particular those areas of the
Company's business operations for which the Employee has primary
responsibility. Such bonus amounts shall be determined by the
Company's Compensation Committee (the "Committee").
5. If the Clinics sustain cash losses, less non cash costs for
financing, interest charges, etc., of over one million five
hundred thousand ($1,500,000.00) in fiscal year 1998, based on
Clinics owned by Company on January 1, 1998, the Board shall have
the right to adjust compensation under items one and two above.
6. Employee is encouraged, from time to time, to incur reasonable
expenses in promoting the business of the Company, provided that
the business name and logo are used, all in accordance with the
directives of the Company's Board of Directors. Such expenses
include, but are not limited to, expenses for travel,
entertainment and miscellaneous expenses incurred in the conduct
of the business of the Company. Employee shall be entitled to
reimbursement from the Company for such expenses upon submission
of proper documentation therefor.
7. The Company is obligated to file any necessary S-8 registration
statements to effectuate the above compensation.
E. Benefits
1. At such reasonable times as the Company shall, in its discretion,
permit Employee shall be entitled, without loss of pay, up to 30
business days per calendar year of combined vacation, personal,
sick, and holiday leave. Such leave shall be taken in such a
manner and at such times as shall be agreed upon by Employee and
the Company, subject to the following conditions:
a. All leaves shall be scheduled in a reasonable manner by
the Employee with reasonable prior notice to the Company.
Employee is responsible for ensuring appropriate
supervision of those areas of the business for which the
Employee has primary responsibility during such leaves.
b. Unused time off shall accrue or carry over from one
calendar year to the next only up to 36 months, provided
that Employee shall be entitled to compensation (at the
Employee's normal per them rate) for unused time off.
2. So long as group health insurance is generally available in the
marketplace, and subject to such exclusions and underwriting
conditions as the insurer may impose as to Employee, the Company
shall pay the cost of group health insurance for the Employee and
his dependents. The insurance provided for Employee shall be the
same as that provided for all other employees of the Company, as
the same may be modified from time to time. This Agreement does
not guarantee Employee's insurability; rather; it merely requires
the Company to pay for the Employee's insurance on the same basis
as for other employees of the Company so long as it is
commercially available, until termination thereof.
3. So long as the Company shall have a 401(k) and/or any other
deferred compensation plan, Employee shall be entitled to
participate in all such deferred compensation plans.
4. Company shall pay employee an automobile expense allowance of
$1,000.00 (one thousand) per month, and reasonable costs for
employees mobile telephone and a fax line at his personal
residence.
5. Company shall pay up to' $1,500 per calendar year toward the cost
of continuing professional education
<PAGE> 3
courses for Employee, provided that same are relevant to
Employee's duties hereunder. Expenditures of any amount exceeding
an aggregate total of $1,500 during any one calendar year for
continuing professional education for Employee shall be submitted
to the Board for its prior approval.
F. Termination: Severance Pay
1. Subject to the provision of subsection (4) below, this Agreement
shall be terminated upon the happening of the first of any of the
following events:
a. Whenever the Company and the Employee mutually agree to
terminate this Agreement; or
b. Upon the death of the Employee; or
c. At the latter of such time as Employee (i) has been
absent from work, disabled or otherwise impaired from
performing the Employee's duties hereunder on a full-time
basis for a continuous period of ten (10) weeks or a
total of eighteen (18) weeks in any consecutive twelve
(12) month period, or (ii) begins receiving disability
insurance benefits; or
d. If the Employee violates any provision of this Agreement
and is given written notice of the same, and fails or
refuses to cure same within thirty (30) days after notice
thereof from the Company (cure may be effected by written
acknowledgment of such violation if it is not a
continuing course of conduct); or
e. Employee's failure or refusal to comply with the accepted
professional policies and standards of the Company after
written notice thereof specifying the nature of such
failure or refusal; or
f. Any behavior which is repeated or persistent following
written notice from the Company and which is egregious or
materially adverse to the normally harmonious and
productive conduct of the Company's Businesses; or
g. At the Company's option, at any time for "cause", as
hereinafter defined.
