<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 15, 1997
REGISTRATION NO. 333-11957
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BIRMAN MANAGED CARE, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 6749 62-1584092
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION CODE IDENTIFICATION NO.)
NUMBER)
</TABLE>
502 GOULD DRIVE
COOKEVILLE, TENNESSEE 38506
(615) 432-6532
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)
DAVID N. BIRMAN, M.D.
PRESIDENT AND CEO
502 GOULD DRIVE
COOKEVILLE, TENNESSEE 38506
(615) 432-6532; (615) 432-6536 (TELECOPIER)
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
JOHN H. HEUBERGER, ESQ. ROBERT S. KANT, ESQ.
PETER B. ROSS, ESQ. JERE M. FRIEDMAN, ESQ.
RUDNICK & WOLFE O'CONNOR, CAVANAGH, ANDERSON, KILLINGSWORTH & BESHEARS, P.A.
203 NORTH LASALLE STREET, SUITE 1800 ONE EAST CAMELBACK ROAD, SUITE 1100
CHICAGO, ILLINOIS 60601 PHOENIX, ARIZONA 85012
(312) 368-4014 (602) 263-2400
(312) 984-2299 (TELECOPIER) (602) 263-2900 (TELECOPIER)
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the registration statement is declared effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Common stock, par value $.001 per share(2)............................ $11,500,000 $3,484.85
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Representative's Warrants(3).......................................... 100 0
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Common Stock(4)....................................................... $1,200,000 $363.64
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Total......................................................... $12,700,100 $3,848.49(5)
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(1) Estimated solely for purposes of computing the registration fee.
(2) Includes 300,000 shares subject to the Underwriters' over-allotment option.
(3) To be issued to the Representative of the Underwriters.
(4) Issuable upon exercise of the Representative's Warrants.
(5) A registration fee of $10,448.33 was previously filed in connection with
this registration statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 15, 1997
PROSPECTUS
BIRMAN LOGO
2,000,000 SHARES OF COMMON STOCK
All of the 2,000,000 shares of common stock (the "Common Stock") offered
hereby are being sold by Birman Managed Care, Inc. (the "Company"). Prior to
this offering, there has been no public market for the Common Stock and there
can be no assurance that such market will develop. It is currently anticipated
that the initial public offering price of the Common Stock will be $5.00 per
share. Application has been made to have the Common Stock approved for quotation
on the Nasdaq National Market under the symbol "BMAN." See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price.
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 6 AND
"DILUTION."
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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</TABLE>
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<CAPTION>
UNDERWRITING DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
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Per Share............... $ $ $
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Total(3)................ $ $ $
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</TABLE>
(1) Excludes (i) a non-accountable expense allowance to Royce Investment Group,
Inc., the representative of the Underwriters (the "Representative") and
Continental Broker-Dealer Corp. (together with the Representative, the
"Underwriters") equal to 3% of the total Price to Public, or $ per share
(an aggregate of $ , or $ if the over-allotment option is
exercised in full); (ii) a consulting fee equal to 1.5% of the total Price
to Public, or $ per share (an aggregate of $ , or $ if
the over-allotment option is exercised in full) to be paid to the
Representative; and (iii) warrants to purchase 200,000 shares of Common
Stock (the "Representative's Warrants") to be issued to the Representative.
The Company also has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
at $ , including the non-accountable expense allowance.
(3) Certain stockholders of the Company have granted the Underwriters a 45-day
option to purchase up to 300,000 additional shares of Common Stock at the
initial public offering price, solely to cover over-allotments, if any. The
Company will not receive any proceeds from the sale of any shares of Common
Stock pursuant to the over-allotment option. If this option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions, and
Proceeds to Company will be $ , $ , and $ ,
respectively and the total proceeds to the selling stockholders would be
$ . See "Principal Stockholders" and "Underwriting."
The shares of Common Stock are being offered by the Underwriters subject to
prior sale when, as and if delivered to and accepted by the Underwriters, and
subject to their right to reject orders, in whole or in part, and subject to
certain other conditions. It is expected that delivery of the certificates
representing the shares will be made against payment therefor at the offices of
Royce Investment Group, Inc., 199 Crossways Park Drive, Woodbury, New York 11799
on or about February , 1997.
ROYCE INVESTMENT GROUP, INC. CONTINENTAL BROKER-DEALER CORP.
The date of this Prospectus is , 1997
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited and reported upon by its independent
certified public accountants after the end of each fiscal year, and quarterly
reports for the first three fiscal quarters of each year containing unaudited
summary consolidated financial information.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, all information in this Prospectus assumes that (i) neither the
over-allotment option granted to the Underwriters nor the Representative's
Warrants will be exercised, and (ii) no other currently outstanding warrants or
options will be exercised.
THE COMPANY
The Company is a health care consulting and management company dedicated to
improving the quality, controlling the cost, and enhancing the efficiency of the
management and delivery of health care services by focusing on the physician as
the most important factor in the health care system. In pursuing these goals,
the Company currently provides its proprietary "Quality Management Program" to
hospitals to educate their medical staffs on patient management. As an expansion
of its business, the Company is developing and will operate various managed care
health programs ("health plans") in association with physician networks,
hospitals, and other health care providers based upon its belief that it can
apply its Quality Management Program experience to improve the management and
delivery of health care services in managed care systems. As part of its health
plan business, the Company will organize physicians into independent practice
associations, or networks, that will provide services to the Company's health
plans as well as independent health plans. In addition, the Company intends to
provide management services to its health plans as well as to independent health
plans. The Company concentrates its efforts on rural communities, particularly
in the south-central, southeast, and central United States, with an initial
focus for its health plans on Mississippi and Tennessee, where the development
of managed care programs has lagged behind other areas of the country.
Under its Quality Management Program, physicians employed by the Company
consult directly with attending physicians at hospitals regarding their overall
patient management program, as systematized in the medical record. The Quality
Management Program is designed to (i) improve patient care by encouraging the
use of the Company's proprietary methodology to assist physicians in the
identification of symptoms and conditions, to determine appropriate treatment,
and to prioritize the goals and objectives of the treatment plan, (ii) reduce
the cost to its hospital-clients of patient care as a result of the early
intervention in identified health problems, and (iii) more accurately describe
in the medical record the severity and complexity of the patient's illness and
the resources utilized to treat the patient. The benefits of the Quality
Management Program typically result in increased Medicare reimbursements for the
Company's hospital-clients.
To leverage the expertise and professional relationships it has gained from
providing its Quality Management Program and to capitalize on the evolution from
traditional fee-for-service to capitated systems in rural communities, the
Company currently is developing and will operate a variety of community-based,
physician-driven, comprehensive health plans. The Company's health plans are
being designed to provide high-quality and cost-efficient health care by
aligning the interests of physicians and their patients by involving selected
community physicians in the development and implementation of treatment
standards, by including selected leaders in the physician community as owners of
the local health plans, and by providing participating physicians with the
opportunity to share in savings realized from their own practice management
through the return of a portion of risk pools established to protect against
cost overruns.
The Company's strategy is to be an important provider of health care
consulting services and health plans. Key aspects of this strategy include (a)
concentrating the Company's Quality Management Program and health plan
operations in predominately rural areas in order to take advantage of the lack
of market penetration, the relative lack of competition, and the local
reputation and relationships it has developed; (b) focusing on the role of the
physician as the most important factor in the delivery of health care services
through co-ownership of the Company's health plans with physicians who provide
services to those health plans and through local physician participation in
developing and implementing treatment standards for their communities; (c)
increasing the number of clients for its Quality Management Program by offering
new services and expanding its marketing efforts in its existing market area and
by introducing its services into new market areas; and (d) applying the
experience it has gained through its Quality Management Program to the
development and operation of health plans.
3
<PAGE> 5
THE OFFERING
Common Stock offered by the
Company............................. 2,000,000 shares
Common Stock outstanding prior to
this offering....................... 6,931,082(1)
Common Stock to be outstanding after
this offering....................... 8,754,082 shares(1)(2)
Use of proceeds..................... The Company intends to apply the net
proceeds of this offering to develop,
establish, and expand its health plans
($2,500,000); establish reserves in
furtherance of its health plans
($3,000,000); complete an acquisition
($1,000,000); expand its Quality
Management Program ($500,000); and
provide working capital for general
corporate purposes ($1,190,000). See
"Use of Proceeds."(3)
Proposed Nasdaq National Market
Symbol.............................. BMAN
Risk Factors and Dilution........... A purchase of shares of Common Stock
involves a high degree of risk and
immediate and substantial dilution to
the purchasers in this offering. See
"Risk Factors" and "Dilution."
- ---------------
(1) Does not include (a) 1,018,566 shares of Common Stock reserved for issuance
upon the exercise of outstanding stock options, or (b) 57,805 shares of
Common Stock reserved for issuance upon the exercise of outstanding
warrants. The outstanding stock options vest over a three-year period. The
outstanding options and warrants first become exercisable in January 1997.
See "Management -- Stock Option Plans" and "Description of
Securities -- Warrants."
(2) Upon completion of this offering, David M. Birman, M.D., Chairman of the
Board, President, and Chief Executive Officer of the Company, will tender to
the Company approximately 177,000 shares of Common Stock as payment in full
of his note payable to the Company of $775,000, plus accrued interest. See
"Certain Transactions." In connection with this offering, Dr. Birman also
has deposited 1,000,000 shares of Common Stock into escrow (the "Escrow
Shares"). The Escrow Shares are included in the number of shares of Common
Stock to be outstanding after this offering. The Escrow Shares are subject
to cancellation and will be contributed to the capital of the Company if the
Company does not attain certain earnings levels. If such earnings levels are
met, the Company will record a substantial non-cash charge to operations,
for financial reporting purposes, as compensation expense relating to the
value of the Escrow Shares released to Dr. Birman. See "Risk
Factors -- Charge to Earnings in the Event of Release of Escrow Shares" and
"Principal Stockholders -- Escrow Shares."
(3) At an assumed offering price of $5.00 per share of Common Stock, the net
proceeds to the Company from this offering are expected to be approximately
$8.2 million. The Company will not receive any proceeds from the sale of any
shares of Common Stock sold pursuant to the exercise of the Underwriters'
over-allotment option. See "Principal Stockholders" and "Underwriting."
---------------------
Unless the context otherwise requires, the term "Company" refers to Birman
Managed Care, Inc., a Delaware corporation, and its subsidiaries, including
Birman & Associates, Inc., BMC Health Plans, Inc., and Hughes & Associates, Inc.
The address of the Company is 502 Gould Drive, Cookeville, Tennessee 38506, and
its telephone number is (615) 432-6532. Except as otherwise indicated, the
information in this Prospectus has been adjusted to give effect to the change of
the state of incorporation of the Company from Tennessee to Delaware on
September 9, 1996 by means of a merger in which the shareholders of the
predecessor Tennessee corporation received 72.939 shares of the Company's Common
Stock for each 100 shares of common stock of the Tennessee corporation then
outstanding.
4
<PAGE> 6
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
HISTORICAL
----------------------
HISTORICAL
FISCAL YEAR ENDED PRO FORMA(3) ------------------------- PRO FORMA(3)
JUNE 30, ------------- -------------
---------------------- 12 MONTHS THREE MONTHS ENDED THREE MONTHS
1995 1996 ENDED SEPTEMBER 30, ENDED
--------- --------- JUNE 30, ------------------------- SEPTEMBER 30,
1996 1995 1996 1996
------------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS:
Revenue........................ $ 4,818 $ 8,417 $ 8,417 $ 1,417 $ 2,372 $ 2,372
Costs and expenses:
Cost of revenue.............. 2,381 2,279 2,279 431 889 889
Selling, general and
administrative............. 3,114 4,237 4,309 926 1,169 1,182
--------- --------- --------- --------- --------- ---------
Income (loss) from
operations................. (677) 1,901 1,829 60 314 301
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations................... (483) 1,172 1,130 35 241 244
--------- --------- --------- --------- --------- ---------
Net income (loss).............. $ (699) $ 1,172 $ 1,130 $ 35 $ 241 $ 244
========= ========= ========= ========= ========= =========
Net income (loss) per share:(2)
-- primary................... $ (.10) $ .17 $ .13 $ .01 $ .04 $ .03
========= ========= ========= ========= ========= =========
-- fully diluted............. $ (.10) $ .15 $ .12 $ .00 $ .03 $ .03
========= ========= ========= ========= ========= =========
Weighted average common shares
outstanding:
-- primary................... 6,703,517 6,703,517 8,526,517 6,703,517 6,703,517 8,526,517
========= ========= ========= ========= ========= =========
-- fully diluted............. 6,703,517 7,703,517 9,526,517 7,703,517 7,703,517 9,526,517
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------
ACTUAL PRO FORMA(1) PRO FORMA,
---------- ------------ AS ADJUSTED(3)
(UNAUDITED) --------------
(UNAUDITED)
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CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................... $1,762,684 $ 866,771 $ 9,532,731
Total assets.............................................. $4,341,661 $5,388,490 $ 12,803,490
Total liabilities......................................... $ 911,491 $1,958,320 $ 1,958,320
Stockholders' equity...................................... $3,430,170 $3,430,170 $ 10,845,170
</TABLE>
- ---------------
(1) Gives effect on a pro forma basis to the pending acquisition of the capital
stock of Canton Management Group, Inc. ("Canton"), as to which the Company
had entered into a definitive acquisition agreement. The pro forma combined
statement of operations data and consolidated balance sheet data for the
year ended June 30, 1996, and the three month period ended September 30,
1996 do not purport to represent what the Company's results of operations or
consolidated balance sheet data would have been if such acquisition had been
consummated on the first day of the respective periods. Although the Company
anticipates that the acquisition will close prior to the end of January
1997, there can be no assurance that such transaction will close by such
time, or at all. See "Unaudited Pro Forma Financial Information."
(2) Earnings per share is based on the average number of shares of common stock
and common stock equivalents outstanding during the year. Shares of common
stock to be placed in escrow upon completion of this offering, which are
common stock equivalents, have been included in the calculation of fully
diluted earnings per share. Shares of common stock issued at amounts
substantially below the initial public offering price within the one-year
period prior to the initial filing of the registration statement relating to
this offering are considered outstanding for all periods presented. The pro
forma average number of shares of common stock and common stock equivalents
outstanding include the shares issuable upon the completion of this
offering, less 177,000 shares to be tendered by Dr. Birman in payment of a
note payable to the Company of $775,000, plus accrued interest. See
"Principal Stockholders -- Escrow Shares," "Certain Transactions" and Note
16 of the Notes to Consolidated Financial Statements.
(3) Gives effect on a pro forma, as adjusted basis to (a) the acquisition of
Canton, and (b) the sale by the Company of the Common Stock offered hereby
at an assumed initial public offering price of $5.00 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
5
<PAGE> 7
RISK FACTORS
The purchase of shares of Common Stock involves a high degree of risk. In
addition to the other information contained in this Prospectus, prospective
purchasers should consider carefully the factors listed below in evaluating a
purchase of shares of Common Stock.
EXPANSION INTO NEW BUSINESS
Since it began its business in 1991, the Company has derived substantially
all of its revenue from its Quality Management Program activities. The Company's
health plan business is in the start-up stage. There can be no assurance that
the Company will be successful in introducing its health plans or that the
health plans will achieve or maintain profitability in the future. Thus,
historic operating results may not be indicative of future operating results.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Growth Strategy."
GROWTH STRATEGY AND LIMITATIONS ON GROWTH
The Company's growth strategy involves the development and operation of
health plans, primarily in rural communities. The success of these health plans
will depend upon the Company's ability to obtain and maintain necessary state
licenses, organize physician networks, secure employers as subscribers to the
health plans, secure Medicare and Medicaid contracts for its health plans,
secure adequate numbers of enrollees to make its health plans economically
viable, and manage the health plans. Identifying and recruiting candidates to be
participating providers and obtaining the necessary licenses to offer and
operate health plans can be a lengthy, complex, and costly process. Although the
Company believes that its reputation and relationships with hospitals and
physicians in market areas in which it intends to establish health plans will
enable it to organize physician networks and enlist other providers for its
health plans, there can be no assurance that the Company will be able to do so,
that the Company will be able to obtain necessary licenses, or that the Company
will be able to operate profitably any health plan.
The Company has recently experienced rapid growth in its Quality Management
Program business. The continued rapid growth of that business may impair the
Company's ability to provide effectively its consulting services, particularly
if the Company is unable to recruit and train an adequate number of qualified
physicians and allied health specialists and adequately manage and supervise its
staff of physicians and allied health specialists. In addition, there can be no
assurance that the Company will manage its expanding operations effectively or
that it will be able to achieve its planned growth. See "Business -- Growth
Strategy."
POTENTIAL FLUCTUATION IN OPERATIONS AND OPERATING RESULTS
The Company's operating results could vary from period to period as a
result of seasonality in discharges of Medicare patients by Quality Management
Program hospital-clients, fluctuations in severity of illness, changes in the
Medicare prospective payment system, the expiration of contracts to provide
Quality Management Program services coupled with a failure to replace such
contracts with comparable engagements, underperforming contract engagements, and
changes in governmental regulations. The Company's operating results will also
vary from period to period as a result of the development, marketing, start-up,
and management of its health plan business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RISK OF MEDICARE AUDITS ON QUALITY MANAGEMENT PROGRAM BUSINESS
Hospitals and physicians providing services under Medicare are subject to
regulatory responsibilities imposed by the Health Care Financing Administration
("HCFA"). Peer Review Organizations ("PROs") engaged by HCFA in each state
routinely review and audit reimbursement requests, including patient admissions,
quality of care, and appropriateness of diagnostic-related group ("DRG")
selections, among other things. The depth of review varies from hospital to
hospital. There is always a risk that PRO attention may focus with increased
scrutiny on reimbursement requests submitted by hospital-clients of the Company
that achieve increased reimbursements as a result of the Quality Management
Program. In addition, HCFA
6
<PAGE> 8
investigates allegations of fraud and abuse of Medicare and Medicaid and has
instituted a multi-state program called "Operation Restore Trust" to punish
persons engaged in fraud and abuse of Medicare and Medicaid, recover funds,
identify areas of vulnerability, and prevent fraud. Among the areas of
investigatory interest to HCFA are billing code fraud, billing schemes, and
kickbacks involving providers. Historically, the Quality Management Program has
not been the cause of a focused review or audit by a PRO or a formal
investigation by HCFA. However, there can be no assurance that focused reviews,
audits, or investigations will not occur in the future. A denial of
reimbursement requests submitted by a hospital-client as a result of the
implementation of the Quality Management Program may result in the Company being
required to reimburse all or a portion of its fees to the hospital-client, could
result in one or more hospital-clients seeking to withdraw from their contracts,
and could result in a formal investigation by HCFA. Such events could have a
material adverse effect on the Company.
PRINCIPAL CLIENTS
The Company has provided Quality Management Program services to various
hospitals operated by Quorum Health Care, Inc. ("Quorum") since 1991. Services
to hospitals operated by Quorum produced approximately 42% of the Company's
Quality Management Program revenue in fiscal 1996 and approximately 25% of the
Company's revenue for the first quarter of fiscal 1997. Historically, the
on-site management of each Quorum hospital has made its own decision regarding
the engagement of the Company, and the Company has entered into a separate
contract with each engaging Quorum facility. The Company is endeavoring to
expand its Quality Management Program client base to reduce its dependence on
Quorum hospitals.
NEED TO PREDICT AND CONTROL HEALTH CARE COSTS
The profitability of the Company's health plans will depend in large part
upon the ability of the Company to predict health care costs accurately and to
control those costs through the negotiation of favorable provider contracts and
the imposition of utilization management, case management, and quality assurance
programs. The demographic characteristics in the rural communities to be served
by the Company's health plans may contribute to health care costs that exceed
Company projections or increase more rapidly than anticipated. In this regard,
persons in the rural communities to be served by the Company's health plans may,
among other things, be older and have lower incomes than persons in other areas
of the country. Changes in health care practices, inflation, new technologies,
major epidemics, diseases and catastrophes, clusters of high-cost cases, and
numerous other factors affecting the delivery and costs of health care cannot be
predicted or controlled and may adversely affect the Company's ability to
predict and control health care costs and claims. In addition, there can be no
assurance that provider agreements negotiated in the future will not result in
substantially higher costs to the Company that cannot be passed through to
payors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
RISK OF LIMITED HEALTH PLANS
The Company intends to offer prospective payors three health plan
alternatives: a health maintenance organization ("HMO"), a preferred provider
organization ("PPO"), and a point-of-service option. Initially, it will offer
only HMOs to commercial and perhaps Medicaid enrollees. Because PPOs and the
point-of-service option require the additional component of indemnity insurance,
the availability of the PPOs and point-of-service option will require separate
licensure of an insurance company and agent and is not expected to be available
to payors and/or enrollees for at least six months following the launch of each
HMO plan. National Benefits Resources, Inc. ("NBR"), a managing general
underwriter of indemnity insurance products and a stockholder in the Company, is
assisting the Company in arranging the necessary insurance licenses. However,
there can be no assurance that the Company will be able to offer a PPO or a
point-of-service option at the time or times that it desires to do so or that
any of the Company's health plans that are launched will be successful in
offering its intended spectrum of plans.
7
<PAGE> 9
HEALTH CARE REFORM
As a result of the escalation of health care costs and the inability of
many individuals and employers to obtain affordable health insurance, numerous
health care reform proposals have been, and may continue to be, introduced in
the United States Congress and state legislatures. Among the proposals under
consideration are price controls on hospitals, insurance market reforms to
increase the availability of group health insurance to small businesses,
requirements that all businesses offer health care coverage to their employees,
the creation of a government health insurance plan or plans that would cover all
citizens, mandated health plan benefits, mandated provider payment arrangements,
and other proposals involving various aspects of health plan operations. There
can be no assurance which, if any, of these proposals will be adopted or the
effect on the Company of any such proposals that are adopted. See
"Business -- Government Regulation."
GOVERNMENT REGULATION
The Company, its Quality Management Program hospital-clients, the health
plans to be organized by the Company, and health insurance companies are subject
to substantial regulation at both the federal and state levels. The Company is
subject to a number of laws governing issues as diverse as relationships between
health care providers and their referral sources, prohibitions against providers
referring patients to an entity with which the provider has a financial
relationship, licensure and other regulatory approvals, the corporate practice
of medicine, and regulation of unprofessional conduct by providers, including
fee-splitting arrangements. Although the Company believes that its current
operations comply, and its proposed operations will comply, with relevant
federal and state laws, many aspects of the relationships between the Company
and its hospital-clients and the Company's health plans have not been the
subject of judicial or administrative interpretation. An adverse review or
determination by any court or applicable administrative agency or changes in the
regulatory requirements could have a material adverse effect on the operations
and financial condition of the Company.
Regulatory matters affecting HMOs and health insurance companies in
particular include regulations relating to cash reserves, minimum net worth,
licensing requirements, approval of policy language and benefits, mandatory
products and benefits, provider compensation arrangements, premium rates, and
periodic examinations by federal and state agencies. The Company will be subject
to state insurance laws if and to the extent it assumes the risk for the
provision of health services. In addition, the Company is subject to federal and
state antitrust laws, which prohibit the Company from engaging in
anticompetitive activities, such as monopolization and price fixing. State
regulations may also restrict the ability of Company HMOs to distribute funds to
the Company. Changes also could be made in Medicare and Medicaid reimbursement
rates. Many states have adopted, or are considering, regulations relating to
mandatory benefits, provider compensation, "any willing provider" provisions,
and the composition of physician networks. Changes in federal and state laws
could increase health care costs and administrative expenses. There can be no
assurance that any future regulatory action by governmental agencies will not
have an adverse impact on the profitability or marketability of the Company's
health plans in their respective jurisdictions. See "Business -- Government
Regulation."
DEPENDENCE UPON REIMBURSEMENT BY THIRD-PARTY PAYORS
Clients for the Company's Quality Management Program derive, and the
Company through its health plans will derive, substantial revenue from
third-party payors. The health care industry is undergoing cost-containment
pressures as third-party payors seek to impose lower reimbursement and
utilization rates and to negotiate reduced rate payments with medical service
providers. The Company believes that this trend will continue. Reductions in
payments to hospitals or other changes in reimbursements for health care
services could have a direct or indirect material adverse effect on the Company.
SUBSTANTIAL COMPETITION
The Company's Quality Management Program competes for hospitals as clients
in the revenue optimization sector of the health care consulting business. The
Company's health plans will compete in the
8
<PAGE> 10
managed care and insurance sectors of the health care industry. Both sectors are
highly competitive. Within each sector, there are a large number of competitors,
many of which have substantially greater financial, technical, marketing, and
management resources than the Company. Although the Company believes the
acceptance of its Quality Management Program and its familiarity with and
reputation in rural areas will enable it to compete successfully, there can be
no assurance that the Company will be able to compete effectively against
existing competitors or that additional competitors will not enter the rural
markets the Company plans to serve. See "Business -- Competition."
RISKS ASSOCIATED WITH HEALTH PLAN CONTRACTS; CAPITATED FEE REVENUE
The Company's success will depend, in part, upon its ability to develop and
market its point-of-service options that offer enrollees the right to select
providers at the time services are sought from the HMO or the PPO or from
outside the system. The Company will offer its HMOs to payors on a prepaid
basis, pursuant to which the HMO will accept a capitated or prepaid per member
per month fee for providing all necessary covered services to a payor's
enrollees. Comparable per member per month capitated fees are then paid by an
HMO to the participating providers. HMO contracts shift much of the financial
risk of providing health care from the payor to the provider. The proliferation
of HMO elections by enrollees could result in greater predictability of Company
revenue and related expenses, while increased elections for PPO and point of
service options by enrollees could result in greater unpredictability of
expenses if enrollees that do not select the HMO option require more frequent or
extensive care than anticipated. As a result, the Company may incur additional
costs that would reduce or eliminate any earnings under its contracts. The
Company intends to reinsure catastrophic and excess risks. There can be no
assurance that the Company will be able to negotiate satisfactory contracts with
payors or with health care providers or obtain or maintain catastrophic
reinsurance.
LIABILITY AND INSURANCE
The physicians and allied health specialists employed by the Company in its
Quality Management Program do not treat patients, make any treatment or
diagnostic decisions, or provide any medical services. Although the Company
believes that the Quality Management Program activities of its physicians do not
constitute the practice of medicine or establish physician-patient relationships
for which the Company could incur liability, the Company may be exposed to the
risk that professional liability claims could be brought against the Company by
third parties.
In its health plan business, the Company will provide only non-medical
services. It will not control or direct the practice of medicine by the
physicians or the compliance with certain regulatory and other requirements
directly applicable to physicians or physician groups. However, Company-managed
networks may become subject to claims, suits, or complaints relating to services
and products provided by the physicians in the network, and there can be no
assurance that such claims will not be asserted against the Company.
Although the Company maintains, and expects to continue to maintain,
insurance coverage for professional liability claims, such insurance, by its
nature, is limited in the scope of coverage and amount. Each of the Company's
health plans will maintain, and the Company will require each physician
participating in the Company's health plans to maintain, comprehensive
professional liability insurance. There can be no assurance that any claims
asserted against the Company will not be successful or, if successful, will not
exceed the limits of any insurance coverage maintained by or for the benefit of
the Company. Furthermore, there can be no assurance that insurance coverage will
continue to be available at acceptable rates. See "Business -- Potential
Liability and Insurance."
New forms of health care organizations have increasingly been subject to
liability for reasons such as failing to credential providers properly or
contributing to physician malpractice. In response, many health care
organizations obtain general liability, managed care, and professional liability
insurance coverage. In addition, medical directors have also faced professional
liability claims and state licensure challenges. The Health Care Quality
Improvement Act of 1986, however, provides immunity from damages for
professional review actions taken by professional review bodies, including
health plans, in good faith, provided that certain procedural
9
<PAGE> 11
standards are met. The Company intends to comply with such procedures in its
professional review actions. However, no assurance can be given that the Company
will satisfy the indemnity requirements or that any insurance coverage the
Company obtains will be adequate to protect against all claims that may be
asserted against the Company.
Like HMOs and health insurers generally, the Company intends to exclude
certain health care services from coverage under its health plans. In the
ordinary course of its health plan business, the Company will be subject to
claims by its enrollees arising out of decisions made by its health plans to
restrict treatment or to restrict reimbursements for certain services. The loss
of any such claim, resulting in a significant punitive or other damage award or
a directive that the Company significantly change its operations, could have a
material adverse effect on the Company. In addition, the risk of potential
liability under punitive damage theories may increase significantly the
difficulty of obtaining reasonable settlements of coverage claims. There can be
no assurance that successful claims of enrollees will not have a material
adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company depends to a significant extent on the efforts and skills of
its key personnel, particularly David N. Birman, M.D. and D. Bradley Seitzinger,
M.D., with respect to its Quality Management Program business and Vincent W.
Wong and Mark C. Wade with respect to its health plan business. The Company has
entered into employment agreements with all four of these key employees. The
loss, incapacity, or unavailability of any of these individuals could adversely
affect the Company's operations. In addition, it may be necessary for the
Company to attract and retain additional individuals to support the growth of
its business or to replace key personnel in the event of the termination of
their employment with the Company. The Company intends to acquire a $1,000,000
key man insurance policy on the life of Dr. Birman. See
"Management -- Employment Agreements."
FUTURE CAPITAL NEEDS
Implementing the Company's growth strategy will require substantial
additional capital for the development of its health plans and for the marketing
and expansion of its Quality Management Program. To date, the Company has
financed its growth primarily through operating income, a bank term loan, and
the proceeds of private offerings of shares of Common Stock, the most recent
offering being completed in June 1996. The Company believes that its existing
cash resources, together with the net proceeds from this offering, cash flow
from operations, and available lines of credit will be sufficient to meet the
Company's working capital and expansion needs for at least the next 12 months.
Since the rate of expansion of the Company's business will depend on the
availability of capital, the Company may be required to raise additional capital
in the future. The Company may obtain such capital through additional borrowings
or the issuance of additional equity or debt securities, either of which could
have an adverse effect on the value of the shares of Common Stock offered by
this Prospectus. There can be no assurance that the Company will be able to
secure such financing, if necessary, on favorable terms. If the Company is
unable to secure additional financing in the future, its ability to pursue its
growth strategy may be delayed, perhaps indefinitely, and its results of
operations for future periods could be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
VOTING CONTROL
Upon completion of this offering, David N. Birman, M.D., the Chairman of
the Board, President, and Chief Executive Officer of the Company, will have sole
beneficial ownership, together with his wife, Sue D. Birman, Executive Vice
President and a director of the Company, of approximately 56.02% (including the
Escrow Shares and assuming the tender of approximately 177,000 shares of Common
Stock by Dr. Birman in repayment of outstanding indebtedness to the Company) of
the outstanding shares of the Common Stock of the Company (approximately %
if the over-allotment option granted to the Underwriters is exercised).
Consequently, absent a further issuance of shares of Common Stock, Dr. Birman
will continue to be able to
10
<PAGE> 12
control the election of the Board of Directors of the Company and thereby
determine the Company's policies and the outcome of corporate actions requiring
stockholder approval.
CHARGE TO EARNINGS IN THE EVENT OF RELEASE OF ESCROW SHARES
Following completion of this offering, the Company will have outstanding
1,000,000 Escrow Shares. The Escrow Shares will be released from escrow if the
Company attains certain earnings levels over the next one to three years. The
Escrow Shares will not be deemed to be outstanding for the purpose of
calculating primary earnings per share until the Company determines that it is
probable that such conditions will be met. In the event that the Company
releases any shares from escrow to Dr. Birman, an officer and director of the
Company, the Company will be required to record a non-cash compensation expense
for financial reporting purposes. In the event of the release of the Escrow
Shares, the Company will recognize a substantial non-cash charge to operations,
equal to the then fair value of such shares, during the period in which the
earnings thresholds are probable of being met, which would have the effect of
significantly reducing or eliminating earnings, if any, at such time. In
addition, the non-cash compensation expense will not be deductible for income
tax purposes. The recognition of such compensation expense may have a depressive
effect on the market price of the Company's securities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Principal Stockholders -- Escrow Shares." There can be no assurance that the
Company's earnings will attain the targets that would enable the Company to
release the Escrow Shares.
ABSENCE OF DIVIDENDS
The Company has paid no cash dividends on its Common Stock since its
inception and does not anticipate paying cash dividends on its Common Stock in
the foreseeable future. Any future dividends will depend on the earnings, if
any, of the Company, its financial requirements, and other factors. See
"Dividend Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of Common Stock offered hereby will experience immediate and
substantial dilution of the pro forma net tangible book value of the shares of
Common Stock in the amount of $3.77 per share, assuming an initial public
offering price of $5.00 per share of Common Stock. In the event that the
Representative's Warrants or other warrants or options to purchase Common Stock
are exercised, or in the event that the Company issues additional shares of
Common Stock in the future, including shares that may be issued in connection
with future acquisitions, purchasers of Common Stock in this offering may
experience further dilution in the pro forma net tangible book value per share
of Common Stock. See "Dilution."
NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF MARKET PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market will develop
or continue after this offering. If an active public market for the Common Stock
does not develop or is not sustained, it will be more difficult for an investor
desiring to liquidate his, her or its investment in the Common Stock to do so in
an orderly fashion and could result in a decline in the market price for the
Common Stock, perhaps below the price paid by the investor for such Common
Stock. The initial public offering price of the Common Stock offered hereby was
determined by negotiations between the Company and the Representative and may
not be indicative of the market price for the Common Stock after this offering.
See "Underwriting" for factors considered in determining the initial public
offering price. From time-to-time after this offering, there may be significant
volatility in the market price for the Common Stock. Quarterly operating results
of the Company, the timing of the launch of health plans, changes in general
conditions in the economy or the health care industry, legislative and
regulatory actions, or other developments affecting the Company or its
competitors could cause the market price of the Common Stock to fluctuate
substantially. On occasion, the equity markets have experienced significant
price and volume fluctuations that have affected the market prices for many
companies' securities, at times for reasons unrelated to the operating
performance of those companies. Concern about the potential effects of health
care reform measures has contributed to the volatility of stock prices of
companies in health care and
11
<PAGE> 13
related industries and may similarly affect the price of the Common Stock
following this offering. Any such fluctuations that occur following this
offering may adversely affect the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of Common Stock after this
offering, or the perception that such a sale could occur, could adversely affect
prevailing market prices for the Common Stock. In addition, any such sales or
perception of such sales could make it more difficult for the Company to sell
equity securities or equity-related securities in the future at a time and price
that the Company deems appropriate. After giving effect to the sale of the
Common Stock offered hereby and the tender of shares of Common Stock in
repayment of a note payable to the Company, the Company will have 8,754,082
shares of Common Stock outstanding, including the 2,000,000 shares offered
hereby and the Escrow Shares. The 2,000,000 shares offered hereby will be freely
tradeable without restriction or registration under the Securities Act of 1933,
as amended (the "Securities Act"). The remaining 6,754,082 shares are
"restricted securities" within the meaning of Rule 144 ("Rule 144") adopted
under the Securities Act. The restricted shares may be sold in the future in
compliance with Rule 144. Rule 144 generally provides that beneficial owners of
Common Stock who have held such common stock for two years may sell, within any
three-month period, a number of shares not exceeding the greater of 1% of the
total outstanding shares or the average weekly trading volume of the shares
during the four calendar weeks preceding such sale. The Company has agreed not
to sell any shares of its Common Stock, and its directors and officers have
agreed not to offer, sell, or otherwise dispose of any shares that they
currently own or that they may subsequently acquire upon exercise of options or
warrants for a period of 24 months after the date of this Prospectus, except as
otherwise permitted by the Representative. Substantially all of the Company's
other stockholders have agreed not to sell any shares of Common Stock that they
currently own or that they may subsequently acquire upon exercise of options or
warrants for a period of 22 months after the date of this Prospectus. The
Representative may consider permitting a sale of shares subject to so-called
"lock-up" agreements in private transactions, if the Representative reasonably
determines that the sale of such shares would not result in a material adverse
effect to the value of the securities.
The Securities and Exchange Commission (the "Commission") has proposed
reducing the initial Rule 144 holding period to one year. It is unclear whether
or when such rule change will be enacted. If enacted, such modification will
reduce the time when certain shares of the Common Stock become eligible for
resale, although such shares will continue to be subject to the lock-up
agreements described above.
STOCK ISSUABLE PURSUANT TO REPRESENTATIVE'S WARRANTS, OPTIONS, AND OTHER
WARRANTS
The Company has agreed to issue to the Representative the Representative's
Warrants to purchase 200,000 shares of Common Stock. The holders of the
Representative's Warrants will have the right to require the Company to register
the Representative's Warrants or the shares of Common Stock issuable upon
exercise of the Representative's Warrants under the Securities Act. The
Representative's Warrants will be exercisable at a price equal to 120% of the
initial public offering price of the Common Stock during the four-year period
commencing one year after the date of this Prospectus. The Company has also
reserved 1,558,780 shares of Common Stock for issuance under the Company's stock
option plans (the "Stock Option Plans") and 57,805 shares of Common Stock for
issuance under warrants previously issued by the Company. The exercise price of
the previously granted options is $1.37 per share ($6.25 per share for options
granted to non-employee directors) and the weighted average exercise price of
the previously issued warrants is $1.39 per share. With the exception of one
option that is vested as to 20,058 shares, the previously granted options may be
exercised beginning February 1, 1997. The previously issued warrants are
exercisable at any time on or after January 1, 1997 and before December 31,
2001.
The holders of the Representative's Warrants, options granted or that may
be granted under the Company's Stock Option Plans, and outstanding warrants may
profit from a rise in the market price of the Common Stock. The existence of the
Representative's Warrants, options, and warrants may adversely affect the terms
on which the Company may obtain additional equity financing. Moreover, such
holders are likely to exercise their rights at a time when the Company would
otherwise be able to obtain capital on terms more favorable than could be
obtained through the exercise of such warrants and options.
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<PAGE> 14
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and of the
Delaware General Corporation Law (the "Delaware GCL") could, together or
separately, discourage potential acquisition proposals, delay or prevent a
change in control of the Company, and limit the price that certain investors
might be willing to pay in the future for shares of Common Stock. Certain of
these provisions (i) permit the issuance, without further stockholder approval,
of preferred stock with rights and privileges that could be senior to the Common
Stock, and (ii) require a super-majority vote requirement in connection with the
adoption of certain corporate transactions not unanimously recommended to the
stockholders by the Board of Directors, including merger, sale of assets, and
securities acquisition transactions. Following this offering, the Company will
also be subject to Section 203 of the Delaware GCL which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any "interested stockholder" for a period of
three years following the date that such stockholder became an interested
stockholder. See "Description of Securities." Because any person interested in
acquiring the Company or its business could be obligated to do so in a
transaction negotiated with management of the Company, the prospects of a
disposition of the Company through an auction process are reduced, thereby
reducing the potential that a significant premium over the market value of
shares of Common Stock would occur. However, because the directors of the
Company owe a fiduciary duty to the stockholders, if a decision to sell the
Company is made the directors could have an obligation to maximize the price
paid for the Company or the shares of its Common Stock.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information contained under "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business" concerning future, proposed, and intended activities
of the Company and the health care industry, and other statements contained
herein regarding matters that are not historical facts are forward-looking
statements (as such term is defined in the Securities Act). Forward-looking
statements, by their very nature, include risks and uncertainties. Accordingly,
actual results may differ, perhaps materially, from those expressed in or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include those discussed under "Risk Factors."
13
<PAGE> 15
THE COMPANY
The Company was incorporated in 1994 in Tennessee under the name BA Forum,
Inc. Its name was changed to Birman Managed Care, Inc. in October 1995. The
Company was reincorporated in Delaware in September 1996. The Company serves as
the holding company for Birman & Associates, Inc. and BMC Health Plans, Inc.
Birman & Associates, Inc. has been engaged in the business of providing the
Quality Management Program since 1991. As of June 30, 1995, Birman & Associates,
Inc. distributed all of the shares of capital stock of Birman Farms, Inc., a
livestock breeding operation, as a dividend to its then sole shareholder, David
N. Birman, M.D. In July 1995, Dr. Birman contributed all of the outstanding
common stock of Birman & Associates, Inc. to the Company. BMC Health Plans, Inc.
was formed in November 1994 to pursue the development of the Company's health
plan business with Dr. Birman as its sole shareholder. In January 1995, Dr.
Birman contributed all of the outstanding common stock of BMC Health Plans, Inc.
to the Company.
In furtherance of its health plan business, in June 1996 the Company
acquired substantially all of the assets of Hughes & Associates, Inc.
("Hughes"), a Jackson, Mississippi-based provider of utilization review services
to insurance companies and health care plans.
On September 6, 1996, the Company entered into a definitive agreement to
acquire substantially all of the issued and outstanding shares of capital stock
of Canton, an inactive holder of a certificate of authority to operate a HMO in
Mississippi. Upon closing of the acquisition, Canton will be renamed Care3, Inc.
and will become a partially owned subsidiary of the Company. Other persons,
particularly certain of the founders of Canton and selected physicians, will be
minority shareholders of Care3, Inc. and may acquire up to 40% of the equity
securities of Care3, Inc. for nominal consideration. The Company anticipates
that it will own not less than 60% of Care3, Inc.
Through another newly formed subsidiary, MMMC, Inc., the Company is
embarking into the management services organization ("MSO") business by entering
into an administrative services agreement with a network of private medical
practitioners in the Gulfport, Mississippi area, MedSouth, Inc. ("MedSouth").
The Company anticipates that it will hold a 90% interest in the MSO, with
MedSouth owning the balance of the capital stock.
The Company's executive offices are located at 502 Gould Drive, Cookeville,
Tennessee 38506; its telephone number is (615) 432-6532.
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<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby, at an assumed initial public offering price of
$5.00 per share, are estimated to be approximately $8,190,000, after deducting
estimated offering expenses of approximately $1,010,000 and underwriting
discounts and commissions of $800,000. The Company currently intends to use the
net proceeds of this offering for the following purposes:
<TABLE>
<CAPTION>
ESTIMATED
PURPOSE AMOUNT
------------------------------------------------------------------------- ----------
<S> <C>
HMO restricted cash reserves(1).......................................... $3,000,000
Development and implementation of health plans(2)........................ $2,500,000
Acquisition of Canton(3)................................................. $1,000,000
Expansion of Quality Management Program business(4)...................... $ 500,000
Working capital for general corporate purposes........................... $1,190,000
</TABLE>
- ---------------
(1) This amount represents the estimated sums required to be deposited in
restricted accounts to evidence the Company's solvency under the HMO
licensing regulations of Tennessee, Kentucky, and other states.
(2) This amount includes the estimated cost of developing and implementing a
health plan in Tennessee and the possible development and implementation of
similar plans in Kentucky and approximately two other states.
(3) This amount includes the estimated cost of completing the acquisition of
Canton, the holder of a certificate of authority to operate a HMO in
Mississippi, including the cash portion of the purchase price to be paid to
the shareholders of Canton and the start-up operation of the health plan in
Mississippi.
(4) This amount includes the estimated costs of developing computer software and
databases to enhance the Quality Management Program; the recruitment,
employment, and training of professional staff members, including
physicians; and Quality Management Program marketing and promotional costs
and expenses to be incurred through July 31, 1997.
Until applied as set forth above, the net proceeds will be invested in
short-term, investment-grade instruments or bank certificates of deposit.
Investment of the net proceeds in short-term securities rather than operations
could adversely affect the Company's overall return on its capital.
The foregoing represents the Company's current intentions with respect to
the allocation of the net proceeds of this offering based upon its present plans
and business conditions. There can be no assurance that unforeseen events or
changes in business conditions or federal or state or government regulations
will not result in the application of the proceeds of this offering in a manner
other than as described in this Prospectus. See "Risk Factors."
The Company will not receive any proceeds from the sale of Common Stock
offered by certain stockholders in connection with any exercise of the
Underwriters' over-allotment option. See "Principal Stockholders." Any funds
received by the Company upon exercise of the Representative's Warrant will be
added to working capital.
DIVIDEND POLICY
To date, the Company has not paid any cash dividends on its Common Stock.
The payment of dividends in the future will be within the discretion of the
Board of Directors and will depend on the Company's earnings, capital
requirements, financial condition, and other relevant factors. The Company does
not intend to declare any cash dividends in the foreseeable future, but instead
intends to retain earnings for use in the Company's business operations. See
"Risk Factors -- Absence of Dividends" and "Description of Securities."
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<PAGE> 17
DILUTION
The difference between the public offering price per share of Common Stock
and the as adjusted pro forma net tangible book value per share of Common Stock
after this offering and giving effect to the acquisition of Canton constitutes
the dilution to investors in this offering. Pro forma net tangible book value
per share is determined by dividing the pro forma net tangible book value (total
pro forma assets less intangible assets and total liabilities) by the number of
outstanding shares of Common Stock (excluding escrow shares).
At September 30, 1996, the pro forma net tangible book value of the Company
was $1,654,845 (unaudited), or $0.28 per share of Common Stock. At September 30,
1996, after giving effect to the sale of the Common Stock offered hereby at an
assumed initial offering price of $5.00 per share (less underwriting discounts
and commissions and estimated expenses of this offering) and the tender of
shares of Common Stock in repayment of a note payable to the Company, the as
adjusted pro forma net tangible book value at that date would be $9,545,805, or
$1.23 per share. This represents an immediate increase in the adjusted pro forma
net tangible book value of $.95 per share to existing stockholders and an
immediate dilution of $3.77 per share to new investors, or approximately 75% of
the assumed offering price of $5.00 per share.
The following table illustrates the per share dilution to new investors
without giving effect to the results of operations of the Company subsequent to
September 30, 1996:
<TABLE>
<S> <C> <C>
Assumed public offering price........................................ $5.00
Pro forma net tangible book value at September 30, 1996............ $ .28
Increase attributable to new investors............................. $ .95
Net tangible book value after offering............................... $1.23
-----
Dilution to new investors............................................ $3.77
=====
</TABLE>
The following table summarizes the number and percentage of shares of
Common Stock purchased from the Company, the amount and percentage of
consideration paid, and the average price per share paid by existing
stockholders and by new investors in this offering.
<TABLE>
<CAPTION>
SHARES PURCHASED
---------------------------------------------------------- TOTAL CONSIDERATION AVERAGE
NON- ESCROW ESCROW SHARES --------------------- PRICE
SHARES SHARES TENDERED NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- --------- ----------- --------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Existing
stockholders..... 5,931,082 1,000,000 (177,000) 6,754,082 77.15% $ 2,010,000 16.74% $ .30
Public investors... 2,000,000 -- -- 2,000,000 22.85% $10,000,000 83.26% $5.00
--------- --------- ------- --------- ------ ----------- ------
Total..... 7,931,082 1,000,000 (177,000) 8,754,082 100.00% $12,010,000 100.00%
========= ========= ======= ========= ====== =========== ======
</TABLE>
The above table assumes no exercise of (i) the Underwriters' over-allotment
option, (ii) the Representative's Warrants, (iii) other outstanding warrants to
purchase 57,805 shares of Common Stock at a weighted average exercise price of
$1.39 per share, (iv) options to purchase 1,006,566 shares of Common Stock
granted to key employees at an exercise price of $1.37 per share, and (v)
options to purchase 12,000 shares of Common Stock granted to non-employee
directors at an exercise price of $6.25 per share. See "Risk
Factors -- Immediate and Substantial Dilution," "Management -- Compensation of
Directors," "Management -- Fiscal 1996 Option Grants," "Principal Stockholders,"
"Underwriting," and "Description of Securities." If the Underwriters'
over-allotment is exercised in full, the number of shares of Common Stock held
by existing stockholders will be reduced to 6,454,082 shares, or 73.73% of the
total number of shares to be outstanding after this offering, and the number of
shares of Common Stock held by new investors will be increased to 2,300,000, or
26.27% of the total number of shares of Common Stock to be outstanding after
this offering. See "Principal Stockholders."
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<PAGE> 18
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
September 30, 1996, (ii) the pro forma capitalization as of September 30, 1996,
giving effect to the acquisition of Canton, as if such acquisition had occurred
on such date, and (iii) the pro forma capitalization as of September 30, 1996,
as adjusted to give effect to the sale of the Common Stock offered hereby (at an
assumed initial public offering price of $5.00 per share), the tender of 177,000
shares of Common Stock of Dr. Birman as payment in full of his $775,000 note
payable to the Company, plus accrued interest, and the application of the net
proceeds therefrom as described under "Use of Proceeds," as if all such events
had occurred on September 30, 1996.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------
ACTUAL PRO FORMA(1) PRO FORMA
---------- ------------ AS ADJUSTED
(UNAUDITED) --------------
(UNAUDITED)
<S> <C> <C> <C>
Long-term debt(1)(2)................................ $ 4,404 $ 604,404 $ 604,404
---------- ---------- ----------
Stockholders' equity:
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; no shares issued and outstanding... 0 0 0
Common Stock, $.001 par value, 25,000,000 shares
authorized; 6,931,082 shares issued and
outstanding actual and 8,754,082 shares issued
and outstanding pro forma as adjusted(3)(4).... 6,931 6,931 8,754
Additional paid-in capital.......................... 1,780,612 1,780,612 9,193,789
Retained earnings................................... 1,642,627 1,642,627 1,642,627
---------- ---------- ----------
Total stockholders' equity................ $3,430,170 $3,430,170 $ 10,845,170
========== ========== ==========
Total capitalization...................... $3,434,574 $4,034,574 $ 11,449,574
========== ========== ==========
</TABLE>
- ---------------
(1) The purchase price for Canton is $1,500,000, payable $700,000 in cash at the
closing and $800,000 payable in four equal annual installments of $200,000
of principal plus interest at 2% per annum on the unpaid principal balance
commencing on the first anniversary of the closing.
(2) The Company has a $1,000,000 maximum principal amount working capital
revolving line of credit facility with American National Bank and Trust
Company of Chicago. The facility has an initial maturity date of October
31, 1997. The facility provides for the accrual of interest on the unpaid
balance at an annual rate equal to the lender's prime rate, adjusted daily.
The facility is secured by the accounts receivable of the Quality
Management Program and of Hughes.
(3) Excludes (a) 1,006,566 shares of Common Stock subject to options pursuant to
the Company's 1995 Option Plan at an exercise price of $1.37 per share; (b)
12,000 shares of Common Stock subject to options pursuant to the Company's
1996 Non-Employee Directors' Non-Qualified Stock Option Plan at an exercise
price of $6.25 per share, (c) 57,805 shares of Common Stock issuable upon
exercise of outstanding Common Stock purchase warrants at a weighted
average exercise price of $1.39 per share, and (d) 200,000 shares of Common
Stock subject to the Representative's Warrants. See "Management -- Stock
Option Plans" and "Description of Securities."
(4) Includes 1,000,000 Escrow Shares. See "Principal Stockholders -- Escrow
Shares."
17
<PAGE> 19
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary historical financial data have been derived from the
audited consolidated financial statements of the Company. The historical
consolidated statement of operations data set forth below with respect to the
fiscal years ended June 30, 1995 and June 30, 1996 are derived from, and are
qualified by reference to, the audited Consolidated Financial Statements
included elsewhere in this Prospectus and should be read in conjunction with
those financial statements and notes thereto. The selected financial data for
the three months ended September 30, 1995 and 1996 have been derived from
unaudited financial statements that are included elsewhere in this Prospectus.
In the opinion of management of the Company, the unaudited financial statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position and the results of
operations for these periods. Operating results for the three months ended
September 30, 1996, are not necessarily indicative of the results that may be
expected for the year ending June 30, 1997. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL
---------------------
HISTORICAL
FISCAL YEAR ENDED PRO FORMA(3) --------------------------- PRO FORMA(3)
JUNE 30, ------------- -------------
--------------------- 12 MONTHS THREE MONTHS ENDED THREE MONTHS
1995 1996 ENDED SEPTEMBER 30, ENDED
--------- --------- JUNE 30, --------------------------- SEPTEMBER 30,
1996 1995 1996 1996
------------- ------------ ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS:
Revenue.......................... $ 4,818 $ 8,417 $ 8,417 $ 1,417 $ 2,372 $ 2,372
Costs and expenses:
Cost of revenue................ 2,381 2,279 2,279 431 889 889
Selling, general and
administrative............... 3,114 4,237 4,309 926 1,169 1,182
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations................... (677) 1,901 1,829 60 314 301
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations..................... (483) 1,172 1,130 35 241 244
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................ $ (699) $ 1,172 $ 1,130 $ 35 $ 241 $ 244
========== ========== ========== ========== ========== ==========
Net income (loss) per share:(2)
-- primary..................... $ (.10) $ .17 $ .13 $ .01 $ .04 $ .03
========== ========== ========== ========== ========== ==========
-- fully diluted............... $ (.10) $ .15 $ .12 $ .00 $ .03 $ .03
========== ========== ========== ========== ========== ==========
Weighted average common shares
outstanding:
-- primary....................... 6,703,517 6,703,517 8,526,517 6,703,517 6,703,517 8,526,517
========== ========== ========== ========== ========== ==========
-- fully diluted................. 6,703,517 7,703,517 9,526,517 7,703,517 7,703,517 9,526,517
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------
ACTUAL PRO FORMA(1) PRO FORMA,
---------- ------------ AS ADJUSTED(3)
(UNAUDITED) --------------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................... $1,762,684 $ 866,771 $ 9,532,731
Total assets.............................................. $4,341,661 $5,388,490 $ 12,803,490
Total liabilities......................................... $ 911,491 $1,958,320 $ 1,958,320
Stockholders' equity...................................... $3,430,170 $3,430,170 $ 10,845,170
</TABLE>
- ---------------
(1) Gives effect on a pro forma basis to the pending acquisition of the capital
stock of Canton, as to which the Company has entered into a definitive
acquisition agreement. The pro forma combined statement of operations data
for the year ended June 30, 1996, and the three-month period ended September
30, 1996 does not purport to represent what the Company's results of
operations would have been if such acquisition had been consummated on the
first day of the respective periods. Although the Company anticipates that
the acquisition will close prior to the end of January 1997, there can be no
assurance that
18
<PAGE> 20
such transaction will close by such time, or at all. Proforma condensed
consolidated financial statements (unaudited) of the Company are included in the
"Financial Statements" section of this Prospectus.
(2) Earnings per share is based on the average number of shares of common stock
and common stock equivalents outstanding during the year. Shares of common
stock to be placed in escrow upon completion of this offering, which are
common stock equivalents, have been included in the calculation of fully
diluted earnings per share. Shares of common stock issued at amounts
substantially below the initial public offering price within the one-year
period prior to the initial filing of the registration statement relating to
this offering are considered outstanding for all periods presented. The pro
forma average number of shares of common stock and common stock equivalents
outstanding include the shares issuable upon the completion of this
offering, and excludes 177,000 shares to be tendered by Dr. Birman as
payment in full of his $775,000 note payable to the Company, plus accrued
interest. See "Principal Stockholders -- Escrow Shares," "Certain
Transactions" and Note 16 of the Notes to Consolidated Financial Statements.
