AHI Healthcare suffers some hard knocks: founder expects 1996 to be profitable overall.

Downey-based AHI Healthcare Systems Inc. has undergone a spate of financial problems since it went public four months ago. They include higher than projected losses for the fourth quarter of 1995, litigation, loan covenant violations and a dramatic plunge in its stock price.

Formed in 1986, AHI manages the practices of physicians unable to meet the growing administrative demands of ever-more-powerful health plans. Known in the health care industry as a management services organization, or MSO, AHI also aligns physicians in regional networks, making them more attractive for managed care contracts.

For the nine months ended Sept. 30, AHI had a net loss of $3.1 million, or 17 cents a share, on revenues of $84.3 million. That compares to net income of $883,000, or 7 cents a share, on revenues of $41.7 million a year before.

Leonardo Berezovsky, the Argentinean-born cardiologist who founded AHI; expects the firm to remain in the red at least through the first quarter of the year, although he believes 1996 will be profitable overall.

In a recent telephone interview, Bererzovsky attributed the current problems to the costs associated with expansion. He noted the company maintains a policy of expending surplus cash on the deals, rather than capitalize them, causing the current woes.

Deal delayed

There have also been delays in closing a deal to acquire Lakewood Health Plan, a Lakewood-based medical group. The delay will prevent Lakewood's revenues from being recorded into AHI's books during calendar 1995, affecting its bottom line.

AHI also announced the projected losses will put it in "technical" violation of its cash flow to funded debt ratio covenant on a $2.9 million line of credit. AHI said it currently owes no money on the line.

The announcements shook up the company's stock. AHI shares plunged $7.375 in Dec. 20 Nasdaq trading, to the $6 range. Two days later, shareholders filed suit in federal court, alleging fraud in the company's recent prospectus, relating to its discussion of the Lakewood acquisition.

"The lawsuit is totally without merit," Berezovksy said.

AHI went public only last September, with an offering of 4.2 million shares at $14 a share that netted the company about $46 million, after commissions. Some proceeds will be used to retire debt, while the remainder will finance more expansion.

Expansion strategy

Berezovsky is the largest shareholder, with a 29.8-percent stake worth about $28 million, based on recent trading prices. He has taken a nearly $28 million paper loss the past several weeks.

AHI's recent growth has been fueled almost entirely through acquisitions. In February, its affiliate in the Southwest, AHI Texas Healthcare Systems Inc., acquired The Healthcare Partnership, a 1,000-physician medical group in Houston. In January 1995, it merged with Louisville, Ky.-based Integrated Medical Management Systems, a physician services management firm. In late 1994, it acquired Camino Real Medical Group, a 1,200-physician practice based in the Bay Area suburb of Los Altos.

During 1995, it acquired Private Physicians Medical Group in Palo Alto and West Bay Independent Practice Association in Daly City, Calif. The two transactions added another 290 physicians to AHI's roster. In December 1994, it inked a strategic alliance with Emory University System of Health Care's physician network.

The deal-making has allowed AHI to cobble together a fairly formidable collection of networks. It manages more than 6,000 physicians with 179,000 patients. It is affiliated with more than 100 health plans and 400 hospitals.

AHI operates 28 different medical networks in 11 states. Another 65 networks are under development, according to company literature.

But the swift expansion meant AHI's operating expenses kept pace with or overtook its triple-digit revenue growth. For the first nine months of 1995, medical network operating expenses more than doubled, to $4.7 million from $2.1 million. Network development costs also ballooned, to $6.5 million from $2.7 million. Depreciation and amortization nearly quadrupled, to $1.6 million from $438,000.

Focus on controlled growth

Berezovsky said the company would focus on controlling and streamlining its recent acquisitions, although he also hoped to continue its expansion.

AHI's role is to take over the administrative duties of a physician's practice or a larger medical group, and pay for patient treatment and staff salaries. Profit is retained from the remaining money.

The long-term goal is to arrange the various physicians into a large geographical network, making them more attractive for recruitment by managed care plans.

Berezovsky notes there is a ripe market for MSO development. "Seventy percent of the physicians in this country are in solo or two-doctor practices," he said. "To a very large extent, it is still a mostly unmanaged environment."

MSOs can relieve various burdens on physicians, but as industry observers point out, they can also make it easier for HMOs to swiftly enter a new market by handing them the keys to a pre-packaged regional provider network.

Whether AHI has a long-term future remains to be seen. Industry experts such as consultant Ronald Spoltore and David Vena, chairman of law firm Latham & Watkins health care practice, believe MSOs will be short-lived, an eventual acquisition target of HMOs.