2. For purposes of this Agreement, the term "cause" is defined to
include: (a) the matters set forth in sections (1)(d) through
(1)(g) above; or (b) a conviction of fraud or embezzlement; or
(c) Employee becomes substantially dependent on alcohol or drugs.
3. Unless the Company determines, by unanimous vote of its Board of
Directors (exclusive of Employee), that immediate termination of
the Employee is necessary for protection of the Company's
Businesses or property, the Company shall notify Employee in
writing, by certified mail, at least thirty (30) days in advance
of any proposed termination pursuant to subsection (1)(d) through
(1)(f) of this Section F (which notice shall state the event for
which Employee is proposed to be discussed in such detail as to
permit a reasonable assessment by Employee of the bona fides
thereof), and shall give Employee (a) such thirty (30) days to
cure any breach or misconduct, if the same is capable of being
cured within such period; or (b) such reasonable amount of time
that the Board of Directors determines is required in order to
cure said breach or misconduct.
4. In the event of termination of this Agreement for any reason
Employee shall be entitled to termination/severance pay equal to
six (6) months of full salary (based on the Employee's most
recent monthly salary payment) (less any amounts due the Company
from the Employee). Upon receipt by Employee of such
termination/severance pay, all of Employee's rights hereunder
shall terminate.
<PAGE> 4
G. Termination for Good Reason
1. Definitions: For purposes of this Section G the following will be
applicable:
a. Change in Control: (i) Acquisition by an individual,
business organization or related group of individuals and
business organizations of the beneficial ownership of 25%
or more of the Company's voting securities; or (ii)
election, at an annual election of a class of directors,
of persons who are not nominated by the Board and who
comprise more than one-half of the class so elected.
b. Good Reason: (i) Without the Employee's express written
consent, the assignment to the Employee of any duties
inconsistent with the Employee's positions, duties,
responsibilities and status with the Company immediately
prior to a Change in Control, or a change in the
Employee's reporting responsibilities, titles or offices
as in effect immediately prior to a Change in Control, or
the Employee's removal from or any failure to re-elect
the Employee to any of such positions, except in
connection with the termination of the Employee's
employment in accordance with provisions of Section F
above, or by the Employee other than for Good Reason;
(ii) a reduction by the Company in the Employee's base
salary as in effect on the date hereof or as the same may
be increased from time to time; (iii) a failure by the
Company to continue any incentive compensation plans in
which the Employee is presently entitled to participate
(the "Incentive Plans") as the same may be modified from
time to time but substantially in the forms currently in
effect, or a failure by the Company to continue the
Employee as a participant in the Incentive Plans on at
least the same basis as Employee presently participates
in accordance with the Incentive Plans; (iv) without the
Employee's written consent, the Employee's reassignment
by the practicality dictates a change in the Employee's
residence, except for required travel on the Company's
business to an extent substantially consistent with the
Employee's present business travel obligations; (v) the
failure by the Company to continue in effect any benefit
or compensation, life insurance, health and accident, or
disability plan in which the Employee is participating at
the time of a Change in Control (or plans providing the
Employee with substantially similar benefits), the taking
of any action by the Company that would adversely affect
the Employee's participation in or materially reduce the
Employee's benefits pursuant to any such plans or deprive
the Employee at the time of the Change in Control, or the
failure of the Company to provide the Employee with a
number of paid vacation days to which the Employee is
then entitled in accordance with the Company's normal
vacation policy in effect on the date hereof; or (vi) any
purported termination of the Employee's employment that
is not effected in accordance with the provisions of
subsection F (3) above, which purported termination shall
not be effective for purposes of the Agreement.
c. Person: Any individual, partnership, corporation, limited
liability company or other group or entity, including two
or more persons acting as a partnership, limited
partnership, syndicate, association or other group for
the purpose of the acquisition, possession or disposition
of stock.
d. Effective Annual Compensation: The aggregate total of the
Employee's then current base salary amount and bonus
amount received by the Employee from the Company based on
services provided to the Company during the previous
fiscal year.