(3) Gives effect on a pro forma, as adjusted basis to (a) the acquisition of
Canton, and (b) the sale by the Company of the Common Stock offered hereby
at an assumed initial public offering price of $5.00 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
Includes Escrow Shares. See footnote 2 above.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS AND ORGANIZATION
The Company is a health care consulting and management company dedicated to
improving the quality, controlling the cost, and enhancing the efficiency of the
management and delivery of health care services by focusing on the physician as
the most important factor in the health care system. The Company commenced
operations in 1991 as Birman & Associates, Inc. to provide its proprietary
Quality Management Program to hospitals to educate their medical staffs on
patient management. As an expansion of its business, the Company, through BMC
Health Plans, Inc., is developing and will operate various health plans in
association with physician networks and other health care providers based upon
its belief that it can apply its Quality Management Program experience to
improve the management and delivery of health care services in managed care
systems. As part of its health plan business, the Company will organize
physicians into independent practice associations, or networks, that will
provide services to health plans, including those operated by the Company. The
Company concentrates its efforts on rural communities, particularly in the
south-central, southeast, and central United States, with an initial focus for
its health plans in Mississippi and Tennessee, where the development of managed
care programs has lagged behind other areas of the country.
The Company has historically rendered its consulting services under
contracts with hospital-clients that typically provide for results oriented
compensation to the Company based upon increases in the hospital-clients'
revenue attributable to the Quality Management Program. The Company also has
fixed rate and combined fixed rate and results oriented engagements with certain
hospital-clients. Substantially all of the Company's revenue in its 1995 and
1996 fiscal years and the first quarter of fiscal 1997 was derived from
consulting fees from its Quality Management Program.
The Company intends to leverage the expertise and professional
relationships it has gained from providing its Quality Management Program and to
capitalize on the evolution from traditional fee-for-service to capitated
systems in rural communities. The Company currently is developing and will
operate a variety of community-based, physician-driven, comprehensive health
plans. To accelerate entry into the health plan business in Mississippi, the
Company has entered into a definitive agreement to acquire Canton, an inactive
holder of a certificate of authority to operate an HMO in Mississippi, and has
arranged for MedSouth Inc. to provide health care services through its provider
network consisting of approximately 350 physicians, four hospitals, and several
ancillary health service providers in the Gulfport, Mississippi area. The
Company currently anticipates that the Mississippi HMO will commence operations
in the first quarter of calendar 1997. In addition, the Company plans to apply
to the State of Tennessee for an HMO license to utilize a physician network the
Company is developing in that state.
To position itself for future expansion, in 1994 the Company was
incorporated as Birman Managed Care, Inc. in Tennessee to be the holding company
for Birman & Associates, BMC Health Plans Inc., and any other future
subsidiaries. In connection with the formation of the Company as a holding
company for its subsidiaries, in June 1995 Birman & Associates, Inc. distributed
to its then sole shareholder, David N. Birman, M.D., all of the shares of
capital stock of Birman Farms, Inc., a livestock breeding operation. In
September 1996, the Company was reincorporated as a Delaware corporation.
The following discussion of the results of the operations and financial
condition of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. Historical results and percentage relationships among accounts are
not necessarily an indication of trends in operating results for any future
period. The consolidated financial statements present the accounts of Birman
Managed Care, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company changed its fiscal year end for financial reporting purposes from
December 31 to June 30 beginning with the 1995 fiscal year.
20
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenue represented by
certain items reflected in the Company's Consolidated Statements of Operations
for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR THREE MONTHS ENDED
JUNE 30 SEPTEMBER 30,
--------------- ---------------------------
1995 1996 1995 1996
----- ----- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue..................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue............................. 49.4% 27.1% 30.4% 37.5%
Gross margin................................ 50.6% 72.9% 69.6% 62.5%
Selling, general and administrative
expenses.................................. 64.7% 50.3% 65.3% 49.3%
Income (loss) from operations............... (14.1)% 22.6% 4.3% 13.3%
Other income (expense):
Interest expense.......................... (1.2)% (.5)% (.7)% .0%
Interest income........................... .6% .5% .3% 1.6%
Loss on sale of assets.................... -- (.1)% -- --
Income (loss) before provision for income
taxes..................................... (14.7)% 22.5% 3.9% 14.9%
Provision for income tax (expense)
benefit................................... 4.7% (8.6)% (1.4)% (4.7)%
Income (loss) from continuing operations.... (10.0)% 13.9% 2.5% 10.2%
Loss from discontinued operations........... (4.5)% -- -- --
Net income (loss)........................... (14.5)% 13.9% 2.5% 10.2%
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1995
Revenue. Revenue from the Quality Management Program increased by 56%, to
approximately $2,216,000 in the three months ended September 30, 1996, from
approximately $1,417,000 in the comparable period of the prior year. Additional
revenue of $156,000 is attributable to the operations of Hughes. The growth in
revenue was attributable to management's action to initiate engagements by new
hospital-clients. The aggregate Medicare discharges of the hospital-clients
increased by 68.7% to 11,300 for the three months ended September 30, 1996, from
6,700 in the comparable period of the prior year and the number of hospital-
clients increased to 32 in September 1996 from 21 in September 1995.
Cost of Revenue. The cost of revenue includes all costs directly
associated with the operations of the Quality Management Program, including
compensation of physicians and allied medical specialists, consulting staff
travel and lodging, and other direct costs of the Quality Management Program.
The cost of revenue of the Quality Management Program increased by 89%, to
approximately $814,000 for the three months ended September 30, 1996, from
approximately $431,000 in the comparable period of the prior year due to an
increase in the number of hospital-clients. The Company's cost of revenue
increased to 37.5% for the three months ended September 30, 1996 from 30.4% for
the three months ended September 30, 1995, due primarily to (i) a one-time
charge for the development of an audit and compliance program for the Quality
Management Program, which resulted in a 3.6% increase in the cost of revenue;
(ii) an increase in training costs due to the hiring of additional physicians
and allied medical specialists for hospital engagements scheduled or anticipated
to start in the second quarter of fiscal 1997, which resulted in an increase in
cost of revenue of 2.0%; and (iii) an increase in other direct costs of the
Quality Management Program, which resulted in a 1.5% increase in cost of
revenue.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 26.3%, to approximately $1,169,000 for the
three months ended September 30, 1996, from approximately $926,000 in the
comparable period of the prior year. The increase in selling, general and
administrative expenses for the three months ended September 30, 1996 was
primarily attributable to (i) the expansion of the Company's management team and
(ii) selling, general and administrative expenses for Hughes & Associates, Inc.,
which was acquired in June 1996 and not consolidated with the financial
statements in the comparable period of the prior year. As a percentage of
revenue, selling, general and administrative expenses decreased to 49.3% for the
three months ended September 30, 1996 from 65.3% in the comparable period in the
prior year.
21
<PAGE> 23
Interest Income and Expense. Interest income increased to approximately
$38,000 for the three months ended September 30, 1996 from approximately $4,600
in the comparable period of the prior year. This increase was attributable to
interest on the increased balance of cash deposits held primarily in money
market accounts and also on the increased balance on loans made by the Company
to Dr. Birman in connection with the farm operations distributed to him in
fiscal 1995. See "Discontinued Operations" below. Interest expense decreased
approximately $10,000, an improvement of 97% for the three months ended
September 30, 1996 from the comparable period of the prior year, as a result of
the Company repaying substantially all the outstanding principal of its term
loan in June 1996.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO THE FISCAL YEAR ENDED JUNE 30, 1995
Revenue. For the fiscal year ended June 30, 1996, revenue from the Quality
Management Program increased by $3.6 million to $8.4 million, or 75%, over the
revenue for fiscal 1995. Approximately 75% of this increase was attributable to
an overall improvement in the Company's results from the Quality Management
Program as measured by increases in the hospital-clients' Medicare related
revenue and approximately 25% of this increase was attributed to management's
action to initiate engagements by new hospital-clients. Period to period changes
in the volume of the Quality Management Program business of the Company is
measured in aggregate annual Medicare discharges of the Company's
hospital-clients. Aggregate Medicare discharges is a factor of the size and
number of hospital-clients. The aggregate Medicare discharges of the
hospital-clients increased from 30,000 in fiscal 1995 to 36,000 in fiscal 1996
and the number of hospital-clients increased from 20 in June 1995 to 29 in June
1996.
Cost of Revenue. The cost of revenue includes all costs directly
associated with the operations of the Quality Management Program, including
compensation of physicians and allied medical specialists, consulting staff
travel and lodging, and other direct costs of the Quality Management Program. In
fiscal 1996, the Company changed the compensation program for its physicians and
allied medical specialists from fixed per diem rates to a combination of salary
and performance-based arrangements and implemented a geographically focused
marketing plan that was effective in improving the utilization of existing
consulting personnel and resources. These changes reduced the cost of revenue by
approximately $100,000 in fiscal 1996. This cost decrease, combined with
increased revenue, resulted in a 22% improvement in the gross margin from fiscal
1995 to fiscal 1996.
Selling, General and Administrative Expenses. For fiscal 1996, selling,
general and administrative expenses increased to $4.2 million from $3.1 million
in fiscal 1995. Approximately 72% of this increase is a result of a full year of
costs of executive and administrative personnel hired in mid-fiscal 1994 to
position the Company to develop its health plan business and the expenditure of
funds to develop the health plan business. In addition, the Company increased
its Quality Management Program marketing efforts and incurred costs associated
with the exploration of acquisition opportunities. As a percentage of revenue,
selling, general and administrative expenses decreased from 64.7% to 50.3% in
fiscal 1996, a 14% improvement, as a result of an enhanced marketing plan that
increased revenues significantly. The enhanced marketing plan included the
addition of new sales personnel, the expansion into new markets, and the
utilization of a team approach to marketing, which included involving physicians
in the marketing effort. Management currently intends to continue to utilize the
new sales approach in the foreseeable future. During the first four months of
fiscal 1997, the Company recruited four new hospital-clients.
Interest Income and Expense. Interest income increased almost $20,000, or
64%, in fiscal 1996 over fiscal 1995 as a result of the accrual of interest on
loans made by the Company to Dr. Birman in connection with the farm operations
distributed to him in fiscal 1995. See "Discontinued Operations" below. Interest
expense decreased approximately $13,000, an improvement of 23% in fiscal 1996
over fiscal 1995, as a result of the Company repaying the $483,896 outstanding
principal balance of its term loan.
Discontinued Operations. The losses from discontinued operations for
fiscal 1995 related to a farm operated by the Company during the period that Dr.
Birman was the sole shareholder of Birman & Associates, Inc. All assets and
liabilities related to the farm operation were distributed by the Company to Dr.
Birman as of the close of fiscal 1995. During fiscal 1996, no expenses were
incurred by the Company in connection with
22
<PAGE> 24
this discontinued operation. However, the Company lent Dr. Birman approximately
$28,000 per month throughout fiscal 1996 to fund negative cash flow experienced
by the farm. The total amount lent to Dr. Birman during the period of July 1,
1995 through September 9, 1996 to defray the operating and ownership costs of
the farm was approximately $465,000. Accordingly, as of September 9, 1996, Dr.
Birman owed a total of $775,000 to the Company. See "Certain Transactions."
RECENT AND PROPOSED ACQUISITIONS
In furtherance of its health plan business, in June 1996 the Company
acquired substantially all of the assets of Hughes, a provider of utilization
review services to insurance companies and health plans. Hughes did not
contribute materially to the results of operations of the Company for fiscal
1996. The Company anticipates that Hughes will make a reasonable direct
contribution to the revenue and net operating income of the Company beginning in
fiscal 1997, particularly after the Company commences its health plan business.
In this regard, the utilization review and case management services of Hughes
are expected to enable the Company to market its physician networks and
management service organization services to large, self-funded employee groups.
As discussed under "Business and Organization," above, the acquisition of
Canton will provide to the Company a certificate of authority to operate an HMO
in Mississippi. On January 8, 1997 the Department of Insurance of the State of
Mississippi approved the acquisition, and closing of this acquisition is
scheduled to occur during January 1997, at which time the Company's Mississippi
HMO will commence operations. The effect on the Company's operations of the
Mississippi HMO will depend to a large extent on the Company's ability to
attract enrollees to its Mississippi health plan which, in turn, will depend to
a significant extent upon the Company's ability to offer PPO and
point-of-service options to its enrollees in addition to the HMO option. Because
the Company's health plan business will be in a "start-up" phase for at least
six months after the HMO commences operations in Mississippi, the Company
anticipates that the Canton acquisition will result in a net operating loss
during at least the first three quarters of calendar 1997.
SEASONALITY
Revenue and operating results historically have varied significantly from
period to period based upon seasonality. The Company typically realizes a
substantial portion of its revenue during the calendar quarters ending December
31, March 31, and June 30, with significantly lower revenue realization during
the calendar quarter ended September 30. Additionally, revenue fluctuates from
month-to-month based on the total number of Medicare discharges experienced by
hospital-clients and hospital-clients' average case mix index reflecting
severity of illness. The Company anticipates that this seasonality will diminish
with the introduction of health plan revenue.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to market its Quality Management Program and
to develop and launch its health plan business including, among other costs, the
organization of the requisite management infrastructure necessary to implement
the Company's health plan business. During fiscal 1995, the Company financed its
operating and business development activities primarily through operating
revenue, net borrowings in excess of repayments of principal of $542,930 under a
term loan made available to the Company by First American National Bank of
Tennessee, net collections on notes receivable from Dr. Birman and short-term
borrowings from a director and unrelated third parties of $171,854, and proceeds
of $144,299 from the sale of assets.
During the three months ended September 30, 1995, the Company financed its
operating and business development activities primarily through operating
revenue and the net proceeds of $392,500 from the private placement of shares of
Common Stock. During the three months ended September 30, 1995, the Company
repaid $95,800 net principal of its term loan using proceeds from the private
placement of Company Stock. In addition, the Company advanced approximately
$143,000 against notes receivable from Dr. Birman and invested approximately
$11,000 in the purchase of property and equipment. See "Certain Transactions."
During fiscal 1996, the Company financed its operations and business
development activities primarily through operating revenue and the net proceeds
of a $1,605,043 private placement of Common Stock. In fiscal 1996, the Company
repaid the entire principal balance of its term loan using proceeds from the
private
23
<PAGE> 25
placement of Common Stock. In addition, the Company repaid $175,000 of
short-term borrowings through the exchange of 127,645 shares of Common Stock.
During the three months ended September 30, 1996, the Company financed its
operating and business activities primarily through operating revenue. In the
three months ended September 30, 1996, the Company advanced approximately
$141,000 to Dr. Birman, invested approximately $142,000 in the purchase of
property and equipment, and repaid $1,607 of principal of its term loan. In
addition, the Company collected $9,000 in notes receivable from Dr. Birman. See
"Certain Transactions."
The Company is committed to acquire all of the outstanding capital stock of
Canton for $1,500,000, payable $700,000 in cash plus $800,000 by promissory
notes payable in four equal annual installments of $200,000 each plus interest
at the rate of 2% per annum on the unpaid principal balance. Additional capital
will be required to establish the reserves required under Mississippi and
Tennessee HMO regulations and to further develop and market the Company's health
plans.
The Company has a $1,000,000 maximum principal amount working capital line
of credit facility with American National Bank and Trust Company of Chicago. The
credit facility is secured by a pledge of the Company's Quality Management
Program and quality assurance/utilization review accounts receivable. These
receivables are obligations of the hospital-clients to the Company and of
insurance company and self-insured employer clients to Hughes, and are not
Medicare or Medicaid receivables.
The Company believes that the net proceeds of this offering, together with
its existing cash resources and available credit facilities, will be sufficient
to meet the Company's anticipated acquisition, expansion, and working capital
needs for the next 24 months. The Company, however, may raise capital through
the issuance of long-term or short-term debt or the issuance of securities in
private or public transactions to fund future expansion of its business either
before or after the end of the 24-month period. There can be no assurance that
acceptable financing for future transactions can be obtained.
IMPACT OF ACCOUNTING STANDARDS
Escrowed Shares
The Company contemplates that the release of the Escrow Shares to Dr.
Birman, who is an officer and director of the Company, should it occur, will
result in a substantial non-cash compensation charge to operations, based on the
then fair market value of the shares. Such charge could cause the Company to
report a net loss or reduce or eliminate the Company's net income, for financial
reporting purposes, for the period during which such shares are or become
probable of being released from escrow. Although the amount of compensation
expense recognized by the Company will not affect the Company's total
stockholders' equity, it may have a depressive effect on the market price of the
Company's securities. See "Principal Stockholders -- Escrow Shares."
Recent Pronouncements
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," which requires the Company
to review for impairment of long-lived assets, certain identifiable intangibles,
and goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable. In
certain situations, an impairment loss would be recognized. SFAS 121 will become
effective for the Company's fiscal year ending June 30, 1997. The Company has
studied the implications of SFAS 121 and, based on its initial evaluation, does
not expect it to have a material impact on the Company's financial condition or
results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which
establishes a fair value-based method of accounting for stock-based compensation
plans and requires additional disclosures for those companies that elect not to
adopt the new method of accounting. The Company will continue to account for
employee purchase rights and stock options under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS 123 disclosures will be effective for
fiscal years beginning after December 31, 1995.
24
<PAGE> 26
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 125) issued by the Financial Accounting Standards Board (FASB) is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive applications is not permitted. The new
standard provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. The Company does not
expect adoption to have a material effect on its financial position or results
of operations.
25
<PAGE> 27
BUSINESS
OVERVIEW
The Company is a health care consulting and management company dedicated to
improving the quality, controlling the cost, and enhancing the efficiency of the
management and delivery of health care services by focusing on the physician as
the most important factor in the health care system. In pursuing these goals,
the Company currently provides its proprietary Quality Management Program to
hospitals to educate their medical staffs on patient management. As an expansion
of its business, the Company is developing and will operate various health plans
in association with physician networks, hospitals, and other health care
providers based upon its belief that it can apply its Quality Management Program
experience to improve the management and delivery of health care services in
managed care systems. As part of its health plan business, the Company will
organize physicians into independent practice associations, or networks, that
will provide services to the Company's health plans as well as to independent
health plans. In addition, the Company intends to provide management services to
its health plans as well as to independent health plans. The Company
concentrates its efforts on rural communities, particularly in the
south-central, southeast, and central United States, with an initial focus for
its health plans on Mississippi and Tennessee, where the development of health
care management systems and managed care programs has lagged behind other areas
of the country.
Under its Quality Management Program, physicians employed by the Company
consult directly with attending physicians at hospital-clients regarding their
overall patient management program, as systematized in the medical record. The
Quality Management Program is designed to (i) improve patient care by
encouraging the use of the Company's proprietary methodology to assist
physicians in the identification of symptoms and conditions, to determine
appropriate treatment, and to prioritize the goals and objectives of the
treatment plan, (ii) reduce the cost to its hospital-clients of patient care as
a result of the early intervention in identified health problems, and (iii) more
accurately describe in the medical record the severity and complexity of the
patient's illness and the resources utilized to treat the patient. The benefits
of the Quality Management Program typically result in increased Medicare
reimbursements for the Company's hospital-clients.
To leverage the expertise and professional relationships it has gained from
providing its Quality Management Program and to capitalize on the evolution from
traditional fee-for-service to capitated systems in rural communities, the
Company currently is developing and will operate a variety of community-based,
physician-driven, comprehensive health plans. The Company's health plans are
being designed to provide high-quality and cost-efficient health care by
aligning the interests of physicians and their patients by involving selected
community physicians in the development and implementation of treatment
standards, by including selected leaders in the physician community as owners of
the local health plans, and by providing participating physicians with the
opportunity to share in savings realized from their own practice management
through the return of a portion of the risk pools established to protect against
cost overruns. The Company's health plans will offer a number of programs,
including a point-of-service option that will enable patients to control their
health care costs while maintaining access to a broad range of providers. Under
the point-of-service option, patients will have the flexibility to select
physicians participating in the Company's HMO, PPO, or indemnity plan at the
time service is sought in order to control their health care costs while
maintaining access to a broad range of providers.
INDUSTRY BACKGROUND
General
In response to escalating health care costs over the past 20 years, federal
and state governmental authorities have increasingly emphasized stringent
cost-containment measures and employers, consumers, and other purchasers of
health care have sought cost-effective alternatives to traditional indemnity
insurance, under which providers generally receive payment on a fee-for-service
basis.
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Although traditional health insurance plans permit enrollees to select any
physician or hospital, enrollees are often responsible for significant
deductibles and provider charges in excess of reimbursement allowances.
Developed primarily as an alternative to traditional indemnity insurance, HMOs
arrange for the delivery of health care to enrollees through participating
health care providers for a fixed monthly premium with little or no deductibles
or copayments regardless of the frequency, value, or type of health care
services utilized. HMOs generally are able to arrange for health care delivery
at lower costs than those associated with traditional indemnity insurance plans
by managing the utilization of health care services, by imposing case management
procedures, by negotiating with providers for discounts from standard health
care provider rates, and through risk-sharing arrangements with the providers.
Since the mid-1980s, increased employer focus on health care costs,
employee choice, and flexibility in obtaining health care has led to the
development of additional managed health care options, some of which are
self-funded. These alternatives include PPOs and point-of-service options. In a
PPO, the enrollee obtains care from a network of preferred providers who provide
services on a discounted fee-for-service basis. A point-of-service option offers
a combination of HMO, PPO, and indemnity insurance. Option plans have gained
favor with some large employer groups because they allow consolidation of health
benefit programs and often permit the enrollee to choose providers within the
HMO or to select a PPO or unaffiliated provider at a higher out-of-pocket cost.
While increasingly popular as a means of expanding employee choice, these
alternatives also result in increased health care costs to employers to the
extent that employees select health care options without the managed care
features of HMOs.
Medicare and Medicaid
In 1965, Congress enacted the Medicare and Medicaid programs as a part of
the Social Security Amendments. Medicare is a national health insurance program
for disabled and aged Americans that separates coverage for inpatient hospital
services and physician services, compensates physicians on a "usual and
customary" charge basis, and pays hospitals on a reasonable cost basis. In
general, most Americans who either (i) are age 65 or older, (ii) receive
disability payments under Social Security, or (iii) need a kidney transplant or
renal dialysis are entitled to inpatient hospital services, commonly known as
Medicare Part A benefits. By paying a monthly fee, any person entitled to Part A
benefits also may choose to receive additional coverage for physician and
outpatient ambulatory service coverage, commonly known as Medicare Part B. The
Medicare program is administered by HCFA, a division of the Department of Health
and Human Services, although HCFA has assigned most of the day-to-day
administration of the Medicare program to private enterprises, such as insurance
companies, appointed as fiscal intermediaries.
In response to spiralling increases in Medicare expenditures, significant
amendments were made to the Medicare program in 1983, including a conversion of
the Part A program to the prospective payment system. Under Part A of the
Medicare program, the Medicare program currently pays a hospital a preset amount
on a per-case basis based upon a prospectively assigned reimbursement value. A
prospective payment is established by classifying each Medicare patient admitted
by the hospital into one of 495 diagnosis-related groups ("DRGs"). Each DRG is
cost-weighted based on an index of average costs set by HCFA. To determine the
reimbursement rate for the hospital, the relative cost weight for an assigned
DRG is then multiplied by a blended rate assigned to the hospital that takes
into account various factors, such as location, Medicare utilization, and
community economics.
The average value of all DRGs assigned to cases within a given time frame
is referred to as the case mix index ("CMI"). The CMI represents the average
severity of the cases treated by a hospital. The greater the severity of
illness, the higher the CMI; the greater the CMI, the higher the Medicare
reimbursement. A hospital must efficiently provide high-quality care and
accurately report its severity of illness through appropriate DRGs in order to
realize fair compensation under the Medicare system.
Medicaid is a federal/state program that provides medical assistance for
low income individuals who are aged, blind, disabled, or eligible for Aid to
Families with Dependent Children assistance. In general, each state administers
its own Medicaid program. The amount of federal payments contributed to each
state's Medicaid program is based upon the state's per-capita income level. To
qualify for federal Medicaid funds, a state
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Medicaid program must meet minimum requirements regarding coverage and services.
States also may elect to extend coverage to larger populations or offer a
broader range of services. Under Medicaid, hospitals are generally paid based on
their reasonable costs or variations on prospective payment systems and
physicians are paid using a charge-based system, fee schedules, or relative
value scales.
Managed Care
Managed care encompasses various arrangements among health care providers,
payors, and enrollees that apply utilization review, utilization of
authorization systems, case management, and allocation of risks and rewards to
increase the efficiency of delivery of health care services. Managed care
delivery systems may include coalitions of independent medical practices,
alliances between hospitals and individual medical practices or physician
networks, PPOs, and HMOs. The primary tools used to manage the allocation of
health care services are capitation and other prepayment arrangements that
transfer a portion of the financial risk of providing health care services to
the providers. Under capitation programs, health care providers receive payment
in advance in a fixed monthly amount per member per month or a fixed amount upon
the occurrence of a specific defined health problem. As a result, the provider
bears the economic risk that the actual cost of caring for plan enrollees
exceeds the capitation rate. Through contributions to and participation in risk
pool reserves, the health plans create economic incentives designed to encourage
providers to monitor enrollees, eliminate inefficiencies, and reduce unnecessary
utilization of services while maintaining and improving the quality of patient
care.
Managed care systems generally assign responsibility for a patient's
medical care to a primary care physician who monitors case history, coordinates
medical services, and typically authorizes, in advance, all specialty and
non-primary care services other than emergency care. Prepaid health plans are
designed to obligate providers to plan and coordinate the services administered
to enrollees, assure the continuity and appropriateness of care, and control the
use of medical resources through (i) utilization management, (ii) case
management, and (iii) associated quality assurance verifications (collectively,
"Treatment Standards"). Utilization management is a process occurring before
authorization of treatment that evaluates the need for and extent of treatment.
Case management is the process occurring after authorization of treatment to
monitor the actual administration of treatment. Quality assurance is the ongoing
evaluation of the level of care being provided to the patients. In many large
managed care organizations, Treatment Standards are set on a company-wide or
national basis by a panel of physicians, allied health professionals, and
business personnel employed by the health care company. The Company believes
that health plans that require local physicians to adhere strictly to
company-wide or national Treatment Standards often limit the physicians'
autonomy and thereby weaken the traditional physician-patient relationship.
Payors, including governmental entities and employers, increasingly expect
health care plans and providers to develop and maintain quality results through
utilization review and quality assurance programs and to accept an allocable
share of the risk of providing medical care. This focus on cost-containment and
financial risk sharing has placed independent providers and small and mid-sized
provider groups at a significant competitive disadvantage because of their
typically higher operating costs, limited purchasing power, and limited risk
management experience. Accordingly, many providers have sought to affiliate with
experienced organizations that manage the non-medical aspects of their
practices, such as office management and billing.
Company Position
Based upon its Quality Management Program experience, the Company believes
that providers in rural areas prefer management organizations that are local in
nature and permit physician ownership and involvement in setting Treatment
Standards. In both its Quality Management Program and its health plan business,
the Company recognizes the importance of the physician as the director of the
consumption of medical services for patients. In the Quality Management Program,
physicians employed by the Company work directly with a hospital-client's
attending physicians to improve their identification of symptoms and conditions,
diagnosis, utilization management, and case management. The Company's health
plan business will feature networks of community-based physicians who will
establish Treatment Standards at a local level
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and who will have a financial interest in the efficient delivery of appropriate
health care. Through the unique involvement by physicians, the Company believes
that its Quality Management Program and health care systems address industry
concerns and create attractive and distinctive products.
GROWTH STRATEGY
The Company's strategy is to build on the strong reputation, health care
and management experience, and market position of its Quality Management Program
to further expand that consulting business and to penetrate rapidly the managed
care segment of the industry. The Company plans to employ the following
strategies to reach these objectives:
- Focus on Rural Markets. The Company plans to focus its Quality Management
Program and health plan operations predominantly in rural areas in order
to take advantage of the lack of market penetration, less competitive
market conditions, and the local reputation and relationships it has
developed through its Quality Management Program. Large, urban-based
medical consulting and managed care providers historically have not
concentrated their efforts on rural areas. As a result, rural areas are
served by fewer health care organizations than larger metropolitan areas
and competitive factors are less intense. In addition, the Company's
experience in serving rural areas through its Quality Management Program
has resulted in the Company gaining a reputation and relationships in
these areas and enhancing its understanding of the special characteristics
of health care in these areas.
- Focus on the Role of the Physician. The Company focuses on the role of
the physician as the most important factor in the delivery of health care
services. The Company's health plans will be organized to align the
interests of the participating physicians with those of the patients, to
enhance the physician-patient relationship, and to reduce the influence of
third parties in the delivery of health care services in local
communities. Local physicians will participate in establishing Treatment
Standards, have an ownership interest in the Company's health plans
serving the physicians' community, and share in risk pools savings. The
Company believes that these factors will enable it to attract and retain
local physicians for its health plans and to utilize the reputation of
these local providers to attract payors and enrollees.
- Develop New Quality Management Program Clients and Services. The Company
plans to increase the number of its clients for its Quality Management
Program by expanding its marketing efforts in its existing market areas,
entering new market areas, and offering new services to existing and new
clients. The Company intends to develop and offer to its Quality
Management Program clients a comprehensive line of additional services
that will ultimately include utilization review of patient care services,
medical information management, access to proprietary computer database
information to evaluate trends in patient treatment, and development of
billing procedures for third-party payors under traditional indemnity,
managed care, and governmental plans.
- Launch Health Plans Applying the Quality Management Experience. The
Company plans to utilize the experience it has gained in its Quality
Management Program in the areas of patient case management, efficient
utilization of health care resources, and proper substantiation of
treatment to assist community physicians in participating in the
establishment of Treatment Standards for the Company's health plans. The
Company believes that this expertise will enable it to transition
providers in rural areas successfully from traditional fee-for-service
reimbursement to capitated health care plans.
QUALITY MANAGEMENT PROGRAM
Concept
Under its Quality Management Program, the Company's specially trained
physicians provide consultation to attending physicians regarding the overall
treatment of patients and the documentation of such treatment with a view
towards improving patient care, containing the cost of patient care, optimizing
the receipt of appropriate Medicare reimbursements, working to reduce
malpractice claims, and improving patient
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satisfaction. The central premises of the Quality Management Program are (i)
recognizing the physician as the primary director of medical services for the
patient and (ii) assisting the physician to develop a problem-oriented format
that produces a complete, consistent, and legible medical record that is
essential to quickly and accurately identify and prioritize disease conditions
and treatment plans in order to improve patient care and patient satisfaction,
reduce the cost of health care by controlling resource consumption, ensure
receipt of appropriate Medicare reimbursement, and reduce malpractice claims.
The attending physician is responsible for the initial patient contact, the
initial evaluation of symptoms and conditions, preliminary diagnosis, hospital
admissions, referrals to specialists, ordering of laboratory services, and
prescribing medication. This places the attending physician in the unique
position of influencing the hospital's reimbursement revenue, costs, and
liability. Since the writing of orders is the responsibility of the attending
physician, the attending physician in essence controls the process and usage of
almost all health care. As a result, a significant aspect of the Quality
Management Program involves consultation and training of the attending physician
at the hospital in facilitating efficient delivery of high-quality health care.
The medical record is the primary tool used by physicians to direct the
medical treatment of a patient, communicate instructions to other health care
service providers, evaluate the progress of the patient, support reimbursements
from third-party payors, including Medicare, and evidence compliance with
Treatment Standards and professional responsibilities. The Company believes that
complete, systemized, and legible medical records enable physicians to design
and record appropriate treatment plans, similar to a business plan, to address
symptoms and conditions that affect the patient from admission to discharge, and
to prioritize, in writing, goals and objectives for appropriate management.
Through the formulation of treatment plans and improved documentation, the
physician focuses on proper diagnosis and thereby becomes more effective in
measuring the patient's severity of illness and progress. The Quality Management
Program also typically results in a more accurate reporting of the hospital's
DRG elections, which results in increased Medicare reimbursement to the
hospital.
The treatment plans and documentation may be applied to clinical guidelines
and quality assessment procedures to increase the total quality of care and
evidence compliance with Treatment Standards. Recognition of the severity of
illness and well-documented records of treatment reduces the likelihood of
errors and omissions, thereby decreasing the liability exposure to the physician
and the hospital.
Operations
Following engagement, the Company assigns a team consisting of a physician
and an allied health specialist to each hospital-client. The team profiles the
client's Medicare patient medical records and identifies problem areas (such as
legibility, proper documentation of patients' histories and physical condition,
discharge summaries, and patient education) in order to identify the specific
hospital-client's needs. After an extended program introduction, the team
interacts on a weekly basis with attending physicians and allied health
professionals in the hospital, on a peer-to-peer level, to assist them in
adopting in their daily routines the practice management methods underlying the
Quality Management Program. A Company executive informs the hospital's chief
executive officer or chief financial officer of the status of the engagement
through a monthly report that summarizes net revenue from Medicare
reimbursements to the client, changes in CMI, and other operating information.
The Quality Management Program emphasizes a problem-solving approach.
Working with the hospital-client's medical records, the Company's physicians
conduct concurrent and retrospective reviews to train attending physicians to
present their findings of symptoms and conditions more thoroughly; to specify
clinical care; to prioritize treatment goals and objectives; to document
properly the process of patient management; and to work to use hospital-client
resources effectively. The Company's allied health specialists educate the
hospital-client's allied health staff regarding the reimbursement process,
encourage coding decisions recognizing legitimate resource expenditures, and
assure proper preparation and maintenance of supporting documentation. As a
result, this program supports the implementation of quality health care
services, while creating a medical record that supports the selection of coding
options that provide optimal and appropriate reimbursement.
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The Company knows of no principal competitor that features peer-to-peer
training of physicians. The Company believes that the use of physicians on its
consulting staff heightens the Company's professionalism and expertise, provides
greater flexibility in addressing client needs, and maximizes the Company's
impact and value for its clients. These factors distinguish the Company from
other firms offering competing services.
Fee Structures
A key feature of the Quality Management Program is the Company's fee
arrangements. The Company offers fee arrangements that are (i) results oriented,
(ii) fixed for the term of the contract, or (iii) a combination of fixed fee and
results oriented arrangements. Results oriented fees are measured by increases
in the hospital-client's revenue attributable to the Quality Management Program.
While the Company's revenue from each client varies depending on client size,
the Company receives an average monthly fee under all fee arrangements of
approximately $30,000 per client. The Company generally enters into two-year
agreements with each hospital-client, which are often renewed.
Client Benefits
The Company believes that its Quality Management Program provides
hospital-clients with improved quality of care and cost effectiveness, increased
patient satisfaction, better utilization of hospital resources, increased
compliance with Medicare coding and reimbursement requirements, increased net
revenue and realization of appropriate payment for services rendered, and
decreased liability exposure. While considerable variation in reimbursement
gains occur on a per-hospital basis as a result of factors such as hospital size
and patient population mix, Quality Management Program hospital-clients
typically experience increased Medicare reimbursements of between 10% and 25%
within the first year of the Company's engagement.
HEALTH PLANS
Concept
To leverage the expertise and professional relationships it has developed
through its Quality Management Program, the Company currently is developing a
variety of community-based, physician-driven, comprehensive health plans. To
align the interests of the participating physicians with those of the enrollees,
local physicians will participate in establishing Treatment Standards and will
share in cost savings in patient care through the return of a portion of risk
pools established to protect against cost overruns. In addition, selected
physicians will have an ownership interest in the local health plans and
management service organizations to be organized by the Company. The Company
anticipates that the Treatment Standards will encourage participating physicians
to apply the Company's Quality Management Program in their practices in order to
improve the efficiency of the delivery of health care services and thereby
maximize their returns from the risk pools.
Through health-care providers, the Company's health plans will offer
enrollees a comprehensive range of health care services, including ambulatory
and outpatient physician care, hospital care, and ancillary diagnostic and
therapeutic services. The Company also intends to provide vision, prescription
drug, and dental services on an indemnity basis through arrangements with
insurers.
The Company's health plans will include HMO, PPO, and point-of-service
options. The point-of-service option will allow enrollees to choose from among
participating and non-participating providers each time medical attention is
desired. The point-of-service option will be available for all types of
enrollees, including Medicare and Medicaid enrollees, if applicable. See "Risk
Factors -- Risk of Limited Health Plans." In order to provide the PPO and
point-of-service options, the Company has entered into an alliance with NBR
under which NBR will arrange licensing, product development, indemnity insurance
coverage, reinsurance coverage, provider excess insurance coverage,
underwriting, and insurance compliance services. The Company will pay NBR a fee
equal to 4.5% of the gross premium revenues derived from the health plans. The
Company and NBR are addressing a more comprehensive alliance agreement that
will, among other things, permit NBR to designate a representative to the
Company's Board of Directors at a later date.
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Because of the Company's presence in the rural south-central, southeast,
and central United States health care market, the initial market area for the
Company's health plans will be in Mississippi and Tennessee. Currently, the
Company is establishing provider networks for its health plan business and
initiating the licensure process to operate health plans in these states. The
Company currently anticipates that its first health plan will be operational in
Mississippi in the first quarter of calendar 1997.
Plan Management
The Company plans to organize separate community-based management service
organizations ("MSOs") to provide administrative services to each community
health plan and physician network. The Company will centralize each MSO's
management and administrative services. Each MSO will be owned by the Company
and selected participating physicians. These MSOs will afford providers with
access to the experience of the Company in the health care business and in the
Quality Management Program. The economies of scale inherent in a MSO will enable
the Company to reduce operating costs by centralizing certain clerical
functions, group purchasing, claims processing, and negotiation of health plan
contracts.
Once physician networks are established in a market, the Company will
administer capitated contracts by profiling costs of care based on patient
populations, analyzing physician treatment patterns, and monitoring specific
health plan contract requirements. The Company believes that its Quality
Management Program experience in the areas of information systems, utilization
management, physician relationships, reimbursement, and case management will
provide it with an advantage in providing these aspects of its health plan
business.
Unlike many large national organizations, each MSO will have its own
committee in which local physicians will participate. The committee will
implement a quality assurance program for the health plan, conduct peer reviews
to assure compliance with MSO rules and other Treatment Standards, and implement
and review other Treatment Standards. The Company will encourage providers to
apply the Quality Management Program methodology in their delivery of
cost-effective, quality care.
After formation of the MSOs, the Company intends to represent the physician
networks in arranging access by other health plans operating in the local
communities and to market the physician networks and MSO administrative services
to large, self-funded employer groups. Under self-funded plans, employers self-
insure their health care expenses and pay for health care claims as such claims
are incurred. The Company will offer utilization review, case management,
provider network discounts, and claims processing for these self-insured plans.
To provide utilization review and case management services to the health plans,
in June 1996 the Company acquired Hughes & Associates, Inc., a Jackson,
Mississippi-based company. Hughes acts as the health care authorization service
for a number of indemnity insurance companies and health plans and is certified
to provide utilization review services in Tennessee, Mississippi, and Louisiana.
Anticipated Sources of Revenue
The Company expects to generate health plan revenue from (i) premium
charges to employers and enrollees, (ii) Medicare and state welfare system
payments, and (iii) network access fees charged to self-funded employers and
other health care plans. The Company intends to structure its premium rates
primarily through community rating, based upon the aggregate costs of basic
benefit plans for the Company's entire membership population calculated on a
per-member/per-month basis and converted into premium rates based on coverage.
The Company intends to adjust the premium rates for various groups based upon
the average age, sex, claims experience, utilization experience, incurred but
not reported claims, inflationary factors, credibility, and reinsurance pooling
levels. The enrollees will pay copayments, coinsurance, or deductibles at the
time certain services are provided in order to encourage appropriate utilization
of health care services by enrollees.
The Company envisions that it will contract with Medicaid and state welfare
systems to provide its health care services. Mississippi has recently enacted
legislation that encourages state welfare participation in managed care
programs. Tennessee provides state welfare system access to HMOs and PPOs
through TennCare(TM).
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The Company's MSOs will receive a percentage of the premiums paid to the
Company's health plans as fees for its management services. Each of the
Company's health plans will contract with its applicable MSO for the provision
of management services.
The Company intends to represent its provider networks in negotiating with
self-insured employers and other health care systems for access to the provider
network. Access fees will vary depending upon the number of providers in the
network. The Company also may provide administrative, utilization review, case
management services, provider network discounts, and claims processing to
self-insured employers for a fee.
Provider Fees
The Company's health plans will compensate physicians, hospitals, and other
health care providers through capitation or discounted fee-for-service payments.
The Company intends to compensate its capitated providers at a flat
per-member/per-month rate, utilizing financial participation in risk pools to
encourage physicians to provide high-quality medical care through the
application of the Company's Quality Management Program. The PPO providers will
be compensated on a discounted fee-for-service basis, and the indemnity
providers will be paid on pre-established fee schedule rates, less deductibles
and coinsurance amounts paid by enrollees. Providers generally will be required
to obtain pre-authorization for certain treatments and will be obligated to
deliver health care according to the health plan's Treatment Standards in order
to assure proper treatment and prevent inappropriate charges. The Company will
obtain reinsurance of catastrophic and excess claims through NBR. Thus, the
health plans will allocate financial risk among the Company, participating
providers, insurers, and enrollees.
Recent Developments
Mississippi. The Company plans to launch its first health plan in
Mississippi during the first quarter of calendar 1997. To accelerate entry into
the health plan business in Mississippi, the Company has entered into a
definitive agreement to acquire Canton, an inactive holder of a certificate of
authority to operate an HMO in Mississippi, and has arranged for MedSouth to
provide health care services through its provider network consisting of
approximately 350 physicians, four hospitals, and several ancillary health
service providers in the Gulfport, Mississippi area. The Company has also
established a MSO to provide administrative and management services to MedSouth.
On January 8, 1997 the Department of Insurance of the State of Mississippi
approved the Canton acquisition, and the closing is scheduled to occur during
January 1997. Upon closing of the acquisition of Canton, the Company will be in
a position to provide HMO health care services to enrollees in six counties in
southern Mississippi. The Company then intends to enlist other service
providers, primarily in the northern and the Delta regions of Mississippi, and
to apply for qualification to provide services to Medicaid beneficiaries in
Mississippi. Certain of the sellers of Canton and MedSouth will be minority
owners of the Mississippi health plan, and MedSouth will have an ownership
interest in the MSO that will provide administrative services to MedSouth. The
Company anticipates that it will be in a position to offer PPO and
point-of-service options to enrollees in Mississippi approximately six months
after the introduction of the HMO.
Tennessee. The Company, together with 35 local primary care
physician-shareholders, has organized a provider network for a health plan to
serve 16 counties in the Cumberland Valley region of Tennessee. The physician
network has contracted with over 285 primary care physicians and 650 specialty
physicians to provide services on a capitated fee and discounted fee for service
basis. The Company is in the process of contracting with hospitals and other
providers to complete this network. The Company plans to apply to the state of
Tennessee for an HMO license utilizing this network in the first quarter of
calendar 1997. The Company also has organized a MSO to provide administrative
services to the network and the health plan.
Kentucky. The Company has identified Kentucky as a natural extension of
its health plan business because of its proximity to Tennessee, a favorable
regulatory environment, and the Company's experience in Kentucky with its
Quality Management Program.
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SALES AND MARKETING
The Company markets its Quality Management Program through a direct sales
force consisting of three full-time sales professionals. The sales force employs
a team marketing approach utilizing Company physicians. The Company participates
in hospital trade shows and utilizes a proprietary database to identify
prospective hospital-clients on the basis of CMI and demographic information.
The Company has found that its most successful engagements have evolved from
acceptance of its Quality Management Program by each of the hospital-prospect's
administrative, attending physician, and medical records staff groups. Once the
Company has identified a prospective hospital-client, it provides introductory
information designed to demonstrate the effectiveness and potential benefits of
the program to the prospect's senior administrative and financial officers.
Thereafter, the Company follows a coordinated effort to include the hospital's
attending physicians and medical records specialists in the engagement decision
making process.
The Company currently plans to market its health plans through a small
full-time sales force that will include members of the Company's senior
management and local and national third-party brokers and agents. The Company
will market its health plans to local commercial employers, individuals, and
self-funded employers. In addition, the Company will contract with sponsors of
government programs such as state welfare agencies. Once a payor has selected
the Company to provide health plan services, the Company will shift its
marketing focus to prospective enrollees through newsletters, brochures,
enrollee education programs, seminars, direct mail advertising, and responses to
satisfaction surveys. The Company intends to develop print advertising directed
at payors and direct advertising to prospective enrollees through consumer media
campaigns. The Company's marketing programs will emphasize the local physician
ownership of the health plan, commitment to preventative care, access to quality
providers and services, understanding of the particular local market, variety of
products, and price stability. The Company believes that the local physician
ownership of its health plans will be advantageous to its marketing effort in
the Gulfport, Mississippi area where it will offer its first health plan.
The Company intends to apply for Medicaid approval of its health plans in
Mississippi and Tennessee. Once its plans are so approved, the welfare agency in
each state will assign Medicaid-qualified residents to the Company's health plan
after giving consideration to the patient's choice of physician and choice of
available health plans. The Company's physician network will provide services to
Medicaid recipients in return for capitated payments. The Company believes that
its name recognition and reputation as a locally owned health plan will be
significant factors in encouraging Medicaid recipients to select the Company's
health plan over competing plans. The Company intends to apply for Medicare risk
contracts after each health plan reaches minimum commercial membership
requirements.
CUSTOMERS
Since 1991, the Company has provided its Quality Management Program in
approximately 84 hospitals located in 15 states. Currently, the Company is
providing its Quality Management Program at approximately 32 hospitals in 13
states. The Company's clients are located principally in rural markets where
health care facilities frequently lack the resources to develop internal quality
training programs. The Company seeks two-year agreements with each Quality
Management Program client. The Company's engagement is often continued beyond
the initial two-year term on a fixed fee basis. Out of approximately 84
engagements, only four have been terminated prior to the end of the contract
term.
Services provided to hospitals operated by Quorum resulted in approximately
42% of the Company's revenue in fiscal 1996 and approximately 25% of the
Company's revenue for the first quarter of fiscal 1997. Quorum operates 249
acute care facilities in 41 states. Over the past five years, the Company has
provided its Quality Management Program at 33 Quorum-operated facilities.
Currently, the Company is providing Quality Management Program services at 12
Quorum-operated facilities. Historically, the on-site management of each Quorum
hospital has made its own decision regarding the engagement of the Company and
the Company has entered into a separate contract with each engaging Quorum
facility. The Company has no long-term contractual or other relationships with
Quorum.
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The Company recently contracted to provide Quality Management Program
services to Community Medical Center in Toms River, New Jersey, under an
agreement that provides for an initial fixed fee of $225,000 per month. The
monthly fee is subject to quarterly adjustment based upon the case mix index
experience of the hospital during the preceding quarterly period of the
agreement. The agreement with Community Medical Center has an initial term of 30
months commencing December 1, 1996, subject to early termination rights
beginning in April 1997, and is renewable annually.
The Company anticipates that the customers of its health plan business will
include employees and individuals located in its health plan market areas and
state welfare agencies servicing Medicaid recipients located in those areas.
Large employers offering self-funded health plans will be sought as customers of
the Company's MSOs. See "Business -- Sales and Marketing."
COMPETITION
Although its Quality Management Program services are significantly
different from those offered by other hospital consulting services, the Company
competes for consulting business primarily with revenue-optimization service
companies. Approximately 500 to 700 companies of varying size offer
revenue-optimization services that may be considered competitive with the
Company. Competitors include the health care consulting practice groups of
Andersen Consulting, the Gailer Review Group, Health Care Management Advisors,
Inc., Iameter, MC Strategies, Inc., National Coding Service, Inc., Quality
Medical Consultants, Inc., and J. A. Thomas & Associates, Inc., an Ernst & Young
preferred provider. Most of these firms have substantially greater financial,
technical, marketing, and management resources than the Company. The Company
does not believe that any single company commands significant market share.
Larger, more established consulting firms have an enhanced competitive position
due, in part, to established name recognition and direct access to
hospital-clients through the provision of other services. Smaller firms,
although not necessarily offering services comparable to those of the Company,
compete on the basis of price. There can be no assurance that the Company will
continue to be able to compete successfully. The Company competes for its
Quality Management Program clients by distinguishing its services from those
provided by revenue optimization service companies, which generally do not use a
physician-dominated consulting staff comparable to that of the Company or
embrace a peer-to-peer teaching approach.
The managed care industry is highly competitive. The Company's health plans
will compete with other providers of health care services, including regional
hospitals and physician practice groups. Competitors include large indemnity
insurers with established managed care operations, such as Aetna, Blue Cross &
Blue Shield, CIGNA, and Prudential; HMOs, such as U.S. Health Care, Humana,
Kaiser Permanente, and Quorum; physician management companies, such as
MedPartners/Mulliken; and physician sponsored organizations. Many competitors
offer a broader range of health care services than the Company's health plans
will offer, have extensive relationships with group specialty practices, and
have financial, managerial, marketing, and technical resources that are much
greater than those of the Company.
The managed health care industry has experienced significant changes in
recent years, primarily as a result of rising health care costs. Employer groups
have demanded a variety of health care options, such as traditional indemnity
insurance, HMOs, PPOs, and point-of-service options. The Company's proposed
operations ultimately will compete with providers of all of these products. The
Company will be required to respond to various competitive factors affecting the
health care industry generally, including new medical technologies that may be
introduced, general trends relating to demand for health care services,
regulatory, economic, and political factors, changes in patient demographics,
and competitive pricing strategies by HMOs and other health care plans. The
Company will be subject to competition in any new geographic area it may enter,
with respect to any products it may offer, and with respect to any commercial
and governmental health care programs developed. There can be no assurance that
the Company will be able to compete successfully.
The Company believes that health plans are in demand in rural communities
where the transition from traditional fee-for-service to capitation has lagged
other areas of the country. The Company believes that the principal competitive
factors in the health plan market include price, participation by practicing
physicians, reputation in the community and other rural markets, documented
performance, profitability, and quality.
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<PAGE> 37
Based upon these competitive factors, the Company believes that it will be able
to compete successfully in the rural markets by adhering to its business
strategy.
GOVERNMENT REGULATION
The Company is subject to various state and federal laws that regulate the
relationship between providers of health care services and payors as well as
laws and regulations relating to business corporations in general. Although many
aspects of the Company's Quality Management Program have not been the subject of
state or federal regulatory interpretation, the Company believes its current
operations are, and its proposed operations will be, in material compliance with
applicable laws. There can be no assurance, however, that a review of the
Company's current or proposed businesses by courts or regulatory authorities
will not result in a determination that could adversely affect the operations of
the Company or that the health care regulatory environment will not change so as
to restrict the Company's existing operations or their expansion.
In recent years, numerous legislative proposals have been introduced or
proposed in the United States Congress and in some state legislatures that would
effect major changes in the United States health care system at both the
national and state level. It is not clear at this time which proposals, if any,
will be adopted or, if adopted, what effect such proposals would have on the
Company's business. There can be no assurance that currently proposed or future
health care legislation or other changes in the administration or interpretation
of governmental health care programs will not have a material adverse effect on
the Company.
Licensure
All states impose licensing requirements on individual physicians and on
certain types of providers of health care services. While the performance of
consulting services to hospitals and management services on behalf of medical
practices does not currently require any regulatory approval on the part of the
Company, there can be no assurance that such activities will not be subject to
licensure in the future.
Corporate Practice of Medicine
Many states, including Mississippi, Tennessee, and Kentucky, maintain
prohibitions against physicians practicing medicine as a business corporation.
These laws vary from state to state and are enforced by the state courts and
regulatory authorities with broad discretion. The Company could incur liability
in the event it fails to enter into appropriate contractual arrangements with
physicians or other health care professionals in conjunction with its consulting
activities or health plans. The Company will not employ physicians to practice
medicine, will not represent to the public that it offers medical services, and
will not control or interfere with the practice of medicine by physicians.
Accordingly, the Company does not believe that its operations will violate
applicable state laws regulating the practice of medicine by a business
corporation. However, because the laws governing the corporate practice of
medicine vary from state to state, any expansion of the operations of the
Company to a state with strict corporate practice of medicine laws may require
the Company to modify its operations, resulting in increased financial risk to
the Company. In addition, there can be no assurance that the Company's
arrangements with health care providers will not be successfully challenged as
constituting the unauthorized practice of medicine.
State Fee-Splitting and Referral Prohibitions
A number of states have enacted laws that prohibit the payment for
referrals and other types of kickback arrangements and prohibit physicians from
splitting professional fees. These statutes are sometimes quite broad and, as a
result, prohibit otherwise legitimate business arrangements. A number of states,
for example, prohibit compensation arrangements that provide for the payment of
rent for furnishing space, facilities, equipment, or personnel services used by
a licensed physician based on a percentage of income from such physician's
practice. Penalties for violating these statutes may include revocation,
suspension, or probation of the physician's license or other disciplinary
action, as well as monetary penalties. Alleged violations also have been used to
declare a contract to be void as against public policy.
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As described below, many states have enacted laws that prohibit physicians
and, in some cases, all health care workers, from splitting fees or referring
patients to entities with which such physician or health care worker has a
financial relationship, regardless of the patient's source of payment. Most
states provide exceptions that permit health care workers to provide health
services personally and as part of a group practice.
Tennessee prohibits a physician from referring patients to an entity in
which the physician has an investment interest. The definition of an investment
interest does not include an investment in a publicly traded entity. Penalties
for violation of this prohibition include licensing sanctions and civil
penalties up to $5,000 for each prohibited referral.
Kentucky prohibits a health care provider from knowingly soliciting,
receiving, or offering any remuneration in return for purchasing, leasing,
ordering, or arranging for any goods, service, or items for which payment may be
received, regardless of the source of payment. In addition, no provider may
knowingly make, offer, or receive a payment for referring a patient to another
provider for the furnishing of benefits regardless of the source of payment. The
penalties for a violation of this provision may be a fine, prohibition on
billing or collecting from patients or third-party payors, or repayment of
reimbursement for the services related to the referral. In addition, Kentucky
prohibits a physician from giving or receiving, directly or indirectly, any
compensation for referring a person to communicate with a licensed physician in
such physician's professional capacity or for any professional services not
actually and personally rendered. The penalties for a violation of this
provision may be a five-year probation or suspension or revocation of such
physician's license.
Pursuant to the terms of the Quality Management Program agreements and the
proposed management services agreements for the Company's health plans, the
Company will receive fees based upon receivables and a percentage of premiums.
The Company believes that its fee structures comply in all material respects
with the fee splitting laws of the states in which it currently operates or
proposes to operate in the future. However, there can be no assurance that such
laws will not be interpreted broadly or amended to be more expansive. Further,
expansion of the operations of the Company to certain jurisdictions may require
it to comply with such jurisdictions' regulations, which could require
structural and organizational modifications of the Company's business. Such
changes, if any, could have a material adverse effect on the Company. However,
since the Company believes that it meets many of the states' exceptions and
intends to structure its health plans to comply with such statutes, the Company
believes that the risk of state action taken against the Company or any of the
Company's contracted health care providers pursuant to the above-referenced
provisions is minimal.
State Regulation of Insurance Business and HMOs
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. Many state insurance commissioners have interpreted their
insurance statutes to prohibit entities from entering into risk-based managed
care contracts unless there is an entity licensed to engage in the business of
insurance in the chain of contracts. An entity not licensed to provide insurance
that contracts directly with a self-insured employer in such a state may be
deemed to be engaged in the unlicensed business of insurance. The Company
intends to obtain all required or appropriate licenses for its health plan
business operations as an HMO or as a provider network. NBR has agreed to
arrange licensed insurers to provide indemnity coverage to enrollees in the
Company's health plans. The Company believes that it is and will be in
compliance with the laws that regulate the business of insurance in the states
in which it does business, but there can be no assurance that future
interpretations of insurance and health care network laws by 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.
Many states also require managed care organizations to contract with any
willing qualified provider that desires to contract with the organization. The
Company could incur liability in the event a managed care organization under the
Company's control fails so to contract.
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Federal Medicare and Medicaid Related Regulation
Since the Company's Quality Management Business focuses on Medicare
reimbursement and the Company's health plans will provide services to Medicare
and Medicaid patients, the Company is and will be subject to a number of federal
laws prohibiting certain activities and arrangements relating to services or
items, that are reimbursable by Medicare or Medicaid or other state-funded
programs.
The False Claims Act. The False Claims Act imposes civil liability on
persons or corporations that make false or fraudulent claims to the government
for payment. A violation of the False Claims Act may result in liability for
monetary penalties and exclusion from the Medicare and Medicaid programs. The
Company takes measures to ensure that hospital-clients of its Quality Management
Program do not submit false or fraudulent claims to the government, and the
Company intends to take similar protective measures with respect to its health
plan business. Because the Company's current revenue relates to Medicare
payments and the Company anticipates that the health plan business could, in the
future, receive significant revenue from Medicare and Medicaid, an exclusion
from the Medicaid and Medicare programs as a result of a violation of the False
Claims Act could have a material adverse effect on the Company. The Company, as
well as its hospital-clients, could incur liabilities for violations of the
False Claims Act.
Prohibition on Assignment. The Medicare and Medicaid laws prohibit the
assignment of Medicare and Medicaid receivables. As a result, the Company could
not obtain a pledge of Medicare and Medicaid receivables as security for payment
of remuneration owed to the Company by a health care provider if it so desired.
Similarly, the Company could not pledge or assign its Medicare and Medicaid
receivables as security for bank lines of credit or other lending arrangements.
Anti-kickback Statute. Certain provisions of the Social Security Act
prohibit the offer, payment, solicitation, or receipt of any form of
remuneration either (i) in return for the referral of Medicare or state health
program patients or patient care opportunities, or (ii) in return for the
recommendation, arrangement, purchase, lease, or order of items or services that
are covered by all federal health care programs, except the federal employees
health benefit plans (the "Anti-kickback Statute"). The Anti-kickback Statute is
broad in scope and has been broadly interpreted by courts in many jurisdictions,
potentially subjecting such arrangements to lengthy expensive investigations and
prosecutions initiated by federal and state governmental officials. In
particular, HCFA has expressed concern that physician ownership in entities in a
position to receive referrals from such physicians may violate the Anti-kickback
Statute.
In part to address concerns regarding the Anti-kickback Statute, since July
1991 the Department of Health and Human Services has promulgated regulations
that provide exceptions, or "safe harbors," for certain transactions that are
deemed not to violate the Anti-kickback Statute. The safe harbors include
protection for waivers or coinsurance and deductible amounts, negotiated
discounts by providers, risk-sharing arrangements with managed care plans,
management and personal services agreements, and investment interests. Since the
Company intends to offer physicians an ownership interest in its health plans,
the Company plans to structure such ownership so that payments made to
physician-investors in its health plans in the form of a return on an investment
interest, such as a dividend or interest income, meet the investment interest
safe harbor and therefore are not deemed to be prohibited "remuneration" under
the Anti-kickback Statute. Accordingly, the Company intends to structure its
health plan ownership so that (i) no more than 40% of the investment interests
will be held by investors who are in a position or make or influence referrals
to the health plan; (iii) no more than 40% of the gross revenue of the health
plan will come from referrals, items or services furnished or business otherwise
generated from investors; and (iii) the terms of the investment interests
offered to investors who are in a position to make or influence referrals to the
health plan will be the same as the terms offered to investors who are not in
such position. There can be no assurance, however, that more than 40% of the
gross revenue of any of the Company's health plans will consistently come from
referrals, items or services furnished or business otherwise generated from
persons or entities other than physician-investors.
Violation of the Anti-kickback Statute is a felony, punishable by fines up
to $25,000 per violation and imprisonment for up to five years. In addition, the
Department of Health and Human Services may impose civil penalties excluding
violators from participation in Medicare or state health programs. Although the
Company does not believe that its current operations violate or that its
proposed operations will violate the
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Anti-kickback Statute, there can be no assurance that in the future regulatory
authorities will not determine that the Company's operations violate the
Anti-kickback Statute. Because the Company anticipates that its health plans
will receive significant revenue as a result of health care services provided to
Medicaid and Medicare enrollees, an exclusion from the Medicaid and Medicare
programs as a result of a violation of the Anti-kickback Statute could have a
material adverse effect on the Company.
Federal Self-Referral Prohibitions. Significant prohibitions against
physician self-referrals for services covered by Medicare and Medicaid programs,
commonly known as "Stark II," were enacted by Congress in the Omnibus Budget
Reconciliation Act of 1993. These prohibitions amended prior physician
self-referral legislation known as "Stark I," which applied only to clinical
laboratory referrals, by dramatically enlarging the list of services and
investment interests to which the referral prohibitions apply. Subject to
certain exemptions, Stark II prohibits a physician or a member of such
physician's immediate family from referring Medicare or Medicaid patients to any
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, unless
such practice satisfies the "group practice" exception. The designated health
services include the provision of clinical laboratory services, radiology, and
other diagnostic services, including ultrasound 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.
Although the definitions of ownership interests and compensation
arrangements are extremely broad, certain ownership interests and compensation
arrangements will not trigger the proscriptions of Stark II. In particular,
exceptions exist for prepaid health plans and personal services agreements. The
prepaid health plan exception covers a physician's ownership interest and
compensation arrangement in the case of services furnished by a prepaid health
plan. The personal services agreement exception covers compensation pursuant to
certain written agreements, such as management or independent contractor
agreements. Because the Company will use reasonable efforts to ensure that its
health plans meet the exceptions described above, the Company believes that the
risk that referrals of patients by physicians who have an interest in the health
plans or an agreement with the Company will be limited.
Interpretative regulations clarifying the provisions of Stark I were issued
on August 14, 1995, and Stark II regulations are scheduled to be proposed in
January 1997. Although the Company believes its proposed health plan operations
will be in compliance with the Stark legislation, future regulations could
require the Company to modify its health plan business. In addition, the
penalties for violating Stark II include a prohibition on Medicaid and Medicare
reimbursement and civil penalties of as much as $15,000 for each violative
referral and $100,000 for participation in a "circumvention scheme" and
exclusion from the Medicare and Medicaid programs. Because the Company
anticipates that its health plans will receive significant revenue as a result
of health care services provided to Medicaid and Medicare enrollees, an
exclusion from the Medicaid and Medicare programs as a result of a violation of
the self-referral prohibitions could have a material adverse effect on the
Company.
The Health Insurance Portability and Accountability Act of 1996. The
Health Insurance Portability and Accountability Act of 1996 (the "Portability
Act") expands the penalties for health care fraud. The Portability Act prohibits
a knowing and willful scheme such as engaging in a pattern or practice of
upcoding or unnecessary care to defraud any health care benefit program,
including Medicare and state health care programs. The penalties include
exclusion from the Medicare program and monetary penalties. The Company takes
measures to ensure that hospital-clients of its Quality Management Program do
not engage in schemes to defraud health care programs, and the Company intends
to take similar protective measures with respect to its health plan business.
Because the Company's current revenue relates to Medicare payments and the
Company anticipates that the health plan business could, in the future, receive
significant revenue from Medicare, an exclusion from the Medicare program as a
result of a violation of the Portability Act could have a material adverse
effect on the Company.
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POTENTIAL LIABILITY AND INSURANCE
The Company may be exposed to potential professional liability claims by
patients of hospital-clients and patients of providers that participate in the
Company's health plans as a result of the negligence or other acts of
physicians. The physicians employed by the Company as part of the Quality
Management Program do not treat patients, attend patient encounters, make any
treatment or diagnosis decisions, or provide any medical services in connection
with that program. However, any claims based on allegations that the Company's
physicians are engaged in the practice of medicine that ultimately are
successful could result in substantial damage awards to claimants, which may
exceed the limits of any applicable insurance coverage. The Company's health
plans will involve the delivery of health care services to the public.
Consequently, the health plans will be exposed to the risk of professional
liability claims and may become subject to claims, suits, or complaints relating
to services and products provided by such plans, and there can be no assurance
that such claims will not be asserted against the Company. In connection with
its Quality Management Program business, the Company currently maintains special
errors and omissions insurance of $1,000,000 per occurrence with a deductible of
$10,000 and general liability insurance of $2,000,000 in the aggregate and
$1,000,000 per occurrence. In its health plan business, the Company will
maintain an occurrence malpractice liability insurance policy with limits of
$5,000,000 in the aggregate and $1,000,000 per occurrence and will require
physicians to maintain malpractice liability insurance in amounts which it deems
adequate for the types of medical services provided. There can be no assurance,
however, that such insurance will be sufficient to cover potential claims or
that adequate levels of coverage will be available in the future at a reasonable
cost. In the event of a successful claim against the Company that is partially
or completely uninsured, the Company's financial condition and reputation could
be materially and adversely affected.
New forms of managed care organizations have increasingly been subject to
liability for reasons such as failure to credential providers properly or
contributing to physician malpractice. In response, many managed care
organizations and other health care entities are not only obtaining general
liability insurance but also managed care and professional liability insurance
coverage. Medical directors also have also faced professional liability claims
and state licensure challenges. The Health Care Quality Improvement Act of 1986,
however, provides immunity from damages for professional review actions taken by
professional review bodies, including health plans, in good faith, provided that
certain procedural standards are met. The Company intends to comply with such
procedures in its professional review actions. However, no assurances can be
given that the insurance coverages obtained by the Company, tort reform, or
immunity provisions will be adequate to insure against all claims that may be
asserted against the Company or that insurance coverage will continue to be
available at acceptable costs.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS, AND LICENSES
The Company regards certain features of its services and documentation as
proprietary and relies on a combination of contract, copyright, and trade secret
laws and other measures to protect its proprietary information. As part of its
confidentiality procedures, the Company generally obtains nondisclosure
agreements from its employees and hospital-clients and limits access to and
distribution of its software, documentation, and other proprietary information.
The Company believes that trade secret and copyright protection are less
significant than factors such as the knowledge, ability, and experience of the
Company's employees and the timeliness and quality of the services it provides.
The Company has recently filed applications with the U.S. Patent and Trademark
Office to register the tradenames and marks Birman(TM), Care3(TM), and
WellFirst(TM) for use in the Company's businesses. Care3 will be the brand name
of the Company's health plans.
FACILITIES
The Company is headquartered in Cookeville, Tennessee, where it occupies
approximately 5,800 square feet of space on a month-to-month basis. In addition,
the Company rents offices in Phoenix, Arizona, Jackson, Mississippi, and
Gulfport, Mississippi. The Company recently entered into a lease for an
approximately 20,000 square foot building to be built to the Company's
specifications in Cookeville, Tennessee. The term of the lease will be ten years
commencing upon completion of the building, which is currently expected to occur
in or
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before the fourth quarter of calendar year 1997. The Company will have an option
to purchase the new building. All office space occupied by the Company is leased
from unaffiliated third parties. Cookeville is approximately 80 miles east of
Nashville, Tennessee.
EMPLOYEES
At January 2, 1997, the Company employed 72 persons and has contractual
arrangements with 22 physicians and other health care professionals. A total of
43 employees are responsible for the administrative affairs of the Company; 22
employees are directly involved in the Quality Management Program business; and
11 employees are directly involved in developing the health plans. The Company
is not subject to any collective bargaining agreements, and it considers its
relations with employees to be good.
With respect to its Quality Management Program, the Company has a staff of
seven full-time employee-physicians and 16 part-time physician-consultants, all
of whom have at least six years of medical practice experience, specializing in
areas that include internal medicine, surgery, obstetrics, gynecology,
pediatrics, oncology, family practice, and emergency room medicine. The Company
also employs 13 full-time and four part-time allied health specialist employees.
LEGAL PROCEEDINGS
On November 2, 1995, Dallas Riley, Jr., a former employee of Birman &
Associates, Inc., filed a lawsuit against Birman & Associates, Inc., David N.
Birman, M.D., and Liberty Mutual Insurance Company in the Circuit Court of
Putnam County, Tennessee seeking permanent disability benefits under the
Tennessee Worker's Compensation statute or, alternatively, $500,000 in damages
for personal injury sustained through the alleged negligence of Birman &
Associates, Inc. Mr. Riley claims that he was permanently disabled as a result
of an injury that he suffered at a Company-sponsored event. The Company's
workers' compensation insurance carrier has recently advised the Company that it
intends to deny coverage of the claim on the basis that the plaintiff is an
independent contractor and not an employee. The Company's general liability
insurance carrier has agreed to defend the Company in the action under
reservation of rights to contest the timeliness of the Company's notice. The
Company believes Mr. Riley's claims are without merit and intends to defend this
action vigorously. There are no other material legal proceedings pending against
the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each
member of the Board of Directors and each executive officer of the Company.
Directors of the Company hold office until the next annual meeting of
shareholders or until their successors have been elected and qualified. Officers
are appointed by and serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------ --- --------------------------------------------
<S> <C> <C>
David N. Birman, M.D. .................... 45 Chairman of the Board, President, and Chief
Executive Officer
Sue D. Birman............................. 38 Executive Vice President and Director
Robert D. Arkin........................... 42 Executive Vice President, Chief Operating
Officer, Secretary, General Counsel, and
Director
Douglas A. Lessard........................ 35 Vice President, Treasurer, and Chief
Financial Officer
Vincent W. Wong........................... 38 President and Chief Executive Officer - BMC
Health Plans, Inc.
Mark C. Wade.............................. 40 Executive Vice President-Sales and
Marketing - BMC Health Plans, Inc.
D. Bradley Seitzinger, M.D. .............. 41 Executive Vice President -- Physician
Services - Birman & Associates, Inc.
William F. Barenkamp, II.................. 41 Vice President and Chief Operating Officer -
Birman & Associates, Inc.
James J. Rhodes........................... 39 Director
Diedrich Von Soosten...................... 56 Director
</TABLE>
David N. Birman, M.D. has served as Chairman of the Board of Directors,
President, and Chief Executive Officer of the Company and its predecessor
corporations since May 1991. From February 1990 to mid-1991, Dr. Birman served
as Chairman of the Board of Birman, Mathes & Associates, Inc., a consulting
company providing quality management and Medicare reimbursement review services
to rural hospitals. From April 1989 until January 1990, Dr. Birman served as a
consultant, providing quality management and Medicare reimbursement review
services to five rural hospitals. Previously, Dr. Birman was employed by
Whitwell Medical Center, Whitwell, Tennessee where, as a physician assistant, he
performed certain clinical duties and developed patient care management
techniques and reporting strategies that formed the basis for development of the
Quality Management Program. Dr. Birman received his M.D. from the Universidad
Tecnologica de Santiago; his B.A., with honors in Biology from Occidental
College; and certification as a physician assistant in primary care and surgery
from the University of Southern California School of Medicine.
Sue D. Birman has served as Executive Vice President and a director of the
Company and its predecessor corporations since May 1991 and served as their
Chief Financial Officer from May 1991 until June 1996. From February 1990 to
mid-1991, Ms. Birman assisted Dr. Birman in the financial aspects and business
development of Birman, Mathes & Associates, Inc. From April 1989 until January
1990, Ms. Birman assisted Dr. Birman in the operation of his consulting firm.
Ms. Birman is the spouse of David N. Birman, M.D.
Robert D. Arkin has served as Chief Operating Officer of the Company since
June 1996, as a director since April 1996, and as Secretary and General Counsel
since March 1996. Prior to joining the Company, Mr. Arkin was engaged for 16
years in the private practice of law, concentrating in the areas of securities,
health, and intellectual property law, including from 1980 to 1984 as an
associate and from 1985 to 1986 as a partner with the Minneapolis, Minnesota law
firm of Leonard, Street and Deinard. Mr. Arkin is licensed to practice law in
the states of Minnesota and Georgia.
Douglas A. Lessard has served as Chief Financial Officer of the Company
since June 1996 and as Controller since January 1996. Mr. Lessard provided
accounting and consulting services to the Company from
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April 1995 through December 1995. From March 1993 through March 1995, Mr.
Lessard served as the Chief Executive Officer and from September 1991 through
March 1993, as Chief Financial Officer of the American Institute of Professional
Careers, Inc., a private college in Phoenix, Arizona, which provides
post-secondary education in legal and other specialized career fields. From
March 1989 through September 1991, Mr. Lessard was employed as the Controller
for Arizona Building and Development, Inc., a real estate development and
management company. Mr. Lessard is a Certified Public Accountant in the State of
Arizona.
Vincent W. Wong has served as President, Chief Executive Officer, and as a
director of BMC Health Plans, Inc. since January 1996. For approximately five
years before joining BMC Health Plans, Inc., Mr. Wong was employed by Foundation
Health Corporation, a New York Stock Exchange listed managed care organization.
During such time, Mr. Wong served in positions of increasing responsibility
culminating in his service as Vice President of Operations. From 1984 to 1991,
Mr. Wong was employed in marketing by Blue Cross Blue Shield of Ohio.
Mark C. Wade has served as Executive Vice President -- Sales and Marketing
of BMC Health Plans, Inc. since July 1995 and has been employed by BMC Health
Plans, Inc. since March 1995. From November 1993 to March 1995, Mr. Wade served
as the founding director and president of Forum Health Care, Inc., a consulting
firm specializing in the development and management of integrated health care
delivery networks for both the private and public sectors. From February 1988 to
November 1993, Mr. Wade served in several positions at Health Management
Associates, Inc., an Arizona company that, commencing in 1982, developed and
managed four prepaid Medicaid plans that operated in 11 of Arizona's 15
counties, a prepaid Medicaid plan in Las Vegas, Nevada, and other managed care
programs. Mr. Wade's last position with Health Management Associates, Inc. was
as vice president for all private sector commercial sales and marketing activity
with particular emphasis on commercial provider networks, including marketing to
large insurance companies and self-funded payors, integrated delivery systems,
pharmacy networks, managed care benefit designs, and utilization management and
third-party administration services.
D. Bradley Seitzinger, M.D. currently serves as Executive Vice
President -- Physician Services of Birman & Associates, Inc. Since September
1991, Dr. Seitzinger has served in several other capacities at Birman &
Associates, Inc., including Regional Physician Manager, Vice President of
Quality Management, Vice President of Physician Operations, and Senior Vice
President of Physician Operations. From September 1989 to September 1991, Dr.
Seitzinger was assistant vice president of medical affairs for Peer Review
Systems, Inc., a private company that contracted with HCFA to perform Medicare
physician peer review for the State of Ohio. Prior to 1993, Dr. Seitzinger
worked in concurrent capacities, including, from 1986 to 1992, assistant
professor of internal medicine at The Ohio State University College of Medicine,
and from 1987 to 1992, private practice as an internal medicine specialist at
Medical Evaluation Services, Inc., Columbus, Ohio. He is certified by the
American Board of Internal Medicine. Dr. Seitzinger received his M.D. from The
Ohio State University. He is licensed to practice medicine in Arizona, Indiana,
Ohio, and Tennessee.
William F. Barenkamp, II has been employed by Birman & Associates, Inc.
since November 1993, currently as Vice President and Chief Operating Officer.
From January 1991 to November 1993, Mr. Barenkamp attended Dallas Theological
Seminary, receiving an M.A. in Theology in 1993. During such period, Mr.
Barenkamp served as associate pastor at East Grand Baptist Church, Dallas,
Texas. From November 1986 to December 1990, Mr. Barenkamp was the Director of
Marketing and Sales for CSS/Cooper Hotels, Inc. of Memphis, Tennessee.
Diedrich Von Soosten became a director of the Company in September 1996.
Since 1990, Mr. Von Soosten has been Managing Partner of Coloney Von Soosten &
Associates, Inc., a management consulting and financial advisory services firm
specializing in business turnarounds. Prior to 1990, Mr. Von Soosten was an
independent consultant providing restructuring and turnaround assistance to
underperforming businesses. Mr. Von Soosten is a former director and officer of
the Association of Certified Turnaround Professionals.
James J. Rhodes became a director of the Company in September 1996. Since
1986, Mr. Rhodes has served as a Regional Manager in the pension division of
ManuLife Financial (The Manufacturer's Life Insurance Company (USA)), a global
financial services company offering annuities, insurance, and investment
products.
43
<PAGE> 45
BOARD COMMITTEES
There are two committees of the Board of Directors: the Compensation
Committee and the Audit Committee. The Compensation Committee determines the
Company's executive compensation policies and practices and changes in
compensation and benefits for senior management. The Compensation Committee also
administers the Company's 1995 Stock Option Plan. The Audit Committee reviews
the internal accounting procedures of the Company, consults with the Company's
independent accountants, and reviews the services provided by such accountants.
Messrs, Rhodes and Von Soosten currently serve as the members of the
Compensation Committee and Audit Committee.
COMPENSATION OF DIRECTORS
All directors receive reimbursement for reasonable expenses incurred in
connection with their attendance at Board of Directors and committee meetings.
In addition, all non-employee directors receive $2,000 for each Board meeting
that they attend. All non-employee directors are also entitled to receive awards
and options to purchase shares of Common Stock under the 1996 Non-Employee
Directors' Non-Qualified Stock Option Plan. See "Management -- Stock Option
Plans -- 1996 Directors' Option Plan."
EXECUTIVE COMPENSATION
The following table provides certain information concerning the
compensation earned by the Company's Chief Executive Officer and the four next
highly compensated executive officers who received compensation in excess of
$100,000 for services rendered in all capacities to the Company for fiscal 1996
(the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
OTHER -----------------------------
ANNUAL ALL OTHER
SALARY BONUS COMPENSATION AWARDS/OPTIONS COMPENSATION
NAME AND THEN-PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
- --------------------------------- ---- ------- ------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
David N. Birman, M.D. ........... 1996 350,000 60,000 69,025 -- --
Chairman of the Board, 1995 275,000 -- 52,922 -- --
President, and Chief Executive 1994 262,500 -- 48,223 -- --
Officer(1)
D. Bradley Seitzinger, M.D. ..... 1996 203,301 15,000 14,272 145,879 --
Executive Vice President -- 1995 174,325 -- 13,731 -- --
Physician Services(2) 1994 158,290 -- 13,344 -- --
Sue D. Birman.................... 1996 150,000 40,000 11,834 -- --
Executive Vice President, Chief 1995 118,617 -- 11,968 -- --
Financial Officer (until May 1994 63,643 -- 11,279 -- --
1996), and Director(3)
Richard M. Ross.................. 1996 202,500 -- 17,588 -- --
Vice Chairman (until August 1995 15,000 -- 49,713 -- --
1996) (4) 1994 -- -- 27,095 -- --
Robert D. Arkin.................. 1996 41,250 -- 247,885 291,758 --
Chief Operating Officer and 1995 -- -- -- -- --
Secretary(5) 1994 -- -- -- -- --
</TABLE>
- ---------------
(1) Other Annual Compensation for David N. Birman, M.D. for fiscal 1996 was
$5,484 in medical insurance premiums, $40,903 in officer's life insurance
premiums, $19,638 in auto allowance, and $3,000 in 401(k) matching
contributions; for fiscal 1995, $4,900 in medical insurance premiums,
$29,550 in officer's life insurance premiums, $16,000 in auto allowance,
and $2,472 in 401(k) matching contributions; and for fiscal 1994, $6,156 in
medical insurance premiums, $26,472 in officer's life insurance premiums,
and $15,595 in auto allowance.
44
<PAGE> 46
(2) Other Annual Compensation for D. Bradley Seitzinger, M.D. for fiscal 1996
was $5,484 in medical insurance premiums, $6,708 in auto allowance, and
$2,080 in 401(k) matching contributions; for fiscal 1995, $4,900 in medical
insurance premiums, $7,188 in auto allowance, and $1,643 in 401(k) matching
contributions; and for fiscal 1994, $6,156 in medical insurance premiums and
$7,188 in auto allowance.
(3) Other Annual Compensation for Sue D. Birman for fiscal 1996 was $9,834 in
auto allowance and $2,000 in 401(k) matching contributions; for fiscal 1995,
$11,000 in auto allowance and $968 in 401(k) matching contributions; and for
fiscal 1994, $11,279 in auto allowance.
(4) Mr. Ross served as Vice-Chairman and a director of the Company from February
1994 to August 1996. Effective September 1, 1996, Mr. Ross resigned as
Vice-Chairman and a director of the Company. Mr. Ross currently serves as a
consultant to the Company. See "Certain Transactions." Other Annual
Compensation for Richard M. Ross for fiscal 1996 was $4,783 in medical
insurance, and $12,805 in officer's life insurance premiums; for fiscal
1995, $2,039 in medical insurance and $47,674 in consulting fees paid to Mr.
Ross prior to being employed by the Company; and for fiscal 1994, $27,095 in
consulting fees paid to Mr. Ross prior to being employed by the Company.
(5) Other Annual Compensation for Robert D. Arkin for fiscal 1996 was $985 in
medical insurance premiums and $246,900 in legal fees paid to Mr. Arkin
prior to being employed by the Company.
EXECUTIVE BONUS PLAN
The Company has adopted an Executive Bonus Plan (the "Executive Bonus
Plan") pursuant to which officers of the Company are eligible to receive cash
bonuses after the close of each fiscal year of the Company. The Executive Bonus
Plan is administered by the Compensation Committee of the Board of Directors.
Bonuses are determined on the basis of (i) the operating profit of the Company,
(ii) net revenue growth of the Company achieved as a percentage of the goal
established by the Company at the beginning of the fiscal year, and (iii) the
officer's individual performance and contribution to the Company. An officer's
bonus for any fiscal year may not exceed such officer's annual base salary
multiplied by the Target Bonus Percentage as defined in the Executive Bonus Plan
in such fiscal year.
STOCK OPTION PLANS
1995 Stock Option Plan
The Company has adopted the 1995 Stock Option Plan (the "1995 Option Plan")
pursuant to which key employees, including officers and directors who are
employees, and consultants of the Company are eligible to receive incentive
stock options as well as non-qualified stock options and stock appreciation
rights ("SARs"). The Plan, which expires in October 2005, is administered by the
Compensation Committee of the Board of Directors. Incentive stock options
granted under the Plan are exercisable for a period of up to 10 years from the
date of grant at an exercise price which is not less than the fair market value
of the Common Stock on the date of the grant, except that the term of an
incentive stock option granted under the Plan to a stockholder owning more than
10% of the outstanding Common Stock may not exceed five years and the exercise
price of an incentive stock option granted to such a stockholder may not be less
than 110% of the fair market value of the Common Stock on the date of the grant.
Non-qualified stock options may be granted on terms determined by the
Compensation Committee of the Board of Directors. SARs, which give the holder
the privilege of surrendering such rights for an amount of stock equal to the
appreciation in the Common Stock between the time of grant and the surrender,
may be granted on any terms determined by the Compensation Committee of the
Board of Directors. The Plan also permits the grant of new stock options to
participants who tender shares of the Company's Common Stock as payment of the
exercise price of stock options or the payment of withholding tax ("Reload
Options"). The Reload Options will be granted at the fair market value of a
share of Common Stock on the date of the grant and will be exercisable six
months following the date of the grant. The Plan also includes limited option
valuation rights upon a change of control of the Company. As of June 30, 1996,
options for the exercise of 1,006,566 shares have been granted under the 1995
Option Plan at the exercise price of $1.37 per share. A total of 1,458,780
shares of Common Stock are reserved for issuance under the 1995 Option Plan.
45
<PAGE> 47
1996 Directors' Option Plan
On September 9, 1996, the Company adopted the 1996 Non-Employee Directors'
Non-Qualified Stock Option Plan (the "1996 Directors' Plan"). A total of 100,000
shares of Common Stock are reserved for issuance under the 1996 Directors' Plan.
Under this plan, upon initial election to the Board of Directors, non-employee
directors are awarded options to purchase 6,000 shares of Common Stock. Upon
each subsequent election to the Board of Directors, non-employee directors
receive option awards to purchase 3,000 shares of Common Stock. These options,
which have an exercise price equal to the fair market value of the shares of
Common Stock as of the date of grant, vest at the rate of 33.33% per year. All
options awarded under the 1996 Directors' Plan expire on the first to occur of
(i) 10 years after the date of grant, or (ii) 90 days after the date the
director is no longer serving in such capacity for reasons other than death or
disability. On September 9, 1996, each of Messrs. Rhodes and Von Soosten were
granted options to purchase 6,000 shares of Common Stock under this plan at an
exercise price of $6.25 per share.
FISCAL 1996 OPTION GRANTS
The following table sets forth certain information concerning individual
grants of incentive stock options to executive officers and directors during the
fiscal year ended June 30, 1996:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES TOTAL
UNDERLYING OPTIONS EXERCISE
OPTIONS GRANTED PRICE PER
NAME OF DIRECTOR OR OFFICER GRANTED UNDER PLAN SHARE EXPIRATION DATE
------------------------------------ --------- ------------- --------- ---------------
<S> <C> <C> <C> <C>
D. Bradley Seitzinger, M.D.......... 145,879 14.5% $1.37 2/1/06
William F. Barenkamp, II............ 72,940 7.2% $1.37 2/1/06
Douglas A. Lessard.................. 72,940 7.2% $1.37 2/1/06
Vincent W. Wong..................... 218,819 21.7% $1.37 1/29/06
Mark C. Wade........................ 145,879 14.5% $1.37 11/1/05
Robert D. Arkin..................... 291,757 29.0% $1.37 3/1/06
</TABLE>
At year end, June 30, 1996, none of the options granted by the Company were
exercisable and the value attributed to the shares of Common Stock of the
Company was equal to the $1.37 exercise price of the options. None of the
persons named in the Summary Compensation Table exercised options during the
fiscal year ended June 30, 1996.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with each of its current executive
officers. The employment agreements provide for annual salaries that generally
are subject to annual adjustments for increases in the Consumer Price Index;
participation in employee deferred compensation plans, stock options and
retirement and insurance plans; and include customary noncompetition,
nondisclosure, and severance provisions. Set forth below is a summary of other
principal provisions of those employment agreements:
In March 1996, the Company entered into an employment agreement with David
N. Birman, M.D. for a term expiring June 30, 2001, pursuant to which Dr. Birman
serves as Chief Executive Officer of the Company. The employment agreement
provides for an initial base salary of $350,000 per annum, participation in the
Executive Bonus Plan, and other compensation not to exceed $60,000 per annum.
The employment agreement provides for severance benefits upon termination as a
result of death, for "cause," by mutual agreement, and as a result of
disability. If Dr. Birman's employment is terminated for reasons other than
death, "cause," mutual agreement, or disability, he shall be entitled to receive
his base salary (as most recently adjusted) for the remainder of the initial
term or the applicable renewal term and all unvested stock options granted to
him under 1995 Option Plan shall accelerate and become vested. If Dr. Birman's
employment is not renewed following expiration of the initial term or the
applicable renewal term, he shall be entitled to receive, as severance, his base
salary (as last adjusted) payable over the 12-month period following the
severance of his employment.
46
<PAGE> 48
In March 1996, the Company entered into an employment agreement with Sue D.
Birman for a term expiring June 30, 2001, pursuant to which Ms. Birman serves as
Executive Vice President of the Company. The employment agreement provides for
an initial base salary of $150,000 per annum, participation in the Executive
Bonus Plan, and other compensation not to exceed $10,000 per annum. The
employment agreement provides for severance benefits upon termination as a
result of death, for "cause," by mutual agreement, and as a result of
disability. If Ms. Birman's employment is terminated for reasons other than
death, "cause," mutual agreement, or disability, she shall be entitled to
receive her base salary (as most recently adjusted) for the remainder of the
initial term or the applicable renewal term and all unvested stock options
granted to her under 1995 Option Plan shall accelerate and become vested. If Ms.
Birman's employment is not renewed following expiration of the initial term or
the applicable renewal term, she shall be entitled to receive, as severance, her
base salary (as last adjusted) payable over the 12-month period following the
severance of her employment.
In March 1996, the Company entered into an employment agreement with Robert
D. Arkin for a term expiring June 30, 2001, pursuant to which Mr. Arkin serves
as Chief Operating Officer, Secretary, and General Counsel of the Company. The
employment agreement provides for an initial base salary of $206,250 per annum,
participation in the Executive Bonus Plan, and other compensation not to exceed
$9,000 per annum. The employment agreement provides for severance benefits upon
termination as a result of death, for "cause," by mutual agreement, and as a
result of disability. If Mr. Arkin's employment is terminated for reasons other
than death, "cause," mutual agreement, or disability, he shall be entitled to
receive his base salary (as most recently adjusted) for the remainder of the
initial term or the applicable renewal term and all unvested stock options
granted to him under 1995 Option Plan shall accelerate and become vested. If Mr.
Arkin's employment is not renewed following expiration of the initial term or
the applicable renewal term, he shall be entitled to receive, as severance, his
base salary (as last adjusted) payable over the 12-month period following the
severance of his employment.
In March 1996, the Company entered into an employment agreement with
Douglas A. Lessard for a term expiring June 30, 2001, pursuant to which Mr.
Lessard serves as Chief Financial Officer of the Company. The employment
agreement provides for an initial base salary of $120,000 per annum,
participation in the Executive Bonus Plan, and other compensation not to exceed
$9,000 per annum. The employment agreement provides for severance benefits upon
termination as a result of death, for "cause," by mutual agreement, and as a
result of disability. If Mr. Lessard's employment is terminated for reasons
other than death, "cause," mutual agreement or disability, he shall be entitled
to receive his base salary (as most recently adjusted) for the remainder of the
initial term or the applicable renewal term and all unvested stock options
granted under the 1995 Option Plan shall accelerate and become vested. If Mr.
Lessard's employment is not renewed following expiration of the initial term or
the applicable renewal term, he shall be entitled to receive, as severance, his
base salary (as last adjusted) payable over the 12-month period following his
severance of employment.
In March 1996, the Company entered into an employment agreement with
Vincent W. Wong for a term expiring on January 31, 1999, pursuant to which Mr.
Wong serves as President and Chief Executive Officer of BMC Health Plans, Inc.
The employment agreement provides for an initial base salary to Mr. Wong of
$180,000 per annum. The employment agreement also provides Mr. Wong with the
opportunity to earn up to an additional $180,000 per annum based upon the number
of enrollees in health plans developed, managed, or operated by the Company and
health plan net earnings. The employment agreement provides for severance
benefits upon termination as a result of death, for "cause," by mutual
agreement, and as a result of disability. If Mr. Wong's employment is terminated
for reasons other than death, "cause," mutual agreement, or disability, he shall
be entitled to receive his base monthly salary (as most recently adjusted)
payable over the six month period following the severance of his employment, and
all unvested stock options granted to him under the 1995 Option Plan shall
accelerate and become vested.
In July 1995, the Company entered into an employment agreement with Mark C.
Wade for a term expiring on September 1, 1998, pursuant to which Mr. Wade serves
as Executive Vice President -- Sales and Marketing of BMC Health Plans, Inc. The
employment agreement provides for a base salary of $165,000 per annum with the
opportunity for Mr. Wade to earn up to an additional $85,000 per annum based
upon the
47
<PAGE> 49
number of enrollees in health plans developed, managed, or operated by the
Company. Mr. Wade's employment agreement does not contain a severance provision.
The Company has entered into an employment agreement with D. Bradley
Seitzinger, M.D. pursuant to which Dr. Seitzinger provides supervisory and other
services to the Company on a full-time basis. The employment agreement is
terminable by either party upon 14 days' prior written notice. The employment
agreement provides for the review of Dr. Seitzinger's salary from time to time
and authorizes the payment of additional compensation, by way of salary, bonus,
or otherwise, at the discretion of the Company. Dr. Seitzinger currently
receives a base salary of $208,000 per annum. Dr. Seitzinger's employment
agreement does not contain a severance provision.
In November 1993, the Company entered into an employment agreement with
William F. Barenkamp, II pursuant to which Mr. Barenkamp provides supervisory
and other services to the Company on a full-time basis. The employment agreement
is terminable by either party without prior notice upon a material breach of the
terms thereof. The employment agreement provides for the review of Mr.
Barenkamp's salary from time to time and authorizes the payment of additional
compensation, by way of salary, bonus, or otherwise, at the discretion of the
Company. Pursuant to the employment agreement, Mr. Barenkamp currently receives
a base salary of $100,000 per annum. Mr. Barenkamp's employment agreement does
not contain a severance provision.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation limits, to the maximum extent
permitted by the Delaware GCL, the personal liability of directors for monetary
damages for breach of their fiduciary duties as directors other than for
liabilities arising from (i) any breach of the directors' duty of loyalty to the
Company and its stockholders; (ii) acts or omissions that involve intentional
misconduct, fraud, or knowing violations of law; (iii) the payment of
distributions in violation of the Delaware GLC; or (iv) transactions in which
the director received an improper personal benefit. The Company's Bylaws require
the Company to indemnify directors and officers for all costs reasonably
incurred in connection with any action, suit, or proceeding in which such
director or officer is made a party by virtue of his or her being a director or
officer of the Company except where such director or officer is finally adjudged
to have been derelict in the performance of his or her duties as such director
or officer.
The Company has entered into indemnification agreements with its directors
and executive officers, which contain provisions which are in some respects
broader than the specific indemnification provisions contained in the Company's
Certificate of Incorporation and Bylaws. The indemnification agreements require
the Company, among other things, to indemnify such directors and officers
against certain liabilities that may arise by reason of their status as
directors or officers (other than liabilities arising from willful misconduct of
a culpable nature), to advance expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to carry directors' and
officers' insurance, if available on reasonable terms. The Company believes
these indemnification agreements are necessary to attract and retain qualified
persons as directors and officers. It is the opinion of the staff of the
Securities and Exchange Commission that indemnification provisions such as those
that are contained in these indemnification agreements have no effect on a
director's or officer's liability under the federal securities laws.
Except for the legal action described under "Business -- Legal
Proceedings," there is no pending litigation or proceeding involving any
director, officer, employee, or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or other proceeding that may result in a claim for such indemnification.
CERTAIN TRANSACTIONS
Prior to June 30, 1995, the Company operated, as a division, a livestock
breeding farm on property owned by David N. Birman, M.D. and Sue D. Birman, his
spouse. At that time, Dr. Birman was the sole stockholder, President, and a
director of the Company, and Mrs. Birman was an Executive Vice President, the
Chief
48
<PAGE> 50
Financial Officer, and a director of the Company. Prior to June 30, 1994, the
Company lent to Dr. and Mrs. Birman approximately $482,000, which was used
primarily to improve their farm property and residence. During fiscal 1995, Dr.
and Mrs. Birman repaid $442,000 of such loan and also received additional
advances of approximately $270,000, resulting in an outstanding principal
balance of $310,000 at June 30, 1995. As of June 30, 1995, the Company
contributed all of its farm assets, subject to the related liabilities, to a new
corporation, Birman Farms, Inc., and distributed all of the outstanding shares
of capital stock of Birman Farms, Inc. to Dr. Birman. This dividend distribution
of property was valued by the Company at $230,000. Subsequent to the
distribution, the Company authorized additional advances to Dr. Birman through
September 1996 of approximately $465,000 to defray the operating and ownership
costs of the farm. Accordingly, as of September 9, 1996, Dr. Birman owed a total
of $775,000 to the Company. The Company has made no further advances to Dr.
Birman to defray the operating and ownership costs of the farm. All amounts owed
to the Company by Dr. Birman accrued interest at a rate of 7% per annum through
August 31, 1996 and will accrue interest at the prime rate of American National
Bank and Trust Company of Chicago from and after September 1, 1996. Interest is
payable annually, in arrears. The outstanding principal balance of the loan plus
all unpaid accrued interest is due and payable in full on August 31, 1999. Dr.
Birman has the option to tender shares of Common Stock owned by him in repayment
of the loan at any time on or prior to January 31, 1997 at a per share price
equal to the initial offering price of the Common Stock or after January 31,
1997 at a price per share equal to 92% of the average closing bid price of the
Common Stock as reported over the previous 20 consecutive trading days. Dr.
Birman has agreed to tender approximately 177,000 shares of Common Stock valued
at $4.50 per share in repayment of approximately $796,500 of outstanding
principal and interest as of the date of this Prospectus which will repay in
full all outstanding advances to Dr. and Ms. Birman. No additional loans will be
made by the Company to any member of management without the approval of the
non-employee members of the Board of Directors of the Company. Dr. Birman has
granted the Underwriters a 45-day option to purchase up to shares of
Common Stock at the initial public offering price, solely to cover
over-allotments, if any.
Richard M. Ross served as Vice-Chairman and as a director of the Company
from February 1994 to August 1996. Effective September 1, 1996, Mr. Ross retired
as Vice-Chairman and a newly formed company controlled by Mr. Ross was engaged
as a consultant to the Company pursuant to a consulting agreement (the
"Consulting Agreement"). While serving as Vice-Chairman of the Company, Mr. Ross
was actively involved in policy-making matters relating to day-to-day operations
of the Company and corporate finance. As a consultant, Mr. Ross will undertake
special assignments designated by Dr. Birman and the Board of Directors
including, among other things, developing business plans for acquired companies
and evaluating acquisition candidates. The Consulting Agreement provides for Mr.
Ross to serve as the provider of consulting services thereunder, provides for a
fee to be paid to the consultant firm of $186,000 per annum payable in equal
monthly installments over the 12-month term of the agreement, and provides for
termination of the Consulting Agreement by mutual agreement, upon the occurrence
of an uncured material breach, upon the death of Mr. Ross, or 10 days after
receipt of notice of termination from the consultant. Except as otherwise
provided or as otherwise agreed to by the parties, the Consulting Agreement will
be renewed annually by the Company for up to an additional five consecutive
years. The Company also paid Mr. Ross a $26,000 severance fee and has
transferred to Mr. Ross personal computer equipment used by Mr. Ross in
rendering services to the Company and having a value of less than $1,000. In
addition, Dr. Birman has sold Mr. Ross 175,000 shares of Company Common Stock in
consideration for a $175,000 principal amount promissory note.
49
<PAGE> 51
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of December 31, 1996 and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, based
on information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person (or group of
affiliated persons) who is known by the Company to own beneficially more than 5%
of the Common Stock; (ii) each of the Named Executive Officers; (iii) each of
the directors; and (iv) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
COMMON SHARES COMMON SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
------------------------ ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------------ ------------ ------- --------- -------
<S> <C> <C> <C> <C>
David N. Birman, M.D.(1)........................ 5,081,408 75.84% 4,904,408 56.02%
Sue D. Birman(1)................................ 5,081,408 75.84% 4,904,408 56.02%
D. Bradley Seitzinger, M.D.(2).................. 85,096(3) 1.22% 85,096(3) *
Robert D. Arkin(2).............................. 97,252(3) 1.38% 97,252(3) 1.11%
Richard M. Ross................................. 175,000 2.52% 175,000 2.00%
James J. Rhodes(2).............................. 0 0 0 0
Diedrich Von Soosten(2)......................... 0 0 0 0
Directors and officers as a group (10
persons)...................................... 5,463,069(3) 76.93% 5,463,069(3) 62.41%
</TABLE>
- ---------------
* Less than 1%
(1) Includes 1,000,000 Escrow Shares but excludes 177,000 to be tendered upon
consummation of the offering. See "Principal Stockholders -- Escrow Shares"
and "Certain Transactions". David N. Birman, M.D. disclaims beneficial
ownership as to 547,047 shares beneficially owned by Sue D. Birman
individually. Sue D. Birman disclaims beneficial ownership as to 4,344,663
shares beneficially owned by David N. Birman, M.D. individually. The address
of Dr. and Mrs. Birman is c/o the Company at 502 Gould Drive, Cookesville,
Tennessee 38506.
(2) Does not include options to purchase shares of Common Stock scheduled to
first become exercisable more than 60 days after the date of this
Prospectus. See "Management -- Stock Option Plans" and "Management -- Fiscal
1996 Option Grants."
(3) Includes shares subject to options exercisable within 60 days after the date
of the Prospectus of 48,626 shares for Dr. Seitzinger, 97,252 shares for Mr.
Arkin, and 170,191 for all officers and directors as a group.
Dr. Birman, and have granted to the
Underwriters an option exercisable within 45 days of the date of this Prospectus
to purchase up to a total of 300,000 shares of Common Stock at the initial
public offering price, less underwriting discounts and commissions set forth on
the cover page of this Prospectus, to cover over-allotments, if any. See
"Underwriting." If the Underwriters exercise the over-allotment option in full,
Dr. Birman, , and will sell , and
shares, respectively, resulting in Dr. Birman owning shares ( %),
owning shares ( %) and owning shares ( %) of the
outstanding Common Stock after this offering.
ESCROW SHARES
In connection with this offering David N. Birman, M.D. has deposited
1,000,000 shares of Common Stock into escrow. The Escrow Shares are not
assignable or transferable. Of the Escrow Shares, (i) 333,333 will be released
from escrow if the Company's net after tax income per share (the "Minimum
After-Tax Income") for the fiscal year ending June 30, 1997 equals or exceeds
$0.17 per share of then issued and outstanding shares of Common Stock of the
Company; (ii) 333,333 Escrow Shares (or, if the condition set forth in (i) above
was not met, 666,666 Escrow Shares) will be released if the Minimum After-Tax
Income for the fiscal year ending June 30, 1998, equals or exceeds $0.26 per
share of then issued and outstanding
50
<PAGE> 52
shares of Common Stock of the Company; and (iii) 333,334 Escrow Shares (or, if
the conditions set forth in either (i) or (ii) were not met, the remaining
Escrow Shares) will be released if the Minimum After-Tax Income for the fiscal
year ending June 30, 1999, equals or exceeds $0.39 per share of then issued and
outstanding shares of Common Stock of the Company.
The Minimum After-Tax Income amounts set forth above will be (a) calculated
exclusive of any extraordinary earnings or charges (including any charges
incurred in connection with the release from escrow of the Escrow Shares and any
Escrow Property (as defined below) in respect thereof) and (b) audited by the
Company's independent public accountants. The Minimum After-Tax Income amounts
set forth above will be subject to adjustment in the event of any stock splits,
reverse stock splits, or other similar events.
Any money, securities, rights, or property distributed in respect of the
Escrow Shares shall be received by the escrow agent, including any property
distributed as dividends or pursuant to any stock split, merger,
recapitalization, dissolution, or total or partial liquidation of the Company
(the "Escrow Property"). If the applicable Minimum After-Tax Income levels set
forth above have not been met by July 1, 1999, the Escrow Shares, as well as any
dividends or other distributions made with respect thereto, will be canceled and
contributed to the capital of the Company. The Company expects that the release
of the Escrow Shares to Dr. Birman would be deemed compensatory and,
accordingly, would result in a substantial charge to operations, which would
equal the then fair market value of such shares. Such charge could substantially
increase the loss or reduce or eliminate the Company's net income for financial
reporting purposes for the period during which such shares are, or become
probable of being, released from escrow. Although the amount of compensation
expense recognized by the Company will not affect the Company's total
stockholders' equity, it may have a negative effect on the market price of the
Company's securities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 16 of the Notes to the Company's
Consolidated Financial Statements.
The Minimum After-Tax Income levels set forth above were determined by
negotiation between the Company and the Representative and should not be
construed to imply or predict any future earnings by the Company or any increase
in the market price of its securities.
DESCRIPTION OF SECURITIES
GENERAL
The Company is incorporated in the State of Delaware. The Company is
authorized to issue 25,000,000 shares of Common Stock, $.001 par value per
share, and 5,000,000 shares of Preferred Stock, $.001 par value per share.
PREFERRED STOCK
There are no shares of Preferred Stock issued and outstanding. The Board of
Directors is authorized, subject to any limitations prescribed by law, without
further action of the stockholders of the Company, to issue from time to time
such shares of Preferred Stock in one or more classes or series, to establish
the number of shares to be included in each such class or series, to fix or
alter the designations, preferences, limitations and relative, participating,
optional or other special rights and qualifications or restrictions of the
shares of each such class or series, including the dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption (including sinking
fund provisions), redemption price or prices, liquidation preferences, and the
number of shares constituting any class or series or the designations of such
class or series. The issuance of Preferred Stock could adversely affect, among
other things, the rights of existing stockholders or could delay or prevent a
change in control of the Company without further action by the stockholders. The
issuance of Preferred Stock could decrease the amount of earnings and assets
available for distribution to holders of Common Stock. In addition, any such
issuance could have the effect of delaying, deferring, or preventing a change in
control of the Company and could make the removal of the present management of
the Company more difficult.
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<PAGE> 53
COMMON STOCK
As of January 1, 1997, there were 6,931,082 shares of Common Stock issued
and outstanding, held of record by 38 stockholders. All of the issued and
outstanding shares of Common Stock are fully paid and non-assessable and all of
the shares of Common Stock issued in this Offering will be fully paid and
non-assessable. Holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders and are
entitled to receive such dividends, if any, as may be declared from time to time
by the Board of Directors out of funds legally available therefor, subject to
the dividend preferences of the Preferred Stock, if any. Upon the liquidation,
dissolution, or winding up of the affairs of the Company, whether voluntary or
involuntary, the holders of Common Stock are entitled to share ratably in all
assets of the Company available for distribution after payment of all
liabilities and liquidation preferences of the Preferred Stock, if any. Holders
of Common Stock have no preemptive rights, no cumulative voting rights, and no
rights to convert their Common Stock into any other securities.
SECTION 203 OF THE DELAWARE GCL AND CERTAIN CHARTER PROVISIONS
Upon the completion of this offering, the Company will be subject to
Section 203 of the Delaware GCL. Section 203 of the Delaware GCL prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation; (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder owns at least 85% of the outstanding voting stock, or
(iii) on or after such date, the business combination is approved by the board
of directors and by the affirmative vote of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder. A "business
combination" includes mergers, asset sales, and other transactions resulting in
a financial benefit to the stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years, did
own) 15% or more of the corporation's voting stock.
The Company's Certificate of Incorporation and By-Laws contain a number of
provisions relating to corporate governance and to the rights of stockholders.
Certain of these provisions may be deemed to have a potential "antitakeover"
effect in that such provisions may delay, defer, or prevent a change of control
of the Company. These provisions include (a) the requirement that not less than
60% of the voting power present and entitled to vote approve any proposal for
(1) the merger of the Company with any other corporation, (2) the sale, lease,
transfer, or other disposition of all or any substantial part of the Company's
assets, or (3) the issuance of any of the Company's voting securities in
exchange or payment for any securities or other property of any corporation or
other entity; (b) the requirement that certain business combinations with a
control person be approved by the affirmative vote of not less than 66 2/3% of
the votes entitled to be cast generally by the outstanding Common Stock or be
unanimously approved by the Company's Board of Directors; and (c) the authority
of the Board of Directors to issue series of Preferred Stock with such voting
rights and other powers as the Board of Directors may determine.
REGISTRATION RIGHTS
If the Company proposes to register any of its securities under the
Securities Act, either for its own account or for the account of other holders
of Company securities, NBR, as the holder of 291,756 shares of Common Stock, and
its permitted transferees are entitled to notice of such registration and are
entitled to include their shares of Common Stock therein, provided, among other
conditions, that the underwriters of such offering will have the right to limit
the number of such shares of Common Stock included in the registration. The
foregoing "piggyback" registration rights do not apply to the registration of
securities for issuance in merger or acquisition transactions or pursuant to
employee compensation programs. The "piggyback" registration rights expire at
the time as NBR may resell its shares of Common Stock pursuant to Rule 144(k)
under the Securities Act. NBR has waived its rights with respect to this
offering. The number of shares held by NBR that are subject to the registration
rights will be reduced to the extent that any such shares are sold pursuant to
the exercise of the Underwriters' over-allotment option. See "Principal and
Selling Stockholders" and "Underwriting."
52
<PAGE> 54
TRANSFER AGENT
The Company's Transfer Agent is American Stock Transfer and Trust Company,
40 Wall Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
8,754,082 shares of Common Stock assuming no exercise of the Representative's
Warrants or other outstanding options and warrants. All shares acquired in this
offering, other than shares that may be acquired by "affiliates" of the Company
as defined by Rule 144 under the Securities Act, will be freely transferable
without restriction or further registration under the Securities Act.
The remaining 6,754,082 shares of Common Stock outstanding after this
offering are deemed "restricted securities," as that term is defined under Rule
144 promulgated under the Securities Act, in that such shares were issued and
sold by the Company in private transactions not involving a public offering. Of
the 6,754,082 shares of Common Stock outstanding, approximately 292,000 shares
will be eligible for sale pursuant to Rule 144 commencing 90 days from the date
of this Prospectus. NBR, as the holder of 291,756 shares of Common Stock, and
its permitted transferees are entitled to certain rights with respect to the
registration of such shares under the Securities Act. See "Description of
Securities -- Registration Rights." The number of outstanding shares of Common
Stock that are considered restricted securities and the number of shares of
Common Stock held by NBR subject to registration rights (if NBR is a selling
stockholder) will be reduced to the extent of sales of such shares pursuant to
the Underwriters' over-allotment option, but will continue to be subject to the
lock-up agreements. See "Principal Stockholders."
In general, under Rule 144 as currently in effect, subject to satisfaction
of certain other conditions, a person (or persons whose shares are required to
be aggregated), including any affiliate of the Company, who beneficially owns
"restricted shares" for a period of at least two years, is entitled to sell
within any three-month period, a number of shares that does not exceed the
greater of 1% (approximately 87,540 shares after this offering) of the
then-outstanding shares of Common Stock, or if the Common Stock is quoted on
Nasdaq, the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of the required notice of sale with the
Securities and Exchange Commission. The seller also must comply with the notice
and manner of sale requirements of Rule 144, and there must be current public
information available about the Company. In addition, any person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for at
least three years and is not an affiliate of the Company can sell such shares
under Rule 144 without regard to any of the limitations described above.