2. Severance Benefits for Termination For Good Reason: If the
Employee, following a Change in Control, terminates the Employee's
employment as the President and Chief Executive Officer of the
Company for Good Reason prior to the end of this contract, the
Employee will be entitled to severance pay in the aggregate amount
of two (2) times the Employee's then current Effective Annual
Compensation, to be payable in twelve (12) equal monthly
installments with the first installment to be paid within thirty
(30) days after the Employee's termination. The Employee will also
be entitled to the continuation of all the Employee's employee
benefits as of the date of the Change in Control from the
Employee's termination through the end of the time period
<PAGE> 5
prescribed in this section for the payment of severance pay. In
the event that employment is terminated due to insolvency or
bankruptcy severance benefit will be waived.
H. Employee Cooperation: The Employee agrees to cooperate fully with the
Company during as well as after the Employee's association with the
Company has terminated in the investigation or defense of all claims
and/or any audits or other reviews conducted by or on behalf of any
third-party payer (including the Federal or state government) arising out
of or relating to the Businesses during the Employee's association with
the Company, and/or any proceedings connected with the collection of any
fees relating thereto. The Employee agrees to complete, sign and furnish
to the Company promptly and documentation required or requested by any
third-party payer in connection with the examination, verification or
review of any payment relating to any services rendered by the Employee
during the Employee's association with the Company.
I. Disclosure of Confidential Information; Patient Records: The Employee
acknowledges that as a result of the Employee's association with the
Company, the Employee will be making use of, acquiring and/or adding to
confidential information of a special and unique nature and value,
relating to such matters as the Company's confidential reports, lists of
referring physicians, third-party and direct payor contracts, contracts
with managed care plans, lists of patients and the fees paid by such
patients, and other confidential matters. As material inducement to
Company to enter into this Agreement, and to pay to the Employee the
compensation referred to in Section D hereof, the Employee covenants and
agrees that the Employee shall not, at any time during or following the
term of this Agreement, directly or indirectly, divulge, disclose or make
any use of, for any purpose whatsoever, any confidential information which
has been obtained by or disclosed to the Employee as a result of or
otherwise in connection with the Employee's provision of services
hereunder. Such information of a confidential nature includes, but is not
limited to, referral source information, medical records, scans, patient
charts, patient ledgers, records of amount received from patients, patient
lists, other financial records of the Company and of patients, any and all
insurance. Medicare and other such records, and any other information of a
private, internal or confidential nature pertaining to the Company's
Businesses, functions or operations, including, without limitation, the
nature of its contractual relationships. In accordance with the foregoing,
the Employee further agrees that the Employee will at no time retain or
remove from the premises of the Company records of any kind or description
whatsoever for any purpose unconnected with the strict performance of the
Employee's association with the Company for any reason, the Employee will
promptly return to the Company all lists, books and records of or
pertaining to the Company's patients and Businesses, and all other
property belonging to the Company, in the Employee's custody, control or
possession.
In the event of a breach or threatened breach acted upon by the Employee
of any of the provisions of this Section 1, the Company, in addition to
and not in limitation of any other rights, remedies or damages available
to the Company at law or in equity, shall be entitled to preliminary and
permanent injunctive relief in order to prevent or to restrain any such
breach by the Employee, or by the Employee's partners, agents,
representatives, servants, employers, employees and/or any and all
persons, directly or indirectly, acting for or with the Employee. The
provisions of this Section I shall survive the termination of this
Agreement.
J. Covenants Against Competition:
1. The Employee acknowledges that the Employee's services to be
rendered hereunder are of a special and unusual character
which have a unique value to Company, the loss of which may
not adequately be compensated by damages in an action at law,
and
2. It is acknowledged by both parties to this Agreement that
Employee is engaged in (i) the ownership of health care
clinics, (ii) diagnostic facilities and (iii) in providing
management and consulting services to healthcare professionals
throughout the United States of America, which activities are
permitted to the extent they do not interfere with Employee's
duties hereunder. The companies that are exempt from this
covenant not to compete section are listed on Schedule A.
Employee will refrain from soliciting or attempting to solicit
to employ any employ of the Company of any of its
subsidiaries, or committing any act the primary purpose of
which is to induce any employee of the Company to leave the
Company's
<PAGE> 6
employ, or significantly interfere with, disrupt or attempt to
disrupt any past, present or prospective relationship,
contractual or otherwise, relating to the Company's business
activities, between the Company and its customers and
suppliers.