The Company intends to file a registration statement under the Securities
Act to register 1,558,780 shares of Common Stock reserved for issuance upon the
exercise of options which have been or may be granted pursuant to the 1995
Option Plan and the 1996 Directors' Plan. See "Management -- Stock Option
Plans." Such registration statement is expected to be filed not earlier than one
year after the date of this Prospectus and is anticipated to become effective
upon its filing. After the effective date of such registration statement, shares
acquired upon the exercise of such options may generally be sold without
restriction in the public market, subject to Rule 144 notice requirements and
volume limitations for stockholders who are affiliates of the Company.
Each holder of Common Stock who is an officer, director, or key employee of
the Company has entered into a "lock-up" agreement providing that such persons
will not offer, sell, contract to sell, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, any shares of the Company's Common
Stock that they currently own or that they subsequently acquire upon exercise of
options or warrants for a period of 24 months after the date of this Prospectus
without the prior written consent of the Representative. In addition,
substantially all of the Company's other stockholders have agreed not to sell
their shares of Common Stock that they currently own or that they subsequently
acquire upon exercise of options or warrants for a period of 22 months after the
date of this Prospectus.
Prior to this offering, there has been no public market for the Common
Stock of the Company, and no predictions can be made regarding the effect, if
any, that future sales of restricted shares or the availability of restricted
shares for sale will have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of the restricted shares of Common
Stock in the public market could adversely affect the then prevailing market
prices for the Common Stock and could impair the Company's ability to raise
capital through the sale of its equity securities.
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<PAGE> 55
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through the Representative, Royce Investment Group,
Inc., have severally agreed to purchase from the Company the number of shares of
Common Stock set forth opposite their names at the initial public offering price
less the underwriting discount and commissions set forth on the cover page of
this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Royce Investment Group, Inc...............................................
Continental Broker-Dealer Corp. ..........................................
Total........................................................... 2,000,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby
(other than those covered by the over-allotment option described below) if the
Underwriters purchase any of the shares offered hereby. The Representative has
advised the Company that the Underwriters propose to offer the Common Stock to
the public at the public offering price set forth on the cover page of this
Prospectus, and that they may allow to certain dealers that are members of the
National Association of Securities Dealers, Inc. (the "NASD") concessions not in
excess of $. per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to other dealers
who are members of the NASD. After the commencement of this offering, the public
offering price, the concession, and the reallowance may be changed by the
Underwriters.
The Company has agreed to pay to the Representative a non-accountable
expense allowance equal to 3.0% of the gross proceeds derived from the sale of
the Common Stock offered hereby, including any Common Stock purchased from the
selling stockholders upon exercise of the Underwriters' over-allotment option,
of which $ has been paid to date. Any expenses in excess of such
expense allowance will be borne by the Underwriters. The Company also has agreed
to pay all expenses in connection with qualifying the shares of Common Stock
offered hereby for sale under the laws of such states as the Representative may
designate, including expenses of counsel retained for such purpose.
Certain stockholders of the Company have granted to the Underwriters an
option, exercisable during the 45-day period commencing on the date of this
Prospectus, to purchase up to 300,000 additional shares of Common Stock from
them at the public offering price set forth on the cover page of this
Prospectus, less underwriting discounts and commissions. The Underwriters may
purchase these shares solely to cover over-allotments, if any, in connection
with the sale of shares of Common Stock offered hereby. To the extent that the
Underwriters exercise this option, each Underwriter will be committed, subject
to certain conditions, to purchase a number of additional shares proportionate
to such Underwriter's initial commitment.
The Company has agreed to sell to the Representative and its designees, for
nominal consideration, the Representative's Warrants to purchase up to 200,000
shares of Common Stock. The Representative's Warrants will be exercisable during
the four-year period commencing one year from the date of this Prospectus at an
exercise price of $6.00 per share (120% of the initial public offering price of
the Common Stock), subject to adjustment in certain events. The Representative's
Warrants will not be transferable for a period of one year from the date of this
Prospectus except to officers of the Underwriters or members of the selling
group. The Company has agreed to register the Common Stock issuable upon
exercise of the Representative's Warrants under the Securities Act during the
four-year period commencing one year from the date of this Prospectus on two
separate occasions, the initial such registration to be at the Company's expense
and the second at the expense of the holders. The Company has also granted
certain "piggyback" registration rights to holders of the Representative's
Warrants. The Representative's Warrants include a provision permitting the
holders to elect a cashless exercise.
During the term of the Representative's Warrants, the holders will have the
opportunity to profit from a rise in the market price of the Company's Common
Stock with a resulting dilution in the interests of the Company's other
stockholders. Any profit realized by the holders of the Representative's
Warrants upon the sale of such warrants or the Common Stock issuable thereunder
may be deemed to be additional underwriting compensation. The holders of the
Representative's Warrants may be expected to exercise the Representative's
54
<PAGE> 56
Warrants at a time when the Company in all likelihood would be able to obtain
equity capital on terms more favorable than those provided in the
Representative's Warrants.
The Underwriters have informed the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
Prior to this offering, there has been no public market for any of the
Common Stock offered hereby. Accordingly, the offering price of the shares of
Common Stock offered hereby has been determined by negotiations between the
Company and the Representative and is not necessarily related to the Company's
asset value, net worth, or other established criteria of value. Factors
considered in determining such price and terms, in addition to prevailing market
conditions, include the history of and the prospects for the industry in which
the Company competes, the present state of the Company's development and its
future prospects, an assessment of the Company's management, the Company's
capital structure, the general condition of the securities markets, and such
other factors as were deemed relevant.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain liabilities in connection with the
Registration Statement, including liabilities under the Securities Act.
For a period of five years following the closing of this offering, the
Representative will have the right to nominate one member of the Company's Board
of Directors.
Upon completion of this offering, the Company will enter into a one-year
financial consulting agreement with the Representative. Under this agreement,
the Company will pay the Representative a fee equal to 1.5% of the gross
proceeds derived from the sale of Common Stock offered hereby, including any
Common Stock sold upon exercise of the over-allotment option, for financial
consulting services provided to the Company by the Representative. Also upon
completion of this offering, the Company and the Representative will enter into
an agreement that will provide that in the event the Representative arranges for
the sale of substantially all of the assets of the Company or for a merger,
consolidation, or acquisition during the five-year period commencing on the date
of this Prospectus, the Representative will receive a fee based on a sliding
scale ranging from 5% of the first $1.0 million of consideration, 4% of the
consideration between $1.0 million and $2.0 million, and 3% of the consideration
in excess of $2.0 million.
The foregoing is a brief summary of the material provisions of the
Underwriting Agreement and does not purport to be a complete statement of its
terms and conditions. A copy of the Underwriting Agreement is on file with the
Securities and Exchange Commission as an exhibit to the Registration Statement
of which this Prospectus is a part. See "Available Information."
The Representative has indicated its intention to make a market in the
Company's Common Stock after the offering made hereby. In connection with that
activity, the Representative may but shall not be required to effect
transactions which stabilize or maintain the market price of the Common Stock at
a level above that which might otherwise prevail in the open market. Such
stabilizing, if commenced, may be discontinued at any time.
LEGAL OPINIONS
The validity of the shares of Common Stock will be passed upon for the
Company by Rudnick & Wolfe, 203 North LaSalle Street, Chicago, Illinois. Certain
legal matters will be passed upon for the Underwriters by O'Connor, Cavanagh,
Anderson, Killingsworth & Beshears, a professional association, One East
Camelback Road, Phoenix, Arizona.
EXPERTS
The financial statements of the Company and of Canton for the fiscal year
ended June 30, 1996 included in this Prospectus have been audited by BDO
Seidman, LLP, independent certified public accountants. The financial statements
of the Company and Canton for the fiscal year ended June 30, 1995 included in
this Prospectus have been audited by Semple & Cooper, P.L.C., independent
certified public accountants, for the period indicated in their report thereof.
Such financial statements have been included herein in reliance upon the reports
of such firms given upon their authority as experts in accounting and auditing.
55
<PAGE> 57
CHANGE IN ACCOUNTANTS
On July 24, 1996 the Company, with the approval of the Board of Directors,
advised Semple & Cooper, P.L.C. that it was dismissing such accounting firm and
was retaining the accounting firm of BDO Seidman, LLP as independent public
accountants for the Company and its subsidiaries for the fiscal year ended June
30, 1996. The decision to retain BDO Seidman, LLP was made because of that
firm's extensive experience in representing public companies and was not
motivated by any disagreements between the Company and Semple & Cooper, P.L.C.
concerning any accounting matter. Semple & Cooper, P.L.C. had been retained
since 1994 and during the entire period of their engagement with the Company
there were no disagreements on any matter relative to accounting principles or
practices, financial statement disclosure, or auditing scope or procedures
which, if not resolved to Semple & Cooper, P.L.C.'s satisfaction, would have
resulted in a reference to the subject matters of the disagreement in connection
with its report. The Semple & Cooper, P.L.C. reports on the Company's financial
statements have not contained an adverse opinion or a disclaimer of opinion, nor
were the opinions qualified or modified as to uncertainty, audit scope, or
accounting principles, nor were there any events of the type requiring
disclosure under Item 304(a)(1)(iv) of Regulation S-B promulgated under the
Securities Act. During the two-year period prior to July 24, 1996, the Company
did not consult BDO Seidman, LLP concerning any matter or the type of opinion
that might be rendered.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus constitutes a part of the Registration Statement and does not contain
all of the information set forth therein and in the exhibits thereto, certain
portions of which have been omitted as permitted by the rules and regulations of
the Commission. For further information with respect to the Company and the
Common Stock offered hereby, reference is hereby made to such Registration
Statement and exhibits. Statements contained in this Prospectus as to the
contents of any document are not necessarily complete and in each instance are
qualified in their entirety by reference to the copy of the appropriate document
filed with the Commission. The Registration Statement, including the exhibits
thereto, may be examined without charge at the Commission's public reference
facility at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C.
20549. In addition, copies of all or any part of the Registration Statement,
including such exhibits thereto, may be obtained from the Commission at its
principal office in Washington, D.C., upon payment of the fees prescribed by the
Commission.
The Registration Statement and the reports and other information to be
filed by the Company following this offering in accordance with the Securities
Exchange Act of 1934, as amended, can be inspected and copied at the principal
office of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington D.C. 20549, and at the following regional offices of the Commission:
7 World Trade Center, New York, NY 10048, and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Il 60601. Copies of such material may
be obtained from the Public Reference Section of the Commission at its principal
office at 450 Fifth Street, N.W., Washington D.C. 20549, upon payment of the
fees prescribed by the Commission. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information regarding registrants, such as the Company, that file
electronically with the Commission.
The Company intends to provide its stockholders with annual reports
containing financial statements audited by independent auditors and quarterly
reports for the first three fiscal quarters of each year containing unaudited
summary consolidated financial information.
56
<PAGE> 58
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
Reports of Independent Certified Public Accountants............................ F-2 & F-3
Consolidated Balance Sheet as of June 30, 1996 and September 30, 1996
(Unaudited).................................................................. F-4
Consolidated Statements of Operations for the years ended June 30, 1995 and
1996 and the three months ended September 30, 1995 and 1996 (Unaudited)...... F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended
June 30, 1995 and 1996 and the three months ended September 30, 1996
(Unaudited).................................................................. F-6
Consolidated Statements of Cash Flows for the years ended June 30, 1995 and
1996 and the three months ended September 30, 1995 and 1996 (Unaudited)...... F-7
Notes to Consolidated Financial Statements..................................... F-8
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES PROFORMA FINANCIAL STATEMENTS
Introduction to Proforma Condensed Consolidated Financial Statements
(Unaudited).................................................................. F-18
Proforma Condensed Consolidated Balance Sheet as of September 30, 1996
(Unaudited).................................................................. F-19
Proforma Condensed Statement of Operations for the year ended June 30, 1996
(Unaudited).................................................................. F-20
Proforma Consolidated Statement of Operations for the three months ended
September 30, 1996 (Unaudited)............................................... F-21
Notes to Proforma Condensed Consolidated Financial Statements (Unaudited)...... F-22
CANTON MANAGEMENT GROUP, INC., (A DEVELOPMENT STAGE COMPANY)
Reports of Independent Certified Public Accountants............................ F-24 & F-25
Balance Sheet as of June 30, 1996 and September 30, 1996 (Unaudited)........... F-26
Statements of Operations for the years ended June 30, 1995 and 1996 and for the
period from October 3, 1993 (Inception) to June 30, 1996 and the three months
ended September 31, 1995 and 1996 (Unaudited)................................ F-27
Statements of Changes in Stockholder's Equity for the period from October 3,
1993 (Inception) to June 30, 1996 and the three months ended September 30,
1996 (Unaudited)............................................................. F-28
Statements of Cash Flows for the years ended June 30, 1995 and 1996 and for the
period from October 3, 1993 (Inception) to June 30, 1996 and the three months
ended September 30, 1995 and 1996 (Unaudited)................................ F-29
Notes to Financial Statements.................................................. F-30
</TABLE>
F-1
<PAGE> 59
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Birman Managed Care, Inc. and Subsidiaries
Cookeville, Tennessee
We have audited the accompanying consolidated balance sheet of Birman
Managed Care, Inc. and Subsidiaries (the "Company") as of June 30, 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Birman
Managed Care, Inc. and Subsidiaries at June 30, 1996, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
BDO Seidman, LLP
Los Angeles, California
August 2, 1996, except for
Notes 7 and 16, which are as
of September 9, 1996
F-2
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors of
Birman Managed Care, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity, and cash flows of Birman Managed Care, Inc. and
Subsidiaries for the year ended June 30, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations, changes in
stockholders' equity, and cash flows of Birman Managed Care, Inc. and
Subsidiaries for the year ended June 30, 1995, in conformity with generally
accepted accounting principles.
SEMPLE & COOPER, P.L.C.
Certified Public Accountants
Phoenix, Arizona
July 19, 1996
F-3
<PAGE> 61
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
JUNE 30, -------------
1996
---------- (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes 1 and 2)................ $1,872,343 $ 1,449,652
Accounts receivable, net of allowance for doubtful
accounts of $44,159
(Notes 1, 2, and 16).................................. 1,043,771 992,903
Prepaid expenses and other............................... 9,903 48,245
Notes receivable......................................... 22,323 27,802
Deferred tax asset (Notes 1 and 8)....................... 95,549 95,549
---------- ----------
Total current assets............................. 3,043,889 2,614,151
---------- ----------
Property and equipment, net of accumulated depreciation
(Notes 1, 4, 5 and 6).................................... 293,684 413,303
Note receivable-related party (Note 3)..................... 631,173 775,000
Deferred offering costs (Note 1)........................... 25,000 475,960
Goodwill (Note 1).......................................... 16,145 15,741
Other assets............................................... -- 47,506
---------- ----------
Total assets..................................... $4,009,891 $ 4,341,661
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable (Note 5)................. $ 2,435 $ 2,496
Current portion of capital lease obligations (Note 6).... 1,540 2,505
Accounts payable......................................... 117,025 698,158
Accrued expenses......................................... 2,050 --
Income taxes payable (Notes 1 and 8)..................... 635,205 148,308
---------- ----------
Total current liabilities........................ 758,255 851,467
Note payable, less current portion (Note 5)................ 5,028 4,404
Capital lease obligations, less current portion (Note 6)... 2,009 --
Deferred income taxes payable (Notes 1 and 8).............. 55,620 55,620
---------- ----------
Total liabilities................................ 820,912 911,491
---------- ----------
Commitments and contingencies (Notes 3 and 7).............. -- --
Stockholders' equity: (Note 11)
Preferred stock, $.001 par value, 5,000,000 shares
authorized, none issued or outstanding................ -- --
Common stock, $.001 par value, 25,000,000 shares
authorized, 6,931,082 issued and outstanding.......... 6,931 6,931
Additional paid-in capital............................... 1,780,612 1,780,612
Retained earnings........................................ 1,401,436 1,642,627
---------- ----------
Total stockholders' equity....................... 3,188,979 3,430,170
---------- ----------
Total liabilities and stockholders' equity....... $4,009,891 $ 4,341,661
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-4
<PAGE> 62
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------- THREE MONTHS ENDED
JUNE 30, JUNE 30, -------------------------------
1995 1996 SEPTEMBER 30, SEPTEMBER 30,
---------- ---------- 1995 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................................. $4,817,572 $8,416,946 $ 1,417,291 $ 2,372,137
Cost of revenue......................... 2,381,023 2,278,932 431,208 888,516
---------- ---------- ---------- ----------
Gross margin............................ 2,436,549 6,138,014 986,083 1,483,621
Selling, general and administrative
expenses.............................. 3,113,660 4,236,607 925,731 1,169,119
---------- ---------- ---------- ----------
Income (loss) from operations........... (677,111) 1,901,407 60,352 314,502
---------- ---------- ---------- ----------
Other income (expense):
Interest expense...................... (57,857) (44,835) (10,295) (247)
Interest income....................... 28,758 47,257 4,661 38,338
Loss on sale of assets................ (1,464) (5,065) -- --
---------- ---------- ---------- ----------
(30,563) (2,643) (5,634) 38,091
---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes.......................... (707,674) 1,898,764 54,718 352,593
Provision for income tax (expense)
benefit (Note 8)...................... 224,331 (726,983) (19,750) (111,402)
---------- ---------- ---------- ----------
Income (loss) from continuing
operations............................ (483,343) 1,171,781 34,968 241,191
Discontinued operations: (Note 10)
Loss from discontinued operations (net
of income tax benefit of $143,700
in 1995)........................... (215,550) -- -- --
---------- ---------- ---------- ----------
Net income (loss)....................... $ (698,893) $1,171,781 $ 34,968 $ 241,191
========== ========== ========== ==========
Primary income (loss) per common stock
share: (Note 1)
Income (loss) from continuing
operations......................... $ (.07) $ .17 $ .01 $ .04
Loss from discontinued operations..... (.03) -- -- --
---------- ---------- ---------- ----------
Net income (loss) per share........... $ (.10) $ .17 $ .01 $ .04
---------- ---------- ---------- ----------
Weighted average common shares
outstanding (Note 1).................. 6,703,517 6,703,517 6,703,517 6,703,517
========== ========== ========== ==========
Fully diluted income (loss) per common
stock share: (Note 1)
Income (loss) from continuing
operations......................... $ (.07) $ .15 $ .00 $ .03
Loss from discontinued operations..... (.03) -- -- --
---------- ---------- ---------- ----------
Net income (loss) per share........... $ (.10) $ .15 $ .00 $ .03
========== ========== ========== ==========
Weighted average common shares
outstanding (Note 1).................. 6,703,517 7,703,517 7,703,517 7,703,517
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-5
<PAGE> 63
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND THE THREE-MONTH PERIOD ENDED
SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
PREFERRED ------------------ PAID-IN RETAINED STOCKHOLDERS'
STOCK SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- --------- ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994......... $ -- 5,470,467 $5,471 $ 2,029 $1,158,548 $ 1,166,048
Dividend distribution (Note
10)............................ -- -- -- -- (230,000) (230,000)
Net loss......................... -- -- -- -- (698,893) (698,893)
------- --------- ------ ---------- ---------- -----------
Balance at June 30, 1995......... -- 5,470,467 5,471 2,029 229,655 237,155
Stock sales (Note 11)............ -- 1,332,970 1,333 1,603,710 -- 1,605,043
Issuance of stock for debt....... -- 127,645 127 174,873 -- 175,000
Net income....................... -- -- -- -- 1,171,781 1,171,781
------- --------- ------ ---------- ---------- -----------
Balance at June 30, 1996......... -- 6,931,082 6,931 1,780,612 1,401,436 3,188,979
Net income (unaudited)........... -- -- -- -- 241,191 241,191
------- --------- ------ ---------- ---------- -----------
Balance at September 30, 1996
(unaudited).................... $ -- 6,931,082 $6,931 $1,780,612 $1,642,627 $ 3,430,170
======= ========= ====== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-6
<PAGE> 64
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------- THREE MONTHS ENDED
JUNE 30, JUNE 30, -----------------------------
1995 1996 SEPTEMBER 30, SEPTEMBER 30,
----------- ----------- 1995 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents
Cash flows from operating activities:
Net income (loss) from continuing
operations................................ $ (483,343) $ 1,171,781 $ 34,968 $ 241,191
----------- ----------- -------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization............. 83,981 73,814 17,995 22,865
Loss on sale of assets.................... 1,464 5,065 -- --
Interest income debited to note
receivable............................. (28,427) (28,011) (3,953) (17,074)
Receivable converted to note receivable... (5,500) -- -- --
Loss from discontinued operations......... (215,550) -- -- --
Interest expense credited to note
payable................................ 1,900 -- 1,900 --
Changes in operating assets and
liabilities:
Accounts receivable.................... 241,193 (547,706) (128,365) 50,868
Prepaid expenses and other............. -- (9,903) -- (38,342)
Deferred tax asset..................... (308,970) 27,372 18,892 --
Goodwill............................... -- (16,145) -- --
Other assets........................... -- -- -- (47,506)
Accounts payable -- trade.............. 8,439 (264,953) (57,061) 581,133
Accrued expenses....................... 8,771 (6,721) 228 (2,050)
Income taxes payable
-- current........................... (35,260) 596,138 (8,799) (486,897)
-- deferred.......................... (98,128) 213,421 678 --
----------- ----------- -------- -----------
(346,087) 42,371 (158,485) 62,997
----------- ----------- -------- -----------
Net cash provided by (used in) operating
activities................................ (829,430) 1,214,152 (123,517) 304,188
----------- ----------- -------- -----------
Cash flows from investing activities:
Purchase of property and equipment........ (65,527) (107,035) (10,605) (142,080)
Collection of notes receivable -- related
parties................................ 441,784 -- 107,187 9,000
Advances for notes receivable -- related
party.................................. (269,930) (343,579) (250,360) (141,232)
Proceeds from sale of assets.............. 144,299 2,325 -- --
----------- ----------- -------- -----------
Net cash provided by (used in)
investing activities................. 250,626 (448,289) (153,778) (274,312)
----------- ----------- -------- -----------
Cash flows from financing activities:
Deferred offering costs................... -- (25,000) (25,000) (450,960)
Proceeds from debt........................ 1,091,000 81,548 161,100 --
Payments on debt.......................... (548,070) (565,444) (256,900) (1,607)
Proceeds from sale of stock............... -- 1,605,043 392,500 --
----------- ----------- -------- -----------
Net cash provided (used in) by
financing activities................. 542,930 1,096,147 271,700 (452,567)
----------- ----------- -------- -----------
Net increase (decrease) in cash and cash
equivalents............................... (35,874) 1,862,010 (5,595) (422,691)
Cash and cash equivalents at beginning of
year...................................... 46,207 10,333 10,333 1,872,343
----------- ----------- -------- -----------
Cash and cash equivalents at end of year.... $ 10,333 $ 1,872,343 $ 4,738 $ 1,449,652
=========== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-7
<PAGE> 65
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS SUMMARY:
The Company is a health care consulting and management company dedicated to
improving the quality, controlling the cost and enhancing the efficiency of the
management and delivery of health care services by focusing on the physician as
the most important factor in the health care system. In pursuing these goals,
the Company currently provides its proprietary "Quality Management Program" to
hospitals and their attending physicians. In addition, the Company is developing
and will operate various health plans in association with physician networks,
hospitals, and other health care providers.
The Company was organized in 1994 and reincorporated in Delaware in 1996 to
serve as the holding company of Birman & Associates, Inc., and BMC Health Plans,
Inc. The Company acquired a third subsidiary on June 14, 1996, through an asset
purchase of Hughes & Associates, Inc. The operations of Hughes & Associates,
Inc. are immaterial. This represents a change in the legal entity, but not in
the operations of the Company. As such, the accompanying consolidated financial
statements are presented on a continuing basis. In addition, effective June 30,
1995, the Company adopted a June 30 fiscal year end. On September 9, 1996, the
Company was reincorporated in Delaware by means of a merger in which
shareholders of the Company received 72,939 shares of Common Stock for each 100
shares of Common Stock then outstanding.
Birman Farms -- Discontinued Operation:
The Company held and operated Birman Farms, a livestock breeding operation,
which utilizes farm land owned personally by David N. Birman, M.D. and Sue
Birman, the principal stockholders and officers and directors of the Company.
Effective June 30, 1995, the Company separately incorporated Birman Farms and
distributed the shares of stock as a dividend to David N. Birman, M.D.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
Birman Managed Care, Inc. and its wholly owned subsidiaries: Birman &
Associates, Inc., BMC Health Plans, Inc. and Hughes & Associates, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents:
Cash and cash equivalents include all highly liquid investments purchased
with an initial maturity of three months or less.
Accounts Receivable:
Accounts receivable represent amounts earned but not collected in
connection with consulting services performed by the Company.
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense as a
percentage of accounts receivable, based on a review of the individual accounts
outstanding and the Company's prior history of uncollectible accounts
receivable.
Property and Equipment:
Property and equipment are stated at cost. Depreciation is provided for on
the straight-line method over the estimated useful lives of the assets.
Maintenance and repairs that neither materially add to the value of the
F-8
<PAGE> 66
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
property nor appreciably prolong its life are charged to expense as incurred.
Betterments or renewals are capitalized when incurred. The estimated useful
lives for asset classifications, are as follows:
<TABLE>
<S> <C>
Computer equipment................................................. 5 years
Office equipment and motor vehicles................................ 5 years
Furniture and fixtures............................................. 5 years
Leasehold improvements............................................. 10 years
</TABLE>
Deferred Offering Costs:
Deferred offering costs represent costs incurred in connection with the
Company's proposed initial public offering of common stock. Deferred offering
costs will be netted against the net proceeds from the proposed public offering,
or expensed should the offering not be completed.
Goodwill:
Goodwill represents the excess of the cost of acquiring the assets of
Hughes & Associates, Inc. over the fair value of their net assets at the date of
acquisition, June 14, 1996, and is being amortized on the straight-line method
over five years. No amortization expense was recorded for the year ended June
30, 1996. For the three-month period ended September 30, 1996 (unaudited),
amortization expense of $404 was recorded. The carrying value of goodwill will
be periodically reviewed by the Company and impairments, if any, will be
recognized when expected future operating cash flows derived from goodwill are
less than their carrying value.
Income Taxes:
For tax reporting purposes, the Company currently reports revenue and
expenses based on the accrual basis method of accounting for the fiscal year
ended June 30, 1996. Previously, the Company used the cash basis method for the
six-month period ended June 30, 1995.
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income
Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis and the utilization of the net operating loss
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Accounting Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings Per Share:
Earnings per share are based upon the weighted average number of shares
outstanding for each of the respective years. All weighted average shares
outstanding give retroactive effect to the 1,000 for 1 stock split in October
1995 and the 72.939 for 100 exchange of shares of Common Stock in connection
with the reincorporation of the Company in Delaware in September 1996. The
Company is planning an initial public
F-9
<PAGE> 67
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
offering of its Common Stock. Pursuant to Securities and Exchange Commission
rules, shares of Common Stock issued for consideration below the anticipated
offering price per share during the 12-month period prior to filing of the
registration statement has been included in the calculation of common share
equivalent shares, using the treasury stock method, as if they had been
outstanding for all periods presented. In addition, shares of Common Stock that
are subject to options and warrants having exercise prices that are below the
anticipated offering price per share, whether or not exercisable, have been
included in the earnings per share calculation, using the treasury stock method.
One million shares of common stock to be placed in escrow upon completion of the
proposed public offering, which are common stock equivalents, have been included
in the calculation of fully diluted earnings per share, when they are not
anti-dilutive. See Note 16.
Interim Financial Information:
The interim financial statements for the three months ended September 30,
1995 and 1996 are unaudited. In the opinion of management, such statements
reflect all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of the results of the interim period. The results of
operations for the three months ended September 30, 1996 are not necessarily
indicative of the results for the entire year.
New Accounting Pronouncements:
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121) issued by the Financial Accounting Standards Board is effective
for financial statements for fiscal years beginning after December 15, 1995. The
new standard establishes new guidelines regarding when impairment losses on
long-lived assets, which include plant and equipment and certain identifiable
intangible assets, should be recognized and how impairment losses should be
measured. The Company does not expect adoption to have a material effect on its
financial position or results of operations.
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting
Standards Board is effective for specific transactions entered into after
December 15, 1995, while the disclosures requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December 31,
1995. The new standard establishes a fair value method of accounting for
stock-based compensation plans and for transactions in which an entity acquires
goods or services from nonemployees in exchange for equity instruments. At the
present time, the Company has not determined if it will change its accounting
policy for stock-based compensation or only provide the required financial
statement disclosures. As such, the impact on the Company's financial position
and results of operations is currently unknown. The Company does not expect
adoption to have a material effect on its financial position or results of
operations.
2. CONCENTRATION OF CREDIT RISK:
The Company maintains cash and cash equivalents at three financial
institutions. Deposits not to exceed $100,000 at each financial institution are
insured by the Federal Deposit Insurance Corporation. At June 30, 1996, and
September 30, 1996 (unaudited), the Company has uninsured cash and cash
equivalents in the amount of $1,790,463 and $1,489,925, respectively.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable. The
Company's accounts receivable primarily result from its consulting services with
rural hospitals in the southeastern, central and south central portion of the
United States. The receivables are primarily billed monthly and are unsecured.
Ongoing credit evaluation and account monitoring procedures are utilized to
minimize the risk of loss.
F-10
<PAGE> 68
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
3. RELATED PARTY TRANSACTIONS:
Notes Receivable:
Included in notes receivable at June 30, 1996 and September 30, 1996
(unaudited) are the following related party notes and interest receivable:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
-------- -------------
<S> <C> <C>
7% notes receivable from David N. Birman, M.D., due on
demand...................................................... $556,586 $ --
Interest receivable -- David N. Birman, M.D................... 74,587 --
Note receivable from David N. Birman, M.D., Interest is the
prime rate at American National Bank and Trust of Chicago
and due in three annual installments beginning 8/31/97.
Principal due
8/31/99..................................................... -- 775,000
-------- --------
$631,173 $ 775,000
======== ========
</TABLE>
For the year ended June 30, 1996, the Company advanced approximately
$343,000 to David N. Birman, M.D. On September 1, 1996, the Company consolidated
the 7% note receivable and all accrued interest into the new note receivable.
4. PROPERTY AND EQUIPMENT:
At June 30, 1996, and September 30, 1996 (unaudited) property and equipment
consist of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
-------- -------------
<S> <C> <C>
Computer and office equipment......................... $303,000 $ 441,994
Furniture and fixtures................................ 125,286 128,372
Motor vehicles........................................ 44,306 44,306
Leasehold improvements................................ 2,544 2,544
-------- --------
475,136 617,216
Less accumulated depreciation and amortization........ 181,452 203,913
-------- --------
$293,684 $ 413,303
======== ========
</TABLE>
For the years ended June 30, 1995 and 1996, depreciation expense was
$83,981 and $73,814, respectively. For the three months ended September 30, 1995
and 1996, depreciation expense was $17,995 and $22,461, respectively.
F-11
<PAGE> 69
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
5. NOTES PAYABLE:
At June 30, 1995 and 1996, and September 30, 1996 (unaudited) notes payable
consist of the following:
<TABLE>
<CAPTION>
JUNE
JUNE 30, 30, SEPTEMBER 30,
1995 1996 1996
--------- ------- -------------
<S> <C> <C> <C>
Line of credit with First American Bank. The line of
credit is due in September 1996, with an interest
rate of prime plus .75%; collateralized by accounts
receivable and was repaid in June 1996.............. $ 396,000 $ -- $ --
Note payable to First American Bank. The note is due
in July 1995, with an interest rate of 9.5%;
collateralized by accounts receivable............... 80,000 -- --
Notes payable due to unrelated parties, non-interest
bearing, due on demand; unsecured. The notes were
repaid through the issuance of common stock in July
1995................................................ 175,000 -- --
Note payable to Toyota Motor Credit Corp. The note is
due and payable in March 1999, with an interest rate
of 12.5%; collateralized by a vehicle............... -- 7,463 6,900
--------- ------- --------
651,000 7,463 6,900
Less current portion of long-term notes payable....... (651,000) (2,435) (2,496)
--------- ------- --------
$ -- $ 5,028 $ 4,404
========= ======= ========
</TABLE>
Line of Credit
In August 1996, the Company arranged a $1,000,000 maximum principal amount
working capital revolving line of credit facility ("facility") with American
National Bank and Trust Company of Chicago. The facility has an initial maturity
date of October 31, 1997. The facility provides for the accrual of interest at a
floating annual rate equal to the lender's prime rate on the unpaid principal
balance. The facility is secured by substantially all of the assets of the
Quality Management Program and Hughes & Associates, Inc. Under the terms of the
facility, the Company can borrow up to the lesser of: (i) $100,000, or (ii) the
maximum facility minus any letter of credit obligations, or (iii) the "Borrowing
Base", (i.e., up to 75% of the face amount of all then existing eligible
receivables), minus any letter of credit obligations. At September 30, 1996
there was a zero balance on the line of credit.
6. CAPITAL LEASE OBLIGATIONS:
The Company is the lessee of a telephone system, with an aggregate cost of
$4,410, under a capital lease agreement which expires in April 1998. As of June
30, 1996 and September 30, 1996 (unaudited), minimum future lease payments due
under the capital lease agreement for the next two years, are as follows:
<TABLE>
<CAPTION>
JUNE
30, SEPTEMBER 30,
1996 1996
------- -------------
<S> <C> <C>
1997................................................. $ 2,684 $ 3,172
1998................................................. 2,440 --
------- -------
Total minimum lease payments......................... 5,124 3,172
Less amount representing interest.................... (1,575) (667)
------- -------
Present value of net minimum lease payments.......... 3,549 2,505
Less current portion................................. (1,540) (2,505)
------- -------
Long-term maturities of capital lease obligations.... $ 2,009 $ 0
======= =======
</TABLE>
The interest rate is imputed based on the lessor's implicit rate of return
at the inception of the lease.
F-12
<PAGE> 70
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES:
Operating Leases:
The Company is currently leasing vehicles and office space under various
non-cancellable operating lease agreements, expiring in April 1998. The terms of
the lease agreements provide for monthly payments ranging from $138 to $3,450.
At June 30, 1996 and September 30, 1996 (unaudited), a schedule of future
minimum lease payments due under the non-cancellable operating lease agreements
is as follows:
<TABLE>
<CAPTION>
JUNE
30, SEPTEMBER 30,
1996 1996
------- -------------
<S> <C> <C>
1997................................................... $34,604 $ 100,993
1998................................................... 12,745 76,284
1999................................................... -- 27,659
2000................................................... -- 1,558
------- ---------
$47,349 $ 206,494
======= =========
</TABLE>
Rent expense under the foregoing operating lease agreements for the years
ended June 30, 1995 and 1996 was $101,040 and $110,588, respectively. Rent
expense for the three months ended September 30, 1995 and 1996 (unaudited) was
$26,387 and $29,640, respectively. The Company occupies office premises in
Cookeville, Tennessee, Jackson, Mississippi, Gulfport, Mississippi, and Phoenix,
Arizona. Rent under these facility leases for the years ended June 30, 1995 and
1996 and three months ended September 30, 1995 and 1996 (unaudited) was $49,117,
$63,258, $13,950, and $20,307, respectively.
Employment Contracts:
The Company has entered into employment contracts with eight key employees,
including David N. Birman, M.D. and Sue D. Birman, through June 2001, which
provide for minimum annual salary, adjusted for cost-of-living changes, and
incentives based on the Company's attainment of specified levels of sales and
earnings. At June 30, 1996 and September 30, 1996 (unaudited), the total
commitment, excluding incentives, was approximately $5.1 million over the next
five years.
Other Commitments:
Effective September 1, 1996, the Company entered into a consulting
agreement with Richard M. Ross, a former officer and director. Under the terms
of the agreement the Company will pay a fee of $186,000 per annum, payable in
equal monthly installments. The contract is renewable annually for up to six
consecutive years.
8. INCOME TAXES AND DEFERRED INCOME TAXES:
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------- THREE MONTHS ENDED
JUNE 30, JUNE 30, -----------------------------
1995 1996 SEPTEMBER 30, SEPTEMBER 30,
--------- -------- 1995 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Federal............................... $(174,531) $565,183 $15,365 $ 86,647
State................................. (49,800) 161,800 4,385 24,755
--------- -------- ------------- -------------
$(224,331) $726,983 $19,750 $ 111,402
========= ======== ========== ==========
</TABLE>
F-13
<PAGE> 71
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
The provision (benefit) for income taxes based on income from continuing
operations differs from the amount obtained by applying the statutory federal
income tax rate to income before taxes primarily due to state income taxes.
The temporary differences that give rise to the deferred tax asset
(liability) at June 30, 1996 and September 30, 1996 (unaudited), are presented
below:
Deferred tax asset -- current:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
-------- -------------
<S> <C> <C>
Allowance for doubtful accounts........................... $ 18,990 $ 18,990
Adjustment due to change from the cash method of reporting
income for income taxes to the accrual method........... 76,559 $ 76,559
-------- --------
$ 95,549 $ 95,549
======== ========
Deferred tax liability -- long-term:
Excess of depreciation for income tax reporting
purposes over depreciation for financial reporting
purposes........................................... $(55,620) $ (55,620)
======== ========
</TABLE>
No valuation allowance has been recorded since it is more likely than not
that the net deferred tax asset will be realized.
9. STATEMENTS OF CASH FLOWS:
During the years ended June 30, 1995 and 1996 and for the three months
ended September 30, 1995 and 1996 (unaudited), the Company recognized investing
and financing activities that affected assets and liabilities but did not result
in cash receipts or payments.
For the year ended June 30, 1995, these non-cash activities are as follows:
The Company reclassified $5,500 from accounts receivable to a note
receivable.
The Company accrued and added $28,427 of interest to notes receivable
from David N. Birman M.D.
The Company declared and distributed as a dividend all of the farm
assets in the net amount of $230,000.
The Company made payments for interest in the amount of $555,957. Payments
were made for income taxes in the amount of $74,327.
For the year ended June 30, 1996, these non-cash activities are as follows:
The Company accrued and added $28,011 of interest to notes receivable
from David N. Birman, M.D.
The Company financed the purchase of an automobile in the amount of $8,007.
The Company retired debt in the amount of $175,000 through the issuance of
Common Stock.
The Company made payments for interest in the amount of $46,735. A refund
was received for income taxes in the amount of $76,530.
For the three months ended September 30, 1995 (unaudited), these non-cash
activities are as follows:
The Company accrued and added $3,953 of interest to notes receivable from
David N. Birman M.D.
The Company made payments for interest and taxes in the amount of $8,395,
and $8,979, respectively.
F-14
<PAGE> 72
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
For the three months ended September 30, 1996 (unaudited), these non-cash
activities are as follows:
The Company accrued and added $17,074 of interest to notes receivable from
David N. Birman M.D.
The Company made payments for interest and taxes in the amount of $247 and
$598,299, respectively.
10. DISCONTINUED OPERATIONS:
Birman & Associates, Inc. disposed of Birman Farms as of June 30, 1995. The
assets disposed of were primarily comprised of farm equipment and livestock. The
farm operation had previously been reported as an operating segment of Birman &
Associates, Inc. Birman Farms was placed under a separate corporation and shares
were distributed as a dividend in the amount of $230,000, which approximates
fair market value, to Dr. Birman.
Net revenues of Birman Farms for 1995 were $23,076. This amount is not
included in net sales in the accompanying consolidated statement of operations.
11. STOCKHOLDERS' EQUITY:
On October 31, 1995, the Company declared a 1,000-for-1 stock split of the
Company's Common Stock. On September 9, 1996, the Company was reincorporated in
Delaware by means of a merger in which shareholders received 72.939 shares of
Common Stock for each 100 shares of Common Stock then outstanding. The
accompanying consolidated financial statements give retroactive effect to the
aforementioned transactions.
During June 1996, the Company issued 1,332,970 shares of Common Stock in a
private placement. The shares of Common Stock were sold at $1.37 per share. The
net proceeds of $1,605,043 were net of offering expenses of $222,457.
12. STOCK OPTION PLAN:
On October 31, 1995, the Company approved the 1995 Stock Option Plan (the
"Plan"). The aggregate of Common Stock that may be issued pursuant to the Plan
will not exceed 1,458,780 shares. Pursuant to the Plan, the Company has issued
stock options to various key employees. The table below summarizes the Company's
stock option transactions:
<TABLE>
<CAPTION>
NUMBER EXERCISE AGGREGATE
OF SHARES PRICE VALUE
---------- -------- ----------
<S> <C> <C> <C>
Balance at June 30, 1995........................... -- $ -- $ --
Options granted.................................... 1,006,566 1.37 1,380,000
---------- ----------
Balance at June 30, 1996........................... 1,006,566 $1,380,000
======== =========
</TABLE>
The above options are granted at fair market value at the date of grant,
become exercisable over a three-year period, or as determined by the Board of
Directors, and expire over periods not exceeding five years.
As of June 30, 1996 and September 30, 1996 (unaudited), none of these
options have been exercised and there have been no options forfeited.
13. STOCK WARRANTS:
As of June 30, 1996 and September 30, 1996 (unaudited), the Company had
outstanding warrants to purchase 21,335 shares of Common Stock at $1.43 per
share and 36,470 shares of Common Stock at $1.37 per share. The warrants become
exercisable in January 1997 and expire at various dates through December 2001.
F-15
<PAGE> 73
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
14. EMPLOYEE BENEFIT PLAN:
Effective January 1, 1994, the Company implemented a profit sharing plan
covering all full-time employees. The plan is designed as a Code Section 401(k)
plan. Employees are permitted to make voluntary contributions to the plan, for
which the Company is required to make a matching contribution up to certain
limitations. For the years ended June 30, 1995 and 1996, the Company made
contributions to the plan in the amounts of $11,766 and $9,482, respectively.
15. SIGNIFICANT CUSTOMER:
The Company has provided Quality Management Program services to various
hospitals owned and managed by Quorum Health Care, Inc. ("Quorum") since 1991.
Hospitals owned and managed by Quorum represented approximately 53% and 42% of
the Company's Quality Management Program revenue in fiscal 1995 and 1996,
respectively. Hospitals owned and managed by Quorum represented approximately
50% and 25% of the Company's Quality Management Program Revenue for the three
months ended September 30, 1995 and 1996, respectively.
16. SUBSEQUENT EVENTS:
Pending Acquisition
On September 6, 1996, the Company entered into a definitive agreement to
acquire most of the issued and outstanding common stock of Canton Management
Group, Inc., a Mississippi corporation ("Canton").
Under the terms of the agreement, the Company will acquire 1,000,000 shares
of newly issued preferred stock of Canton for $1.00 per share, payable $700,000
in cash and $300,000 by a promissory note. The promissory note bears interest at
a rate of 2% per annum and is payable in varying annual installments over two
years. In addition, the Company will acquire approximately 33% of the
outstanding common stock of Canton for a $500,000 promissory note which bears
interest at a rate of 2% per annum and is payable in varying annual installments
over four years.
Canton will purchase and retire approximately 65% of the outstanding common
stock held by persons other than the Company for $1,000,000, payable $700,000 in
cash and $300,000 by a promissory note. The promissory note bears interest at a
rate of 2% per annum and is payable in varying annual installments over two
years.
Reincorporation
On September 9, 1996, the Company was reincorporated in Delaware by means
of a merger in which shareholders of the Company received 72.939 shares of
Common Stock for each 100 shares of Common Stock then outstanding.
Initial Public Offering
In September 1996, the Company filed a registration statement for an
initial public offering ("IPO"). As amended, the registration statement
contemplates the sale of 2,000,000 shares of Common Stock by the Company,
subject to the Prospectus relating to the IPO. The anticipated IPO price to the
public is expected to be $5.00 per share.
In connection with the IPO, Dr. Birman, the Company's principal
stockholder, has agreed to place 1,000,000 shares of Common Stock in escrow.
These shares will not be assignable or transferrable (but may be voted) until
such time as they are released from escrow. The release from escrow is based
upon the Company meeting certain annual earnings levels over the next three
years. All reserved shares remaining in escrow on
F-16
<PAGE> 74
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
June 30, 1999 will be forfeited and contributed to the Company's capital. In the
event the Company attains any of the earnings thresholds providing for the
release of the escrow shares to Dr. Birman, the Company will recognize
compensation expense at such time based on the fair market value of the shares.
In addition, it is contemplated that Dr. Birman will tender approximately
177,000 shares of his Common Stock, valued at $4.50 per share, as payment in
full of his note to the Company in the amount of $775,000 plus accrued interest,
at the time of closing the IPO.
Directors' Option Plan
On September 9, 1996, the Company adopted the 1996 Non-Employee Directors
Non-Qualified Stock Option Plan (the "1996 Directors' Plan"). A total of 100,000
shares of Common Stock are reserved for issuance under the 1996 Directors' Plan.
Under this plan, upon initial election to the Board of Directors, all
non-employee directors are awarded options to purchase 6,000 shares of Common
Stock. Upon each subsequent election to the Board of Directors, non-employee
Directors receive option awards to purchase 3,000 shares of Common Stock. These
options, which have an exercise price equal to the fair market value of the
shares of Common Stock as of the date of grant, vest at the rate of 33.33% per
year. All options awarded under the 1996 Directors' Plan expire on the first to
occur of (i) 10 years after the date of grant or (ii) 90 days after the date the
director is no longer serving in such capacity for reasons other than death or
disability.
Executive Bonus Plan
The Company has adopted an Executive Bonus Plan (the "Executive Bonus
Plan") pursuant to which officers of the Company are eligible to receive cash
bonuses after the close of each fiscal year of the Company. The Executive Bonus
Plan is administered by the Compensation Committee of the Board of Directors.
Bonuses are determined on the basis of (i) the operating profit of the Company,
(ii) net revenue growth of the Company achieved as a percentage of the goal
established by the Company at the beginning of the fiscal year, and (iii) the
officer's individual performance and contribution to the Company. An officer's
bonus for any fiscal year may not exceed such officer's annual base salary
multiplied by the Target Bonus Percentage as defined by the Executive Bonus Plan
in such fiscal year.
F-17
<PAGE> 75
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
INTRODUCTION TO
PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited Proforma Condensed Consolidated Balance Sheet as of
September 30, 1996, and the unaudited Proforma Condensed Consolidated Statement
of Operations for the year ended June 30, 1996 and the three month period ended
September 30, 1996 give effect to the acquisition by Birman Managed Care, Inc.
of Canton Management Group, Inc. pursuant to the Acquisition Agreement pending
between the parties, and are based on the estimates and assumptions set forth
herein and in the notes to such statements. This proforma information has been
prepared utilizing the historical financial statements and notes thereto, which
are incorporated by reference herein. The unaudited Proforma Condensed
Consolidated Financial Statements do not purport to be indicative of the results
which actually would have been obtained had the purchase been effected on the
dates indicated or of the results which may be obtained in the future.
The unaudited Proforma Condensed Consolidated Financial Statements is based
on the purchase method of accounting for the acquisition of Canton Management
Group, Inc. The proforma entries are described in the accompanying footnotes to
the unaudited Proforma Condensed Consolidated Financial Statements.
The unaudited Proforma Condensed Consolidated Balance Sheet and the
unaudited Proforma Condensed Consolidated Statement of Operations and the
related notes should be read in conjunction with Birman Managed Care, Inc.'s
audited consolidated financial statements contained elsewhere in this
Prospectus. In management's opinion, all adjustments necessary to reflect the
acquisition have been made.
F-18
<PAGE> 76
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
CANTON
MANAGEMENT
HISTORICAL GROUP, INC.
BIRMAN (A DEVELOPMENT PROFORMA
CONSOLIDATED STAGE COMPANY) PROFORMA ENTRIES CONSOLIDATED
------------ -------------- ---------------- ------------
<S> <C> <C> <C> <C>
Cash................................... $ 1,449,652 $ 9,984 $ (700,000)(1) $ 759,636
Accounts receivable.................... 992,903 727 993,630
Prepaid expenses....................... 48,245 -- 48,245
Notes receivable....................... 802,802 -- 802,802
Deferred tax asset..................... 95,549 -- 95,549
Property, plant and equipment.......... 413,303 -- 413,303
Deferred taxes, long-term.............. -- 24,000 (24,000)(2) --
License and goodwill................... 15,741 -- 1,103,693(1) 1,119,434
Other assets........................... 523,466 132,425 655,891
Restricted certificates of deposit..... -- 500,000 500,000
----------- -------- -----------
Total Assets................. $ 4,341,661 $667,136 $ 5,388,490
=========== ======== ===========
Current portion -- long-term debt...... 2,496 -- 200,000(1) 202,496
Current portion of capital lease....... 2,505 -- 2,505
Accounts payable....................... 698,158 6,624 704,782
Accrued expenses....................... -- -- --
Income taxes payable................... 148,308 -- 148,308
Long-term debt......................... 4,404 -- 600,000(1) 604,404
Deferred income taxes.................. 55,620 -- (24,000)(2) 31,620
Minority interest...................... -- -- 264,205(1) 264,205
Preferred stock........................ -- -- --
Common stock........................... 6,931 -- 6,931
Additional paid-in capital............. 1,780,612 713,673 (713,673)(1) 1,780,612
Retained earnings (deficit)............ 1,642,627 (53,161) 53,161(1) 1,642,627
----------- -------- -----------
$ 4,341,661 $667,136 $ 5,388,490
=========== ======== ===========
</TABLE>
- ---------------
(1) To record the purchase of Canton Management Group, Inc. pursuant to the
acquisition agreement between the parties, and record the minority
interest.
(2) To reclassify long-term deferred income taxes.
See accompanying notes to proforma condensed consolidated financial statements
(as adjusted).
F-19
<PAGE> 77
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
CANTON
MANAGEMENT
HISTORICAL GROUP, INC.
BIRMAN (A DEVELOPMENT PROFORMA PROFORMA
CONSOLIDATED STAGE COMPANY) ENTRIES CONSOLIDATED
------------ -------------- -------- ------------
<S> <C> <C> <C> <C>
Revenue......................................... $ 8,416,946 -- $ 8,416,946
Cost of revenues................................ 2,278,932 -- 2,278,932
----------- -------- -----------
Gross profit.................................... 6,138,014 -- 6,138,014
General and administrative expenses............. 4,236,607 71,961 (1) 4,308,568
----------- -------- -----------
Income from operations.......................... 1,901,407 (71,961) 1,829,446
Other income (expense).......................... (2,643) 12,211 (2) 9,568
----------- -------- -----------
Income before provision for income taxes........ 1,898,764 (59,750) 1,839,014
Income taxes.................................... (726,983) 17,900 (709,083)
----------- -------- -----------
Net income (loss)............................... $ 1,171,781 $(41,850) $ 1,129,931
=========== ======== ===========
Net income (loss) per share -- primary.......... $ .17 $ (.42) $ .17
Net income (loss) per share -- fully diluted.... $ .15 $ (.42) $ .15
=========== ======== ===========
Weighted average number of shares outstanding --
primary....................................... 6,703,517 100,000 6,703,517
Weighted average number of shares outstanding --
fully diluted................................. 7,703,517 100,000 7,703,517
=========== ======== ===========
</TABLE>
- ---------------
(1) Amortization of the licenses recorded in connection with the purchase of
Canton Management Group, Inc. will be reported on a straight-line basis over
35 years, commencing when operations begin.
(2) Does not include the effects of additional interest expense on notes payable
as amount is immaterial.
See accompanying notes to proforma condensed consolidated financial statements
(as adjusted).
F-20
<PAGE> 78
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
CANTON
MANAGEMENT
HISTORICAL GROUP, INC.
BIRMAN (A DEVELOPMENT PROFORMA PROFORMA
CONSOLIDATED STAGE COMPANY) ENTRIES CONSOLIDATED
------------ -------------- -------- ------------
<S> <C> <C> <C> <C>
Revenue......................................... $ 2,372,137 $ -- $ 2,372,137
Cost of revenues................................ 888,516 -- 888,516
----------- -------- -----------
Gross profit.................................... 1,483,621 -- 1,483,621
General and administrative expenses............. 1,169,119 13,339 (1) 1,182,458
----------- -------- -----------
Income from operations.......................... 314,502 (13,339) 301,163
Other income (expense).......................... 38,091 16,388 (2) 54,479
----------- -------- -----------
Income before provision for income taxes........ 352,593 3,049 355,642
Income taxes.................................... (111,402) -- (111,402)
----------- -------- -----------
Net income (loss)............................... $ 241,191 $ 3,049 $ 244,240
=========== ======== ===========
Net income (loss) per share -- primary.......... $ .04 $ .03 $ .04
Net income (loss) per share -- fully diluted.... $ .03 $ .03 $ .03
=========== ======== ===========
Weighted average number of shares outstanding --
primary....................................... 6,703,517 100,000 6,703,517
Weighted average number of shares outstanding --
fully diluted................................. 7,703,517 100,000 7,703,517
=========== ======== ===========
</TABLE>
- ---------------
(1) Amortization of the licenses recorded in connection with the purchase of
Canton Management Group, Inc. will be reported on a straight-line basis over
35 years, commencing when operations begin.
(2) Does not include the effects of additional interest expense on notes payable
as amount is immaterial.
See accompanying notes to proforma condensed consolidated financial statements
(as adjusted).
F-21
<PAGE> 79
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO PROFORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (AS ADJUSTED)
(UNAUDITED)
1. PENDING ACQUISITION
On September 6, 1996, the Company entered into a definitive agreement to
acquire most of the issued and outstanding common stock of Canton Management
Group, Inc., a Mississippi corporation ("Canton").
Under the terms of the agreement, the Company will acquire 1,000,000 shares
of newly issued preferred stock of Canton for $1 per share, payable $700,000 in
cash and $300,000 by a promissory note. The promissory note bears interest at a
rate of 2% per annum and is payable in varying annual installments over two
years. In addition, the Company will acquire approximately 33% of the
outstanding Common Stock of Canton for a $500,000 promissory note, which bears
interest at a rate of 2% per annum and is payable in varying annual installments
over four years.
Canton will purchase and retire approximately 65% of the outstanding Common
Stock held by persons other than the Company for $1,000,000, payable $700,000 in
cash and $300,000 by a promissory note. The promissory note will bear interest
at a rate of 2% per annum and will be payable in varying annual installments
over two years.
2. EFFECT OF PENDING ACQUISITION
The adjustments to the Proforma Condensed Consolidated Balance Sheet as of
September 30, 1996 reflect the pending acquisition as if it occurred on
September 30, 1996. The Proforma Condensed Consolidated Statement of Operations
for the year ended June 30, 1996 and the three month period ended September 30,
1996 reflects the pending acquisition as if it occurred on the first day of the
period presented.
F-22
<PAGE> 80
CANTON MANAGEMENT GROUP, INC.,
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
JUNE 30, 1996 AND
SEPTEMBER 30, 1996 (UNAUDITED)
F-23
<PAGE> 81
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Canton Management Group, Inc.
(A Development Stage Company)
Jackson, Mississippi
We have audited the accompanying balance sheet of Canton Management, Inc.
(A Development Stage Company) (the "Company") as of June 30, 1996, and the
related statements of operations, changes in stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of the
Company for the period from October 3, 1993 (Inception) to June 30, 1995 were
audited by other auditors whose report dated August 7, 1996, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Canton Management Group, Inc. (A Development Stage
Company) at June 30, 1996, and the results of its operations and its cash flows
for the year then ended, and for the period from October 3, 1993 (Inception) to
June 30, 1996, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Los Angeles, California
August 7, 1996
F-24
<PAGE> 82
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Canton Management Group, Inc.
(A Development Stage Company)
Jackson, Mississippi
We have audited the accompanying statements of operations, changes in
stockholders' equity, and cash flows for the period from October 3, 1993
(Inception) to June 30, 1995 of Canton Management, Inc. (A Development Stage
Company) (the "Company"). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Canton
Management Group, Inc. (A Development Stage Company) for the period from October
3, 1993 (Inception) to June 30, 1995 in conformity with generally accepted
accounting principles.
Semple & Cooper, P.L.C.
Phoenix, Arizona
August 7, 1996
F-25
<PAGE> 83
CANTON MANAGEMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
-------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 1).......................... $ 2,143 $ 9,984
Interest income receivable.................................. 998 727
-------- --------
Total current assets................................ 3,141 10,711
-------- --------
Office equipment, Net (Notes 1 and 4)......................... 2,641 --
-------- --------
Other assets:
Restricted certificates of deposit (Notes 1 and 2).......... 500,000 500,000
Organization and license costs (Note 1)..................... 132,425 132,425
Deferred tax asset (Notes 1 and 3).......................... 24,000 24,000
-------- --------
Total other assets.................................. 656,425 656,425
-------- --------
Total assets........................................ $662,207 $ 667,136
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................................ $ 11,190 $ 6,624
-------- --------
Stockholder's equity: (Note 5)
Preferred stock, no par value, 1,000,000 shares authorized;
no shares issued or outstanding.......................... -- --
Class A voting common stock, no par value, 100,000 shares
authorized; 100,000 shares issued and outstanding........ -- --
Class B non-voting common stock, no par value, 100,000
shares authorized; no shares issued or outstanding....... -- --
Paid-in capital............................................. 100,000 100,000
Contributed capital......................................... 607,227 613,673
Accumulated deficit, during development stage............... (56,210) (53,161)
-------- --------
Total stockholder's equity.......................... 651,017 660,512
-------- --------
Total liabilities and stockholder's equity.......... $662,207 $ 667,136
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE> 84
CANTON MANAGEMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
YEAR ENDED THREE MONTHS ENDED OCTOBER 3,
-------------------- ------------------------------ 1993 (INCEPTION)
JUNE 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30, TO SEPT. 30,
1995 1996 1995 1996 1996
-------- -------- ------------- ------------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Donated services............. $ -- $ -- $ -- $ -- $132,425
Gain on sale of fixed
assets.................... -- -- -- 10,840 10,840
Interest income.............. 9,724 12,211 3,014 5,548 29,037
-------- -------- -------- ------- ---------
Total revenue........ 9,724 12,211 3,014 16,388 172,302
-------- -------- -------- ------- ---------
Expenses:
Advertising.................. 788 -- -- -- 2,395
Consulting................... 67,800 41,500 11,250 7,250 155,775
Depreciation................. 1,056 1,056 250 -- 2,641
Donations.................... -- 1,000 1,000 -- 1,000
Dues......................... 5,000 1,100 -- -- 11,354
Fees and licenses............ 25 25 -- 2,542 3,992
Legal and accounting......... 7,659 8,194 -- 1,168 11,897
Office....................... 3,554 3,021 974 291 15,805
Printing..................... 213 244 -- -- 1,027
Rent......................... 12,000 12,000 3,000 1,000 26,000
Telephone.................... 4,746 2,527 544 505 6,793
Travel and entertainment..... 5,587 1,294 294 583 10,784
-------- -------- -------- ------- ---------
Total expenses....... 108,428 71,961 17,312 13,339 249,463
-------- -------- -------- ------- ---------
Loss before income tax
benefit...................... (98,704) (59,750) (14,298) 3,049 (77,161)
Income tax benefit............. 29,600 17,900 -- -- 24,000
-------- -------- -------- ------- ---------
Net loss....................... $(69,104) $(41,850) $ (14,298) $ 3,049 $(53,161)
======== ======== ======== ======= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE> 85
CANTON MANAGEMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIODS FROM OCTOBER 3, 1993 (INCEPTION) THROUGH SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS CLASS
A B RETAINED
PREFERRED COMMON COMMON PAID-IN CONTRIBUTED EARNINGS
STOCK STOCK STOCK CAPITAL CAPITAL (DEFICIT)
--------- ------ ------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 3, 1993
(Inception)........................ $-- $-- $-- $ -- $ -- $ --
Contributions........................ -- -- -- -- 322,359 --
Net Income........................... -- -- -- -- -- 54,744
--- --- --- -------- -------- --------
Balance at June 30, 1994............. -- -- -- -- 322,359 54,744
Contributions........................ -- -- -- -- 93,920 --
Net Loss............................. -- -- -- -- -- (69,104)
--- --- --- -------- -------- --------
Balance at June 30, 1995............. -- -- -- -- 416,279 (14,360)
Contributions........................ -- -- -- -- 190,948 --
Issuance of 100,000 shares of Class A
common stock, no par value, on June
27, 1996........................... -- -- -- 100,000 -- --
Net Loss............................. -- -- -- -- -- (41,850)
--- --- --- -------- -------- --------
Balance at June 30, 1996............. -- -- -- 100,000 607,227 (56,210)
Contributions........................ -- -- -- -- 6,446 --
Net income........................... -- -- -- -- -- 3,049
--- --- --- -------- -------- --------
Balance at September 30, 1996........ $-- $-- $-- $100,000 $ 613,673 $ (53,161)
=== === === ======== ======== ========
</TABLE>
F-28
<PAGE> 86
CANTON MANAGEMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
OCTOBER 3,
YEAR ENDED THREE MONTHS ENDED 1993
------------------------- ------------------------------- (INCEPTION)
JUNE 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30, TO SEPT. 30,
1995 1996 1995 1996 1996
---------- ---------- ------------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).......... $ (69,104) $ (41,850) $ (14,298) $ 3,049 $ (53,161)
Reconciliation of net loss to
cash used by operating
activities:
Donated services........... -- -- -- -- (132,425)
Depreciation............... 1,056 1,056 250 -- 2,641
Gain on sale of fixed
assets.................. -- -- -- (10,840) (10,840)
Changes in operating assets
and liabilities:
Investment income
receivable.............. -- (998) -- 271 (727)
Deferred income taxes...... (29,600) (17,900) -- -- (24,000)
Accounts payable........... 2,663 4,566 -- (4,566) 6,624
---------- ---------- ---------- -------- ---------
Net cash used by
operating
activities............ (94,985) (55,126) (14,048) (12,086) (211,888)
---------- ---------- ---------- -------- ---------
Cash flows from investing
activities:
Proceeds from sale of
assets.................. -- -- -- 13,481 13,481
Purchase of office
equipment............... -- -- -- -- (5,282)
Purchase of restricted
certificate of
deposit................. (250,000) (250,000) -- -- (500,000)
---------- ---------- ---------- -------- ---------
Net cash (used in)
provided by investing
activities............ (250,000) (250,000) -- 13,481 (491,801)
---------- ---------- ---------- -------- ---------
Cash flows from financing
activities:
Paid-in capital............ -- 100,000 -- -- 100,000
Contributed capital........ 93,920 190,948 18,912 6,446 613,673
---------- ---------- ---------- -------- ---------
Net cash provided by
financing
activities............ 93,920 290,948 18,912 6,446 713,673
---------- ---------- ---------- -------- ---------
Net increase (decrease) in
cash and cash
equivalents................ (251,065) (14,178) 4,864 7,841 9,984
Cash and cash equivalents,
beginning of period........ 267,386 16,321 16,073 2,143 --
---------- ---------- ---------- -------- ---------
Cash and cash equivalents,
end of period.............. $ 16,321 $ 2,143 $ 20,937 $ 9,984 $ 9,984
========== ========== ========== ======== =========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-29
<PAGE> 87
CANTON MANAGEMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Operations:
Progressive Health Management, Inc. was incorporated in Mississippi on
October 3, 1993 for the purpose of providing health care services to Mississippi
Medicaid enrollees on a capitated fee basis contracted with the State of
Mississippi. Progressive Health Management, Inc. was licensed by the State of
Mississippi as a Health Maintenance Organization (HMO) on February 15, 1994.
Progressive Health Management, Inc. was merged with and into Canton
Management Group, Inc. (the "Company") on May 6, 1994.
The Company has been approved by the Mississippi State Department of Health
to provide HMO coverage in the counties of Madison, Attala, Carroll, Grenada,
Holmes, Humphreys, Leaks, Leflore, Montgomery and Yazoo.
As of June 30, 1996, the Company had no contracts in effect with the State
of Mississippi to provide any services for enrollees. The Company expects these
contracts to be negotiated before March 31, 1997, at which time the Company will
officially commence operations as an HMO.
Accounting Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents.
Minimum Net Worth Requirements:
The Company was required by the State of Mississippi to provide a minimum
cash insolvency reserve of $500,000 as of June 30, 1996 and September 30, 1996
(unaudited).
Office Equipment:
Office equipment is stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method based on the estimated
useful lives of the assets. The estimated useful lives are five years.
Organization and License Costs:
Costs associated with the organization of the Company and license costs
have been capitalized and will be amortized over a five year period and
thirty-five year period once operations commence.
Donated Services:
The Company has recognized services donated by physicians, attorneys and
consultants in the amount of $132,425. These services have been recorded as
donated services in the period received.
F-30
<PAGE> 88
CANTON MANAGEMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED
Income Taxes:
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income
Taxes". Under SFAS No. 109 deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax basis
of assets and liabilities that will result in taxable or deductible amounts in
the future, based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable or
refundable for the period, plus or minus the changes during the period in
deferred tax assets and liabilities.
Interim Financial Information:
The interim financial statements for the three months ended September 30,
1995 and 1996 are unaudited. In the opinion of management, such statements
reflect all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of the results of the interim period. The results of
operations for the three months ended September 30, 1996 are not necessarily
indicative of the results for the entire year.
2. RESTRICTED CERTIFICATES OF DEPOSIT:
As of June 30, 1996, the Company held two $250,000 certificates of deposit
bearing interest rates of 4.8% and 3.8%, respectively, and having a maturity
date of September 20, 1996. The certificates of deposit are restricted for use
as insolvency reserves to meet the minimum net worth requirements of the State
of Mississippi.
3. INCOME TAXES:
Deferred tax assets as of June 30, 1996 and September 30, 1996 (unaudited)
consist solely of net operating loss carryforwards as follows:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
-------- -------------
<S> <C> <C>
Deferred tax asset-net operating loss................ $ 24,000 $24,000
Less: Valuation allowance............................ 0 0
-------- -------
$ 24,000 $24,000
======== =======
</TABLE>
The Company has unused net operating losses available for carryforward to
offset future taxable income and tax liabilities for income tax reporting
purposes, which expire as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, AMOUNT
------------------------------------------------------------------ -------
<S> <C>
2009............................................................ $46,108
2010............................................................ 44,029
-------
$90,137
=======
</TABLE>
The Tax Reform Act of 1986 contains provisions which limit the federal net
operating loss carryforwards available that can be used in any given year in the
event of certain occurrences, which include significant ownership changes.
F-31
<PAGE> 89
CANTON MANAGEMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED
4. OFFICE EQUIPMENT:
At June 30, 1996, office equipment consists of the following:
<TABLE>
<S> <C>
Office equipment................................................... $ 5,282
Less accumulated depreciation...................................... (2,641)
-------
Office equipment, net.............................................. $ 2,641
=======
</TABLE>
5. CONTRIBUTED CAPITAL:
The shareholders of the Company have made various unrestricted cash
contributions of $613,673 for the period from October 3, 1993 (inception)
through September 30, 1996 (unaudited).
6. STATEMENTS OF CASH FLOWS:
Non-Cash Investing and Financing Activities:
During the period from the date of inception, October 3, 1993 through
September 30, 1996 (unaudited), the Company recognized investing and financing
activities that affected its assets and liabilities, but did not result in cash
receipts or payments. These non-cash activities are as follows:
Organization costs in the amount of $132,425 were donated to the Company.
No payments were made for income taxes or interest.
7. PENDING LEGISLATIVE MATTERS:
In April 1996, the Mississippi legislature approved a pilot capitation
project for Medicaid recipients. The pilot capitation project was approved in
only three counties in which the Company is approved to provide HMO coverage.
Those counties are Humphreys, Leflore and Yazoo. Although not approved
presently, the Company may apply for approval to provide HMO coverage in other
counties included in the pilot project. The scope of the counties included in
the pilot project is not expected to change until the 1997 session of the
Mississippi legislature convenes. The Company has not negotiated any Medicaid
capitation contracts or enrolled any participants as of September 30, 1996
(unaudited).
F-32
<PAGE> 90
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
The Company........................... 14
Use of Proceeds....................... 15
Dividend Policy....................... 15
Dilution.............................. 16
Capitalization........................ 17
Selected Historical and Pro Forma
Consolidated Financial Data......... 18
Management's Discussion and Analysis
of
Financial Condition and Results of
Operations.......................... 20
Business.............................. 26
Management............................ 42
Certain Transactions.................. 48
Principal Stockholders................ 50
Description of Securities............. 51
Shares Eligible for Future Sale....... 53
Underwriting.......................... 54
Legal Opinions........................ 55
Experts............................... 55
Change in Accountants................. 56
Additional Information................ 56
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
BIRMAN LOGO
2,000,000 SHARES OF COMMON STOCK
------------------------
PROSPECTUS
------------------------
ROYCE INVESTMENT
GROUP, INC.
CONTINENTAL BROKER-DEALER CORP.
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 91
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses incurred in connection with the issuance and distribution of
the securities being registered hereby are as follows:
<TABLE>
<CAPTION>
AMOUNT*
-----------
<S> <C>
S.E.C. Registration Fee................................................. $ 10,448.33
NASD Filing Fee......................................................... 46,452.71
Qualification Under State Securities Laws (including legal fees)........ 8,035
Printing................................................................ 148,000
Legal Fees and Expenses................................................. 205,000
Accounting Fees......................................................... 125,000
Transfer Agent and Registrar Fees and Expenses.......................... 3,500
Miscellaneous........................................................... 13,563.96
----------
Total......................................................... $560,000.00
==========
</TABLE>
- ---------------
* All fees and expenses are estimates except the Securities and Exchange
Commission registration fee and the National Association of Securities
Dealers, Inc. filing fee. All fees and expenses of this offering are to be
paid by the Company.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Common Stock share numbers and per share purchase prices presented
below have been adjusted to take into account the exchange of 1.370998138 shares
of Birman Managed Care, Inc., a Tennessee corporation, for one share of the
Company in connection with the merger of the Tennessee corporation into the
Company on September 9, 1996, and a 1000-for-one stock split effected by the
Tennessee corporation on October 31, 1995. No registration was required under
the Securities Act of 1933, as amended (the "Securities Act") with respect to
either the exchange or the stock splits as they did not involve the "sale" of
securities within the meaning of the Securities Act. For purposes hereof, the
Company and the predecessor Tennessee corporation are hereinafter referred to as
the Company.
On January 1, 1995, the Company issued an aggregate of 3,500,000 shares of
Common Stock to its President and Chief Executive Officer in exchange for all of
the issued and outstanding capital stock of BMC Health Plans, Inc. The Common
Stock in this transaction was issued in reliance on the exemption provided by
Section 4(2) of the Securities Act.
On June 30, 1995, the Company issued an aggregate of 4,000,000 shares of
Common Stock to its President and Chief Executive Officer in exchange for all of
the issued and outstanding capital stock of Birman & Associates, Inc. The Common
Stock in this transaction was issued in reliance on the exemption provided by
Section 4(2) of the Securities Act. Dr. Birman represented to the Company that
he was a sophisticated (and accredited) investor, knowledgeable about the
Company.
Between July 2, 1995 and November 30, 1995, the Company sold a total of
359,227 shares of Common Stock to 14 investors for an aggregate consideration of
$492,500 or $1.37 per share. The Common Stock in this transaction was issued in
reliance on the exemption provided by Section 4(2) of the Securities Act. All 14
investors were close personal friends or family members of the President and
Chief Executive Officer or highly compensated employees of, or consultants to,
the Company. The offers and sales were made directly by the President and Chief
Executive Officer in separate, isolated transactions, not as part of a
coordinated offering of securities. Each of the investors represented to the
Company that he was a sophisticated investor, or relied upon the advice of a
financial advisor before making his investment.
II-1
<PAGE> 92
Between January 10, 1996 and June 30, 1996, the Company sold 1,101,398
shares of Common Stock to 23 investors for an aggregate consideration of
$1,510,000 or $1.37 per share. Each investor represented to the Company that he
was an accredited investor as such term is defined in Regulation D promulgated
under the Securities Act ("Regulation D"). The Common Stock in these
transactions was issued in reliance on Rule 505 of Regulation D.
During the three years ended June 30, 1996, the Company granted to eight of
its officers and key employees, in reliance upon the exemption provided by Rule
701 and Section 4(2) of the Securities Act, incentive stock options pursuant to
the Company's 1995 Stock Option Plan to purchase a total of 1,006,566 shares of
Common Stock at an exercise price of $1.37 per share.
On January 1, 1996, the Company issued to one person who is a consultant to
the Company a warrant to purchase 36,470 shares of Common Stock, at an exercise
price of $1.37 per share expiring December 31, 2001. The Company relied upon the
exemption provided by Section 4(2) of the Securities Act in issuing this
warrant.
On July 1, 1996, the Company issued to one person who acted as a finder of
prospective investors in the Company's Regulation D offering a warrant to
purchase 21,335 shares of Common Stock, at an exercise price of $1.43 per share
expiring June 30, 2001. The Company relied upon the exemption provided by
Section 4(2) of the Securities Act in issuing this warrant.
On September 9, 1996, the Company issued to two non-employee directors
options to purchase a total of 12,000 shares of Common Stock at an exercise
price of $6.25 per share in reliance upon Rule 701. The options were granted
under the Company's 1996 Non-Employee Directors' Non-Qualified Stock Option
Plan.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. EXHIBITS
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
*1.2 Form of Agreement Among Underwriters.
*1.3 Form of Selected Dealer Agreement.
3.1 Certificate of Incorporation of Birman Managed Care, Inc.
3.2 By-laws of Birman Managed Care, Inc.
3.3 Certificate of Merger dated September 9, 1996 by and between Birman Managed Care,
Inc. -- Delaware and Birman Managed Care, Inc.
4.1 Reference is made to Exhibits 3.1 through 3.3.
4.2 Specimen Common Stock Certificate.
*4.6 Form of Representative's Warrant.
*5.1 Form of Opinion of Rudnick & Wolfe.
10.1 Employment Agreement by and between Birman Managed Care, Inc. and David N. Birman,
M.D. entered into on March 1, 1996.
10.2 Employment Agreement by and between Birman Managed Care, Inc. and Sue D. Birman
entered into on March 1, 1996.
10.3 Employment Agreement by and between Birman Managed Care, Inc. and Robert D. Arkin
entered into on March 1, 1996; Amendment No. 1 by and between Birman Managed Care,
Inc. and Robert D. Arkin entered into on March 1, 1996.
10.4 Employment Agreement by and between Birman Managed Care, Inc., BMC Health Plans,
Inc. and Vincent W. Wong entered into on March 1, 1996.
10.5 Employment Agreement by and between Birman Managed Care, Inc. and Douglas A. Lessard
entered into on March 1, 1996; Amendment No. 1 by and between Birman Managed Care,
Inc. and Douglas A. Lessard entered into on March 1, 1996; Amendment No. 2 by and
between Birman Managed Care, Inc. and Douglas A. Lessard entered into on September
1, 1996.
</TABLE>
II-2
<PAGE> 93
<TABLE>
<C> <S>
10.6 Employment Agreement by and between Birman Managed Care, Inc. and Mark C. Wade
entered into on July 1, 1995; Amendment No. 1 by and between Birman Managed Care,
Inc., BMC Health Plans, Inc. and Mark C. Wade entered into on October 30, 1995;
Amendment No. 2 by and between Birman Managed Care, Inc. and Mark C. Wade entered
into on September 1, 1996.
10.7 Employment Agreement by and between Birman Managed Care, Inc. and Brad Seitzinger,
M.D. entered into on August 26, 1991.
10.8 Employment Agreement by and between Birman Managed Care, Inc. and Bill Barenkamp
entered into on November 9, 1993.
10.9 Consulting Agreement by and between Richard M. Ross, RRCG, L.L.C., and Birman
Managed Care, Inc. entered into as of September 1, 1996.
10.10 1995 Stock Option Plan for Birman Managed Care, Inc. dated October 31, 1995.
10.11 1996 Non-Employee Directors' Non-Qualified Stock Option Plan of Birman Managed Care,
Inc.
10.12 Stock Purchase Agreement by and between Birman Managed Care, Inc., Canton Management
Group, Inc. and Wesley Prater, M.D., Larry Cooper, M.D., Kelvin Ramsey, M.D., L.C.
Tennin, M.D., Louis Saddler, M.D., James Goodman, Ph.D, Vic Caracci, Michael T.
Caracci, Robert T. Teague, M.S.W., Vincent Caracci, Charlie Hills, Harold Wheeler,
M.D., Stephanie Tucker, Winifred Fulgham and Joyce Johnson entered into on September
6, 1996.
10.13 Promissory Note by David N. Birman, M.D. and payable to the Company.
10.14 Loan and Security Agreement dated August 21, 1996 by and between American National
Bank
and Trust Company of Chicago and Birman & Associates, Inc.
10.15 Loan and Security Agreement dated August 21, 1996 by and between Hughes &
Associates, Inc.
10.16 Promissory Note (Secured) dated August 21, 1995 in the stated principal amount of
$1,000,000 payable to American National Bank & Trust Company of Chicago by Birman &
Associates and Hughes & Associates, Inc.
10.17 Form of Indemnification Agreement for Birman Managed Care, Inc.
10.18 Executive Bonus Plan.
10.19 Agreement by and between National Benefit Resources, Inc. and Birman Managed Care,
Inc. entered into on April 16, 1996.
10.20 Agreement dated September 17, 1996 by and between Birman Managed Care, Inc. and
Community Medical Center.
*10.21 Form of Escrow Agreement.
*10.22 Lease dated December 2, 1996 between Arc Builders, LLC and Birman Managed Care, Inc.
*10.23 Form of Consulting Agreement between Birman Managed Care, Inc. and Royce Investment
Group, Inc.
*10.24 Form of Merger and Acquisition Agreement between Birman Managed Care, Inc. and Royce
Investment Group, Inc.
*11.1 Calculation of Income (Loss) Per Share.
16.1 Letter from Semple & Cooper, P.L.C. Re: Change of public accountants.
21.1 List of Subsidiaries.
*23.1 Consent of BDO Seidman, LLP. Re: Birman Managed Care, Inc.
*23.2 Consent of BDO Seidman, LLP Re: Canton Management Group, Inc.
*23.3 Consent of Semple & Cooper, P.L.C. Re: Birman Managed Care, Inc.
*23.4 Consent of Semple & Cooper, P.L.C. Re: Canton Management Group, Inc.
*23.5 Consent of Rudnick & Wolfe (included in the Opinion filed as Exhibit 5.1 hereto).
24.1 Powers of Attorney of Certain Officers and Directors.
*27 Financial Data Schedule.
</TABLE>
- ---------------
* Filed with this amendment.
All other exhibits previously filed.
II-3
<PAGE> 94
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes the registration
statement to be signed on its behalf by the undersigned, in the City of
Cookeville, State of Tennessee, on January , 1997.
BIRMAN MANAGED CARE, INC.
By: /s/ DAVID N. BIRMAN
------------------------------------
David N. Birman, M.D., President
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ---------------------------------------- -----------------
<C> <S> <C>
/s/ DAVID N. BIRMAN Chairman of the Board, President and January , 1997
- ----------------------------------- Chief Executive Officer
David N. Birman
/s/ SUE D. BIRMAN Executive Vice President, Director January , 1997
- -----------------------------------
Sue D. Birman
/s/ ROBERT D. ARKIN Executive Vice President, Chief January , 1997
- ----------------------------------- Operating Officer, Secretary, and
Robert D. Arkin Director
/s/ DOUGLAS A. LESSARD Vice President, Treasurer and Chief January , 1997
- ----------------------------------- Financial Officer
Douglas A. Lessard
Director January , 1997
- -----------------------------------
Diedrich Von Soosten
/s/ JAMES J. RHODES* Director January , 1997
- -----------------------------------
James J. Rhodes
</TABLE>
* By Power of Attorney
II-4
<PAGE> 95
APPENDIX A
Description of Graphic and Image Material
1. Location: Inside Front Cover Page of Prospectus
Caption: Birman Quality Management Program
Subcaption: 80 Client Hospital Implementations in 13 States
Description: This illustration depicts the implementation of the Company's
Quality Management Program using three pictures. At the top of
the page is a picture of two physicians conferring over a
medical record, captioned "Birman physicians consult with
attending physicians." An arrow leads to a second picture
depicting one of the physicians in the first picture attending
to a patient, captioned "Attending physicians apply Quality
Management Programs." An arrow leads from the second picture to
the third picture that depicts a hand writing on a medical
record, captioned "Client hospitals optimize reimbursements and
utilization." To depict the continuity of the flow of
information, an arrow leads from the third picture back to the
first picture. In the background of the illustration is a map
of the United States running from the east coast to the
Mississippi River depicting by state the locations of past and
present hospital-clients of the Company's Quality Management
Program.
2. Location: Inside Back Cover Page of Prospectus
Caption: Birman Health Plans Target Underserved Rural Markets
Description: This illustration depicts the Company's health plan strategy.
At the top of the page is a picture of a family, captioned
"Point of Service -- Patient Chooses Treatment Option At Each
Visit." An arrow points from the family to an arc having three
points of reference labelled HMO, PPO, and Traditional
Indemnity, respectively. Below the arc is a map of the
Southeastern and Southcentral United States showing, by state,
the penetration of HMOs based upon the 1995 HMO-PPO Digest
published by Hoechst Marion Roussel, Inc., captioned "Current
Penetration of HMO Patients by State." The percentages of the
population of the states that are enrollees in HMOs reflected
in the illustration are as follows:
<TABLE>
<CAPTION>
Southeast Southcentral
- --------------------------- -------------------------------
State Percentage State Percentage
- ----- ---------- ----- ----------
<S> <C> <C> <C>
Delaware 25.6% Kentucky 12.4%
Maryland 29.7% Tennessee 9.0%
West Virginia 3.2% Arkansas 6.4%
Virginia 14.1% Mississippi 0.8%
North Carolina 8.7% Alabama 7.6%
South Carolina 5.4% Louisiana 7.4%
Georgia 10.9%
Florida 18.0%
</TABLE>
<PAGE> 1
Exhibit 1.1
ROYCE INVESTMENT GROUP, INC.
2,000,000 Shares
BIRMAN MANAGED CARE, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
ROYCE INVESTMENT GROUP, INC.
As Representative of the Several Underwriters
199 Crossways Park Drive
Woodbury, New York 11797
BIRMAN MANAGED CARE, INC., a Delaware corporation (the
"Company"), proposes to issue and sell to the underwriters named in Schedule A
(the "Underwriters") of this Underwriting Agreement (the "Agreement"), for whom
you are acting as representative (the "Representative"), an aggregate of
2,000,000 shares (the "Stock") of Common Stock, $.001 par value (such class of
stock being herein called the "Common Stock"), of the Company. In addition,
those stockholders of the Company named in Schedule B (the "Selling
Stockholders") propose to grant to the Underwriters (or, at its option, the
Representative, individually) the option referred to in Section 2(b) hereof to
purchase all or any part of an aggregate of 300,000 additional shares of Common
Stock. Unless the context otherwise indicates, the term "Stock" shall include
the 300,000 additional shares referred to above. The Company further agrees to
issue, upon the First Closing Date (as hereafter defined), the Representative's
Stock Purchase Warrants more fully discussed in Section 14 below (the
"Warrants"). The Stock, the Warrants, and the shares of Common Stock issuable
upon exercise of the Warrants are herein collectively called the "Securities."
You have advised the Company and the Selling Stockholders that
you and the other Underwriters desire to purchase, severally, the Stock, and
that you have been authorized by the Underwriters to execute this agreement on
their behalf. The Company and the Selling Stockholders confirm the agreements
made by them with respect to the purchase of the Stock by the several
Underwriters on whose behalf you are signing this Agreement, as follows:
<PAGE> 2
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriters that:
(a) A registration statement (File No. 333-11957) on Form
S-B2 relating to the public offering of the Stock, including a form of
prospectus subject to completion, copies of which have heretofore been delivered
to you, has been prepared by the Company in conformity with the requirements of
the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder, and has been filed with the Commission
under the Act and one or more amendments to such registration statement may have
been so filed. After the execution of this Agreement, the Company will file with
the Commission either (i) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the Act, a
prospectus in the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have been filed, in such
registration statement), with such changes or insertions as are required by Rule
430A under the Act or permitted by Rule 424(b) under the Act and as have been
provided to and approved by the Representative prior to the execution of this
Agreement, or (ii) if such registration statement, as it may have been amended,
has not been declared by the Commission to be effective under the Act, an
amendment to such registration statement, including a form of prospectus, a copy
of which amendment has been furnished to and approved by the Representative
prior to the execution of this Agreement. As used in this Agreement, the term
"Registration Statement" means such registration statement, as amended at the
time when it was or is declared effective, including all financial schedules and
exhibits thereto and including any information omitted therefrom pursuant to
Rule 430A under the Act and included in the Prospectus (as hereinafter defined);
the term "Preliminary Prospectus" means each prospectus subject to completion
filed with such registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration Statement
or any amendment thereto at the time it was or is declared effective); and the
term "Prospectus" means (A) the prospectus first filed with the Commission
pursuant to Rule 424(b) under the Act, or (B) if the prospectus included in the
Registration Statement omits information in reliance upon Rule 430A of the Rules
and Regulations and such information is included in a term sheet (as described
in Rule 434(b) of the Rules and Regulations) filed with the Commission pursuant
to Rule 424(b) of the Rules and Regulations, the prospectus included in the
Registration Statement and such term sheet, taken together, or, (C) if no
prospectus is required to be filed pursuant to said Rule 424(b), such term means
the prospectus included in the Registration Statement; except that if such
registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration statement and prior
to the Option Closing Date (as hereinafter defined), the terms "Registration
Statement" and "Prospectus" shall include such registration statement and
prospectus as so amended, and the term "Prospectus" shall include the prospectus
as so supplemented, or both, as the case may be.
(b) Neither the Commission nor the "blue sky" or securities
authority of any jurisdiction has issued any order preventing or suspending the
use of any Preliminary Prospectus relating to the proposed offering of the
Securities nor instituted or, to the best
2
<PAGE> 3
knowledge of the Company, contemplated instituting proceedings for that purpose.
When the Registration Statement becomes effective and at all times subsequent
thereto up to and on the First Closing Date or the Option Closing Date (as
hereinafter defined), as the case may be, (i) the Registration Statement and
Prospectus will in all respects conform to the requirements of the Act and the
Rules and Regulations; and (ii) neither the Registration Statement nor the
Prospectus will include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make statements
therein not misleading; provided, however, that the Company makes no
representations, warranties or agreements as to information contained in or
omitted from the Registration Statement or Prospectus in reliance upon, and in
conformity with, written information furnished to the Company by or on behalf of
the Underwriters specifically for use in the preparation thereof. It is
understood that the statements set forth in the Prospectus on page 2 with
respect to stabilization, under the heading "Underwriting," and the identity of
counsel to the Underwriters under the heading "Legal Matters" constitute the
only information furnished in writing by or on behalf of the several
Underwriters for inclusion in the Registration Statement and Prospectus, as the
case may be.
(c) The Company currently is not engaged in any business other
than acting as a holding company for the capital stock of the subsidiaries
listed on Schedule C hereto (each a "Subsidiary" and, collectively, the
"Subsidiaries"). Other than the Subsidiaries, the Company does not own any stock
or other equity interest in or control, directly or indirectly, any corporation,
partnership or other entity or other subsidiaries. The Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, with full power and authority
(corporate and other) to own or lease its properties and conduct its business as
described in the Registration Statement and Prospectus and is duly qualified to
transact business as a foreign corporation and is in good standing in all other
jurisdictions in which the nature of its business or the character or location
of its properties requires such qualification, except where failure to so
qualify will not materially affect the Company's business, properties or
financial condition.
(d) Each Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its organization, with full corporate and other power and authority to own or
lease its properties and conduct its business as described in the Registration
Statement and the Prospectus; each Subsidiary is duly qualified to transact
business as a foreign corporation and is in good standing in all jurisdictions
in which the nature of its business or location of its properties requires such
qualification, except where the failure to so qualify would not have a material
adverse effect upon the business, properties or financial condition of such
Subsidiary. Except as disclosed in the Registration Statement and the
Prospectus, the Company or a wholly owned Subsidiary of the Company owns all of
the outstanding capital stock of each Subsidiary free and clear of any security
interest, claim, lien, charge, encumbrance, or adverse interest of any nature.
(e) The authorized, issued and outstanding capital stock of
the Company as of September 30, 1996 is as set forth in the Prospectus under
"Capitalization"; the shares of issued and outstanding capital stock of the
Company set forth thereunder have been duly
3
<PAGE> 4
authorized, validly issued, and are fully paid and non-assessable and have been
issued in compliance with all federal and state securities laws; except as set
forth in the Prospectus, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or agreements or other rights to
convert any obligation into, any shares of capital stock of the Company or any
Subsidiary have been granted or entered into by the Company or any Subsidiary;
and the Securities conform to all statements relating thereto contained in the
Registration Statement and Prospectus. The descriptions of the Company's stock
option and other stock-based plans and of the options or other rights granted
and exercised thereunder, as set forth in the Registration Statement and the
Prospectus, are accurate summaries and fairly present the information required
to be shown with respect to such plans and rights in all material respects.
Neither the Company nor any Subsidiary has any employee benefit plans
(including, without limitation, pension, profit sharing, and welfare benefit
plans) or deferred compensation arrangements, except as set forth in the
Registration Statement and the Prospectus. The Company and its affiliates are
not currently offering any securities other than the Securities, nor have they
offered or sold any of the Company's securities, except as described in the
Registration Statement and the Prospectus.
(f) The Securities have been duly authorized, and when paid
for, issued, and delivered pursuant to this Agreement, will be duly authorized,
validly issued, fully paid and non-assessable, and free of preemptive rights of
any security holder of the Company. All necessary and proper corporate
proceedings have been taken to validly authorize the issuance and sale of the
Securities, and no further approval or authority of the stockholders or the
Board of Directors of the Company is required for the issuance and sale of the
Securities to be sold by the Company as contemplated herein. Neither the filing
of the Registration Statement nor the offering or sale of the Securities as
contemplated in this Agreement gives rise to any rights, other than those which
have been waived or satisfied, for or relating to the registration of any shares
of Common Stock, except as described in the Registration Statement.
(g) The Company has the legal right, corporate power, and
authority to enter into this Agreement and perform the transactions contemplated
hereby. This Agreement, the Warrants, the M/A Agreement, and the Consulting
Agreement (to be delivered to you in accordance with Section 4(s) hereof) have
been duly and validly authorized, executed and delivered by the Company and are
legally binding upon and enforceable against the Company in accordance with
their respective terms.
(h) Each approval, registration, qualification, license,
permit, consent, order, authorization, designation, declaration, or filing by or
with any regulatory, administrative, or other governmental body or agency
necessary in connection with the execution and delivery by the Company of this
Agreement and the consummation of the transactions herein contemplated (except
such additional actions as may be required by the National Association of
Securities Dealers, Inc. (the "NASD") or may be necessary to qualify the
Securities for public offering under state securities or Blue Sky laws) has been
obtained or made and each is in full force and effect.
4
<PAGE> 5
(i) Except as described in the Prospectus, neither the Company
nor any of its Subsidiaries is in violation, breach or default of or under, and
consummation of the transactions herein contemplated do not and will not
conflict with, or result in a breach or violation of, any of the terms or
provisions of, or constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any of the property or assets
of the Company or any Subsidiary pursuant to the terms of any contract, lease,
license, franchise, permit, indenture, mortgage, deed of trust, loan agreement
or other agreement, obligation or instrument to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary may be bound or
to which any of the property or assets of the Company or any Subsidiary is
subject, nor will such action result in any violation of the provisions of the
certificate of incorporation or the by-laws of the Company or any Subsidiary, as
amended, or any statute or any order, rule or regulation applicable to the
Company or any Subsidiary of any court or of any regulatory authority or other
governmental body having jurisdiction over the Company or any Subsidiary.
(j) Subject to the qualifications stated in the Prospectus,
the Company or one of its Subsidiaries has good and marketable title to all
properties and assets described in the Prospectus as owned by it, free and clear
of all liens, mortgages, security interests, pledges, charges, encumbrances or
restrictions, except such as are not materially significant or important in
relation to its business; all of the material leases and subleases under which
the Company or a Subsidiary holds properties or assets as lessee or sublessee as
described in the Prospectus are in full force and effect, and, except as
described in the Prospectus, neither the Company nor any of its Subsidiaries is
in default in any material respect with respect to any of the terms or
provisions of any of such leases or subleases, and no claim has been asserted by
anyone adverse to rights of the Company or any of its Subsidiaries as lessee or
sublessee under any of the leases or subleases mentioned above, or affecting or
questioning the right of the Company or any of its Subsidiaries to continued
possession of the leased or subleased premises or assets under any such lease or
sublease except as described or referred to in the Prospectus; and the Company
or a Subsidiary owns or leases all such properties described in the Prospectus
as are necessary to its operations as now conducted and, except as otherwise
stated in the Prospectus, as proposed to be conducted as set forth in the
Prospectus.
(k) Semple & Cooper, P.L.C. and BDO Seidman, LLP, who have
given their reports on certain financial statements filed and to be filed with
the Commission as a part of the Registration Statement, which are incorporated
in the Prospectus, are, with respect to the Company, independent public
accountants as required by the Act and the Rules and Regulations.
(l) The financial statements and schedules, together with
related notes, set forth in the Prospectus or the Registration Statement present
fairly the financial position and results of operations and changes in cash flow
of the Company and the Subsidiaries on the basis stated in the Registration
Statement, at the respective dates and for the respective periods to which they
apply. Said statements schedules, and related notes have been prepared in
accordance with generally accepted accounting principles applied on a basis
which is consistent during the periods involved and with the Act and the Rules
and Regulations, and all adjustments necessary
5
<PAGE> 6
for a fair presentation of results for such periods have been made. The
information set forth under the captions "Dilution," "Capitalization" and
"Selected Financial Data" in the Prospectus fairly present, on the basis stated
in the Prospectus, the information included therein. No other financial
statements or schedules are required to be included in the Registration
Statement. The pro forma financial statements and other pro forma financial
information included in the Registration Statement and the Prospectus have been
prepared in accordance with the Act and the Rules and Regulations with respect
to pro forma financial statements, have been properly compiled on a pro forma
basis, and, in the opinion of the Company, the assumptions used in the
preparation thereof were reasonable and the adjustments used therein are
appropriate to give effect to the transactions and circumstances referred to
therein.
(m) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, (i) there has not been
any material adverse change or any development involving the likelihood of a
future material adverse change in or affecting the condition, financial or
otherwise, of the Company and the Subsidiaries taken as a whole or the earnings,
business affairs, management, key personnel, properties or business prospects of
the Company and the Subsidiaries taken as a whole, whether or not occurring in
the ordinary course of business; (ii) there has not been any transaction entered
into by the Company or any Subsidiary, other than transactions in the ordinary
course of business or transactions specifically described in the Registration
Statement and the Prospectus; (iii) neither the Company nor any Subsidiary has
sustained any material loss or interference with its respective business or
properties from fire, flood, windstorm, accident or other calamity; (iv) neither
the Company nor any Subsidiary has paid or declared any dividends or other
distribution with respect to its capital stock, and neither the Company nor any
Subsidiary is in default in the payment of principal of or interest on any
outstanding debt obligations; (v) there has not been any change in the capital
stock or any issuance of options, warrants, or other rights to acquire capital
stock or material increase in indebtedness of the Company or any Subsidiary; and
(vi) neither the Company nor any Subsidiary has any material contingent
obligation which is not disclosed in the Registration Statement and the
Prospectus or contained in the financial statements or related notes thereto.
(n) Except as set forth in the Prospectus, there is not now
pending or, to the knowledge of the Company, threatened, any action, suit or
proceeding to which the Company or any Subsidiary is a party before or by any
court or governmental regulatory, or administrative agency or body or arbitral
forum, which might result in any material adverse change in the condition
(financial or other), business prospects, net worth, or properties of the
Company or any Subsidiary, nor are there any actions, suits or proceedings
related to environmental matters or related to discrimination on the basis of
age, sex, religion or race; and no labor disputes involving the employees of the
Company or any Subsidiary exist or are imminent which might be expected to
adversely affect the conduct of the business, property or operations or the
financial condition or results of operations of the Company or any Subsidiary.
Neither the Company nor any Subsidiary is subject to the provisions of any
injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body or arbitral forum, which might
result in a material adverse change in the business, assets, or condition of the
Company or any Subsidiary.
6
<PAGE> 7
(o) Except as disclosed in the Prospectus, the Company and
each Subsidiary has filed all necessary federal, state, local, and foreign
income and franchise tax returns and has paid all taxes shown as due thereon and
has paid all tax assessments received by it; and there is no tax deficiency or
assessment which has been or to the knowledge of the Company might be asserted
against the Company or any Subsidiary. Each of the Company and each Subsidiary
has paid all sales, use, transfer, and other taxes applicable to it and its
business and operations.
(p) Either the Company or a Subsidiary owns or possesses
adequate and sufficient rights by license agreement or otherwise to use and
enjoy the full rights in and to all patents, patent rights, trade secrets,
license or royalty arrangements, trademarks and trademark rights, service marks,
trade names, copyrights, know how or proprietary techniques or rights thereto of
others, and governmental, regulatory or administrative authorizations, orders,
permits, certificates, and consents necessary for the conduct of the business of
the Company and its Subsidiaries; the Company is not aware of any pending or
threatened action, suit, proceeding, or claim by others, either domestically or
internationally, that the Company or any Subsidiary is violating any (A)
patents, patent rights, copyrights, trademarks or trademark rights, inventions,
service marks, trade names, licenses or royalty arrangements, trade secrets,
know how or proprietary techniques or rights thereto of others, or (B)
governmental, regulatory or administrative authorizations, orders, permits,
certificates and consents; the Company is not aware, after due diligence, of any
rights of third parties to, or any infringement of, any of the Company's or any
Subsidiary's patents, patent rights, trademarks or trademark rights, copyrights,
licenses or royalty arrangements, trade secrets, know how or proprietary
techniques as well as processes and substances, or rights thereto of others,
which could materially and adversely affect the use thereof by the Company or
any Subsidiary or which would have a material adverse effect on the Company and
the Subsidiaries taken as a whole; the Company is not aware, after due inquiry,
of any pending or threatened action, suit, proceeding, or claim by others
challenging the validity or scope of any of such patents, patent rights,
trademarks or trademark rights, copyrights, licenses or royalty arrangements,
trade secrets, know how, or proprietary techniques or rights thereto of others.
The Company and its Subsidiaries possess no patents.
(q) The Company and each of its Subsidiaries is conducting
business in compliance with all applicable laws, rules and regulations of the
jurisdictions in which it is conducting business, including, without limitation,
all applicable local, state, and federal environmental laws and regulations,
except where the failure to so comply would not have a material adverse effect
on the business or financial condition of the Company and the Subsidiaries taken
as a whole (collectively "Governmental Laws and Regulations"). Without limiting
the foregoing, the Company's current operations do not, and its proposed
operations will not violate any Governmental Laws and Regulations described in
the Registration Statement and the Prospectus. Except as described in the
Registration Statement and the Prospectus, the Company and each of its
Subsidiaries possesses adequate certificates or permits issued by the
appropriate federal, state and local regulatory authorities necessary to conduct
its respective business (as currently conducted and proposed to be conducted)
and to retain possession of its respective
7
<PAGE> 8
properties. Neither the Company nor any Subsidiary has received any notice of
any proceeding relating to the revocation or modification of any of these
certificates or permits.
(r) All transactions among the Company or any Subsidiary and
the officers, directors, and affiliates of the Company or any Subsidiary have
been accurately disclosed in the Registration Statement and the Prospectus, to
the extent required to be disclosed in the Registration Statement and the
Prospectus in accordance with the Act and the Rules and Regulations. As used in
this Agreement, the term "affiliate" shall mean a person or entity controlling,
controlled by or under common control with any specified person or entity, or
possessing the ability to direct, directly or indirectly, the management or
policies of the controlled person or entity, whether through the ownership of
voting securities, by contract, positions of employment, family relationships,
service as an officer, director or partner of the person or entity, or
otherwise.
(s) The Company and each Subsidiary maintains insurance of the
types and in the amounts which it deems adequate for its business and which is
customary for companies in its industry, including, but not limited to, general
liability insurance and insurance covering all real and personal property owned
or leased by the Company or any Subsidiary against theft, damage, destruction,
acts of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect.
(t) The Company has taken all appropriate steps reasonably
necessary or appropriate to assure that otherwise than hereunder or with the
prior written consent of the Representative, no offering, sale, or other
disposition of any Common Stock of the Company will be made (A) for a period of
two (2) years after the date of this Agreement, directly or indirectly, by the
Company or any of its directors, officers, or holders of at least 5% of the
Company's Common Stock as of the date of this Agreement, or (B) for a period of
twenty-two (22) months after the date of this Agreement, by all other holders of
the Company's Common Stock as of the date of this Agreement. For a period of two
(2) years from the effective date of the Registration Statement, the Company, at
its expense, shall provide the Representatives with copies of the Company's
daily transfer sheets, which shall be mailed to the Representatives no less
frequently than weekly.
(u) The Company is classified as a "C" corporation with the
Internal Revenue Service.
(v) The Company's board of directors consists of those persons
listed in the Prospectus. Except as disclosed in the Prospectus, none of such
persons is employed by the Company or any of its Subsidiaries nor is any of them
affiliated with the Company or any of its Subsidiaries, except for service on
its board of directors.
(w) The Company has not, directly or indirectly, at any time
(i) made any contributions to any candidate for political office, or failed to
disclose fully any such contribution in violation of law or (ii) made any
payment to any state, federal or foreign
8
<PAGE> 9
governmental officer or official, or other person charged with similar public or
quasi-public duties, other than payments or contributions required or allowed by
applicable law. The Company's internal accounting controls and procedures are
sufficient to cause the Company to comply in all material respects with the
Foreign Corrupt Practices Act of 1977, as amended.
(x) On the Closing Dates (hereinafter defined) all transfer
or other taxes, (including franchise, capital stock or other tax, other than
income taxes, imposed by any jurisdiction) if any, which are required to be paid
in connection with the sale and transfer of the Securities to the several
Underwriters hereunder will have been fully paid or provided for by the Company
and all laws imposing such taxes will have been fully complied with.
(y) All contracts and other documents of the Company which
are, under the Act and the Rules and Regulations, required to be described in
the Registration Statement or filed as exhibits to the Registration Statement
have been so described or filed.
(z) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock.
(aa) The Company has not, since the filing of the Registration
Statement (a) sold, bid for, purchased, attempted to induce any person to
purchase, or paid anyone any compensation for soliciting purchases of, its
capital stock, or (b) paid or agreed to pay to any person any compensation for
soliciting another person to purchase any securities of the Company, except for
the sale of Securities under this Agreement.
(ab) The Company has not entered into any agreement pursuant
to which any person is entitled, either directly or indirectly, to compensation
from the Company or any Subsidiary for services as a finder or otherwise in
connection with the public offering referred to herein; the Company has obtained
a full release from any other investment banking firm(s) for any obligations to
such firm(s) for services provided prior to the date of this Agreement or for
any rights of such firm(s) to underwrite an offering of the Company's
securities.
(ac) The Company is eligible to use Form SB-2 for the
registration of the Securities.
(ad) Neither the Company, nor to its knowledge, after due and
diligent inquiry, any person other than any Underwriter, has made any
representation, promise or warranty, whether verbal or in writing, to anyone,
whether an existing stockholder or not, that any of the Securities will be
reserved for or directed to them during the proposed public offering.
(ae) Except as previously disclosed in writing by the Company
to the Representative, no officer, director or stockholder of the Company has
any National Association
9
<PAGE> 10
of Securities Dealers Inc. (the "NASD") affiliation, and the Company has no
management or financial consulting agreement with any third party.
(af) The Company is not, and upon receipt of the proceeds from
the sale of the Stock will not be, an "investment company" within the meaning of
the Investment Company Act of 1940, as amended, and the rules and regulations
thereunder.
(ag) The Company has not distributed and will not distribute
prior to the First Closing Date any offering material in connection with the
offering and sale of the Stock other than the Prospectus, the Registration
Statement and the other materials permitted by the Act.
(ah) The Common Stock and the Warrants have been or will be
registered under Section 12 of the Securities Exchange Act of 1954, as amended,
(the "Exchange Act") and have been or will be approved for quotation on the
Nasdaq National Market.
2. Representations and Warranties of the Selling Stockholders.
Each Selling Stockholder represents and warrants to, and agrees with, the
Underwriters that:
(a) Such Selling Stockholder has and at the Option Closing
Date will have good and valid title to the Option Stock (as hereinafter defined)
to be sold by such Selling Stockholder, free of any liens, encumbrances,
equities and claims, and full right, power and authority (including any
requisite corporate or partnership authority) to execute and deliver this
Agreement and to effect the sale and delivery of such Option Stock; and upon the
delivery of and payment for such Option Stock pursuant to this Agreement, good
and valid title thereto, free of any lien, encumbrance, equity or claim will be
transferred to the several Underwriters.
(b) The consummation by such Selling Stockholder of the
transactions herein contemplated and the fulfillment by such Selling Stockholder
of the terms hereof will not (i) result in a breach of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust or other agreement or instrument to which such Selling Stockholder is a
party, or of any order, rule or regulation applicable to such Selling
Stockholder of any court or of any regulatory body or administrative agency or
other governmental body having jurisdiction, or (ii) require the consent,
approval, authorization, registration or qualification of or with any
governmental authority, except such as have been obtained and such as may be
required under state securities or blue sky laws and applicable regulations of
the NASD.
(c) Without having undertaken to determine independently the
accuracy or completeness of either the representations and warranties of the
Company contained herein or the information contained in the Registration
Statement or the Prospectus (other than information pertaining to such Selling
Stockholder), such Selling Stockholder has no knowledge of any material fact,
condition or information relating to such Selling Stockholder which is not
disclosed in the Registration Statement or the Prospectus; and the sale of the
Option Stock by such Selling Stockholder pursuant hereto is not prompted by any
information concerning the Company or any of the Subsidiaries which is not set
forth in the Registration Statement or the Prospectus.
10
<PAGE> 11
(d) Such Selling Stockholder has duly executed and delivered a
power of attorney and custody agreement (with respect to such Selling
Stockholder, the "Power-of-Attorney" and the "Custody Agreement,"
respectively), each in the form heretofore delivered to the Representative,
appointing __________________ and ___________________ as such Selling
Stockholder's attorney-in-fact (the "Attorney-in-Fact") with authority to
execute, deliver and perform this Agreement on behalf of such Selling
Stockholder and appointing American Stock Transfer and Trust Company as
custodian thereunder (the "Custodian"). Such Selling Stockholder has full power
and authority to enter into the Custody Agreement and the Power-of-Attorney and
to perform its obligations under the Custody Agreement. The Custody Agreement
and the Power-of-Attorney have been duly executed and delivered by such Selling
Stockholder and, assuming due authorization, execution and delivery by the
Custodian, are the legal, valid, binding and enforceable instruments of such
Selling Stockholder. Such Selling Stockholder agrees that the Stockholder's
shares of Option Stock placed on deposit with the Custodian are subject to the
interests of the Underwriters hereunder, that the arrangements made for such
custody, the appointment of the Attorney-in-Fact and the right, power and
authority of the Attorney-in-Fact to execute and deliver this Agreement, to
agree on the price at which the Stockholder's shares of Stock Option are to be
sold to the Underwriters, and to carry out the terms of this Agreement, are to
that extent irrevocable and that the obligations of such Selling Stockholder
hereunder shall not be terminated, except as provided in this Agreement or the
Custody Agreement, by any act of such Selling Stockholder, by operation of law
or otherwise. If the Selling Stockholder shall die or become incapacitated, or
if any other event should occur, before the delivery of such Option Stock
hereunder, the certificates for such Option Stock deposited with the Custodian
shall be delivered by the Custodian in accordance with the respective terms and
conditions of this Agreement as if such death, incapacity, or other event had
not occurred, regardless of whether or not the Custodian or the Attorney-in-Fact
shall have received notice thereof.
(e) Such Selling Stockholder has not (i) taken, directly or
indirectly, any action designed to cause or to result in, or that has
constituted or might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Stock or (ii) since the filing of the Registration Statement,
(A) sold, bid for, purchased, attempted to induce any person to purchase, or
paid anyone any compensation for soliciting purchases of, the Stock, or (B) paid
or agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company (except for the sale of Option
Stock by such Selling Stockholder under this Agreement).
3. Purchase, Delivery and Sale of the Stock.
(a) Subject to the terms and conditions of this Agreement, and
upon the basis of the representations, warranties, and agreements herein
contained, the Company agrees to issue and sell to the Underwriters, and each
such Underwriter agrees, severally and not jointly, to buy from the Company at
the gross price per share indicated in the Prospectus (the "Initial Price") less
the Underwriters' discount of ten percent (10%) of the Initial Price, at the
place and time hereinafter specified, the number of shares of Stock set forth
opposite the names of the
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Underwriters in Schedule A attached hereto (the "First Stock") plus any
additional shares of Stock which such Underwriters may become obligated to
purchase pursuant to the provisions of Section 11 hereof. The First Stock shall
consist of 2,000,000 shares of Stock to be purchased from the Company.