3. In view of the foregoing and of the confidential information
to be obtain by or disclosed to the Employee as hereinabove
set forth (including, without limitation, the confidential
referral source lists and information which are the
proprietary property of Company), and further as a material
inducement to the Company to enter into this Agreement and pay
to the Employee the compensation referred to in this
Agreement, the Employee covenants and agrees that, during the
term of this Agreement and for a period of two (2) years after
termination of this Agreement in accordance with the
provisions of Subsection G (2) including, but not limited to,
the expiration of this Agreement without renewal, neither the
Employee nor any person or entity, under the Employee's own
account or as agent, servant, partner, employee or shareholder
of any corporation, invest in (other than passive 'investments
of 5% or less in publicly traded entitles), manage or control
any individual or entity that is engaged in the trade or
business of providing medical chiropractic or physical
services, staffing or health care personnel or diagnostic
health care services in Dallas or Dallas County, Texas. or
within a ten (10) mile radius of any facility at which the
Company or any of its subsidiaries is then providing services.
Such covenant shall not be deems or constructed to prohibit
the Employee from simply treating, patients (as opposed to
being involved in management, ownership or consulting). This
section shall apply only to transactions and situations
arising or occurring after the date of this Agreement, and
shall not apply to passive investments in entities publicly
traded over a regulated securities exchange and does not apply
to those entities listed in Schedule A.
4. The Employee covenants and agrees that, if the Employee shall
violate any of the Employee's covenants or agreements provided
for pursuant to the foregoing subsections of this Section J,
the Company shall be entitled to an accounting and repayment
of all profits, compensation, commissions, remunerations or
benefits which the Employee directly or indirectly has
realized and/or may realize as a result of, growing out of or
in connection with any such violation.
5. The foregoing covenants by the Employee shall be construed as
an agreement independent of any claim or right of the Employee
hereunder. The existence or alleged existence of any claim or
cause of action by the Employee against the Company, whether
predicted on this employment relationship or otherwise, shall
in no event constitute a defense against or waiver of the
Company's right to enforce the foregoing covenants.
K. Reasonableness of Restrictions
1. The Employee has carefully read and considered the provisions
of Sections I and J hereof and, having done so, agrees that
the restrictions and remedies set forth in such sections
(including, but not limited to, the time period of
restriction, the geographical area of restriction and the
damages and injunctive relief provisions therein) are fair and
reasonable and are reasonably required for the protection of
the interests of the Company.
2. In the event that, notwithstanding the foregoing, any of the
provisions of Section I or J shall be held to be invalid or
unenforceable, the remaining provisions thereof shall
nevertheless continue to be valid and enforceable as though
the invalid or unenforceable parts had not been included
therein. In the event that any provision of Section J hereof
relating to time period and/or area of restriction shall be
declared by a court of competent jurisdiction to exceed the
maximum time period or area such court deems reasonable and
enforceable, said time period and/or area of restriction shall
be deemed to become and thereafter be the maximum time period
and/or area which such court deems reasonable and enforceable.
L. Notices: Any notice or document required or desired to be given to either
party herein shall be in writing and shall be deemed given (a) when sent
registered mail, return receipt requested and postage prepaid, addressed
to the party at the address indicated below (or such other address as that
party may hereafter designate); or (b) when delivered personally to that
party at said address:
<PAGE> 7
If to the Company:
American HealthChoice, Inc.
1300 W. Walnut Hill Lane
Suite 275
Irving, Texas 75038
If to the Employee:
Dr. J. W. Stucki
575 Whispering Oaks
Double Oak, Texas 75067
M. Arbitration: Any claim, controversy or dispute with respect to this
Agreement shall be promptly submitted to arbitration ("Arbitration") for
determination. The Arbitration shall be binding upon the parties
thereto, without a right by any party to a trial de novo in a court of
competent jurisdiction, and shall be conducted under the auspices of the
American Arbitration Association (herein referred to as "Association")
with venue in Dallas County, Texas, and in accordance with its
Commercial Arbitration Rules, however:
1. The party seeking Arbitration shall give written notice of a
Demand to Arbitrate (herein referred to as "Demand") to the other
party and to the Association; the Demand shall include (a) the
issues to be determined, (b) a copy of this arbitration provision
and c) the Association to designate three arbitrators;
2. Within ten (10) days after receipt of the Demand, the other party
shall give (a) written notice (herein referred to as "Response")
to the party that demanded arbitration and to the Association of
any additional issues to be arbitrated. (b) its answer to the
issues raised by the party that sent the Demand and c) its
designation of a second arbitrator.