Delivery of the First Stock against payment therefor shall
take place at the offices of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, One East Camelback Road, Phoenix, Arizona 85012 (or at such other
place as may be designated by agreement between you and the Company) at 8:00
a.m., Mountain Standard time, on February __, 1997 , or at such later time and
date as you may designate, such time and date of payment and delivery for the
First Stock being herein called the "First Closing Date."
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, each Selling Stockholder hereby grants an option to the
several Underwriters (which may be exercised, at its option, by the
Representative, individually) to purchase all or any part of the number of
shares set forth next to such Selling Stockholder's name on Schedule B at the
Initial Price, less the Underwriters' discount (such additional Stock,
representing an aggregate of 300,000 shares of Stock, being referred to herein
as the "Option Stock"). This option may be exercised within 45 days after the
effective date of the Registration Statement upon notice by the Representative
to the Company advising as to the amount of Option Stock as to which the option
is being exercised, the names and denominations in which the certificates for
such Option Stock are to be registered and the time and date when such
certificates are to be delivered. Such time and date shall be determined by the
Representative but shall not be earlier than one nor later than ten full
business days after the exercise of said option, nor in any event prior to the
First Closing Date, and such time and date is referred to herein as the "Option
Closing Date." The Company shall promptly deliver a copy of such notice to each
of the Selling Stockholders. Delivery of the Option Stock against payment
therefor shall take place at the offices of O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, One East Camelback Road, Phoenix, Arizona 85012. The
number of shares of Option Stock to be purchased from each Selling Stockholder
shall be determined by multiplying the total number of shares of Option Stock
for which the option is being exercised by a fraction, the numerator of which is
the maximum number of share of Option Stock to be sold by such Selling
Stockholder (as set forth next to such Selling Stockholder's name on Schedule B)
and the denominator of which is 300,000 (the maximum number of shares of Option
Stock that may be sold by all Selling Stockholders pursuant to this Section
3(b)); subject, however, to such adjustment as the Representative may approve to
eliminate fractional shares. The number of shares of Option Stock to be
purchased by each Underwriter, if any, shall bear the same percentage to the
total number of shares of Option Stock being purchased by the several
Underwriters pursuant to this Section 3(b) as the number of shares of First
Stock such Underwriter is purchasing bears to the total number of the First
Stock being purchased pursuant to Section 3(a), as adjusted, in each case by the
Representative in such manner as the Representative may deem appropriate. The
Option granted hereunder may be exercised only to cover overallotments in the
sale by the Underwriters of First Stock referred to in Section 3(a) above or to
permit purchases by the Underwriters to the extent permitted by law. In the
event
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<PAGE> 13
the Company declares or pays a dividend or distribution on its Common Stock,
whether in the form of cash, shares of Common Stock or any other consideration,
prior to the Option Closing Date, such dividend or distribution shall also be
paid on the Option Stock at the Option Closing Date.
(c) The Company will make the certificates for the Stock to be
purchased by the Underwriters hereunder available to you for checking at least
one full business day prior to the First Closing Date or the Option Closing Date
(which are collectively referred to herein as the "Closing Dates"). The
certificates shall be in such names and denominations as you may request, at
least two full business days prior to the Closing Dates. Time shall be of the
essence and delivery at the time and place specified in this Agreement is a
further condition to the obligations of each Underwriter.
Definitive certificates in negotiable form for the Stock to be
purchased by the Underwriters hereunder will be delivered by the Company to you
for the accounts of the several Underwriters against payment of the respective
purchase prices therefor by the several Underwriters, by certified or bank
cashier's checks or wire transfer in New York Clearing House (next day) funds,
payable to the order of the Company.
In addition, in the event the Underwriters (or the
Representative, individually) exercise the option to purchase from the Selling
Stockholders all or any portion of the Option Stock pursuant to the provisions
of Section 3(b) above, payment for such stock shall be made to or upon the order
of the Company by certified or bank cashier's checks or wire transfer payable in
New York Clearing House funds at the offices of O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, at the time and date of delivery of such Stock as
required by the provisions of Section 3(b) above, against receipt of the
certificates for such Stock by the Representative for the respective accounts of
the several Underwriters registered in such names and in such denominations as
the Representative may request.
It is understood that you, individually and not as
Representative of the several Underwriters, may (but shall not be obligated to)
make any and all payments required pursuant to this Section 3 on behalf of any
Underwriters whose check or checks shall not have been received by the
Representative at the time of delivery of the Stock to be purchased by such
Underwriter or Underwriters. Any such payment by you shall not relieve any such
Underwriter or underwriters of any of its or their obligations hereunder. It is
also understood that you, individually rather than all of the Underwriters, may
(but shall not be obligated to) purchase the Option Stock referred to in
subsection (b) of this Section 3, but only to cover overallotments.
(d) It is understood that the several Underwriters are to make
a public offering of the First Stock as soon as the Representative deems it
advisable to do so. The First Stock is to be initially offered to the public at
the Initial Price set forth in the Prospectus. The Representative from time to
time thereafter may change the public offering price and other selling terms. To
the extent, if at all, that any Option Stock is purchased pursuant to Section
3(b) hereof, the Underwriters will offer them to the public on the foregoing
terms. It is further
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<PAGE> 14
understood that the Representative will act on behalf of the Underwriters in the
offering and sale of the Stock, in accordance with an Agreement Among
Underwriters entered into by the Representative and the several other
Underwriters on or prior to the date hereof. The Representative shall have the
right to associate with other underwriters and dealers as it may determine and
shall have the right to grant to such persons such concessions out of the
underwriting discount to be received by the Underwriters as it may determine,
under and pursuant to a Selected Dealers' Agreement.
4. Covenants of the Company. The Company covenants and agrees
with the several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, to become effective as promptly as possible. If required, the Company
will file the Prospectus and any amendment or supplement thereto with the
Commission in the manner and within the time period required by Rule 424(b) of
the Rules and Regulations and, if applicable, a term sheet as described in Rule
434(b)of the Rules and Regulations. Upon notification from the Commission that
the Registration Statement has become effective, the Company will so advise you
and will not at any time, whether before or after the effective date, file any
amendment to the Registration Statement or supplement to the Prospectus of which
you shall not previously have been advised and furnished with a copy or to which
you or your counsel shall have objected in writing or which is not in compliance
with the Act and the Rules and Regulations. At any time prior to the later of
(A) the completion by all of the Underwriters of the distribution of the Stock
contemplated hereby (but in no event more than nine months after the date on
which the Registration Statement shall have become or been declared effective)
and (B) 25 days after the date on which the Registration Statement shall have
become or been declared effective (the "Minimum Period"), the Company will
prepare and file with the Commission, promptly upon your request, any amendments
or supplements to the Registration Statement or Prospectus which, in your
opinion, may be necessary or advisable in connection with the distribution of
the Stock.
As soon as the Company is advised thereof, the Company will
advise you, and confirm the advice in writing, of the receipt of any comments of
the Commission, of the effectiveness of any post-effective amendment to the
Registration Statement, of the filing of any supplement to the Prospectus or any
amended Prospectus, of any request made by the Commission for amendment of the
Registration Statement or for supplementing of the Prospectus or for additional
information with respect thereto, of the issuance by the Commission or any state
or regulatory body of any stop order or other order or threat thereof suspending
the effectiveness of the Registration Statement or any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Stock for offering in any jurisdiction, or of the
institution of any proceedings for any of such purposes, and will use its best
efforts to prevent the issuance of any such order, and, if issued, to obtain as
soon as possible the lifting thereof.
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<PAGE> 15
The Company has caused to be delivered to you copies of each
Preliminary Prospectus, and the Company has consented and hereby consents to the
use of such copies for the purposes permitted by the Act. The Company authorizes
the Underwriters and dealers to use the Prospectus in connection with the sale
of the Stock for such period as in the opinion of counsel to the several
Underwriters the use thereof is required to comply with the applicable
provisions of the Act and the Rules and Regulations. In case of the happening,
at any time within such period as a Prospectus is required under this Act to be
delivered in connection with sales by an underwriter of any event of which the
Company has knowledge and which materially affects the Company or the securities
of the Company, or which in the opinion of counsel for the Company or counsel
for the Underwriters should be set forth in an amendment of the Registration
Statement or a supplement to the Prospectus in order to make the statements
therein not then misleading, in light of the circumstances existing at the time
the Prospectus is required to be delivered to a purchaser of the Stock or in
case it shall be necessary to amend or supplement the Prospectus to comply with
law or with the Rules and Regulations, the Company will notify you promptly and
forthwith prepare and furnish to you copies of such amended Prospectus or of
such supplement to be attached to the Prospectus, in such quantities as you may
reasonably request, in order that the Prospectus, as so amended or supplemented,
will not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements in the Prospectus, in
the light of the circumstances under which they are made, not misleading. The
preparation and furnishing of any such amendment or supplement to the
Registration Statement or amended Prospectus or supplement to be attached to the
Prospectus shall be without expense to the Underwriters, except that in case any
Underwriter is required, in connection with the sale of the Stock, to deliver a
Prospectus nine months or more after the effective date of the Registration
Statement, the Company will upon request of and at the expense of the
Underwriter, amend or supplement the Registration Statement and Prospectus and
furnish the Underwriter with reasonable quantities of prospectuses complying
with Section 10(a)(3) of the Act.
The Company will comply with the Act, the Rules and
Regulations and the Securities Exchange Act of 1934 and the rules and
regulations thereunder in connection with the offering and issuance of the
Stock.
(b) The Company will use its best efforts to qualify the
Securities for sale under the securities or "blue sky" laws of such
jurisdictions as the Representative may designate and will make such
applications, file such documents, furnish such information, and take other
actions as may be required for that purpose and to comply with such laws,
provided the Company shall not be required to qualify as a foreign corporation
or a dealer in securities or to execute a general consent to service of process
in any jurisdiction in any action other than one arising out of the offering or
sale of the Stock. The Company will, from time to time, prepare and file such
statements and reports as are or may be required to continue such qualification
in effect for so long a period as the Underwriters may reasonably request.
(c) If the sale of the Stock provided for herein is not
consummated for any reason caused by the Company, the Company shall pay all
costs and expenses incident to the
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<PAGE> 16
performance of the Company's obligations hereunder, including but not limited
to, all of the expenses itemized in Section 10, including the accountable
expenses of the Underwriters, including legal fees.
(d) For so long as the Company is a reporting company under
either Section 12(g) or 15(d) of the Securities Exchange Act of 1934, the
Company, at its expense, will furnish to its stockholders an annual report
(including financial statements audited by independent public accountants), in
reasonable detail, and at its expense, will furnish to you during the period
ending five (5) years from the date hereof, (i) as soon as practicable after the
end of each fiscal year, a consolidated balance sheet of the Company and its
Subsidiaries as at the end of such fiscal year, together with consolidated
statements of income, surplus, and cash flow of the Company and its Subsidiaries
for such fiscal year, all in reasonable detail and accompanied by a copy of the
certificate or report thereon of independent accountants; (ii) as soon as
practicable after the end of each of the first three fiscal quarters of each
fiscal year, consolidated summary financial information of the Company for such
quarter in reasonable detail; (iii) as soon as they are available, a copy of all
reports (financial or other) mailed to security holders; (iv) as soon as they
are available, a copy of all non-confidential reports and financial statements
furnished to or filed with the Commission of any securities exchange or
automated quotation system on which any class of securities of the Company is
listed; and (v) such other information as you may from time to time reasonably
request. The Company will deliver to the Representative similar reports with
respect to significant subsidiaries, as that term is defined in the Rules and
Regulations, which are not consolidated in the Company's financial statements.
The Company will also use its best efforts to cause its officers, directors, and
beneficial owners of 10% or more of any of its registered securities to deliver
a copy of any of the Commission Forms 3, 4, and 5 filed with the Commission to
the Representative, and the Company shall deliver copies of all such Forms
received by it to the Representative.
(e) The Company will deliver to you at or before the First
Closing Date two signed copies of the Registration Statement including all
financial statements and exhibits filed therewith, and of all amendments
thereto, and will deliver to the several Underwriters such number of conformed
copies of the Registration Statement, including such financial statements but
without exhibits, and of all amendments thereto, as the several Underwriters may
reasonably request. The Company will deliver to or upon the order of the several
Underwriters, from time to time until the effective date of the Registration
Statement, as many copies of any Preliminary Prospectus filed with the
Commission prior to the effective date of the Registration Statement as the
Underwriters may reasonably request. The Company will deliver to the
Underwriters on the effective date of the Registration Statement and thereafter
for so long as a Prospectus is required to be delivered under the Act, from time
to time, as many copies of the Prospectus, in final form, or as thereafter
amended or supplemented, as the Underwriters may from time to time reasonably
request.
(f) The Company will make generally available to its security
holders and deliver to you as soon as it is practicable to do so but in no event
later than 90 days after the end of twelve months after its current fiscal
quarter, an earnings statement (which need not
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<PAGE> 17
be audited) covering a period of at least twelve consecutive months beginning
after the effective date of the Registration Statement, which shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise the Representative in writing when such statement
has been so made available and will furnish the Representative with a true and
correct copy thereof.
(g) The Company will apply the net proceeds from the sale of
the Stock for the purposes set forth under "Use of Proceeds" in the Prospectus,
and will file such reports with the Commission with respect to the sale of the
Stock and the application of the proceeds therefrom as may be required pursuant
to Rule 463 under the Act.
(h) The Company will, promptly upon your request, prepare and
file with the Commission any amendments or supplements to the Registration
Statement, Preliminary Prospectus or Prospectus and take any other action, which
in the reasonable opinion of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A., counsel to the several Underwriters, may be reasonably necessary
or advisable in connection with the distribution of the Stock, and will use its
best efforts to cause the same to become effective as promptly as possible.
(i) The Company will reserve and keep available that maximum
number of its authorized but unissued shares of Common Stock which are issuable
upon exercise of the Warrants outstanding from time to time.
(j) For a period of two (2) years after the date of this
Agreement, no officer, director or holder of at least 5% of the Company's Common
Stock (the "Principal Stockholders") will offer, sell or dispose of, directly or
indirectly, any shares of Common Stock without the prior written consent of the
Representative. In addition, for a period of twenty-two (22) months after the
date of this Agreement, none of the other holders, as of the date of this
Agreement, of the Company's Common Stock or options or warrants to acquire
shares of Common Stock will offer, sell, or dispose of, directly or indirectly,
any shares of Common Stock without the prior written consent of the
Representative. In order to enforce this covenant, the Company has required each
of person listed on Schedule D to enter into an agreement substantially in the
form set forth on Schedule E, and has required each other holder of Common Stock
or options or warrants to acquire Common Stock to enter into an agreement
substantially as set forth on Schedule F. The Company has furnished the
Representative with an executed copy of each such agreement. The Company also
shall impose stop-transfer instructions with respect to the shares owned by all
such persons until the end of such period.
(k) The Company will use its best efforts to (i) cause a
registration statement under the Exchange Act, if not already effective, to be
declared effective concurrently with the completion of this offering and will
notify the Representative in writing immediately upon the effectiveness of such
registration statement, and (ii) if requested by the Representative, to obtain
and keep current a listing in the Standard & Poors or Moody's Industrial OTC
Manual. The Company will make all filings required, including registration under
the Securities Exchange
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<PAGE> 18
Act, to obtain the listing of its Common Stock on the Nasdaq National Market,
and will effect and maintain such listing for at least five (5) years from the
date of this Agreement.
(l) The Company and each of the Principal Stockholders
represents that it, he, or she has not taken and agree that it, he, or she will
not take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Stock or to facilitate the
sale or resale of the Stock.
(m) On the Closing Date, and simultaneously with the delivery
of the Stock, the Company shall execute and deliver to you, individually and not
as representative of the Underwriters, the Warrants. The Warrants will be
substantially in the form of the Representative's Stock Purchase Warrant filed
as Schedule G hereto.
(n) During the twenty-four (24) month period commencing on the
date of this Agreement, the Company will not, without the Representative's prior
written consent, sell, contract to sell, issue for other purposes or otherwise
dispose of any securities of the Company other than (i) shares of Common Stock
issuable on the exercise of any options, warrants, or other rights which are
disclosed in the Prospectus and (ii) shares of Common Stock issuable upon the
exercise of options granted to employees, officers or directors after the date
of this Agreement if such options are reasonable and are granted in good faith
and at prices which are not less than the greater of (A) the initial public
offering price of the Stock or (B) the fair market value of the Common Stock on
the date of grant. During the six (6) month period commencing on the date of
this Agreement, the Company will not, without the prior written consent of the
Representative, grant options to any current officer of the Company. During the
one (1) year period commencing on the date of this Agreement, the Company will
not, without the prior written consent of the Representative, file a
registration statement (on Form S-8 or otherwise) covering the issuance of any
shares of Common Stock upon exercise of stock options. During the three year
period from the First Closing Date, the Company will not, without the prior
written consent of the Representative offer or sell or permit any of its
officers to offer or sell any of its securities pursuant to Regulation S under
the Act or in any financing in which the actual price of its equity securities
that are or will be sold or issued cannot be determined accurately at the time
of initial sale or placement.
(o) David N. Birman, M.D., will be President of the Company on
the Closing Dates. The Company has obtained key person life insurance on the
life of Dr. Birman in an amount of not less than $1.0 million and will use its
best efforts to maintain such insurance until the end of the third anniversary
of the date of this Agreement, or, if such individual's employment is terminated
prior to such date, to maintain such insurance on his successor until the
expiration of such period. For a period of thirteen months from the date of this
Agreement, the compensation of the executive officers of the Company shall not
be increased from the compensation levels disclosed in the Prospectus.
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<PAGE> 19
(p) During the one (1) year period commencing on the date of
this Agreement, the Company will not, without the Representative's prior written
consent, (i) undertake or authorize any change in its capital structure; (ii)
authorize, create, issue or sell any funded obligations, notes or other
evidences of indebtedness, except in the ordinary course of business; (iii)
consolidate or merge with or into any other corporation or effect a material
corporate reorganization of the Company; or (iv) create any mortgage or any lien
upon any of its properties or assets, except in the ordinary course of its
business.
(q) The Company will, for a period of five (5) years from the
Closing Date, use its best efforts, including but not limited to the
solicitation of proxies, to appoint or elect one (1) designee of the
Representative to the Company's board of directors. Such designee shall be
entitled to receive reimbursement for all reasonable expenses incurred in
attending such meetings, including, but not limited to, expenses for food,
lodging, and transportation.
(r) The Company has appointed American Stock Transfer and
Trust Company as the Company's transfer agent for the Common Stock. Unless the
Representative otherwise consents in writing, the Company will continue to
retain a transfer agent reasonably satisfactory to the Representative for a
period of one year following the First Closing Date. The Company will make
arrangements to have available at the office of the transfer agent sufficient
quantities of certificates representing the Stock and shares of Common Stock
issuable upon the exercise of the Warrants as may be needed for the quick and
efficient transfer of the Stock as contemplated hereunder and for the one-year
period following the First Closing Date or Option Closing Date, whichever occurs
later.
(s) On the Closing Date and simultaneously with the delivery
of the Stock the Company shall execute and deliver to you, individually and not
as representative of the Underwriters (i) an agreement with you regarding
mergers, acquisitions, joint ventures and certain other forms of transactions,
in the form previously delivered to the Company by you (the "M/A Agreement") and
(ii) pay the entire payment under a one-year consulting agreement in the form
previously delivered to the Company by you (the "Consulting Agreement").
(t) For a period of five (5) years from the Effective Date the
Company (i) at its expense, shall cause its regularly engaged independent
certified public accountants to review (but not audit) the Company's financial
statements for each of the first three (3) fiscal quarters prior to the
announcement of quarterly financial information, the filing of the Company's SB
quarterly report, and the mailing of quarterly financial information to
stockholders and (ii) shall not change its accounting firm within the prior
written consent of the Chairman or the President of the Representative.
(u) As promptly as practicable after the Closing Date, the
Company will prepare, at its own expense, hard cover "bound volumes" relating to
the offering, and will distribute at least four of such volumes to the
individuals designated by the Representative or counsel to the Underwriters.
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<PAGE> 20
(v) The Company shall, for a period of six years after the
date of this Agreement, submit such reports to the Secretary of the Treasury and
to stockholders, as the Secretary may require, pursuant to Section 1202 of the
Internal Revenue Code, as amended, or regulations promulgated thereunder, in
order for the Company to qualify as a "small business" so that stockholders may
realize special tax treatment with respect to their investment in the Company.
(w) The Company shall not grant registration rights to any
person which are exercisable prior to thirteen (13) months after the First
Closing Date.
5. Covenants of the Selling Stockholders. Each Selling
Stockholder covenants and agrees with the several Underwriters that:
(a) For a period of 120 days after the effective date of the
Registration Statement, such Selling Stockholder will not (i) take, directly or
indirectly, any action designed to cause or to result in, or that might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Stock or (ii) directly or indirectly, without the prior written consent of the
Representative, on behalf of the Underwriters, (A) bid for, purchase, attempt to
induce any person to purchase, or pay anyone any compensation for soliciting
purchases of, the Stock or (B) pay or agree to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company (except for the sale of Stock by the Selling Stockholder under this
Agreement).
(b) As soon as such Selling Stockholder is advised thereof,
such Selling Stockholder will advise the Representative (and immediately
thereafter confirm such advice in writing), (i) of receipt by such Selling
Stockholder, or by any representative or agent of such Selling Stockholder, of
any communication from the Commission relating to the Registration Statement,
the Prospectus or any Preliminary Prospectus, or any notice or order of the
Commission relating to the Company or such Selling Stockholder in connection
with the transactions contemplated by this Agreement and (ii) of the happening
of any event which makes or may make any statement made in the Registration
Statement, the Prospectus or any Preliminary Prospectus relating to such Selling
Stockholder untrue or that requires the making of any change in the Registration
Statement, the Prospectus or such Preliminary Prospectus, as the case may be, in
order to make any such statement relating to such Selling Stockholder, in light
of the circumstances in which it was made, not misleading.
6. Conditions of Underwriters' Obligation. The obligations of
the several Underwriters to purchase and pay for the Stock which they have
respectively agreed to purchase hereunder, are subject to the accuracy (as of
the date hereof, and as of the Closing Dates) of and compliance with the
representations and warranties of the Company herein, to the performance by the
Company of its covenants and obligations hereunder, and to the following
conditions:
(a) The Registration Statement shall have become effective and
you shall have received notice thereof not later than 10:00 A.M., New York time,
on the day
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<PAGE> 21
following the date of this Agreement, or at such later time or on such later
date as to which you may agree in writing; on or prior to the Closing Dates no
stop order suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that or a similar purpose shall have been
instituted or shall be pending or, to your knowledge or to the knowledge of the
Company, shall be contemplated by the Commission; any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A., counsel to the several Underwriters; and no stop order shall be
in effect denying or suspending effectiveness of such qualification nor shall
any stop order proceedings with respect thereto be instituted or pending or
threatened. If required, the Prospectus shall have been filed with the
Commission in the manner and within the time period required by Rules 424(b) and
430A under the Act.
(b) At the First Closing Date, you shall have received the
opinion, addressed to the Underwriters, dated as of the First Closing Date, of
Rudnick & Wolfe, counsel for the Company, in form and substance satisfactory to
counsel for the Underwriters, to the effect that:
(i) the Company and each of its Subsidiaries has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the state of its incorporation, with full corporate power and
authority to own its properties and conduct its business as described in the
Registration Statement and Prospectus; the Company and each of its Subsidiaries
is duly qualified or licensed to do business as a foreign corporation and is in
good standing in each jurisdiction in which the ownership or leasing of its
properties or conduct of its business requires such qualification, except where
the failure to qualify would not have a material adverse effect upon the
business or financial condition of the Company or such Subsidiary;
(ii) to the best knowledge of such counsel after due
inquiry, (a) the Company has obtained, or is in the process of obtaining, all
licenses, permits and other governmental authorizations necessary to the conduct
of its business as described in the Prospectus, (b) such licenses, permits and
other governmental authorizations obtained are in full force and effect, and (c)
the Company is in all material respects complying therewith;
(iii) the authorized capitalization of the Company as of
September 30, 1996, is as set forth under "Capitalization" in the Prospectus;
all shares of the Company's outstanding stock requiring authorization for
issuance by the Company's board of directors have been duly authorized, validly
issued, are fully paid and non-assessable and conform to the description thereof
contained in the Prospectus; the outstanding shares of Common Stock of the
Company have not been issued in violation of the preemptive rights of any
shareholder and the shareholders of the Company do not have any preemptive
rights or other rights to subscribe for or to purchase, nor are there any
restrictions upon the voting or transfer of any of the Stock; the Securities
conform to the description thereof contained in the Prospectus; the Securities
have been duly authorized and, when issued and delivered pursuant to this
Agreement, will be duly and validly issued, fully paid, non-assessable, free of
preemptive rights and no personal liability will attach to the ownership
thereof; no further approval or authority of the stockholders or the Board
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<PAGE> 22
of Directors of the Company is required for the issuance and sale of the
Securities to be sold by the Company as contemplated herein; all prior sales by
the Company of the Company's securities have been made in compliance with or
under an exemption from registration under the Act and applicable state
securities laws and the stockholders of the Company have no recision rights with
respect to any outstanding securities of the Company; and to the best of such
counsel's knowledge, neither the filing of the Registration Statement nor the
offering or sale of the Securities as contemplated by this Agreement gives rise
to any registration rights or other rights, other than those which have been
waived or satisfied for or relating to the registration of any shares of Common
Stock;
(iv) each of this Agreement, the Warrants, the M/A Agreement
and the Consulting Agreement have been duly and validly authorized, executed and
delivered by the Company and assuming due execution by each other party hereto,
constitutes a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law);
(v) the certificates evidencing the Stock are in due and
proper form; the Warrants will be exercisable for shares of Common Stock of the
Company in accordance with the terms of the Warrants and at the prices therein
provided for; the shares of Common Stock of the Company issuable upon exercise
of the Warrants have been duly authorized and reserved for issuance upon such
exercise and such shares, when issued upon such exercise in accordance with the
terms of the Warrants and at the price provided for, will be duly and validly
issued, fully paid and non-assessable;
(vi) after due inquiry, such counsel knows of no pending or
threatened legal or governmental actions, suits, or proceedings to which the
Company or any of its Subsidiaries is a party which could materially adversely
affect the business, property, financial condition or operations of the Company
or any of its subsidiaries or which question the validity of the Common Stock of
the Company, the Stock, this Agreement, the Warrants, the M/A Agreement or the
Consulting Agreement, or of any action taken or to be taken by the Company
pursuant to this Agreement, the Warrants, the M/A Agreement or the Consulting
Agreement, and no such proceedings are known to such counsel to be contemplated
against the Company or any of its Subsidiaries; there are no governmental
proceedings or regulations required to be described or referred to in the
Registration Statement which are not so described or referred to; to the best of
such counsel's knowledge, after due inquiry, neither the Company nor any
Subsidiary is a party or is subject to the provisions of any injunction,
judgment, decree or order of any court, regulatory body, administrative agency
or other governmental body or agency or arbitral forum; and during the course of
its ordinary due diligence, which does not include knowledge of the Company's
and its Subsidiaries' day-to-day operations, nothing has come to the attention
of such counsel that would suggest that the Company or any of its Subsidiaries
is not conducting business
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<PAGE> 23
in compliance with all applicable laws, statutes, rules and regulations of any
state and of the United States of America, except where the failure to so comply
would not have a material adverse effect on the business or financial condition
of the Company and the Subsidiaries taken as a whole.
(vii) neither the Company nor any of its Subsidiaries is in
violation of or default under, nor will the execution and delivery of this
Agreement, the Warrants, the M/A Agreement or the Consulting Agreement, and the
incurrence of the obligations herein or therein set forth and the consummation
of the transactions herein or therein contemplated, result in a breach or
violation of, or constitute a default under the certificate of incorporation or
by-laws, in the performance or observance of any material obligations,
agreement, covenant or condition contained in any bond, debenture, note or other
evidence of indebtedness or in any contract, indenture, mortgage, loan
agreement, lease, joint venture or other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which it or any of its
properties may be bound or in violation of any material order, rule, regulation,
writ, injunction, or decree of any government, governmental instrumentality or
court, domestic or foreign;
(viii) the Registration Statement has become effective under
the Act, and to the best of such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for that purpose have been instituted or are pending before, or threatened by,
the Commission; the Registration Statement, all Preliminary Prospectuses, and
the Prospectus (except for the financial statements and other financial data
contained therein, or omitted therefrom, as to which such counsel need express
no opinion) comply as to form in all material respects with the applicable
requirements of the Act and the Rules and Regulations; any required filing of
the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules
and Regulations has been made in the manner and within the time period required
by such Rule 424(b).
(ix) such counsel has participated in the preparation of the
Registration Statement and the Prospectus and nothing has come to the attention
of such counsel to cause such counsel to have reason to believe that the
Registration Statement or any amendment thereto at the time it became effective
or as of the Closing Dates contained any untrue statement of a material fact
required to be stated therein or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading or
that the Prospectus or any supplement thereto contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make
statements therein, in light of the circumstances under which they were made,
not misleading (except, in the case of both the Registration Statement and any
amendment thereto and the Prospectus and any supplement thereto, for the
financial statements, notes thereto and other financial information and
schedules contained therein, as to which such counsel need express no opinion);
(x) all descriptions in the Registration Statement and the
Prospectus, and any amendment or supplement thereto, of contracts and other
documents are
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<PAGE> 24
accurate and fairly present the information required to be shown, and such
counsel is familiar with all contracts and other documents referred to in the
Registration Statement and the Prospectus and any such amendment or supplement
or filed as exhibits to the Registration Statement, and such counsel does not
know of any contracts or documents of a character required to be summarized or
described therein or to be filed as exhibits thereto which are not so
summarized, described or filed;
(xi) no authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary in connection with
the authorization, issuance, transfer, sale or delivery of the Stock by the
Company, in connection with the execution, delivery and performance of this
Agreement by the Company or in connection with the taking of any action
contemplated herein, or the issuance of the Warrants or the Common Stock
underlying the Warrants, other than registrations or qualifications of the Stock
under applicable state or foreign securities or Blue Sky laws and registration
under the Act;
(xii) the statements in the Registration Statement under the
captions "Business," "Use of Proceeds," "Management," and "Description of Common
Stock" have been reviewed by such counsel and insofar as they refer to
descriptions of agreements, statements of law, descriptions of statutes,
licenses, rules or regulations or legal conclusions, are correct in all material
respects;
(xiii) the Stock has been duly authorized for quotation on the
Nasdaq National Market; and
(xiv) the statements of federal or state law or regulation
contained under the captions "Risk Factors" and "Business -- Government
Regulation" and other references in the Registration Statement and Prospectus,
and any amendment or supplement thereto, to regulatory matters (collectively,
the "Regulatory Portion") are, to the extent that they constitute matters of law
or legal conclusions, in all material respects, correct and accurate statements
or summaries of applicable federal or state law and regulations, subject to the
qualifications set forth therein; and the Regulatory Portion of the Registration
Statement and the Prospectus, at the time the Registration Statement became
effective and at the First Closing Date, did not contain any untrue statement of
a material fact, or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Such opinions shall also cover such matters incident to the
transactions contemplated hereby as the Representative or counsel for the
Underwriters shall reasonably request. In rendering such opinion, such counsel
may rely upon certificates of any officer of the Company or public officials as
to matters of fact; and may rely as to all matters of law other than the law of
the United States or of the State of Delaware upon opinions of counsel
satisfactory to you, in which case the opinion shall state that they have no
reason to believe that you and they are not entitled to so rely.
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<PAGE> 25
(c) All corporate proceedings and other legal matters relating
to this Agreement, the Registration Statement, the Prospectus and other related
matters shall be satisfactory to or approved by O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A., counsel to the several Underwriters, and you
shall have received from such counsel a signed opinion, dated as of the First
Closing Date, together with copies thereof for each of the other Underwriters,
with respect to the validity of the issuance of the Stock, the form of the
Registration Statement and Prospectus (other than the financial statements and
other financial data contained therein), the execution of this Agreement and
other related matters as you may reasonably require. The Company shall have
furnished to counsel for the several Underwriters such documents as they may
reasonably request for the purpose of enabling them to render such opinion.
(d) You shall have received on the date hereof and on the
First Closing Date and the Option Closing Date, as the case may be, a signed
letter from Semple & Cooper, P.L.C., auditors for the Company, dated the date
hereof, the First Closing Date, and the Option Closing Date, as the case may be,
which shall confirm, on the basis of a review in accordance with the procedures
set forth in the letter signed by such firm and dated and delivered to the
Representative on each date noted above the following matters:
(i) They are independent public accountants with respect to
the Company within the meaning of the Act.
(ii) The financial statements and schedules included in the
Registration Statement and Prospectus covered by their reports therein set forth
comply as to form in all material respects with the applicable accounting
requirements of the Act and the applicable Rules and Regulations.
(e) You shall have received on the date hereof and on the
First Closing Date and the Option Closing Date, as the case may be, a signed
letter from BDO Siedman, LLP, auditors for the Company, dated the date hereof,
the First Closing Date, and the Option Closing Date, as the case may be, which
shall confirm, on the basis of a review in accordance with the procedures set
forth in the letter signed by such firm and dated and delivered to the
Representative on each date noted above the following matters:
(i) They are independent public accountants with respect to
the Company within the meaning of the Act.
(ii) The financial statements and schedules included in the
Registration Statement and Prospectus covered by their reports therein set forth
comply as to form in all material respects with the applicable accounting
requirements of the Act and the applicable Rules and Regulations.
(iii) On the basis of procedures (but not an examination in
accordance with generally accepted auditing standards) consisting of a reading
of the minutes of meetings and consents of the stockholders and board of
directors of the Company and the
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<PAGE> 26
Subsidiaries and the committees of such boards subsequent to June 30, 1996, as
set forth in the minute books of the Company and the Subsidiaries, inquiries of
officers and other employees of the Company and the Subsidiaries who have
responsibilities for financial and accounting matters with respect to
transactions and events subsequent to June 30, 1996, and such other specified
procedures and inquires to a date not more than five days prior to the date of
each such letter, nothing has come to their attention which in their judgment
would indicate that (A) with respect to the period subsequent to June 30, 1996,
there were, as of the date of the most recent available monthly consolidated
financial statements of the Company and, as of a specified date not more than
five days prior to the date of such letter, any changes in the capital stock or
long-term indebtedness of the Company or payment or declaration of any dividend
or other distribution, or decrease in net current assets, total assets or net
stockholder's equity, in each case as compared with the amounts shown in the
most recent audited consolidated financial statements included in the
Registration Statement and the Prospectus, except for changes or decreases which
the Registration Statement and the Prospectus disclose have occurred or may
occur or which are set forth in such letter or (B) during the period from June
30, 1996, to the date of the most recent available monthly unaudited
consolidated financial statements of the Company and to a specified date not
more than five days prior to the date of such letter, there was any decrease, as
compared with the corresponding period in the prior fiscal year, in total
revenues or total or per share net income, except for decreases which the
Registration Statement and the Prospectus disclose have occurred or may occur or
which are set forth in such letter.
(iv) Stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings and other financial
information pertaining to the Company set forth in the Registration Statement
and the Prospectus, which have been specified by the Representative, to the
extent that such amounts, numbers and percentages and information may be derived
from the general accounting and financial records of the Company and its
subsidiaries or from schedules furnished by the Company, and excluding any
questions requiring an interpretation by legal counsel, with the results
obtained from the application of specified reasonings, inquiries and other
appropriate procedures specified by the Representative (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in such letter heretofore delivered, and found them to be
in agreement.
(v) Stating that although they are unable to and do not
express an opinion on the unaudited pro forma financial statements (the "Pro
Forma Financial Statements") included in the Registration Statement, they have
(A) read the Pro Forma Financial Statements, (B) made inquiries of appropriate
officials of the Company who have responsibility for financial and accounting
matters about the bases for their determination of the pro forma adjustments to
the historical amounts in the Pro Forma Financial Statements and whether the Pro
Forma Financial Statements comply in form in all material respects with the
applicable accounting requirements of the Act and the Rules and Regulations, and
(C) proved the arithmetic accuracy of the application of the pro forma
adjustments to the historical amounts in the Pro Forma Financial Statements, and
that on the basis of such procedures and such other inquiries and procedures as
may be specified in such letter, nothing came to their attention that caused
26
<PAGE> 27
them to believe that the Pro Forma Financial Statements do not comply in form in
all material respects with the applicable requirements of the Act and the Rules
and Regulations and that the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of such statements.
(vi) Such other matters as may be reasonably requested by the
Underwriters. All such letters shall be in form and substance satisfactory to
the Representative and its counsel.
(f) At the Closing Dates, (i) the representations and warranties
of the Company contained in this Agreement shall be true and correct with the
same effect as if made on and as of the Closing Dates and the Company shall have
performed all of its obligations hereunder and satisfied all the conditions on
its part to be satisfied at or prior to such Closing Date, (ii) the Registration
Statement and the Prospectus and any amendments or supplements thereto shall
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and in all material respects conform
to the requirements thereof, and neither the Registration Statement nor the
Prospectus nor any amendment or supplement thereto shall contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, (iii)
there shall have been, since the respective dates as of which information is
given, no material adverse change, or any development involving a prospective
material adverse change in the business, properties or condition (financial or
otherwise), results of operations, capital stock, long-term or short-term debt
or general affairs of the Company or any of its Subsidiaries from that set forth
in the Registration Statement and the Prospectus, except changes which the
Registration Statement and Prospectus indicate might occur after the effective
date of the Registration Statement, and neither the Company nor any of its
Subsidiaries shall have incurred any material liabilities or agreement not in
the ordinary course of business other than as referred to in the Registration
Statement and Prospectus; and (iv) except as set forth in the Prospectus, no
action, suit or proceeding at law or in equity shall be pending or threatened
against the Company or any of its Subsidiaries which would be required to be set
forth in the Registration Statement, and no proceedings shall be pending or
threatened against the Company or any of its Subsidiaries before or by any
commission, board or administrative agency in the United States or elsewhere,
wherein an unfavorable decision, ruling or finding would materially and
adversely affect the business, property, condition (financial or otherwise),
results of operations or general affairs of the Company or any of its
Subsidiaries, and (v) you shall have received, at the First Closing Date, a
certificate signed by each of the Chairman of the Board or the President and the
principal financial or accounting officer of the Company, dated as of the First
Closing Date, evidencing compliance with the provisions of this Section 6(f).
(g) The Company shall have furnished to you such further
certificates and documents confirming the representations, warranties and
covenants contained herein and related matters as you may reasonably have
requested.
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<PAGE> 28
(h) You shall have received from each person listed on Schedule D
hereto an agreement in the form set forth on Schedule E hereto, and from each of
the Company's other stockholders an agreement in the form set forth on Schedule
F hereto.
(i) The Securities and the Warranties shall be qualified in such
states as the Representative may reasonably request and each such qualification
shall be in effect and not subject to any stop order or other proceeding on the
Closing Date or Option Closing Date, as the case may be.
(j) The Company shall have obtained a full release from any other
investment banking firm(s) for any obligations to such firm(s) for services
provided prior to the date of this Agreement or for any rights of such firm(s)
to underwrite an offering of the Company's securities.
(k) The Company stock shall have been approved for quotation on
the Nasdaq National Market.
(l) Upon exercise of the option provided for in Section 3(b)
hereof, the obligations of the several Underwriters (or, at its option, the
Representative, individually) to purchase and pay for the Option Stock referred
to therein will be subject (as of the date hereof and as of the Option Closing
Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at the
Option Closing Date, and no stop order suspending the effectiveness thereof
shall have been issued and no proceedings for that purpose shall have been
instituted or shall be pending, or, to your knowledge or the knowledge of the
Company, shall be contemplated by the Commission, and any reasonable request on
the part of the Commission for additional information shall have been complied
with to the satisfaction of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A., counsel to the several Underwriters.
(ii) At the Option Closing Date there shall have been
delivered to you as Representative the signed opinion of Rudnick & Wolfe,
counsel for the Company, dated as of the Option Closing Date, in form and
substance satisfactory to O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A., counsel to the several Underwriters, together with copies of
such opinion for each of the other several underwriters, which opinion shall be
substantially the same in scope and substance as the opinion furnished to you at
the First Closing Date pursuant to Section 6(b), except that such opinion, where
appropriate, shall cover the Option Stock.
(iii) At the Option Closing Date there shall have been
delivered to you as Representative the signed opinion of Rudnick & Wolfe,
counsel for the Selling Stockholders, dated the Option Closing Date, to the
effect that:
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<PAGE> 29
(A) to the knowledge of such counsel, each Selling Stockholder
has full power and authority to enter into this Agreement, the Custody Agreement
and the Power-of-Attorney and to sell, transfer and deliver the number of shares
of the Stock being sold by the Selling Stockholder hereunder in the manner
provided in this Agreement and to perform its obligations under the Custody
Agreement; the execution and delivery of this Agreement, the Custody Agreement
and the Power-of-Attorney have been duly authorized by all necessary action of
each Selling Stockholder; this Agreement, the Custody Agreement and the
Power-of-Attorney have been duly executed and delivered by each Selling
Stockholder; assuming due authorization, execution and delivery by the
Custodian, the Custody Agreement and the Power-of-Attorney are the legal, valid,
binding and enforceable instruments of each Selling Stockholder, subject to
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
generally and subject, as to enforceability, to general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law);
(B) to such counsel's best knowledge upon due investigation,
the delivery by each Selling Stockholder to the several Underwriters of
certificates for the number of shares of Option Stock being sold hereunder by
such Selling Stockholder against payment therefor as provided herein, will
convey good and marketable title to such securities to the several Underwriters,
free and clear of all security interests, liens, encumbrances, equities, claims
or other defects, provided that the Shareholder's Securities were acquired by
the several Underwriters for value in good faith and without notice (within the
meaning of Section 8-302 of the Uniform Commercial Code) of any such security
interests, liens, encumbrances, equities, claims or other defects; and
(C) to the knowledge of such counsel, the sale of each
Stockholder's Option Stock to the Underwriters by such Selling Stockholder
pursuant to this Agreement, the compliance by each Selling Stockholder with the
other provisions of this Agreement, the Custody Agreement and the consummation
by each Selling Stockholder of the other transactions herein contemplated do not
(A) require the consent, approval, authorization, registration or qualification
of or with any governmental authority, except such as have been obtained and
such as may be required under state securities or blue sky laws or (B) conflict
with or result in a breach or violation of any of the terms and provisions of
(1) any statute, rule or regulation or (2) any judgment, decree or order of any
court or arbitrator, in each case known to such counsel, which is applicable to
any Selling Stockholder.
In rendering such opinions, such counsel may rely, as to matters of fact,
to the extent such counsel deems proper, on certificates of the Selling
Stockholders and executive officers of the Company and public officials.
(iv) You shall have received a certificate from each Selling
Stockholder, signed by such Selling Stockholder, dated the Option Closing Date,
to the effect that:
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<PAGE> 30
(A) the representations and
warranties of such Selling Stockholder in this Agreement are true and correct as
if made on and as of the Option Closing Date;
(B) to the extent that any
statements or omissions are made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto in reliance
upon and in conformity with written information furnished to the Company by such
Selling Stockholder specifically for use therein, the Registration Statement, as
amended as of the Option Closing Date, does not include any untrue statement of
a material fact or omit to state any material fact necessary to make the
statements therein not misleading, and the Prospectus, as amended or
supplemented as of the Option Closing Date, does not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading; and
(C) such Selling Stockholder has
performed all covenants and agreements on its part to be performed or satisfied
under this Agreement at or prior to the Option Closing Date.
(v) At the Option Closing Date there
shall have been delivered to you a certificate of the Chairman of the Board or
the President and the principal financial or accounting officer of the Company,
dated the Option Closing Date, in form and substance satisfactory to O'Connor,
Cavanagh, Anderson, Killingsworth & Beshears, P.A., counsel to the several
Underwriters, substantially the same in scope and substance as the certificate
furnished to you at the First Closing Date pursuant to Section 6(e).
(vi) At the Option Closing Date there
shall have been delivered to you letters in form and substance satisfactory to
you from Semple & Cooper, P.L.C., and BDO Seidman, LLP, as set forth in Sections
6(d) and 6(e).
(vii) All proceedings taken at or prior to
the Option Closing Date in connection with the sale and issuance of the Option
Stock shall be satisfactory in form and substance to you, and you and O'Connor,
Cavanagh, Anderson, Killingsworth & Beshears, P.A., counsel to the several
Underwriters, shall have been furnished with all such documents, certificates,
affidavits and opinions as you may request in connection with this transaction
in order to evidence the accuracy and completeness of any of the
representations, warranties or statements of the Company or its compliance with
any of the covenants or conditions contained herein.
(m) No action shall have been taken by the
Commission or the NASD the effect of which would make it improper, at any time
prior to the Closing Dates, for members of the NASD to execute transactions (as
principal or agent) in the Common Stock and no proceedings for the taking of
such action shall have been instituted or shall be pending, or, to the knowledge
of the Underwriter or the Company, shall be contemplated by the Commission or
the
30
<PAGE> 31
NASD. The Company represents that at the date hereof it has no knowledge that
any such action is in fact contemplated by the Commission or the NASD. The
Company shall advise the Underwriter of any NASD affiliation of any of its
officers, directors, stockholders or their affiliates.
If any of the conditions herein provided for in this Section
shall not have been fulfilled as of the date indicated, this Agreement and all
obligations of the several Underwriters under this Agreement may be cancelled
at, or at any time prior to, each Closing Date by the Representative. Any such
cancellation shall be without liability of the Underwriters to the Company.
7. Conditions of the Obligations of the Company. The
obligation of the Company to sell and deliver the Securities is subject to the
following conditions:
(a) The Registration Statement shall have become
effective not later than 10:00 A.M. New York time, on the day following the date
of this Agreement, or on such later date as the Company and the Representative
may agree to in writing.
(b) At the Closing Dates, no stop orders
suspending the effectiveness of the Registration Statement shall have been
issued under the Act or any proceedings therefor initiated or threatened by the
Commission.
If the conditions to the obligations of the Company provided
for in this Section have been fulfilled on the First Closing Date but are not
fulfilled after the First Closing Date and prior to the Option Closing Date,
then only the obligation of the Company to sell and deliver the Stock on
exercise of the option provided for in Section 3(b) hereof shall be affected.
8. Indemnification.
(a)(i) The Company agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of the Act against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all reasonable costs of defense and
investigation and all attorneys' fees), to which such Underwriter or such
controlling person may become subject, under the Act or otherwise, and will
reimburse, as incurred, such Underwriter and such controlling persons for any
legal or other expenses reasonably incurred in connection with investigating,
defending against or appearing as a third party witness in connection with any
losses, claims, damages or liabilities, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in (A) the Registration Statement, any Preliminary Prospectus, the Prospectus,
or any amendment or supplement thereto, (B) any blue sky application or other
document executed by the Company specifically for that purpose or based upon
written information furnished by the Company filed in any state or other
jurisdiction in order to qualify any or all of the Securities under the
securities laws thereof (any such application, document or
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<PAGE> 32
information being hereinafter called a "Blue Sky Application"), or arise out of
or are based upon the omission or alleged omission to state in the Registration
Statement, any Preliminary Prospectus, Prospectus, or any amendment or
supplement thereto, or in any Blue Sky Application, a material fact required to
be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent, but only to the extent, that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of the Underwriters
specifically for use in the preparation of the Registration Statement or any
such amendment or supplement thereof or any such Blue Sky Application or any
such preliminary Prospectus or the Prospectus or any such amendment or
supplement thereto. This indemnity will be in addition to any liability which
the Company may otherwise have.
(a)(ii) Each Selling Stockholder agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of the Act against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all reasonable costs of defense and
investigation and all attorneys' fees), to which such Underwriter or such
controlling person may become subject, under the Act or otherwise, and will
reimburse, as incurred, such Underwriter and such controlling persons for any
legal or other expenses reasonably incurred in connection with investigating,
defending against or appearing as a third party witness in connection with any
losses, claims, damages or liabilities, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in (A) the Registration Statement, any Preliminary Prospectus, the Prospectus,
or any amendment or supplement thereto, (B) any Blue Sky Application or other
document executed by the Company specifically for that purpose or based upon
written information furnished by such Selling Stockholder filed in any state or
other jurisdiction in order to qualify any or all of the Securities under the
securities laws thereof or arise out of or are based upon the omission or
alleged omission to state in the Registration Statement, any Preliminary
Prospectus, Prospectus, or any amendment or supplement thereto, or in any Blue
Sky Application, a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, however, that such Selling
Stockholder will not be liable in any such case to the extent, but only to the
extent, that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with written information
furnished to the Company by or on behalf of the Underwriters specifically for
use in the preparation of the Registration Statement or any such amendment or
supplement thereof or any such Blue Sky Application or any such preliminary
Prospectus or the Prospectus or any such amendment or supplement thereto. In no
event, however, shall the liability of any Selling Shareholder for
indemnification under this Section 8(a)(ii) exceed the proceeds received by such
Selling Shareholder from the Underwriters in the offering. This indemnity will
be in addition to any liability which such Selling Stockholder may otherwise
have.
32
<PAGE> 33
(b) Each Underwriter severally, but not jointly, will
indemnify and hold harmless the Company, the Selling Stockholders, each of its
directors, each nominee (if any) for director named in the Prospectus, each of
its officers who have signed the Registration Statement, and each person, if
any, who controls the Company within the meaning of the Act, against any losses,
claims, damages or liabilities (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees) to which the Company, such Selling Stockholder, or any such
director, nominee, officer or controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, (i) in reliance upon and in conformity with written
information furnished to the Company by you or by any Underwriter through you
specifically for use in the preparation thereof and (ii) relates to the
transactions effected by the Underwriters in connection with the offer and sale
of the Securities contemplated hereby, it being understood that the statements
set forth in the Prospectus on page 2 with respect to stabilization, under the
heading "Underwriting," and the identity of counsel to the Underwriters under
the heading "Legal Matters" constitute the only information furnished in writing
by or on behalf of the several Underwriters for inclusion in the Registration
Statement and Prospectus, as the case may be. This indemnity agreement will be
in addition to any liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify in writing the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that if the indemnified party is an Underwriter
or a person who
33
<PAGE> 34
controls such Underwriter within the meaning of the Act, the fees and expenses
of such counsel shall be at the expense of the indemnifying party if (i) the
employment of such counsel has been specifically authorized in writing by the
indemnifying party or (ii) the named parties to any such action (including any
impleaded parties) include both such Underwriter or such controlling person and
the indemnifying party and in the judgment of the Representative, it is
advisable for the Representative or such Underwriters or controlling persons to
be represented by separate counsel (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of such
Underwriter or such controlling person, it being understood, however, that the
indemnifying party shall not, in connection with any one such action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys for all
such Underwriters and controlling persons, which firm shall be designated in
writing by you). No settlement of any action against an indemnified party shall
be made without the consent of the indemnifying party, which shall not be
unreasonably withheld in light of all factors of importance to such indemnifying
party.
9. Contribution. In order to provide for just and equitable
contribution under the Act in any case in which (i) any Underwriter makes claim
for indemnification pursuant to Section 8 hereof but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case, notwithstanding the
fact that the express provisions of Section 8 provide for indemnification in
such case, or (ii) contribution under the Act may be required on the part of any
Underwriter, then the Company and the Selling Stockholders and each person who
controls the Company and the Selling Stockholders, in the aggregate, and any
such Underwriter shall contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (which shall, for all purposes of this
Agreement, include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys' fees) in either such case (after
contribution from others) in such proportions that all such Underwriters are
responsible in the aggregate for that portion of such losses, claims, damages or
liabilities represented by the percentage that the underwriting discount per
share appearing on the cover page of the Prospectus bears to the public offering
price appearing thereon, and the Company and the Selling Stockholders shall be
responsible for the remaining portion, provided, however, that (a) if such
allocation is not permitted by applicable law then the relative fault of the
Company, the Selling Stockholders, and the Underwriters and controlling persons,
in the aggregate, in connection with the statements or omissions which resulted
in such damages and other relevant equitable considerations shall also be
considered. The relative fault shall be determined by reference to, among other
things, whether in the case of an untrue statement of a material fact or the
omission to state a material fact, such statement or omission relates to
information supplied by the Company, the Selling Stockholders, or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
Company, the Selling Stockholders, and the Underwriters agree that it would not
be just and equitable if the respective obligations of the Company, the Selling
Stockholders, and the Underwriters to contribute pursuant to this Section 9 were
to be determined by pro rata or per capita allocation of the aggregate damages
34
<PAGE> 35
(even if the Underwriters and their respective controlling persons in the
aggregate were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in the first sentence of this Section 9 and (b) that the contribution of each
contributing Underwriter shall not be in excess of its proportionate share
(based on the ratio of the number of Stock purchased by such Underwriter to the
number of Stock purchased by all contributing Underwriters) of the portion of
such losses, claims, damages or liabilities for which the Underwriters are
responsible. No person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. As used in this
paragraph, the term "Underwriter" includes any officer, director, or other
person who controls an Underwriter within the meaning of Section 15 of the Act,
the word "Company" includes any officer, director, or person who controls the
Company within the meaning of Section 15 of the Act. If the full amount of the
contribution specified in this paragraph is not permitted by law, then any
Underwriter and each person who controls any Underwriter shall be entitled to
contribution from the Company, the Selling Stockholders, and their respective
officers, directors and controlling persons to the full extent permitted by law.
The foregoing contribution agreement shall in no way affect the contribution
liabilities of any persons having liability under Section 11 of the Act other
than the Company, the Selling Stockholders, and the Underwriters. No
contribution shall be requested with regard to the settlement of any matter from
any party who did not consent to the settlement; provided, however, that such
consent shall not be unreasonably withheld in light of all factors of importance
to such party.
10. Costs and Expenses.
(a) Whether or not this Agreement becomes effective
or the sale of the Stock to the Underwriters is consummated, the Company will
pay all costs and expenses incident to the performance of this Agreement by the
Company and the Selling Stockholders including, but not limited to, the fees and
expenses of counsel to the Company and the Selling Stockholders and of the
Company's and the Selling Stockholders' accountants; the costs (up to $10,000)
of investigative reports regarding the Company, its principal stockholders
and/or its officers and directors; the costs and expenses incident to the
preparation, printing, filing and distribution under the Act of the Registration
Statement (including the financial statements therein and all amendments and
exhibits thereto), Preliminary Prospectus and the Prospectus, as amended or
supplemented, the fee of the NASD in connection with the filing required by the
NASD relating to the offering of the Securities contemplated hereby; all
expenses, including reasonable fees and disbursements of counsel to the
Underwriters, in connection with the qualification of the Securities under the
state securities or blue sky laws which the Representative shall designate; the
cost of printing and furnishing to the several Underwriters copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, this
Agreement, the Agreement Among Underwriters, Selling Agreement, Underwriters'
Questionnaire, Underwriters' Power of Attorney and the Blue Sky Memorandum; any
fees relating to the listing of the Common Stock on the Nasdaq National Market
or other securities exchange; the cost of printing the certificates representing
the Stock; the fees of the transfer agent; the costs of advertising, including
the cost (up to $20,000) of publication of at least three "tombstones" of the
offering (at least one of which shall be in a
35
<PAGE> 36
national business newspaper and one of which shall be in a major New York
newspaper; the cost of preparing at least four hard cover "bound volumes"
relating to the offering for individuals designated by the Underwriter; and all
other costs and expenses incident to the performance of the Company's
obligations under this Agreement which are not otherwise provided for in this
Section. The Company shall pay any and all taxes (including any transfer,
franchise, capital stock or other tax imposed by any jurisdiction) on sales to
the Underwriters hereunder. The Company will also pay all cost and expenses
incident to the furnishing of any amended Prospectus or of any supplement to be
attached to the Prospectus as called for in Section 5(a) of this Agreement
except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses the Company shall at
the First Closing Date pay to Royce Investment Group, Inc. in its individual
rather than representative capacity, a non-accountable expense allowance of
three percent (3%) of the gross proceeds of the sale of First Stock $( ), of
which $25,000 has been paid. In the event the overallotment option is exercised,
the Company shall pay to Royce Investment Group, Inc. at the Option Closing Date
an additional amount equal to three percent (3%) of the gross proceeds on
exercise of the overallotment option. In the event the transactions contemplated
hereby are not consummated by reason of any action of the Company (other than as
a result of a reduction by the Underwriters of the number of shares of Stock to
be purchased from the Company or a reduction of the Initial Price at which the
Stock is to be purchased from the Company) or because of a breach by the Company
of any covenant, representation or warranty herein, the Company shall be liable
for the accountable out-of-pocket expenses of the Underwriters, including legal
fees and disbursements, up to $100,000, and in any event the Underwriters may
retain amounts theretofore paid to them as set forth above to the extent such
amounts represent accountable out-of-pocket expenses
(c) No person is entitled either directly or indirectly to
compensation from the Company, from any Selling Stockholder, from the
Representative or from any other person for services as a finder in connection
with the proposed offering, and the Company and Selling Stockholders agree to
indemnify and hold harmless the Representative and the other Underwriters,
against any losses, claims, damages or liabilities, joint or several (which
shall, for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), to which the
Company, the Selling Stockholders, the Representative or such other Underwriter
or person may become subject insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon the
claim of any person (other than an employee of the party claiming indemnity) or
entity that he or it is entitled to a finder's fee in connection with the
proposed offering by reason of such person's or entity's influence or prior
contact with the indemnifying party.
11. Substitution of Underwriters. If any Underwriters shall
for any reason not permitted hereunder cancel their obligations to purchase the
First Stock hereunder, or shall fail to take up and pay for the number of First
Stock set forth opposite their respective names in Schedule A hereto upon tender
of such First Stock in accordance with the terms hereof, then:
36
<PAGE> 37
(a) If the aggregate number of shares of First Stock which
such Underwriter or Underwriters agreed but failed to purchase does not exceed
10% of the total number of First Stock, the other Underwriters shall be
obligated severally, in proportion to their respective commitments hereunder, to
purchase the First Stock which such defaulting Underwriter or Underwriters
agreed but failed to purchase.
(b) If any Underwriter or Underwriters so default and the
agreed number of First Stock with respect to which such default or defaults
occurs is more than 10% of the total number of First Stock, the remaining
Underwriters shall have the right to take up and pay for (in such proportion as
may be agreed upon among them) the First Stock which the defaulting Underwriter
or Underwriters agreed but failed to purchase. If such remaining Underwriters do
not, at the First Closing Date, take up and pay for the First Stock which the
defaulting Underwriter or Underwriters agreed but failed to purchase, the time
for delivery of the First Stock shall be extended to the next business day to
allow the several Underwriters the privilege of substituting within twenty-four
hours (including nonbusiness hours) another underwriter or underwriters
satisfactory to the Company. If no such underwriter or underwriters shall have
been substituted as aforesaid, within such twenty-four hour period, the time of
delivery of the First Stock may, at the option of the Company, be again extended
to the next following business day, if necessary, to allow the Company the
privilege of finding within twenty-four hours (including nonbusiness hours)
another underwriter or underwriters to purchase the First Stock which the
defaulting Underwriter or Underwriters agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted Underwriters to
take up the First Stock of the defaulting Underwriter or Underwriters as
provided in this Section, (i) the Company or the Representative shall have the
right to postpone the time of delivery for a period of not more than seven
business days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees promptly to file any amendments to the
Registration Statement or supplements to the Prospectus which may thereby be
made necessary, and (ii) the respective numbers of First Stock to be purchased
by the remaining Underwriters or substituted Underwriters shall be taken at the
basis of the underwriting obligation for all purposes of this Agreement.
If in the event of a default by one or more Underwriters and the
remaining Underwriters shall not take up and pay for all the First Stock agreed
to be purchased by the defaulting Underwriters or substitute another underwriter
or underwriters as aforesaid and the Company shall not find or shall not elect
to seek another underwriter or underwriters for such First Stock as aforesaid,
then this Agreement shall terminate.
If, following exercise of the option provided in Section 3(b)
hereof, any Underwriter or Underwriters shall for any reason not permitted
hereunder cancel their obligations to purchase Option Stock at the Option
Closing Date, or shall fail to take up and pay for the number of Option Stock,
which they become obligated to purchase at the Option Closing Date upon tender
of such Option Stock in accordance with the terms hereof, then the remaining
Underwriters or substituted Underwriters may take up and pay for the Option
Stock of the defaulting Underwriters in the manner provided in Section 11(b)
hereof. If the remaining
37
<PAGE> 38
Underwriters or substituted Underwriters shall not take up and pay for all such
Option Stock, the Underwriters shall be entitled to purchase the number of
Option Stock for which there is no default or, at their election, the option
shall terminate and the exercise thereof shall be of no effect.
As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section. In the event of
termination, there shall be no liability on the part of any nondefaulting
Underwriter to the Company, provided that the provisions of this Section 11
shall not in any event affect the liability of any defaulting Underwriter to the
Company arising out of such default.
12. Effective Date. The Agreement shall become effective upon
its execution except that you may, at your option, delay its effectiveness until
11:00 A.M., New York time on the first full business day following the effective
date of the Registration Statement, or at such earlier time after the effective
date of the Registration Statement as you in your discretion shall first
commence the initial public offering by the Underwriters of any of the Stock.
The time of the initial public offering shall mean the time of release by you of
the first newspaper advertisement with respect to the Stock, or the time when
the Stock is first generally offered by you to dealers by letter or telegram,
whichever shall first occur. This Agreement may be terminated by you at any time
before it becomes effective as provided above, except that Sections 4(c), 8, 9,
10, 15, 16, 17 and 18 shall remain in effect notwithstanding such termination.
13. Termination.
(a) This Agreement, except for Sections 4(c), 8, 9, 10,
15, 16, 17 and 18 hereof, may be terminated at any time prior to the First
Closing Date, and the option referred to in Section 3(b) hereof, if exercised,
may be cancelled at any time prior to the Option Closing Date, by you if in your
judgment it is impracticable to offer for sale or to enforce contracts made by
the Underwriters for the resale of the Stock agreed to be purchased hereunder by
reason of (i) the Company having sustained a material loss, whether or not
insured, by reason of fire, earthquake, flood, accident or other calamity, or
from any labor dispute or court or government action, order or decree; (ii)
trading in securities on the New York Stock Exchange, the American Stock
Exchange, the Nasdaq Small Cap Market or the Nasdaq National Market having been
suspended or limited; (iii) material governmental restrictions having been
imposed on trading in securities generally (not in force and effect on the date
hereof); (iv) a banking moratorium having been declared by federal or New York
state authorities; (v) an outbreak of international hostilities or other
national or international calamity or crisis or change in economic or political
conditions having occurred; (vi) a pending or threatened legal or governmental
proceeding or action relating generally to the Company's business, or a
notification having been received by the Company of the threat of any such
proceeding or action, which could materially adversely affect the Company; (vii)
except as contemplated by the Prospectus, the Company is merged or consolidated
into or all or substantially all of the capital stock or assets of the Company
are acquired by another company or group or there exists a binding legal
commitment for the foregoing or any other material change of ownership or
control occurs; (viii) the passage by the Congress of the United
38
<PAGE> 39
States or by any state legislative body, or federal or state agency or other
authority of any act, measure, rule or regulation, or the adoption of any
orders, rules or regulations by any governmental body or any authoritative
accounting institute or board, or any governmental executive, which is
reasonably believed likely by the Representative to have a material impact on
the business, financial condition or financial statements of the Company or the
market for the securities offered pursuant to the Prospectus; (ix) any adverse
change in the financial or securities markets beyond normal market fluctuations,
having occurred since the date of this Agreement, or (x) any material adverse
change having occurred, since the respective dates of which information is given
in the Registration Statement and Prospectus, in the earnings, business,
prospects or general condition of the Company, financial or otherwise, whether
or not arising in the ordinary course of business.
(b) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 13 or in
Section 12, the Company shall be promptly notified by you, by telephone or
telegram, confirmed by letter.
14. Warrants. At or before the First Closing Date, the Company
will sell to Royce Investment Group, Inc. (for its own account and not as
Representative of the several Underwriters), or its designees for a
consideration of $100, and upon the terms and conditions set forth in the form
of Warrant attached as Schedule G hereto, Warrants to purchase an aggregate of
200,000 shares of Common Stock of the Company. In the event of conflict in the
terms of this Agreement and the Warrants, the language of the Warrants shall
control.
15. Representations, Warranties and Agreements to Survive
Delivery. The respective indemnities, agreements, representations, warranties
and other statements of the Company or the Selling Stockholders, where
appropriate, and the Underwriters set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any investigation
made by or on behalf of the Underwriters, the Company, the Selling Stockholders,
or any of their respective officers or directors or any controlling person and
will survive delivery of and payment of the Securities and the termination of
this Agreement.
16. Notice. Any communications specifically required hereunder
to be in writing, if sent to the Underwriters, will be mailed, delivered or
telegraphed and confirmed to them at Royce Investment Group, Inc., 199 Crossways
Park Drive, Woodbury, New York 11797, with a copy sent to O'Connor, Cavanagh,
Anderson, Killingsworth & Beshears, One East Camelback Road, Phoenix, Arizona
85012; or if sent to the Company, will be mailed, delivered or telegraphed and
confirmed to it at Birman Managed Care, Inc., 502 Gould Drive, Cookeville,
Tennessee 38506; and if sent to the Selling Stockholders, will be mailed,
delivered, or telegraphed and confirmed to the Attorney-in-Fact at
____________________________________.
17. Parties in Interest. The Agreement herein set forth is
made solely for the benefit of the several Underwriters, the Company, the
Selling Stockholders, any person controlling the Company or any of the several
Underwriters, and directors of the Company, nominees for directors (if any)
named in the Prospectus, its officers who have signed the
39
<PAGE> 40
Registration Statement, and their respective executors, administrators,
successors, and assigns and no other person shall acquire or have any right
under or by virtue of this Agreement. The term "successors and assigns" shall
not include any purchaser, as such purchaser, from any of the several
Underwriters of the Stock. All of the obligations of the Underwriters hereunder
are several and not joint.
18. Applicable Law. This Agreement will be governed by, and
construed in accordance with, the laws of the State of New York applicable to
agreements made and to be entirely performed within New York.
19. Execution in Counterparts. This Agreement and any notices
delivered hereunder may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument. This Agreement and any and all notices may be delivered by
telecopy and shall be effective upon receipt, with the original of such document
to be deposited promptly in the United States mail or overnight delivery
service.
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return this agreement, whereupon it will become a
binding agreement between the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
BIRMAN MANAGED CARE, INC.
By:______________________________________
Its:_____________________________________
EACH OF THE SELLING STOCKHOLDERS
NAMED IN SCHEDULE B HERETO
By:______________________________________
Attorney-in-Fact
40
<PAGE> 41
The foregoing Underwriting Agreement is hereby confirmed and
accepted as of the date first above written.
ROYCE INVESTMENT GROUP, INC.
For itself and as Representative
of the several Underwriters
By:________________________________
Its:_______________________________
41
<PAGE> 42
SCHEDULE A
UNDERWRITERS
<TABLE>
<CAPTION>
Name of Underwriter Number of Stock to be Purchased
- ------------------- -------------------------------
<S> <C> <C>
Royce Investment Group, Inc.
Continental Broker-Dealer Corp.
Total:
---------
2,000,000
=========
</TABLE>
<PAGE> 43
SCHEDULE B
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Maximum
Name of Number of Shares
Selling Stockholders to be Sold
- -------------------- ----------------
<S> <C>
Total:
-------
300,000
=======
</TABLE>
<PAGE> 1
Exhibit 1.2
2,000,000 Shares
BIRMAN MANAGED CARE, INC.
AGREEMENT AMONG UNDERWRITERS
New York, New York
February __, 1997
Royce Investment Group, Inc.
As Representative of the Several Underwriters
199 Crossways Park Drive
Woodbury, NY 11797
Dear Sirs:
1. Underwriting Agreement. We understand that Birman Managed Care,
Inc., a Delaware corporation (the "Company"), proposes to enter into an
underwriting agreement in the form attached hereto as Exhibit A (the
"Underwriting Agreement") with the underwriters named in Schedule A to the
Underwriting Agreement (the "Underwriters") acting severally and not jointly
with respect to the purchase of an aggregate of 2,000,000 shares (the "Stock")
of Common Stock, $.001 par value, of the Company.
Unless the context indicates otherwise, the term "Stock" shall also
include an additional 300,000 shares of Common Stock, all or any part of which
the Representative, individually and not as Representative of the Underwriters,
is entitled to purchase from certain selling stockholders the Company upon
exercise of the Representative's option referred to in Section 2(b) of the
Underwriting Agreement.
This is to confirm that we agree to purchase, in accordance with the
terms hereof and of the Underwriting Agreement, the number of shares of Stock
set forth opposite our name in Schedule A to the Underwriting Agreement, plus
such number of shares of Stock, if any, which we may become obligated to
purchase pursuant to Section 4 hereof ("our Stock"). The ratio which the number
of shares of our Stock bears to the total number of shares of Stock purchased
pursuant to the Underwriting Agreement is herein called "our underwriting
proportion."
2. Registration Statement and Prospectus. We have heretofore received
and examined a copy of the registration statement, as amended to the date
hereof, and the related
<PAGE> 2
prospectus in respect of the Stock, as filed with the Securities and Exchange
Commission. The registration statement, as amended at the time it becomes
effective, including financial statements and exhibits, is hereinafter referred
to as the "Registration Statement," and the prospectus in the form first filed
with the Securities and Exchange Commission pursuant to Rule 424(b) after the
Registration Statement becomes effective is referred to as the "Prospectus."
We confirm that the information furnished to you by us for use in
the Registration Statement and in the Prospectus is correct and is not
misleading insofar as it relates to us. We consent to being named as an
Underwriter in such Registration Statement and we are willing to accept our
responsibilities under the Securities Act of 1933, as a result thereof. We
confirm that we have authorized you to advise the Company on our behalf (a) as
to the statements to be included in any Preliminary Prospectus and in the
Prospectus under the heading "Underwriting" insofar as they relate to us and (b)
that there is no other information about us required to be stated in the
Registration Statement or Prospectus. We further confirm that, upon request by
you, as Representative, we have furnished a copy of any amended preliminary
prospectus to each person to whom we have furnished a copy of any previous
preliminary prospectus, and we confirm that we have delivered, and we agree that
we will deliver, all preliminary and final prospectuses required for compliance
with the provisions of Rule 15c2-8 under the Securities Exchange Act of 1934.
3. Authority of the Representative. We authorize you, acting as
Representative, to execute and deliver on our behalf the Underwriting Agreement,
and to agree to any variation of its terms (except as to the purchase price and
the number of our Stock) which, in your judgment, is not a variation which
materially and adversely affects our rights and obligations. We also authorize
you, in your discretion and on our behalf, with approval of counsel for the
Underwriters, to approve the Prospectus and to approve of, or object to, any
further amendments to the Registration Statement, or amendments or supplements
to the Prospectus. We further authorize you to exercise all the authority and
discretion vested in the Underwriters and in you by the provisions of the
Underwriting Agreement and to take all such action as you, in your discretion,
may believe desirable to carry out the provisions of the Underwriting Agreement
and of this Agreement, including the extension of any date specified in the
Underwriting Agreement, the exercise of any right of cancellation or
termination, and to determine all matters relating to the public advertisement
of the Stock; provided, however, that, except with the consent of Underwriters
who shall have agreed to purchase in the aggregate 50% or more of the Stock, no
extension of the time by which the Registration Statement is to become
effective, as provided in Section 5(a) of the Underwriting Agreement, shall be
for a period in excess of two business days. We authorize you to take such
action as in your discretion may be necessary or desirable to effect the sale
and distribution of the Stock, including, without limiting the generality of the
foregoing, the right to determine the terms of any proposed offering, the
concession to Selected Dealers (as hereinafter defined) and the reallowance, if
any, to other
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<PAGE> 3
dealers and the right to make the judgments provided for in Sections ____ and
____ of the Underwriting Agreement.
4. Authority of Representative as to Defaulting Underwriters. Until the
termination of this Agreement, we authorize you to arrange for the purchase by
other persons, who may include you or any of the other Underwriters, of any
Stock not taken up by any defaulting Underwriter. In the event that such
arrangements are made, the respective amounts of the Stock to be purchased by
the non-defaulting Underwriters and by such other person or persons, if any,
shall be taken as the basis for all rights and obligations hereunder; but this
shall not in any way affect the liability of any defaulting Underwriter to the
other Underwriters for damages resulting from its default, nor shall any such
default relieve any other Underwriter of any of its obligations hereunder or
under the Underwriting Agreement except as herein or therein provided.
In the event of default by one or more Underwriters in respect of
their obligations (a) under the Underwriting Agreement to purchase the Stock
agreed to be purchased by them thereunder, or (b) under this Agreement to take
up and pay for any Stock purchased, or (c) to deliver any Stock sold or
over-allotted by you for the respective accounts of the Underwriters pursuant to
Section 9 hereof, or to bear their respective share of expenses or liabilities
pursuant to Sections 11, 13 and 14 hereof, and to the extent that arrangements
shall not have been made by you for any persons to assume the obligations of
such defaulting Underwriter or Underwriters, we agree to assume our
proportionate share of the obligations of each defaulting Underwriter or
Underwriters (subject in the case of clause (a) above to the limitations
contained in Section 11 of the Underwriting Agreement) without relieving any
such defaulting Underwriter or Underwriters of its liability therefor.
5. Offering of Stock. We understand that you will notify us when the
initial public offering of the Stock is to be made and of the initial public
offering price. We hereby authorize you, in your sole discretion, after the
initial public offering, to change the public offering price, the concession and
the reallowance. The offering price at any time in effect is hereinafter
referred to as the "public offering price." We agree that we will not offer any
of the Stock for sale at a price other than the public offering price or allow
any discount therefrom except as herein otherwise specifically provided.
We agree that public advertisement of the offering shall be made by
you on behalf of the Underwriters on such date as you shall determine. We have
not advertised the offering and will not do so until after such date. We
understand that any advertisement we may then make will be our own
responsibility and at our own expense.
We authorize you to reserve and offer for sale to institutions and
other retail purchasers and to dealers (the "Selected Dealers") to be selected
by you (such dealers may include
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<PAGE> 4
any Underwriter) such of our Stock as you, in your sole discretion, shall
determine. Any such offering to Selected Dealers may be made pursuant to a
Selling Agreement, in the form attached hereto as Exhibit B, or otherwise, as
you may determine. The form of Selling Agreement attached hereto as Exhibit B is
satisfactory to us.
We authorize you to make purchases and sales of the Stock from or to
any Selected Dealers or Underwriters at the public offering price, less all or
any part of the concession and, with your consent, any Underwriter may make
purchases or sales of the Stock from or to any Selected Dealer or Underwriter at
the public offering price, less all or any part of the concession.
We understand that you will notify each Underwriter promptly upon the
release of the Stock for public offering as to the amount of Stock reserved for
sale to Selected Dealers and retail purchasers. Stock not so reserved may be
sold by each Underwriter for its own account, except that from time to time you
may, in your discretion, add to the Stock reserved for sale to Selected Dealers
and retail purchasers any Stock retained by an Underwriter remaining unsold. We
agree to notify you, from time to time, upon request, of the amount of our Stock
retained by us remaining unsold. If all of the Stock reserved for offering to
Selected Dealers and retail purchasers is not promptly sold by you, any
Underwriter may, from time to time, with your consent, obtain a release of all
or any Stock of such Underwriter then remaining unsold, and Stock so released
shall thereafter be deemed not to have been reserved. Stock of any Underwriter
so reserved which remains unsold, or, if sold, has not been paid for at any time
prior to the termination of this Agreement may, in your discretion or upon the
request of such Underwriter, be delivered to such Underwriter for carrying
purposes only, but such Stock shall remain subject to redelivery to you upon
demand for disposition by you until this Agreement is terminated.
We agree that in connection with sales and offers to sell the Stock, if
any, made by us outside the United States or its territories or possessions, (a)
we will furnish to each person to whom any such offer or sale is made such
prospectus, advertisement or other offering document containing information
relating to the Stock or the Company, as may be required under the laws of the
jurisdiction in which such offer or sale is made and (b) we will furnish to each
person to whom any such offer is made a copy of the then current preliminary
prospectus, and to each person to whom any such sale is made, a copy of the
Prospectus referred to in the Underwriting Agreement (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto). Any prospectus, advertisement or other offering document (other than
any such preliminary prospectus or Prospectus) furnished by us to any person in
accordance with the preceding sentence and all such additional offering
material, if any, as we may furnish to any person (i) shall comply in all
respects with the laws of the jurisdiction in which it is so furnished, (ii)
shall be prepared and so furnished at our sole risk and expense, and (iii) shall
not contain information relating to the Stock or the Company which is
inconsistent in any respect with information contained in the then current
preliminary prospectus or in the
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<PAGE> 5
Prospectus (as then amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), as the case may be.
We recognize the importance of a broad distribution of the Stock
among bona fide investors and we agree to use our best efforts to obtain such
broad distribution and, to that end, to the extent we deem practicable, to give
priority to small orders.
We agree that we will not sell to any account over which we exercise
discretionary authority any of the Stock which we have agreed to purchase
pursuant to the Underwriting Agreement.
6. Compensation to Representative. We authorize you to charge to our
account, as compensation for your services as Representative in connection with
this offering, including the purchase from the Company of the Stock and the
management of the offering, an amount equal to $0. per share in respect to each
of our shares of Stock.
7. Payment and Delivery. At or before 9:00 a.m., New York City time, on
the Closing Date as defined in the Underwriting Agreement, we agree to deliver
to you at your office a certified or official bank check payable in New York
Clearing House funds to your order, in an amount equal to the initial public
offering price, less the concession to the Selected Dealers in respect of that
portion of our Stock which has been retained by or released to us for direct
sales.
In the event that our funds are not received by you when required,
you are authorized, in your discretion, but shall not be obligated, to make
payment for our account pursuant to the Underwriting Agreement by advancing your
own funds. Any such payment by you shall not relieve us from any of our
obligations hereunder or under the Underwriting Agreement.
We authorize you to hold and deliver against payment any of our
Stock which have been sold or reserved for sale to Selected Dealers or retail
purchasers. Any of our Stock not sold or reserved by you as aforesaid will be
available for delivery to us at your office as soon as practicable after such
Stock has been delivered to you.
Upon the termination of this Agreement, or prior thereto at your
discretion, you will deliver to us any of our Stock reserved by you for sale to
Selected Dealers or retail purchasers, but not sold and paid for against payment
by us of an amount equal to the initial public offering price of such Stock,
less the concession to the Selected Dealers in respect thereof.
8. Authority to Borrow. We authorize you to arrange loans for our
account and to execute and deliver any notes or other instruments in connection
therewith, and to pledge
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<PAGE> 6
as security therefor all or any part of our Stock, as you may deem necessary or
advisable to carry out the purchase, carrying and distribution of the Stock, and
to advance your own funds, charging current interest rates.
9. Over-allotment; Stabilization. We authorize you, for the account of
each Underwriter, prior to the termination of this Agreement, and for such
longer period as may be necessary to cover any short position incurred for the
accounts of the several Underwriters pursuant to this Agreement, (a) to
over-allot in arranging for sales of Stock to Selected Dealers and others and,
if necessary, to purchase Stock (whether pursuant to exercise of the option set
forth in Section 2(b) of the Underwriting Agreement or otherwise) at such prices
as you may determine for the purpose of covering such over-allotments, and (b)
for the purpose of stabilizing the market in the Stock, to make purchases and
sales of Stock on the open market or otherwise, for long or short account, on a
when-issued basis or otherwise, at such prices, in such amounts and in such
manner as you may determine; provided, however, that at no time shall our net
commitment, either for long or short account, under this Section 9 exceed 15% of
the amount of our Stock. Such purchases, sales and over-allotments shall be made
for the respective accounts of the several Underwriters as nearly as practicable
to their respective underwriting proportions. We agree to take up on demand at
cost any Stock so purchased for our account and deliver on demand any Stock so
sold or over-allotted for our account. We authorize you to sell for the account
of the Underwriters any Stock purchased pursuant to this Section 9, upon such
terms as you may deem advisable, and any Underwriter, including yourselves, may
purchase such Stock. You are authorized to charge the respective accounts of the
Underwriters with broker's commissions or dealer's mark-up on purchases and
sales effected by you.
If pursuant to the provision of the preceding paragraph and prior to
the termination of this Agreement (or prior to such earlier date as you may have
determined) you purchase or contract to purchase for the account of any
Underwriter in the open market or otherwise any Stock which was retained by, or
released to, us for direct sale, or any Stock which may have been issued in
exchange for such Stock, we authorize you either to charge our account with an
amount equal to the concession to Selected Dealers with respect thereto, which
amount shall be credited against the cost of such Stock, or to require us to
repurchase such Stock at a price equal to the total cost of such purchase,
including transfer taxes and broker's commissions or dealer's mark-up, if any.
In lieu of such action you may, in your discretion, sell for our account the
Stock so purchased and debit or credit our account for the loss or profit
resulting from such sale.
You will notify us promptly if and when you engage in any
stabilization transaction pursuant to this Section 9 or otherwise and will
notify us of the date of termination of stabilization. We agree to file with you
any reports required of us including "Not as Manager" reports pursuant to Rule
17a-2 under the Securities Exchange Act of 1934 not later than five business
days following the day upon which such stabilization transaction was terminated,
and
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<PAGE> 7
we authorize you to file on our behalf with the Securities and Exchange
Commission any reports required by such Rule.
10. Limitation on Transactions by Underwriters. Except as permitted by
you, we will not, during the term of this Agreement, bid for, purchase, sell or
attempt to induce others to purchase or sell, directly or indirectly, any Stock
other than (i) as provided in the Underwriting Agreement and in this agreement,
(ii) purchases from or sales to dealers of the Stock at the public offering
price, less all or any part of the reallowance to dealers, or (iii) purchases or
sales by us of any Stock as broker or unsolicited orders for the account of
others.
We represent that we have not participated in any transaction
prohibited by the preceding paragraph and that we have at all times complied
with the provisions of Rule 10b-6 of the Securities and Exchange Commission
applicable to this offering.
We may, with your prior consent, make purchases of the Stock from
and sales to other Underwriters at the public offering price, less all or any
part of the concession to dealers.
11. Allocation and Payment of Expenses. We understand that all expenses
of a general nature incurred by you, as Representative, in connection with the
purchase, carrying, marketing and sale of the Stock shall be borne by the
Underwriters in accordance with their respective share of the underwriting
obligations. We authorize you to charge our account with our share, based on our
underwriting obligation, of the aforesaid expenses, including all transfer taxes
paid on our behalf on sales or transfers made for our account.
As promptly as possible after the termination of this Agreement, the
accounts arising pursuant hereto shall be settled and paid. Your ascertainment
of all expenses and the apportionment thereof shall be conclusive.
Notwithstanding any settlement or settlements hereunder, we will remain liable
for our share of all expenses and liabilities which may be incurred by or for
the accounts of the Underwriters, including any expenses and liabilities
referred to in Sections 13 and 14(b) hereof, which shall be determined as
provided in this Section 11.
12. Termination. Unless this Agreement or any provision hereof is
earlier terminated by you, and except for provisions herein that contemplate
obligations surviving the termination hereof as noted in the next paragraph,
this Agreement will terminate at the close of business on the 30th day after the
date hereof, but in your discretion, may be extended by you for a further period
not exceeding 30 days with the consent of the Underwriters who have agreed to
purchase in the aggregate 50% or more of the Stock. No termination or suspension
pursuant to this Section shall affect your authority under Section 9 to cover
any short position under this Agreement.
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<PAGE> 8
Upon termination of this Agreement, all authorizations, rights and
obligations hereunder shall cease, except (i) the mutual obligations to settle
accounts under Section 11, (ii) our obligation to pay any transfer taxes which
may be assessed and paid on account of any sales hereunder for our account,
(iii) our obligation with respect to purchases which may be made by you from
time to time thereafter to cover any short position incurred under this
Agreement, (iv) the provisions of Sections 13 and 14, and (v) the obligations of
any defaulting Underwriter, all of which shall continue until fully discharged.
13. Liability of Representative and Underwriters. Neither as
Representative nor individually shall you be under any liability whatsoever to
any other Underwriter, nor shall you be under any liability in respect of any
matters connected herewith or action taken by you pursuant hereto, except for
the obligations expressly assumed by you in this Agreement. You shall be under
no liability for or in respect of the value of the Stock or the validity of the
form thereof, the Registration Statement, the Prospectus, or agreements or other
instruments executed by the Company or others; or for or in respect of the
delivery of the Stock; or for the performance by the Company or others of any
agreement on its or their part.
Nothing herein contained shall constitute the several Underwriters
an association, or partners with us or with each other, or, except as herein
expressly provided, render any Underwriter liable for the obligation of any
other Underwriter. The rights, obligations and liabilities of each of the
Underwriters are several, in accordance with their respective obligations, and
not joint. Notwithstanding any settlement of accounts under this Agreement, we
agree to pay our underwriting proportion of the amount of any claim, demand or
liability which may be asserted against and discharged by the Underwriters or
any of them, based on the claim that the Underwriters constitute an association,
unincorporated business or other entity, and also to pay our underwriting
proportion of expenses approved by you incurred by the Underwriters, or any of
them, in contesting any such claims, demands or liabilities. If the Underwriters
shall be deemed to constitute a partnership for income tax purposes, it is the
intent of each Underwriter to be excluded from the application of Sub-chapter K,
Chapter 1, Subtitle A of the Internal Revenue Code of 1954, as amended. Each
Underwriter elects to be so excluded and agrees not to take any position
inconsistent with such election. Each Underwriter authorizes you, in your
discretion, to execute and file on behalf of the Underwriters such evidence of
election as may be required by the Internal Revenue Service.
14. Indemnification and Future Claims.
(a) We agree to indemnify and hold harmless you and each other
Underwriter, and each person, if any, who controls you and such other
Underwriter within the meaning of Section 15 of the Securities Act of 1933, and
to reimburse their expenses, to the extent and upon the terms that we agree to
indemnify and hold harmless the Company and to reimburse expenses as set forth
in the Underwriting Agreement. Our indemnity agreement set
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<PAGE> 9
forth in this Section 14 shall remain in full force and effect regardless of any
investigation made by or on behalf of such other Underwriter or controlling
person and shall survive the delivery of and payment for the Stock and the
termination of this Agreement.
(b) In the event that any time any claim or claims shall be
asserted against you, as Representative, or otherwise involving the Underwriters
generally, relating to the Registration Statement or any preliminary prospectus
or the Prospectus, as such may be from time to time amended or supplemented, the
public offering of the Stock or any of the transactions contemplated by this
Agreement, we authorize you to take such other action as you shall deem
necessary or desirable under the circumstances, including settlement of any such
claim or claims if such course of action shall be recommended by counsel
retained by you. We agree to pay to you on request, our underwriting proportion
of all expenses incurred by you (including, but not limited to, disbursements
and fees of counsel so retained) in investigating and defending against such
claim or claims and our underwriting proportion of any liability incurred by you
in respect of such claim or claims, whether such liability shall be the result
of a judgment or as a result of any such settlement.
15. Title to Securities. The Stock purchased by, or on behalf of, the
respective Underwriters shall remain the property of such Underwriters until
sold, and title to any such Stock shall not in any event pass to the
Representative by virtue of any of the provisions of this Agreement.
16. Blue Sky Matters. It is understood that you assume no
responsibility with respect to the right of any Underwriter or other person to
offer or to sell Stock in any jurisdiction, notwithstanding any information
which you may furnish as to the jurisdictions under the securities laws of which
it is believed the Stock may be sold.
17. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of New York.
18. Capital Requirements. We confirm that the incurrence by us of our
obligation under this Agreement and under the Underwriting Agreement will not
place us in violation of the net capital requirements of Rule 15c3-1 under the
Securities Exchange Act of 1934 or of any applicable rules relating to capital
requirements of any securities exchange to which we are subject.
19. Miscellaneous. Any notice from you to us shall be deemed to have
been duly given if mailed, telephoned or telegraphed to us at the address set
forth in the Underwriters Questionnaire furnished by us to you. Any notice from
us to you shall be deemed to have been duly given if mailed, telephoned or
telegraphed to you at 199 Crossways Park Drive, Woodbury, New York 11797.
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<PAGE> 10
We understand that you are a member in good standing of the NASD. We
hereby confirm that we are actually engaged in the investment banking or
securities business and are either (i) a member in good standing of the NASD or
(ii) a dealer with its principal place of business located outside the United
States, its territories and its possessions, and not registered as a broker or
dealer under the 1934 Act, who agrees not to make any sales within the United
States, its territories or its possessions, or to persons who are nationals
thereof or residents therein (except that we may participate in sales to
Selected Dealers and others under Section 5 of this Agreement). We hereby agree
to comply with the provisions of Rule 2740 of the NASD Conduct Rules and if we
are a foreign dealer and not a member of the NASD, we also hereby agree to
comply with the NASD's interpretation with respect to free-riding and
withholding and to comply, as though it were a member of the NASD, with the
provisions of Rules 2730 and 2750 of such Conduct Rules, and to comply with rule
2420 of such Conduct Rules as that Rule applies to a non-member foreign dealer.
In connection with sales and offers to sell Stock made by us outside the United
States, its territories and possessions (i) we will either furnish to each
person to whom any such sale or offer is made a copy of the then current
Preliminary Prospectus or the Prospectus, as the case may be, or inform such
person that such Preliminary Prospectus or Prospectus will be available upon
request, and (ii) we will furnish to each person to whom any such sale or offer
is made such prospectus, advertisement or other offering document containing
information relating to the Stock or the Company as may be required under the
law of the jurisdiction in which such sale or offer is made. Any prospectus,
advertisement or other offering document furnished by us to any person in
accordance with the preceding sentence and any such additional offering material
as we may furnish to any person (x) shall comply in all respects with the law of
the jurisdiction in which it is so furnished, (y) shall be prepared and so
furnished at our sole risk and expense and (z) shall not contain information
relating to the Stock or the Company which is inconsistent in any respect with
the information contained in the then current Preliminary Prospectus or in the
Prospectus, as the case may be.
We understand that, in consideration of your services in connection
with the public offering of the Stock, the Company has agreed with you
individually and not as Representative of the Underwriters (a) to sell to you
the Representative's warrants (the "Representative's Warrants") referred to in
Section 12 of the Underwriting Agreement for the sum of $100, (b) to pay to you
a non-accountable expense allowance referred to in Section 8(b) of the
Underwriting Agreement, (c) to enter into the M/A Agreement and Consulting
Agreement described in Sections __ and __ of the Underwriting Agreement. In
addition, you may, at your sole discretion, elect to exercise the over-allotment
option individually. We confirm to you that we shall make no claim to the
Representative's Warrants, the Company's securities underlying the
Representative's Warrants, the non-accountable expense allowance or, to the
over-allotment option, to the extent you elect to exercise such option
individually. You confirm to us that we shall have no obligations or liabilities
with respect to the purchase of the Representative's Warrants, the exercise
thereof, the Company's securities underlying the Representative's
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<PAGE> 11
Warrants, or the non-accountable expense allowance or, to the over-allotment
option, to the extent you elect to exercise such option individually.
Please confirm that the foregoing correctly states the understanding
between us by signing and returning to us a counterpart hereof.
Very truly yours,
____________________________________
By:_________________________________
(Attorney-in-fact for each of
the several Underwriters named
in Schedule A to the attached
Underwriting Agreement.)
Confirmed as of the date
first above written:
ROYCE INVESTMENT GROUP, INC.
as Representative
By:__________________________________
Its:_________________________________
11
<PAGE> 1
Exhibit 1.3
BIRMAN MANAGED CARE, INC.
2,000,000 Shares
$.001 par value
SELLING AGREEMENT
New York, New York
February __, 1997
Dear Sirs:
1. We and the other Underwriters named in the Prospectus (the
"Underwriters") relating to 2,000,000 shares of Common Stock, $.001 par value
(the "Shares") of Birman Managed Care, Inc. (the "Company") acting through us as
Representative, are severally offering for sale an aggregate of 2,000,000 Shares
(the "Firm Shares"). In addition, the several Underwriters have been granted an
option to purchase from the Company up to an additional 300,000 Shares (the
"Option Shares") to cover over-allotments in connection with the sale of the
Firm Shares. The Firm Shares and any Option Shares purchased are herein called
the "Shares." The Shares and the terms under which they are to be offered for
sale by the several Underwriters are more particularly described in the
Prospectus.
2. The Shares are to be offered to the public by the several
Underwriters at the price per Share set forth on the cover page of the
Prospectus (the "Public Offering Price"), in accordance with the terms of
offering thereof set forth in the Prospectus.
3. Some or all of the several Underwriters are severally offering,
subject to the terms and conditions hereof, a portion of the Shares for sale to
certain dealers who are actually engaged in the investment banking or securities
business and who are either (i) members in good standing of the National
Association of Securities Dealers, Inc. (the "NASD") or (ii) dealers with their
principal places of business located outside the United States, its territories
and its possessions and not registered as brokers or dealers under the
Securities Exchange Act of 1934, as amended (the "1934 Act") who have agreed not
to make any sales within the United States, its territories and its possessions
or to persons who are nationals thereof or residents therein (such dealers who
shall agree to purchase Shares hereunder being herein called "Selected
Dealers"), at the Public Offering Price, less a selling concession (which may be
changed) of not in excess of $ per Share payable as hereinafter provided,
out of which concession an amount not exceeding $ per Share may be
reallowed by Selected Dealers to members of the NASD or foreign dealers
qualified as aforesaid. The Selected Dealers have agreed to comply with the
provisions of Rule 2740 of the NASD Conduct Rules, and, if any such dealer is a
foreign dealer
<PAGE> 2
and not a member of the NASD, such Selected Dealer also has agreed to comply
with the NASD's interpretation with respect to free-riding and withholding, to
comply, as though it were a member of the NASD, with the provisions of Rules
2730 and 2750 of such Conduct Rules and to comply with Rule 2420 of such Conduct
Rules as that Rule applies to non-member foreign dealers. Some of or all the
Underwriters may be included among the Selected Dealers. Each of the
Underwriters has agreed that, during the term of this Agreement, it will be
governed by the terms and conditions hereof whether or not such Underwriter is
included among the Selected Dealers.
4. On behalf of the Underwriters we shall act as Representative under
this Agreement and shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the public offering of the
Shares.
5. If you desire to purchase any of the Shares, your application should
reach us promptly by telephone or telegraph at 44 Wall Street, New York, New
York 10005, Attention: Syndicate Department, Telephone Number (212) 968-2017. We
reserve the right to reject subscriptions in whole or in part, to make
allotments and to close the subscription books at any time without notice. The
Shares allotted to you will be confirmed, subject to the terms and conditions of
this Agreement.
6. The privilege of subscribing for the Shares is extended to you only
on behalf of such of the Underwriters, if any, as may lawfully sell the Shares
to dealers in your state or other jurisdiction.
7. Any Shares purchased by you under the terms of this Agreement may be
immediately reoffered to the public in accordance with the terms of the offering
thereof set forth herein and in the Prospectus, subject to the securities or
blue sky laws of the various states or other jurisdictions.
You agree to pay us on demand for the accounts of the several
Underwriters an amount equal to the Selected Dealer concession as to any Shares
purchased by you hereunder which, prior to the termination of this paragraph, we
may purchase or contract to purchase for the account of any Underwriter and, in
addition, we may charge you with any broker's commission and transfer tax paid
in connection with such purchase or contract to purchase. Certificates for
Shares delivered on such repurchases need not be the identical certificates
originally purchased
You agree to advise us from time to time, upon request, of the
number of Shares purchased by you hereunder and remaining unsold at the time of
such request, and, if in our opinion any such Shares shall be needed to make
delivery of the Shares sold or over-allotted for the account of one or more of
the Underwriters, you will, forthwith upon our request, grant to us for the
account or accounts of such Underwriter or Underwriters the right, exercisable
promptly after receipt of notice from you that such right has been granted, to
purchase, at the
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<PAGE> 3
Public Offering Price less the selling concession or such part thereof as we
shall determine, such number of Shares owned by you as shall have been specified
in our request.
No expenses shall be charged to Selected Dealers. A single transfer
tax, if payable, upon the sale of the Shares by the respective Underwriters to
you will be paid when such Shares are delivered to you. However, you shall pay
any transfer tax on sales of Shares by you and you shall pay your proportionate
share of any transfer tax (other than the single transfer tax described above)
in the event that any such tax shall from time to time be assessed against you
and other Selected Dealers as a group or otherwise
Neither you nor any other person is or has been authorized to give
any information or to make any representation in connection with the sale of the
Shares other than as contained in the Prospectus.
8. The first three paragraphs of Section 7 hereof will terminate when
we shall have determined that the public offering of the Shares has been
completed and upon telegraphic notice to you of such termination, but, if not
theretofore terminated, they will terminate at the close of business on the 30th
full business day after the date hereof; provided, however, that we shall have
the right to extend such provisions for a further period or periods, not
exceeding an additional 30 days in the aggregate upon telegraphic notice to you.
9. For the purpose of stabilizing the market in the Shares, we have
been authorized to make purchases and sales of the Shares of the Company, in the
open market or otherwise, for long or short account, and, in arranging for
sales, to over-allot.
10. On becoming a Selected Dealer, and in offering and selling the
Shares, you agree to comply with all the applicable requirements of the
Securities Act of 1933, as amended (the "1933 Act"), and the 1934 Act. You
confirm that you are familiar with Rule 15c2-8 under the 1934 Act relating to
the distribution of preliminary and final prospectuses for securities of an
issuer (whether or not the issuer is subject to the reporting requirements of
Section 13 or 15(d) of the 1934 Act) and confirm that you have complied and will
comply therewith.
We hereby confirm that we will make available to you such number of
copies of the Prospectus (as amended or supplemented) as you may reasonably
request for the purposes contemplated by the 1933 Act or the 1934 Act, or the
Rules and Regulations thereunder.
11. Upon request, you will be informed as to the states and other
jurisdictions in which we have been advised that the Shares have been qualified
for sale under the respective securities or blue sky laws of such states and
other jurisdictions, but neither we nor any of the other Underwriters assume any
obligation or responsibility as to the right of any Selected Dealer to sell the
Shares in any state or other jurisdiction or as to the eligibility of the Shares
for sale therein. We will, if requested, file a Further State Notice in respect
of the Shares pursuant to Article 23-A of the General Business Law of the State
of New York.
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<PAGE> 4
12. No Selected Dealer is authorized to act as our agent or as agent
for the Underwriters, or otherwise to act on our behalf or on behalf of the
Underwriters, in offering or selling the Shares to the public or otherwise or to
furnish any information or make any representation except as contained in the
Prospectus.
13. Nothing will constitute the Selected Dealers an association or
other separate entity or partners with the Underwriters, with us, or with each
other, but you will be responsible for your share of any liability or expense
based on any claim to the contrary. We and the several Underwriters shall not be
under any liability for or in respect of value, validity or form of the Shares,
or the delivery of the certificates for the Shares, or the performance by anyone
of any agreement on its part, or the qualification of the Shares for sale under
the laws of any jurisdiction, or for or in respect of any other matter relating
to this Agreement, except for lack of good faith and for obligations expressly
assumed by us or by the Underwriters in this Agreement and no obligation on our
part shall be implied herefrom. The foregoing provisions shall not be deemed a
waiver of any liability imposed under the 1933 Act.
14. Payment for the Shares sold to you hereunder is to be made at the
Public Offering Price less the above-mentioned selling concession on such time
and date as we may advise, at Royce Investment Group, Inc., 199 Crossways Park
Drive, Woodbury, New York 11797, by a certified or official bank check in
current New York Clearing House funds, payable to the order of Royce Investment
Group, Inc., as Representative, against delivery of certificates for the Shares
so purchased. If such payment is not made at such time, you agree to pay us
interest on such funds at the prevailing broker's loan rate.
15. Notices to us should be addressed to Royce Investment Group, Inc.,
Attention: Syndicate Department. Notices to you shall be deemed to have been
duly given if telegraphed or mailed to you at the address to which this letter
is addressed.
16. If you desire to purchase any Shares, please confirm your
application by signing and returning to us your confirmation on the duplicate
copy of this letter enclosed herewith, even though you may have previously
advised us thereof by telephone or telegraph. Our signature hereon may be by
facsimile.
Very truly yours,
Royce Investment Group, Inc.
As Representative of the
Several Underwriters
By: ____________________________________
Authorized Officer
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<PAGE> 5
Royce Investment Group, Inc.
199 Crossways Park Drive
Woodbury, New York 11797
We hereby subscribe for _________ Shares of Birman Managed Care, Inc.
in accordance with the terms and conditions stated in the foregoing letter. We
hereby acknowledge receipt of the Prospectus referred to in the first paragraph
thereof relating to said Shares. We further state that in purchasing said Shares
we have relied upon said Prospectus and upon no other statement whatsoever,
whether written or oral. We confirm that we are a dealer actually engaged in the
investment banking or securities business and that we are either (i) a member in
good standing of the National Association of Securities Dealers, Inc. (the
"NASD") or (ii) a dealer with its principal place of business located outside
the United States, its territories and its possessions and not registered as a
broker or dealer under the Securities Exchange Act of 1934, as amended, who
hereby agrees not to make any sales within the United States, its territories
and its possessions or to persons who are nationals thereof or residents
therein. We hereby agree to comply with the provisions of Rule 2740 of the NASD
Conduct Rules and if we are a foreign dealer and not a member of the NASD, we
also agree to comply with the NASD's interpretation with respect to free-riding
and withholding, to comply, as though we were a member of the NASD, with the
provisions of Rules 2730 and 2750 of such Conduct Rules, and to comply with Rule
2420 of such Conduct Rules as that Rule applies to non-member foreign dealers.
______________________________________
By: _________________________________
Authorized Officer
Address: _____________________________
______________________________________
Dated: ____________________
<PAGE> 1
Exhibit 4.6
COMMON STOCK PURCHASE WARRANT
TO PURCHASE COMMON STOCK OF
BIRMAN MANAGED CARE, INC.
<PAGE> 2
Void after 5:00 p.m. New York Time, on February ____, 2002.
Warrant to Purchase 200,000 Shares of Common Stock.
COMMON STOCK PURCHASE WARRANT
OF
BIRMAN MANAGED CARE, INC.
This is to Certify That, FOR VALUE RECEIVED, ROYCE INVESTMENT GROUP,
INC., or assigns ("Holder"), is entitled to purchase, subject to the provisions
of this Warrant, from BIRMAN MANAGED CARE, INC., a Delaware corporation
("Company"), 200,000 fully paid, validly issued and nonassessable shares of
Common Stock, par value $.001 per share, of the Company ("Common Stock") at a
price of $6.00 per share at any time or from time to time during the period from
February ____, 1998 to February ____, 2002, but not later than 5:00 p.m. New
York City Time, on February ____, 2002. The number of shares of Common Stock to
be received upon the exercise of this Warrant and the price to be paid for each
share of Common Stock may be adjusted from time to time as hereinafter set
forth. The shares of Common Stock deliverable upon such exercise, and as
adjusted from time to time, are hereinafter sometimes referred to as "Warrant
Shares" and the exercise price of a share of Common Stock in effect at any time
and as adjusted from time to time is hereinafter sometimes referred to as the
"Exercise Price". This Warrant, together with warrants of like tenor,
constituting in the aggregate warrants (the "Warrants") to purchase 200,000
shares of Common Stock, was originally issued pursuant to an underwriting
agreement between the Company and Royce Investment Group, Inc. ("Royce"), in
connection with a public offering through Royce of 2,000,000 shares of Common
Stock, in consideration of $100 received for the Warrants.
(a) EXERCISE OF WARRANT.
(1) This Warrant may be exercised in whole or in part at any time
or from time to time on or after February ____, 1998 and until February ____,
2002 (the "Exercise Period"), subject to the provisions of Section (j)(2)
hereof; provided, however, that (i) if either such day is a day on which banking
institutions in the State of New York are authorized by law to close, then on
the next succeeding day which shall not be such a day, and (ii) in the event of
any merger, consolidation or sale of substantially all the assets of the Company
as an entirety, resulting in any distribution to the Company's stockholders,
prior to February ____, 2002, the Holder shall have the right to exercise this
Warrant commencing at such time through February ____, 2002 into the kind and
amount of shares of stock and other securities and property (including cash)
receivable by a holder of the number of shares of Common Stock into which this
Warrant might have been exercisable immediately prior thereto. This Warrant may
be
<PAGE> 3
exercised by presentation and surrender hereof to the Company at its principal
office, or at the office of its stock transfer agent, if any, with the Purchase
Form annexed hereto duly executed and accompanied by payment of the Exercise
Price for the number of Warrant Shares specified in such form. As soon as
practicable after each such exercise of the warrants, but not later than seven
(7) days from the date of such exercise, the Company shall issue and deliver to
the Holder a certificate or certificate for the Warrant Shares issuable upon
such exercise, registered in the name of the Holder or its designee. If this
Warrant should be exercised in part only, the Company shall, upon surrender of
this Warrant for cancellation, execute and deliver a new Warrant evidencing the
rights of the Holder thereof to purchase the balance of the Warrant Shares
purchasable thereunder. Upon receipt by the Company of this Warrant at its
office, or by the stock transfer agent of the Company at its office, in proper
form for exercise, the Holder shall be deemed to be the holder of record of the
shares of Common Stock issuable upon such exercise, notwithstanding that the
stock transfer books of the Company shall then be closed or that certificates
representing such shares of Common Stock shall not then be physically delivered
to the Holder.
(2) At any time during the Exercise Period, the Holder may, at its
option, exchange this Warrant, in whole or in part (a "Warrant Exchange"), into
the number of Warrant Shares determined in accordance with this Section (a)(2),
by surrendering this Warrant at the principal office of the Company or at the
office of its stock transfer agent, accompanied by a notice stating such
Holder's intent to effect such exchange, the number of Warrant Shares to be
exchanged and the date on which the Holder requests that such Warrant Exchange
occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the
date specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Company (the "Exchange Date"). Certificates for the
shares issuable upon such Warrant Exchange and, if applicable, a new warrant of
like tenor evidencing the balance of the shares remaining subject to this
Warrant, shall be issued as of the Exchange Date and delivered to the Holder
within seven (7) days following the Exchange Date. In connection with any
Warrant Exchange, this Warrant shall represent the right to subscribe for and
acquire the number of Warrant Shares (rounded to the next highest integer) equal
to (i) the number of Warrant Shares specified by the Holder in its Notice of
Exchange (the "Total Number") less (ii) the number of Warrant Shares equal to
the quotient obtained by dividing (A) the product of the Total Number and the
existing Exercise Price by (B) the current market value of a share of Common
Stock. Current market value shall have the meaning set forth Section (c) below,
except that for purposes hereof, the date of exercise, as used in such Section
(c), shall mean the Exchange Date.
(b) RESERVATION OF SHARES. The Company shall at all times reserve for
issuance and/or delivery upon exercise of this Warrant such number of shares of
its Common Stock as shall be required for issuance and delivery upon exercise of
the Warrants.
(c) FRACTIONAL SHARES. No fractional shares or script representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount
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<PAGE> 4
in cash equal to such fraction multiplied by the current market value of a
share, determined as follows:
(1) If the Common Stock is listed on a national
securities exchange or admitted to unlisted trading privileges
on such exchange or listed for trading on the Nasdaq National
Market, the current market value shall be the last reported
sale price of the Common Stock on such exchange or market on
the last business day prior to the date of exercise of this
Warrant or if no such sale is made on such day, the average
closing bid and asked prices for such day on such exchange or
market; or
(2) If the Common Stock is not so listed or admitted
to unlisted trading privileges, but is traded on the Nasdaq
Small Cap Market, the current Market Value shall be the
average of the closing bid and asked prices for such day on
such market and if the Common Stock is not so traded, the
current market value shall be the mean of the last reported
bid and asked prices reported by the National Quotation
Bureau, Inc. on the last business day prior to the date of the
exercise of this Warrant; or
(3) If the Common Stock is not so listed or admitted
to unlisted trading privileges and bid and asked prices are
not so reported, the current market value shall be an amount,
not less than book value thereof as at the end of the most
recent fiscal year of the Company ending prior to the date of
the exercise of the Warrant, determined in such reasonable
manner as may be prescribed by the Board of Directors of the
Company.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This
Warrant is exchangeable, without expense, at the option of the Holder, upon
presentation and surrender hereof to the Company or at the office of its stock
transfer agent, if any, for other warrants of different denominations entitling
the holder thereof to purchase in the aggregate the same number of shares of
Common Stock purchasable hereunder. This Warrant is not transferable (other than
by will or pursuant to the laws of descent and distribution and except as
provided under Subsection (a)(1)(ii) hereof) and may not be assigned or
hypothecated for a period of one year from February ____, 1997, except to and
among the officers of Royce, any member of the selling group, or to and among
the officers of any member of the selling group. Upon surrender of this Warrant
to the Company at its principal office or at the office of its stock transfer
agent, if any, with the Assignment Form annexed hereto duly executed and funds
sufficient to pay any transfer tax, the Company shall, without charge, execute
and deliver a new Warrant in the name of the assignee named in such instrument
of assignment and this Warrant shall promptly be cancelled. This Warrant may be
divided or combined with other warrants which carry the same rights upon
presentation hereof at the principal office of the Company or at the office of
its stock transfer agent, if any, together with a written notice specifying the
names and denominations in which new Warrants are to be issued and signed by the
Holder hereof. The term "Warrant" as used herein includes any Warrants into
which this Warrant may
3
<PAGE> 5
be divided or exchanged. Upon receipt by the Company of evidence satisfactory to
it of the loss, theft, destruction or mutilation of this Warrant, and (in the
case of loss, theft or destruction) of reasonably satisfactory indemnification,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
will execute and deliver a new Warrant of like tenor and date. Any such new
Warrant executed and delivered shall constitute an additional contractual
obligation on the part of the Company, whether or not this Warrant so lost,
stolen, destroyed, or mutilated shall be at any time enforceable by anyone.