3. If a Response designating a second arbitrator is not received
within the aforesaid ten day time, the Association shall
designate the second arbitrator forthwith.
4. The two arbitrators as designated pursuant to the foregoing
provisions shall then designate a third arbitrator within ten
(10) days after the designation of the second arbitrator. If the
two arbitrators cannot agree on the designation of the third
arbitrator within the ten day time period allotted, the
Association shall designate the third arbitrator forthwith.
5. The arbitration panel as thus designated shall proceed with the
Arbitration by giving written notice to all parties of its
proceedings and hearings in accordance with the Association's
applicable procedures. The Arbitration shall be conducted in
accordance with the Commercial Arbitration Rules of the
Association except as modified by this Agreement. The arbitrators
shall follow and apply the substantive laws of the State of
Texas, and, at all hearings where evidence is taken, they shall
follow and apply the rules of evidence as then in effect in the
State of Texas. The cost of the Arbitration shall be borne and
paid equally between the parties thereto, but that cost, along
with all other costs and expenses, including attorneys' fees,
shall be subject to award, in whole or in part by the arbitrators
in their discretion to the prevailing party on the various issues
arbitrated.
6. Upon written demand on any party to the Arbitration for the
production of documents reasonably related to the issues being
arbitrated, the party upon which such demand is made shall
forthwith produce, or make available for inspection and copying,
such documents without the necessity of any action by the
arbitrators.
7. The arbitrators shall have the power to grant any and all relief
and remedies, whether at law or in equity, that
<PAGE> 8
the courts in the State of Texas may grant. The decision of the
arbitrators shall be final and may be enforced by any court
having jurisdiction. The parties to this Agreement expressly
consent to the jurisdiction of the Association in Dallas Texas.
M. Miscellaneous
1. Further Assurances: At any time, and from time to time, each
party will execute such additional instruments and take such
action as may be reasonably requested by the other party to carry
out the intent and purposes of this Agreement.
2. Costs' and Expenses: Each party hereto agrees to pay its own
costs and expenses incurred in negotiating this Agreement and
consummating the transactions described herein.
3. Time: Time is of the essence.
4. Entire Agreement: This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter
hereof. It supersedes all prior negotiations, letters and
understandings relating to the subject matter hereof.
5. Amendment: This Agreement may not be amended, supplemented or
modified in whole or in part except by an instrument in writing
signed by the party or parties against whom enforcement of any
such amendment, supplement or modification is sought.
6. Assignment: This Agreement may not be assigned to any party
hereto without prior written consent of the other party.
7. Choice of Law Venue, Jurisdiction: This Agreement will be
interpreted, construed and enforced in accordance with the laws
of the State of Texas. Both parties agree that venue is Dallas,
Texas. Both parties agree to submit to jurisdiction in Texas.
8. Headings: The section and subsection headings in this Agreement
are inserted for convenience only and shall not affect in any way
the meaning or interpretation of this Agreement.
9. Pronouns: All pronouns and any variations thereof shall be deemed
to refer to the masculine, feminine, neuter, singular or plural
as the context may require.
10. Number and Gender: Words used in this Agreement, regardless of
the number and gender specifically used, shall be deemed and
construed to include any other number, singular or plural, and
any other gender, masculine, feminine or neuter, as the context
indicates is appropriate.
11. Construction: The parties hereto participated in the preparation
of this Agreement; therefore, this Agreement shall be construed
neither against nor in favor of any of the parties hereto, but
rather in accordance with the fair meaning thereof.
12. Effect of Waiver: The failure of any party at any time or times
to require performance of any provision of this Agreement will in
no manner affect the right to enforce the same. The waiver by any
party of any breach of any provision of this Agreement will not
be construed to be a waiver by any such party of any succeeding
breach of that provision or a waiver by such party of any breach
of any other provision.
13. Severabilily: The invalidity, illegality or unenforceability of
any provision or provisions of this Agreement will not affect any
other provision of this Agreement, which will remain in full
force and effect, nor will the invalidity, illegality or
unenforceability of a portion of any provision of this Agreement
affect the balance of such provision. In the event that any one
or more of the provisions contained in this Agreement or any
portion
<PAGE> 9
thereof shall for any reason be held to be invalid, illegal or
unenforceable in any respect, this Agreement shall be reformed,
construed and enforced as if such invalid, illegal or
unenforceable provision had never been contained herein.
14. Enforcement: Should it become necessary for any party to
institute legal action to enforce the terms and conditions of
this Agreement, the successful party will be awarded reasonable
attorneys' fees at all trial and appellate levels, expenses and
costs.
15. Binding Nature: This Agreement will be binding upon and will
inure to the benefit of any successor successors of the parties
hereto.
16. No Third-Party Beneficiaries: No person shall be deemed to
possess any third-party beneficiary right pursuant to this
agreement. It is the intent of the parties hereto that no direct
benefit to any third-party is intended or implied by the
execution of this Agreement.
17. Counterparts: This Agreement maybe executed in one or more
counterparts, each of which will be deemed an original and all of
which together will constitute one and the same instrument.
18. Representation: The Company by its Board of Directors
specifically requested Jay R. Stucki to finalize the terms of
this agreement and both parties indemnify and hold harmless Jay
R. Stucki for any claims or disputes that arise under this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
EMPLOYEE:
/s/ Dr. J.W. Stucki
------------------------------
Dr. J.W. Stucki
COMPANY:
/s/ Jay R. Stucki
------------------------------
Jay R. Stucki, CFO
/s/ Mandel Sherman
------------------------------
Mandel Sherman, Director
/s/ Robert DePalo
------------------------------
Robert DePalo, Director
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF AMERICAN HEALTHCHOICE, INC.
<TABLE>
<CAPTION>
SUBSIDIARY CLINIC
---------- ------
<S> <C>
1. AHC Chiropractic Clinics, Inc., a Texas corporation Bandera, Wurzbach, San Pedro & Katy
chiropractic
AHC Physicians Corporation, Inc., a Texas corporation San Pedro & Southcross medical
AHC Physicians Corporation, Inc., a Georgia corporation Peachtree, Conyers & McDonough medical
Total Medical Diagnostics, Inc., a Delaware corporation Inactive
Nationwide Sports and Injury, Inc., a Texas corporation Bandera, Wurzbach, San Pedro & Katy
Physical therapy
United Chiropractic Clinics of Uptown, Inc., a Louisiana corporation Uptown
New Orleans East Chiropractic Clinics, Inc., a Louisiana corporation New Orleans East
AHC Clinic Management, L.L.C., a Texas limited liability company Inactive
AHI Management, Inc., a Texas corporation Corporate office
Diagnostic Services, Inc., a Texas corporation Inactive
Katy Sports Injury and Rehab, Incorporated, a Texas corporation Inactive
Pacific Chiropractic (San Pedro), Incorporated,
d/b/a United Chiropractic Clinic, a Texas corporation Inactive
Apple Chiropractic Clinic of Wurzbach, Incorporated,
a Texas corporation Inactive
Valley Family Health Center, L.L.C., a Texas
limited liability company Valley Family chiropractic
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 169,895
<SECURITIES> 0
<RECEIVABLES> 16,142,617
<ALLOWANCES> (8,354,930)
<INVENTORY> 65,000
<CURRENT-ASSETS> 8,325,269
<PP&E> 2,448,344
<DEPRECIATION> (1,157,767)
<TOTAL-ASSETS> 10,060,302
<CURRENT-LIABILITIES> 2,365,754
<BONDS> 0
0
0
<COMMON> 15,520
<OTHER-SE> 3,153,570
<TOTAL-LIABILITY-AND-EQUITY> 10,060,302
<SALES> 7,226,113
<TOTAL-REVENUES> 7,226,113
<CGS> 0
<TOTAL-COSTS> 10,271,835
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 731,796
<INCOME-PRETAX> (3,777,518)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,777,518)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,777,518)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