(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue
hereof, be entitled to any rights of a shareholder in the Company, either at law
or equity, and the rights of the Holder are limited to those expressed in the
Warrant and are not enforceable against the Company except to the extent set
forth herein.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at
any time and the number and kind of securities purchasable upon the exercise of
the Warrants shall be subject to adjustment from time to time upon the happening
of certain events as follows:
(1) In case the Company shall (i) declare a dividend
or make a distribution on its outstanding shares of Common
Stock in shares of Common Stock, (ii) subdivide or reclassify
its outstanding shares of Common Stock into a greater number
of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the
Exercise Price in effect at the time of the record date for
such dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be adjusted
so that it shall equal the price determined by multiplying the
Exercise Price by a fraction, the denominator of which shall
be the number of shares of Common Stock outstanding after
giving effect to such action, and the numerator of which shall
be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be
made successively whenever any event listed above shall occur.
(2) Whenever the Exercise Price payable upon exercise
of each Warrant is adjusted pursuant to Subsection (1) above,
the number of Shares purchasable upon exercise of this Warrant
shall simultaneously be adjusted by multiplying the number of
Shares initially issuable upon exercise of this Warrant by the
Exercise Price in effect on the date hereof and dividing the
product so obtained by the Exercise Price, as adjusted.
(3) No adjustment in the Exercise Price shall be
required unless such adjustment would require an increase or
decrease of at least five cents ($0.05) in such price;
provided, however, that any adjustments which by reason of
this Subsection (3) are not required to be made shall be
carried forward and taken into account in any subsequent
adjustment required to be made hereunder. All calculations
under this Section (f) shall be made to the nearest cent or to
the
4
<PAGE> 6
nearest one-hundredth of a share, as the case may be. Anything
in this Section (f) to the contrary notwithstanding, the
Company shall be entitled, but shall not be required, to make
such changes in the Exercise Price, in addition to those
required by this Section (f), as it shall determine, in its
sole discretion, to be advisable in order that any dividend or
distribution in shares of Common Stock, or any subdivision,
reclassification or combination of Common Stock, hereafter
made by the Company shall not result in any Federal Income tax
liability to the holders of Common Stock or securities
convertible into Common Stock (including Warrants).
(4) Whenever the Exercise Price is adjusted, as
herein provided, the Company shall promptly but no later than
10 days after any request for such an adjustment by the
Holder, cause a notice setting forth the adjusted Exercise
Price and adjusted number of Shares issuable upon exercise of
each Warrant, and, if requested, information describing the
transactions giving rise to such adjustments, to be mailed to
the Holders at their last addresses appearing in the Warrant
Register, and shall cause a certified copy thereof to be
mailed to its transfer agent, if any. The Company may retain a
firm of independent certified public accountants selected by
the Board of Directors (who may be the regular accountants
employed by the Company) to make any computation required by
this Section (f), and a certificate signed by such firm shall
be conclusive evidence of the correctness of such adjustment.
(5) In the event that at any time, as a result of an
adjustment made pursuant to Subsection (1) above, the Holder
of this Warrant thereafter shall become entitled to receive
any shares of capital stock of the Company other than Common
Stock, thereafter the number of such other shares so
receivable upon exercise of this Warrant shall be subject to
adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in Subsections (1) to
(4), inclusive above.
(6) Irrespective of any adjustments in the Exercise
Price or the number or kind of shares purchasable upon
exercise of this Warrant, Warrants theretofore or thereafter
issued may continue to express the same price and number and
kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Agreement.
(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall
be adjusted as required by the provisions of the foregoing Section (f), the
Company shall forthwith file in the custody of its Secretary or an Assistant
Secretary at its principal office and with its stock transfer agent, if any, an
officer's certificate showing the adjusted Exercise Price determined as herein
provided, setting forth in reasonable detail the facts requiring such
adjustment, including a statement of the number of additional shares of Common
Stock, if any, and such other facts as shall be necessary to show the reason for
and the manner of computing
5
<PAGE> 7
such adjustment. Each such officer's certificate shall be made available at all
reasonable times for inspection by the holder or any holder of a Warrant
executed and delivered pursuant to Section (a) and the Company shall, forthwith
after each such adjustment, mail a copy by certified mail of such certificate to
the Holder or any such holder.
(h) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding, (i) if the Company shall pay any dividend or make any distribution
upon the Common Stock or (ii) if the Company shall offer to the holders of
Common Stock for subscription or purchase by them any share of any class or any
other rights or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then in any such case, the Company shall cause
to be mailed by certified mail to the Holder, at least fifteen days prior the
date specified in (x) or (y) below, as the case may be, a notice containing a
brief description of the proposed action and stating the date on which (x) a
record is to be taken for the purpose of such dividend, distribution or rights,
or (y) such reclassification, reorganization, consolidation, merger, conveyance,
lease, dissolution, liquidation or winding up is to take place and the date, if
any is to be fixed, as of which the holders of Common Stock or other securities
shall receive cash or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up.
(i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale, lease or conveyance to another corporation of
the property of the Company as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
Holder shall have the right thereafter by exercising this Warrant at any time
prior to the expiration of the Warrant, to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
which might have been purchased upon exercise of this Warrant immediately prior
to such reclassification, change, consolidation, merger, sale or conveyance. Any
such provision shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Section (i) shall similarly apply to
successive reclassifications, capital reorganizations and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances. In
the event that in connection with any such capital reorganization or
reclassification, consolidation, merger, sale or conveyance, additional shares
of Common Stock shall be issued in exchange, conversion,
6
<PAGE> 8
substitution or payment, in whole or in part, for a security of the Company
other than Common Stock, any such issue shall be treated as an issue of Common
Stock covered by the provisions of Subsection (1) of Section (f) hereof.
(j) REGISTRATION UNDER THE SECURITIES ACT OF 1933.
(1) The Company shall advise the Holder of this
Warrant or of the Warrant Shares or any then holder of
Warrants or Warrant Shares (such persons being collectively
referred to herein as "holders") by written notice at least
four weeks prior to the filing of any post-effective amendment
to the Company's Registration Statement No. 333-11957 on Form
SB-2 ("Registration Statement"), declared effective by the
Securities and Exchange Commission on , 1997 or of
any new registration statement or post-effective amendment
thereto under the Securities Act of 1933 (the "Act") covering
securities of the Company and will for a period of six years,
commencing one year from the effective date of the
Registration Statement, upon the request of any such holder,
include in any such post-effective amendment or registration
statement such information as may be required to permit a
public offering of the Warrants or the Warrant Shares. The
Company shall supply prospectuses and other documents as the
Holder may request in order to facilitate the public sale or
other disposition of the Warrants or Warrant Shares, qualify
the Warrants and the Warrant Shares for sale in such states as
any such holder designates and do any and all other acts and
things which may be necessary or desirable to enable such
Holders to consummate the public sale or other disposition of
the Warrants or Warrant Shares, and furnish indemnification in
the manner as set forth in Subsection (3)(C) of this Section
(j). Such holders shall furnish information and
indemnification as set forth in Subsection (3)(C) of this
Section (j), except that the maximum amount which may be
recovered from the Holder shall be limited to the amount of
proceeds received by the Holder from the sale of the Warrants
or Warrant Shares.
(2) If any majority holder (as defined in Subsection
(4) of this Section (j) below) shall give notice to the
Company at any time during the four year period commencing one
year from the effective date of the Registration Statement to
the effect that such holder contemplates (i) the transfer of
all or any part of his, her, or its Warrants and/or Warrant
Shares, or (ii) the exercise and/or conversion of all or any
part of his or its Warrants and the transfer of all or any
part of the Warrants and/or Warrant Shares under such
circumstances that a public offering (within the meaning of
the Act) of Warrants and/or Warrant Shares will be involved,
and desires to register under the Act, the Warrants and/or the
Warrant Shares, then the Company shall, within two weeks after
receipt of such notice, file a post-effective amendment to the
Registration Statement or a new registration statement on Form
S-1 or such other form as the holder requests, pursuant to the
Act, to the end that the Warrants and/or Warrant Shares may be
sold under the Act as promptly as practicable thereafter and
the
7
<PAGE> 9
Company will use its best efforts to cause such registration
to become effective and continue to be effective (current)
(including the taking of such steps as are necessary to obtain
the removal of any stop order) until the holder has advised
the Company that all of the Warrants and/or Warrant Shares
have been sold; provided that such holder shall furnish the
Company with appropriate information (relating to the
intentions of such holders) in connection therewith as the
Company shall reasonably request in writing. In the event the
registration statement is not declared effective under the Act
prior to December 1, 2001, then at the holder's request, the
Company shall purchase the Warrants from the holders for a per
share price equal to the fair market value of the Common Stock
less the per share Exercise Price. The holder may, at its
option, request the registration of the Warrants and/or
Warrant Shares in a registration statement made by the Company
as contemplated by Subsection (1) of this Section (j) or in
connection with a request made pursuant to Subsection (2) of
this Section (j) prior to the acquisition of the Warrant
Shares upon exercise of the Warrants and even though the
holder has not given notice of exercise of the Warrants. If
the Company determines to include securities to be sold by it
in any registration statement originally requested pursuant to
this Subsection (2) of this Section (j), such registration
shall instead be deemed to have been a registration under
Subsection (1) of this Section (j) and not under Subsection
(2) of this Section (j). The holder may thereafter at its
option, exercise the Warrants at any time or from time to time
subsequent to the effectiveness under the Act of the
registration statement in which the Warrant Shares were
included.
(3) The following provision of this Section (j)
shall also be applicable:
(A) Within ten days after receiving any such
notice pursuant to Subsection (2) of this Section
(j), the Company shall give notice to the other
holders of Warrants and Warrant Shares, advising that
the Company is proceeding with such post-effective
amendment or registration statement and offering to
include therein Warrants and/or Warrant Shares of
such other holders, provided that they shall furnish
the Company with such appropriate information
(relating to the intentions of such holders) in
connection therewith as the Company shall reasonably
request in writing. Following the effective date of
such post-effective amendment or registration, the
Company shall upon the request of any owner of
Warrants and/or Warrant Shares forthwith supply such
a number of prospectuses meeting the requirements of
the Act, as shall be requested by such owner to
permit such holder to make a public offering of all
Warrants and/or Warrant Shares from time to time
offered or sold to such holder, provided that such
holder shall from time to time furnish the Company
with such appropriate information (relating to the
intentions of such holder) in connection therewith as
the Company shall request in writing. The Company
shall also use its best efforts to qualify the
8
<PAGE> 10
Warrant Shares for sale in such states as such
majority holder shall designate.
(B) The Company shall bear the entire cost
and expense of any registration of securities
initiated by it under Subsection (1) of this Section
(j) notwithstanding that Warrants and/or Warrant
Shares subject to this Warrant may be included in any
such registration. The Company shall also comply with
one request for registration made by the majority
holder pursuant to Subsection (2) of this Section (j)
at its own expense and without charge to any holder
of any Warrants and/or Warrant Shares; and the
Company shall comply with one additional request made
by the majority holder pursuant to Subsection (2) of
this Section (j) (and not deemed to be pursuant to
Subsection (1) of this Section (j)) at the sole
expense of such majority holder. Any holder whose
Warrants and/ or Warrant Shares are included in any
such registration statement pursuant to this Section
(j) shall, however, bear the fees of his own counsel
and any registration fees, transfer taxes or
underwriting discounts or commissions applicable to
the Warrant Shares sold by him pursuant thereto.
(C) The Company shall indemnify and hold
harmless each such holder and each underwriter,
within the meaning of the Act, who may purchase from
or sell for any such holder any Warrants and/or
Warrant Shares from and against any and all losses,
claims, damages and liabilities caused by any untrue
statement or alleged untrue statement of a material
fact contained in the Registration Statement or any
post-effective amendment thereto or any registration
statement under the Act or any prospectus included
therein required to be filed or furnished by reason
of this Section (j) or caused by any omission or
alleged omission to state therein a material fact
required to be stated therein or necessary to make
the statements therein not misleading, except insofar
as such losses, claims, damages or liabilities are
caused by any such untrue statement or alleged untrue
statement or omission or alleged omission based upon
information furnished or required to be furnished in
writing to the Company by such holder or underwriter
expressly for use therein, which indemnification
shall include each person, if any, who controls any
such underwriter within the meaning of such Act
provided, however, that the Company will not be
liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in
said registration statement, said preliminary
prospectus, said final prospectus or said amendment
or supplement in reliance upon and in conformity with
written information furnished by such Holder or any
other Holder, specifically for use in the preparation
thereof.
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<PAGE> 11
(D) Neither the giving of any notice by any
such majority holder nor the making of any request
for prospectuses shall impose any upon such majority
holder or owner making such request any obligation to
sell any Warrants and/or Warrant Shares, or exercise
any Warrants.
(4) The term "majority holder" as used in this
Section (j) shall include any owner or combination of owners
of Warrants or Warrant Shares in any combination if the
holdings of the aggregate amount of (i) the Warrants held by
him, her, or among them, plus (ii) the Warrants which he, she,
or they would be holding if the Warrants for the Warrant
Shares owned by him, her, or among them had not been
exercised, would constitute a majority of the Warrants
originally issued.
The Company's agreements with respect to Warrants or Warrant
Shares in this Section (j) shall continue in effect regardless of the exercise
and surrender of this Warrant.
BIRMAN MANAGED CARE, INC.
By:_______________________________________
Its:______________________________________
Dated: February ____, 1997
Attest:
___________________________
Secretary
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<PAGE> 12
PURCHASE FORM
Dated ____________,
The undersigned hereby irrevocably elects to exercise the
within Warrant to the extent of purchasing _______ shares of Common Stock and
hereby makes payment of _______ in payment of the actual exercise price thereof.
----------------
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name _______________________________________
(Please typewrite or print in block letters)
Address ____________________________________
Signature __________________________________
<PAGE> 13
ASSIGNMENT FORM
FOR VALUE RECEIVED, ______________ hereby sells, assigns and transfers
unto
Name _______________________________________
(Please typewrite or print in block letters)
Address ____________________________________
the right to purchase Common Stock represented by this Warrant to the extent of
______ shares as to which such right is exercisable and does hereby irrevocably
constitute and appoint ___________ as attorney, to transfer the same on the
books of the Company with full power of substitution in the premises.
Date ____________, ____
Signature ___________________
<PAGE> 1
EXHIBIT 5.1
January , 1997 312/368-4000
The Board of Directors
Birman Managed Care, Inc.
502 Gould Drive
Cookeville, Tennessee 38506
Dear Sirs:
We have examined the registration statement filed with the Securities
and Exchange Commission on September 13, 1996 (Registration Statement No.
333-11957) and all amendments thereto filed on or before the date of this
opinion for registration under the Securities Act of 1933, as amended, of
2,000,000 shares of common stock, $.001 par value per share ("Common Stock"), of
Birman Managed Care, Inc., a Delaware Corporation (the "Company"), warrants to
purchase 200,000 shares of Common Stock to be issued to Royce Investment Group,
Inc. ("Representative's Warrants"), and Common Stock issuable upon exercise of
Representative's Warrants. We have examined pertinent corporate documents and
records of the Company, including its Certificate of Incorporation and its
By-Laws, and we are familiar with the corporate proceedings had and contemplated
in connection with the issuance of the Common Stock and Representative's
Warrants by the Company. We have also made such other examinations as we have
deemed necessary or appropriate as a basis for the opinion hereinafter
expressed.
On the basis of the foregoing, we are of the opinion that the 2,000,000
shares of Common Stock, the Representative's Warrants, and the Common Stock
issuable upon the proper exercise of Warrants issuable upon the proper exercise
of the Representative's Warrants have been duly authorized, and, when issued and
paid for on the basis referred to in the aforementioned registration statement,
such shares and warrants will be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
registration statement and to the reference to our firm in the prospectus under
the caption "Legal Matters."
Very truly yours,
RUDNICK & WOLFE
<PAGE> 1
Exhibit 10.21
ESCROW AGREEMENT
AGREEMENT, dated as of the ___ day of January, 1997, by and among
CONTINENTAL STOCK TRANSFER & TRUST COMPANY, a New York corporation (hereinafter
referred to as the "Escrow Agent"), BIRMAN MANAGED CARE, INC., a Delaware
corporation (the "Company"), and DAVID N. BIRMAN, M.D. (the "Stockholder").
WHEREAS, the Company contemplates a public offering ("Public Offering")
of shares of its Common Stock, par value $.001 per share (the "Common Stock")
through Royce Investment Group, Inc. as underwriter (the "Underwriter") pursuant
to a Registration Statement on Form SB-2 as filed with the Securities and
Exchange Commission (the "Registration Statement"); and
WHEREAS, in connection with the Public Offering, the Stockholder has
agreed to deposit in escrow an aggregate of 1,000,000 shares of Common Stock,
upon the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein contained, the parties hereto agree as follows:
1. The Stockholder and the Company hereby appoint Continental Stock
Transfer & Trust Company as Escrow Agent. Concurrently with the execution and
delivery of this Agreement, the Stockholder has delivered to the Escrow Agent to
hold in accordance with the provisions hereof a certificate or certificates
representing an aggregate of 1,000,000 shares of Common Stock owned of record by
the Stockholder, together with stock powers executed in blank. The Escrow Agent,
by its execution and delivery of this Agreement, hereby acknowledges receipt of
the Escrow Shares and its appointment as Escrow Agent to hold the Escrow Shares
in escrow, upon the terms, provisions and conditions hereof.
2. This Agreement shall become effective upon the date on which the
Securities and Exchange Commission declares effective the Registration Statement
(the "Effective Date") and shall continue in effect until the earlier of (i) the
date specified in Section 4(d) hereof, or (ii) the distribution by the Escrow
Agent of all of the Escrow Shares in accordance with the terms hereof (the
"Termination Date"). The period of time from the Effective Date until the
Termination Date is referred to herein as the "Escrow Period."
3. During the Escrow Period, the Escrow Agent shall receive all of the
money, securities, rights or property distributed in respect of the Escrow
Shares then held in escrow, including any such property distributed as dividends
or pursuant to any stock split, merger, recapitalization, dissolution, or total
or partial liquidation of the Company, such property to be held and distributed
as herein provided and hereinafter referred to collectively as the "Escrow
Property."
<PAGE> 2
4. (a) The Escrow Shares are subject to release to the Stockholder to
the extent and only in the event the conditions set forth herein are met. The
Escrow Agent, upon notice to such effect from the Company as provided in Section
5 hereof, shall deliver the Escrow Shares, together with stock powers executed
in blank, and the Escrow Property deposited in escrow with respect to such
Escrow Shares, to the Stockholder, only if, and to the extent that, one or more
of the following conditions is met:
(i) 333,333 Escrow Shares shall be released if the Company's net
after-tax income per share (the "Minimum After-Tax Income")
for the fiscal year ending June 30, 1997, equals or exceeds
$.017 per share of then issued and outstanding shares of the
Company's Common Stock; or
(ii) 333,333 Escrow Shares (or, if the conditions set forth in (i)
above were not met, 666,666 Escrow Shares) shall be released
if the Minimum After-Tax Income for the fiscal year ending
June 30, 1998, equals or exceeds $.026 per share of then
issued and outstanding shares of the Company's Common Stock;
or
(iii) 333,334 Escrow Shares (or, if the conditions set forth in
either (i) or (ii) were not met, the remaining Escrow Shares)
shall be released if the Minimum After-Tax Income for the
fiscal year ending June 30, 1999, equals or exceeds $.039 per
share of then issued and outstanding shares of the Company's
Common Stock.
(b) The determination of Minimum After-Tax Income shall be (i)
calculated exclusive of any extraordinary earnings or charges (including any
charges incurred in connection with the release from escrow the Escrow Shares
and any Escrow Property in respect thereof pursuant to the provisions of this
Section 4); and (ii) audited by the Company's independent public accountants.
(c) The Minimum After-Tax Income amounts set forth in Section
4(a) shall be proportionately adjusted for any stock splits, stock dividends,
stock distributions, reverse stock splits, combinations, recapitalizations, or
other similar events.
(d) If the Escrow Agent has not received the notice provided
for in Section 5 hereof and delivered all of the Escrow Shares and related
Escrow Property in accordance with the provisions of Section 4 on or prior to
July 1, 1999, the Escrow Agent shall deliver the certificates representing all
or the remaining Escrow Shares, together with stock powers executed in blank,
and any related Escrow Property to the Company to be placed in the Company's
treasury for cancellation thereof as a contribution to capital. After such date,
the Stockholder shall have no further rights as a stockholder of the Company
with respect to any of the cancelled Shares.
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<PAGE> 3
5. Upon the occurrence or satisfaction of any of the events or
conditions specified in Section 4 hereof, the Company shall promptly give
appropriate notice to the Escrow Agent, the Underwriter (and if the transfer
agent of the Company's Common Stock is different from the Escrow Agent, such
transfer agent) and present such documentation as is reasonably required by the
Escrow Agent to evidence the satisfaction of such conditions.
6. It is understood and agreed by the parties to this Agreement as
follows:
(a) The Escrow Agent is not and shall not be deemed to be a
trustee for any party for any purpose and is merely acting as a depository and
in a ministerial capacity hereunder with the limited duties herein prescribed.
(b) The Escrow Agent does not have and shall not be deemed to
have any responsibility in respect of any instruction, certificate or notice
delivered to it or of the Escrow Shares or any related Escrow Property other
than faithfully to carry out the obligations undertaken in this Agreement and to
follow the directions in such instruction or notice provided in accordance with
the terms hereof.
(c) The Escrow Agent is not and shall not be deemed to be
liable for any action taken or omitted by it in good faith and may rely upon,
and act in accordance with, the advice of its counsel without liability on its
part for any action taken or omitted in accordance with such advice. In any
event, its liability hereunder shall be limited to liability for gross
negligence, willful misconduct or bad faith on its part.
(d) The Escrow Agent may conclusively rely upon and act in
accordance with any certificate, instruction, notice, letter, telegram,
cablegram or other written instrument believed by it to be genuine and to have
been signed by the proper party or parties.
(e) The Company agrees (i) to pay the Escrow Agent's
reasonable fees and to reimburse it for its reasonable expense including
attorneys' fees incurred in connection with its duties hereunder and (ii) to
save harmless, indemnify and defend the Escrow Agent for, from and against any
loss, damage, liability, judgment, cost and expense whatsoever, including
counsel fees, suffered or incurred by it by reason of, or on account of, any
misrepresentation made to it or its status or activities as Escrow Agent under
this Agreement except for any loss, damage, liability, judgment, cost or expense
resulting from gross negligence, willful misconduct or bad faith on the part of
the Escrow Agent. The obligation of the Escrow Agent to deliver the Escrow
Shares to either the Stockholder or the Company shall be subject to the prior
satisfaction upon demand from the Escrow Agent of the Company's obligations to
so save harmless, indemnify and defend the Escrow Agent and to reimburse the
Escrow Agent or otherwise pay its fees and expenses hereunder.
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<PAGE> 4
(f) The Escrow Agent shall not be required to defend any legal
proceeding which may be instituted against it in respect of the subject matter
of this Agreement unless requested to do so by the Stockholder and indemnified
to the Escrow Agent's satisfaction against the cost and expense of such defense
by the party requesting such defense. If any such legal proceeding is instituted
against it, the Escrow Agent agrees promptly to give notice of such proceeding
to the Stockholder and the Company. The Escrow Agent shall not be required to
institute legal proceedings of any kind.
(g) The Escrow Agent shall not, by act, delay, omission or
otherwise, be deemed to have waived any right or remedy it may have either under
this Agreement or generally, unless such waiver be in writing, and no waiver
shall be valid unless it is in writing, signed by the Escrow Agent, and only to
the extent expressly therein set forth. A waiver by the Escrow Agent under any
term of this Agreement shall not be construed as a bar to, or waiver of, the
same or any other such right or remedy which it would otherwise have on any
other occasion.
(h) The Escrow Agent may resign as such hereunder by giving 30
days' written notice thereof to the Stockholder and the Company. Within 20 days
after receipt of such notice, the Stockholder and the Company shall furnish to
the Escrow Agent written instructions for the release of the Escrow Shares (if
such shares and property, if any, have not yet been released pursuant to Section
4 hereof) to a substitute Escrow Agent which (whether designated by written
instruction from the Stockholder and the Company jointly or in the absence
thereof by instructions from a court of competent jurisdiction to the Escrow
Agent) shall be a bank or trust company organized and doing business under the
laws of the United States or any state thereof. Such substitute Escrow Agent
shall thereafter hold any Escrow Shares and any related Escrow Property received
by it pursuant to the terms of this Agreement and otherwise act hereunder as if
it were the Escrow Agent originally named herein. The Escrow Agent's duties and
responsibilities hereunder shall terminate upon the release of all shares then
held in escrow according to such written instruction or upon such delivery as
herein provided. This Agreement shall not otherwise be assignable by the Escrow
Agent without the prior written consent of the Company.
7. The Stockholder shall have the sole power to vote the Escrow Shares
and any securities deposited in escrow under this Agreement while they are being
held pursuant to this Agreement.
8. (a) The Stockholder agrees that during the term of this Agreement he
will not sell, transfer, hypothecate, negotiate, pledge, assign, encumber or
otherwise dispose of any or all of the Escrow Shares, unless and until the
Company shall have given the notice as provided in Section 5. This restriction
shall not be applicable to transfers upon death, by operation of law, to family
members of the Stockholder or to any trust for the benefit of the Stockholder,
provided that such transferees agree to be bound by the provisions of this
Agreement.
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<PAGE> 5
(b) The Stockholder will take any action necessary or
appropriate, including the execution of any further documents or agreements, in
order to effectuate the transfer of the Escrow Shares to the Company if required
pursuant to the provisions of this Agreement.
9. Each of the certificates representing the Escrow Shares will bear
legends to the following effect, as well as any other legends required by
applicable law:
(a) "The sale, transfer, hypothecation, negotiation, pledge,
assignment, encumbrance or other disposition of the shares
evidenced by this certificate are restricted by and are
subject to all of the terms, conditions and provisions of a
certain Escrow Agreement entered into among Continental Stock
Transfer & Trust Company, Birman Managed Care, Inc. and David
N. Birman, M.D., dated as of January ___, 1997, a copy of
which may be obtained from the Secretary of Birman Managed
Care, Inc. No transfer, sale or other disposition of these
shares may be made unless specific conditions of such
agreement are satisfied."
(b) "The shares evidenced by this certificate have not been
registered under the Securities Act of 1933, as amended. No
transfer, sale or other disposition of these shares may be
made unless a registration statement with respect to these
shares has become effective under said Act, or the Company is
furnished with an opinion of counsel satisfactory in form and
substance to it that such registration is not required."
Upon execution of this Agreement, the Company shall direct the transfer
agent for the Company to place stop transfer orders with respect to the Escrow
Shares and to maintain such orders in effect until the transfer agent and the
Underwriter shall have received written notice from the Company as provided in
Section 5.
10. Each notice, instruction or other certificate required or permitted
by the terms hereof shall be in writing and shall be communicated by personal
delivery, fax or registered or certified mail, return receipt requested, to the
parties hereto at the addresses set forth below, or at such other address as any
of them may designated by notice to each of the others:
(i) If to the Company, to:
Birman Managed Care, Inc.
502 Gould Drive
Cookeville, Tennessee 38506
Attention: David N. Birman, President
(ii) If to the Stockholder, to:
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<PAGE> 6
David N. Birman, M.D.
--------------------------
--------------------------
--------------------------
(iii) If to the Escrow Agent, to:
Continental Stock Transfer & Trust Company
Two Broadway, 19th Floor
New York, New York 10004
Attention: ______________________________
(iv) If to Royce, to:
Royce Investment Group, Inc.
199 Crossways Park Drive
New York, New York 11797
Attention: John Higgins
All notices, instructions or certificates given hereunder to the Escrow Agent
shall be effective upon receipt by the Escrow Agent. All notices given hereunder
by the Escrow Agent shall be effective and deemed received upon personal
delivery or transmission by fax or, if mailed, five (5) calendar days after
mailing by the Escrow Agent.
A copy of the communications sent to the Company, the Stockholder or
the Escrow Agent, shall be sent by ordinary mail to ________________. A copy of
all communications sent to the Underwriter shall be sent by ordinary mail to
Bachner, Tally, Polevcy & Misher LLP, 380 Madison Avenue, New York, NY 10017,
Attention: Jill Cohen, Esq.
11. Except as set forth in Section 12 hereof, this Agreement may not be
modified, altered or amended in any material respect or cancelled or terminated
except by an agreement in writing.
12. In the event that the Public Offering is not consummated within
twenty-five (25) days of the Effective Date of the Registration Statement, this
Agreement shall terminate and be of no further force and effect and the Escrow
Agent, upon written notice from both the termination, will return the Escrow
Shares and any Escrow Property in respect thereof to the Stockholder.
13. This Agreement shall be governed by and construed in accordance
with the laws of New York and shall be binding upon and inure to the benefit of
all parties hereto and their respective successors in interest and assigns.
6
<PAGE> 7
14. This Agreement may be executed in several counterparts, which taken
together shall constitute a single instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
BIRMAN MANAGED CARE, INC.
By:______________________________________
David N. Birman, M.D.
President and Chief Executive Officer
CONTINENTAL STOCK TRANSFER
& TRUST COMPANY
By:______________________________________
Its:_____________________________________
STOCKHOLDER
_________________________________________
David N. Birman, M.D.
7
<PAGE> 1
DWL:112296-01 EXHIBIT 10.22
This Instrument Prepared by Ledbetter and Buck, Attorneys
P. O. Box 715, Cookeville, Tennessee, 38503-0715
LEASE AGREEMENT
THIS LEASE made and entered this day of , 1996, by and between ARC
BUILDERS, LLC (hereinafter called Lessor) and BIRMAN MANAGED CARE, INC.
(hereinafter called Lessee).
W I T N E S S E T H:
ARTICLE I
PREMISES: Lessor does hereby let and lease unto Lessee the premises
situated in the City of Cookeville, County of Putnam and State of Tennessee, and
more particularly described as the shaded area on Exhibit A attached hereto, and
a description of same shall be made Exhibit B to this Lease upon completion of a
survey thereof acceptable to Lessor and Lessee.
ARTICLE II
TERM AND CONSTRUCTION: This Lease shall become effective upon full
execution by both parties. The initial term of this Lease shall be for ten (10)
years beginning on the Commencement Date as hereinafter defined. Each party
agrees, upon request by the other, to execute a supplemental agreement
evidencing the actual term of this Lease at such time as the exact dates are
known.
From and after the date hereof, Lessor shall construct, at its sole
cost and expense, the Premises in accordance with those certain Plans and
Specifications (the "Plans") attached hereto as Exhibit "C" and made a part
hereof, and any changes or amendments thereto which are properly authorized in
writing by Lessor and Lessee, and shall proceed with due diligence with such
construction so that construction is completed and the Premises are ready for
occupancy and served by utilities necessary therefor on or before seven (7)
months from commencement of construction with credit for weather delays and acts
of God as certified by the architect. When the Premises have been substantially
completed in accordance with the Plans (subject to normal minor "punch-list"
items which do not materially interfere with Lessee's intended use and occupancy
of the Premises) and Lessor has obtained a permanent certificate of occupancy
entitling Lessee to occupy the Premises, Lessor shall notify Lessee that the
Premises are ready for occupancy. Lessor shall prepare and certify by signature
and deliver to Lessee a written statement certifying that the Premises have been
substantially completed in accordance with the Plans and any authorized changes
or amendments thereto, and certifying the date of substantial completion. Lessor
shall diligently complete as soon as reasonably possible any items of work and
adjustments not completed when the Premises are so ready for occupancy. Lessor
shall assign to Lessee all applicable third party warranties and guaranties
obtained by Lessor in connection with the construction of such improvements. As
used herein, the term "Commencement Date n shall mean that date which is the
earlier to occur of (i) the issuance of a Certificate of Occupancy establishing
that the Premises are ready for occupancy by Lessee or (ii) Lessee's actual
occupancy of a majority of the Premises. Prior to the commencement Date, Lessor
shall furnish to Lessee a certificate from Lessor's architect that the Premises
have been substantially completed in accordance with the Plans. Lessor and
Lessee shall, upon such delivery, execute an amendment to this Lease setting
forth the actual Commencement Date and expiration date of the Lease. Failure to
execute such amendment shall not affect the actual Commencement Date and
expiration date of the Lease. Lessor shall complete the punch-list within thirty
(30) days of the Commencement Date.
<PAGE> 2
ARTICLE III
BUILDOUT: The building to be constructed is generally described as an
approximately 20,000 square foot office building, including interior walls,
bathrooms, floor coverings, and ceiling, and including all plumbing and basic
plumbing fixtures, electrical service and basic electrical fixtures, HVAC
system, and site work, including paving and parking, in accordance with certain
plans and specifications (the Plans). Such improvements shall be completed free
and clear of mechanics and other liens, and in accordance with the building
codes and all applicable laws, ordinances and regulations, of any public
authority affecting the same.
ARTICLE IV
RENT: The Lessee agrees to pay to Lessor as fixed minimum rent for said
premises during said term, the sum of $180,000.00 annually. The rent shall be
payable in advance in equal monthly installments of $15,000.00, WITHOUT DEMAND,
on the first day of each month, commencing on the Commencement Date and
continuing on the 1st day of each successive month thereafter during the term of
the Lease. If the first day upon which rent becomes payable is other than the
first day of any calendar month, Lessee shall pay rent for the balance of the
month at a daily rate based upon the monthly rent. Notwithstanding the
foregoing, commencing with the first day of the first month of the sixth year
from the Commencement Date, the monthly rental payments due hereunder shall be
$17,080.00 during years six and seven. Then commencing on the first day of the
first month of the eighth year, the monthly rental payments shall be $18,333.00,
and shall continue in the amount of $18,333.00 until the expiration of the
initial term of the lease. The first and last months' rent will be paid upon the
execution of this Lease. For purposes of payment of the last month's rental
payment, it shall be assumed that the last month's rent is equal to the first
month's rent, and an appropriate adjustment shall be made and any difference
paid to Lessor by Lessee in advance of the last month of the Lease.
Until further notice to Lessee, rent shall be payable to and mailed to
ARC Builders, LLC, P. O. Box 3324, Cookeville, TN 38502. Late payments are
subject to a late charge of 1.5 percent per month, if not received five (5) days
after due date.
ARTICLE V
UTILITIES: Lessee shall pay, when due all bills for gas, water,
electricity, other utilities, and rubbish removal at the premises.
ARTICLE VI
TAXES AND ASSESSMENTS: Lessee agrees to pay all taxes and assessments
on the Premises including personal property taxes due and payable during the
term of this Lease and any renewals.
Notwithstanding anything to the contrary herein contained, if Lessee
deems excessive or illegal any such tax, assessment or charge described in this
Article VI, Lessee may, at its sole cost, contest same by appropriate legal
proceedings which operate to prevent the collection thereof or other realization
thereon and the sale, levy or forfeiture of or upon all or any part of the
Premises to satisfy the same; provided, however, that if at any time payment of
the whole or any part thereof shall become necessary in order to prevent
imposition of a tax lien, the delivery of a tax deed, or similar tax enforcement
device or procedure, of the Premises, or otherwise adversely affect Lessor's
title to the Premises, as determined by Lessor in its sole but reasonable
discretion, because of nonpayment thereof, then Lessee shall, within ten (10)
days of written demand from Lessor, either pay the same in time to prevent
delivery of such tax deed or imposition of such lien or other adverse action or
post a bond or other security acceptable to Lessor, in its sole but reasonable
discretion, which has the effect of preventing delivery of such tax deed or
imposition of such lien or other adverse action (provided, that Lessor shall
have the right to use the proceeds of the bond or such other security to pay the
taxes if thereafter required
2
<PAGE> 3
to prevent delivery of a tax deed or imposition of such lien or other adverse
action). Any contest, whether before or after payment, may be made in the name
of the Lessor or Lessee or both, as Lessee shall determine. If requested by
Lessee, Lessor shall participate actively in any such contest (but only if all
expenses and costs incurred or suffered by Lessor, including fees of attorneys
and/or accountants, shall be paid by Lessee), but Lessee shall be entitled to
any refund of any such tax, assessment or charge or penalty or interest thereon
which may have been paid by Lessee, or by Lessor and reimbursed by Lessee to
Lessor. If Lessee does not timely contest such taxes, Lessor may contest any
such tax, assessment or charge, and if contested by Lessor, Lessee shall pay the
actual reasonable costs incurred by Lessor in connection therewith so long as
Lessor's contest is successful. Lessor and Lessee agree to cooperate in any such
contest and to avoid duplicating their efforts.
ARTICLE VII
INSURANCE: The Lessee will indemnify and save harmless the Lessor
against destruction of the premises and from all liabilities, obligations,
damages, causes of action, claims or judgments which may be imposed upon or
incurred by or asserted against the Lessor regarding this premises during the
term or extensions of the lease.
During the term of this lease, Lessee shall maintain general liability
insurance for the benefit of Lessor, Lessor's lender, and Lessee, as their
respective interests may appear, in an amount not less than $1,000,000 combined
single limit for bodily injury and/or property damage arising out of any one
accident or occurrence. Lessee shall provide Lessor with written evidence of
such coverage annually. All policies shall contain a provision for thirty (30)
day notice to Lessor of cancellation of any policy.
Lessee shall also maintain fire and extended coverage insurance
insuring the improvements to the premises in an amount equal to one hundred
(100%) percent of the agreed upon replacement value of the improvements. Agreed
replacement value will be determined at the beginning of this lease. Said value
shall be adjusted at the beginning of each lease year per the BLS consumer price
index. Such fire and extended coverage insurance policies shall be in the names
of the Lessor, Lessor's lender, and Lessee as their respective interests may
appear. Lessee shall provide Lessor with written evidence of such coverage prior
to the beginning of each lease year.
A. PARTIAL DAMAGE TO THE PREMISES:
Lessee shall notify Lessor in writing immediately upon the occurrence
of any damage to the Premises. If the Premises are only partially damaged to the
extent that the cost of repair will not exceed fifty (50.0%) percent of the full
replacement cost of the Premises, this Lease shall remain in effect and Lessor
shall repair the damage. If the damage to the Premises occurs during the last
year of the Lease Term and such damage will require more than thirty (30) days
to repair, either Lessor or Lessee may elect to terminate this Lease as of the
date the damage occurred. The party electing to terminate this Lease shall give
written notification to the other party of such election within thirty (30) days
after Lessee's notice to Lessor of the occurrence of the damage. Notwithstanding
the foregoing, in the event of such termination by Lessor, Lessee may void such
termination if Lessee is not in default hereunder (beyond any applicable grace
periods) at such time and within fifteen (15) days of Lessee's receipt of such
notice of termination, Lessee exercises the option to renew the term hereof in
accordance with and subject to Article XV hereinbelow.
B. SUBSTANTIAL OR TOTAL DESTRUCTION:
1. If the Premises are substantially destroyed to the extent that the
cost of repair will exceed fifty (50.0%) percent of the full replacement cost of
the Premises or totally destroyed by any cause whatsoever, the Lease shall
terminate as of the date of the destruction occurred.
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<PAGE> 4
2. Notwithstanding the preceding sentence, if (i) the Premises can be
rebuilt within eight (8) months after the date of the destruction; (ii) there is
at least one (1) year remaining in the term hereof (or Lessee otherwise
exercises the renewal option contained in Article XV hereinbelow); and (iii)
Lessee is not in default hereunder (beyond applicable grace periods) at such
time, Lessor shall rebuild the Premises and this Lease shall remain in full
force and effect.
Completion of Restoration. Notwithstanding anything contained herein to
the contrary, in the event of a casualty whereby Lessor is required to restore
the Premises, Lessee shall nevertheless have the right to terminate this Lease
if Lessor does not complete such restoration within eight (8) months of the date
of such casualty with credit for bad weather/non-working days as certified by
the architect.
The Lessor and the Lessee, and all parties claiming under them, hereby
mutually release and discharge each other from all claims and liabilities
arising from or caused by any hazard covered by insurance on the leased property
or covered by insurance in connection with property on or activities conducted
on the leased property regardless of the cause of damage or loss.
ARTICLE VIII
MAINTENANCE:
(a) MAINTENANCE BY LESSEE: Lessee shall at its own cost and expense,
keep and maintain in good order, condition and repair the entire leased premises
and each and every part thereof; excluding the repair, maintenance and
replacement of any roofing, air conditioning/heating unit(s) systems, structural
walls, foundations, parking lot paving, and underground utilities. Lessee shall
provide rubbish removal for the premises and maintain the landscaping, lawn, and
banks in a neat and attractive condition.
Should Lessee fail to maintain the interior or exterior of the premises
in a neat and well repaired condition, Lessor may, but shall not be obligated,
to conduct such maintenance or repairs, and the costs of same shall be added to
the next monthly rent and be then immediately due and payable. Should the
Lessee's operation become a nuisance to the public in general, Lessor may, at
its sole option, terminate this Lease upon thirty (30) days' written notice, but
first providing Lessee thirty (30) days to correct any deficiencies.
(b) MAINTENANCE BY LESSOR: Except to the extent of damage caused by any
negligent or willful act or omission of Lessee, or Lessee s employees, agents,
contractors or invitees, Lessor shall keep the foundation, air conditioning and
heating units and systems, roof, structural walls of the improvements and
exterior or underground utilities on the Premises in good order, condition and
repair. Notwithstanding anything contained herein to the contrary, for the first
year following the Commencement Date, Lessor shall be responsible for all
repairs (but only due to faulty workmanship and materials) to the Premises,
including those described in Lessor's responsibility under subsection (a) above,
except to the extent caused by any negligent or willful act or omission of
Lessee, or Lessee's employees, agents, contractors, or invitees.
ARTICLE IX
USE: Lessee agrees to use the premises for the operation of an office
building.
Lessee will use and occupy said premises and appurtenances in a
careful, safe and proper manner, and will comply with the requirements of the
all governing authorities regarding the conduct of Lessee's business; and Lessee
will not permit said premises to be used for any unlawful purpose.
Lessee further agrees that it will not deal in nor permit occupancy of
its premises by an business, person, or entity which deals in drugs or
pornographic items.
4
<PAGE> 5
The Lessee is required to operate a business in the demised premises.
If Lessee ceases to do business, Lessor has the right, but not the obligation to
require Lessee to vacate the premises.
ARTICLE X
SIGNS: All signage shall be subject to prior, written approval by
Lessor. Lessee shall, prior to the construction or erection of signage, submit
the size, location, design, and method of hanging of same to Lessor for written
approval. All signs must comply with the laws of all governmental entities
controlling same, and upon removal of any signs, Lessee shall repair all damage
caused by such removal.
ARTICLE XI
ALTERATIONS: Any such changes and alterations erected by Lessee shall
be and remain the property of Lessee during the term of the Lease, and Lessee
shall, unless Lessor elects as hereinafter provided, remove all alterations,
additions, improvements, and partitions erected by Lessee and restore the leased
premises to its original condition by the date of termination of this Lease. All
such improvements installed by Lessee may be removed by Lessee prior to the
termination of this Lease if Lessee so elects, and shall be removed if required
by Lessor. Upon such removal, Lessee shall restore the leased premises to its
original condition, ordinary wear and tear excepted. All such removals and
restorations shall be accomplished in a good, workman-like manner DO as not to
damage the primary structure or structural qualities of the building or other
improvements situated on the leased premises.
Lessee shall not permit any mechanic's or other liens to stand against
the property for work or material furnished to Lessee. Lessee shall hold Lessor
harmless for any claims of damage resulting directly from Lessee's work.
ARTICLE XII
SURRENDER OF PREMISES: Lessee will deliver and surrender to the Lessor
possession of the demised premises upon the expiration of this Lease or its
termination by any cause, in a good clean rentable condition and in as good
condition and repair as at the commencement of said term.
ARTICLE XIII
LESSOR'S ACCESS: Lessor may have free access to the premises at all
reasonable times following reasonable notice (except in the case of an
emergency) for the purpose of inspecting the same and also during the last two
(2) months of the term of this Lease for the purpose of exhibiting said
premises, provided that same shall not interfere with Lessee's business.
ARTICLE XIV
DEFAULT OF LESSEE: Should the Lessee fail to pay the rent or any part
thereof, as the same become due under this Lease, or violate any other terms or
conditions of this Lease, or abandon the Leased Premises, the Lessor shall then
have the right, at the Lessor's option, to take possession of the Leased
Premises, and let the same as the agent of the Lessee, and apply the proceeds
received from such letting toward the payment of the rent of the Lessee under
this lease; and such re-entry and re-letting shall not discharge the Lessee from
liability for rent, nor from any other obligations of the Lessee under the terms
hereof; or the Lessor may, at the Lessor's option, re-enter the Leased Premises
and terminate this Lease without relieving the lessee of any of his obligations
under this Lease. The receipt of rent after any conditions broken shall not be
deemed a waiver of termination. In order to entitle the Lessor to re-enter the
Leased Premises, it shall not be necessary to give notice of rent being due and
unpaid, nor to make demand for rent, the execution of this Lease signed by the
parties hereto being sufficient notice
5
<PAGE> 6
of the rent being due and demand for the same; and this Lease shall be so
construed, any law, usage or custom to the contrary notwithstanding. In the
event that monthly payments become delinquent for a period of thirty-one (31)
days, the Lessor reserves the right to terminate the lease at its discretion
with all Lessor rights in effect.
Notwithstanding the foregoing to the contrary, Lessor shall not
exercise any remedies upon a default hereunder by Lessee unless such default
remains uncured as follows: with respect to monetary defaults, until after the
expiration of ten (10) days following written notice thereof from Lessor and
with respect to non-monetary defaults, until after the thirtieth (30th) calendar
day following written notice from Lessor (provided that if such non-monetary
default is of such nature as cannot be cured within such thirty-day period,
Lessee shall have a reasonable additional period of time to complete such cure
so long as Lessee promptly commences such cure and diligently prosecutes it
thereafter).
DEFAULT OF LESSOR: In the event Lessor neglects or fails to comply with
any of its obligations contained in this Lease, and such default should continue
for a period of thirty (30) days after Lessee has given written notice thereof
to Lessor [plus such additional time as may be necessary while the curing of the
default is continuously and diligently prosecuted by Lessor, with respect to
defaults (other than failure to make monetary payments) which cannot by their
very nature be cured within thirty (30) days, except in the event of an
emergency in which event Lessee shall have the right to take whatever reasonable
actions are appropriate prior to the expiration of such thirty (30) day period,
then Lessee may make such payments and do such work and otherwise perform
Lessor's covenants, all on behalf of and at the expense of Lessor. Lessor agrees
to pay to Lessee forthwith the amount of the payment so made or the cost of and
expenses incurred. In the event of a default by Lessor as contemplated
hereinabove, Lessee shall, simultaneously with any notice given to Lessor
deliver a copy of such notice to any holder of a Deed of Trust as to whom Lessee
has been duly notified in accordance with the notice provisions set forth
herein, which notice by Lessor to Lessee shall set forth the name and full
address of any such holder. Any such holder shall have the right, but not the
obligation, to effect cures on behalf of Lessor within the time period set forth
herein, and in the event of any such cure by any such holder, such cure shall be
accepted by Lessee as a cure by Lessor hereunder. The time given to such holder
to cure Lessor's default shall run concurrently with any time granted to Lessor
to cure such default.
ARTICLE XV
OCCUPANCY AFTER EXPIRATION: In the event of Lessee's continued
occupancy of the premises after the expiration of the term of this Lease or any
renewal or extension, with or without the consent of the Lessor, such tenancy
shall be from month to month and in no event from year to year, and such
continued occupancy shall not defeat the Lessor's right to possession of the
premises. All other covenants, provisions, obligations and conditions of this
lease shall remain in full force during such month to month tenancy.
ARTICLE XVI
EMINENT DOMAIN: In the event that the entire demised premises shall at
any time after the execution of this Lease be taken by public or quasi public
use or condemned under eminent domain, then this Lease shall terminate and
expire as of the date of such taking and any prepaid rent or unearned charges
shall be refunded to Lessee.
ARTICLE XVII
WAIVER OF RIGHTS: No acquiescence by either party in any breach of
covenant or default by the other party hereunder shall operate as a waiver of
its rights with respect to any other breach or default, whether of the same or
any other covenant or condition.
6
<PAGE> 7
ARTICLE XVIII
QUIET ENJOYMENT: Lessor hereby warrants that it has a fee simple
interest to the premises and covenants that if the Lessee shall perform all of
the covenants and agreements herein stipulated to be performed on Lessee's part,
the Lessee shall at all times during said term have the peaceable and quiet
enjoyment and possession of said premises.
ARTICLE XIX
ENTIRE AGREEMENT: This instrument governed by the laws of Tennessee
shall merge all undertakings between the parties hereto with respect to the
leased premises and shall constitute the entire lease agreement unless otherwise
hereafter modified by both parties in writing.
ARTICLE XX
NOTICES: Any notice or consent required to be given by or on behalf of
either party to the other shall be in writing and shall be given by mailing such
notice or consent by registered mail or certified mail, return receipt requested
addressed to the other party as follows:
(i) If to Lessor: ARC BUILDERS, LLC
P. O. Box 3324
Cookeville, TN 38502
(ii) If to Lessee: BIRMAN MANAGED CARE, INC.
--------------------------
--------------------------
Or at such other address as may be specified from time to time in writing by
either party.
ARTICLE XXI
SUBORDINATION: This Lease and all of the rights of Lessee hereunder are
subject and subordinate at all times to any mortgage, deed of trust or deed to
secure debt which now or hereafter affects the real property of which the
Premises form a part (the "Property"), and to all renewals, modifications,
consolidations, replacements and extensions thereof, so long as the holder
thereof agrees to recognize Lessee's rights and benefits hereunder so long as
Lessee is not in default hereunder beyond the expiration of any applicable
notice and opportunity to cure period.
ARTICLE XXII
ESTOPPEL CERTIFICATES: Upon either party's request, the other party
shall execute, acknowledge and deliver to the requesting party a written
statement certifying: (i) that none of the terms or provisions of this Lease
have been changed (or if they have been changed, stating how they have been
changed); (ii) that this Lease has not been cancelled or terminated; (iii) the
last date of payment (or receipt, if Lessor is the certifying party) of the rent
and other charges and the time period covered by such payment; (iv) that Lessor
or Lessee, as the case may be, is not in default under this Lease (of if a party
is claimed to be in default, stating why); and (v) such other representations or
information with respect to Lessee, Lessor or the Lease as such party may
reasonably request or which any prospective purchaser or encumbrances of the
Premises or of Lessee's business may require. Lessor or Lessee shall deliver
such statement by Lessee to any prospective purchaser or encumbrances of the
Premises. Such purchaser or encumbrances may rely conclusively upon such
statement as true and correct. If Lessee fails to do so within twenty (20) days
after written request, Lessee shall be in default hereunder without the
requirement of any further notice.
7
<PAGE> 8
ARTICLE XXIII
LEGAL PROCEEDINGS: If Lessee or Lessor shall be in breach or default
under this Lease, such party (the "Defaulting Party") shall reimburse the other
party (the "Nondefaulting Party") upon demand for any reasonable costs or
expenses that the Nondefaulting Party incurs in connection with any breach or
default of the Defaulting Party under this Lease, but only after suit is
commenced and a final, non-appealable judgment entered. Such reasonable costs
shall include legal fees and costs incurred for the negotiation of a settlement,
enforcement of rights or otherwise. Furthermore, if any action for breach of or
to enforce the provisions of this Lease is commenced, the court in such action
shall award to the party in whose favor a judgment is entered, a reasonable sum
as settlement, enforcement of rights or otherwise. Furthermore, if any action
for breach of or to enforce the provisions of this Lease is commenced, the court
in such action shall award to the party in whose favor a judgment is entered,
reasonable attorneys' fees and costs actually incurred. The losing party in such
action shall pay such attorneys' fees and costs.
ARTICLE XXIV
SUBLETTING - CONTINUING OBLIGATIONS OF LESSEE: Lessee may, but only
with the Lessor's prior written consent, such consent not to be unreasonably
withheld, sublet the premises or any part thereof, and may, but only with
Purchaser's prior written consent, assign or otherwise transfer all of its
rights and interests hereunder; provided, however, that no assignment, transfer,
or sublease shall affect or reduce any of the obligations of Lessee hereunder,
but all obligations of Lessee hereunder shall continue in full force and effect
as the obligations of a principal and not of a guarantor or surety.
ARTICLE XXV
OPTION TO PURCHASE: Lessee shall have the option to purchase the
premises upon the terms and conditions hereinafter set forth for the purchase
price of One Million Six Hundred Fifty Thousand and no/100 (61,650,000.00)
Dollars. Provided, however, that the option may only be exercised by the giving
of Notice of Intent to Exercise Option upon any one of the following: 1) not
less than ninety (90) days prior to Completion Date; 2) not less than ninety
(90) days prior to the end of the fifth year of the initial term of the lease;
3) not less than ninety (90) days prior to the end of the seventh year of the
initial term of the lease; and 4) not less than ninety (90) days prior to the
end of the tenth year. Provided further, that in the event the Option to
purchase is so exercised, closing shall occur on or before thirty (30) days
after the Completion Date or at the end of the fifth, seventh or tenth years of
the initial term.
IN WITNESS WHEREOF, the parties have hereto set their hands to
duplicate copies hereof as of the date first above written.
SIGNED, SEALED AND DELIVERED LESSOR:
IN THE PRESENCE OF:
ARC BUILDERS, LLC
By:
- ------------------------------ -------------------------------
WITNESS
LESSEE:
BIRMAN MANAGED CARE, INC.
By:
- ------------------------------ -------------------------------
WITNESS
8
<PAGE> 9
STATE OF TENNESSEE
COUNTY OF PUTNAM
The foregoing instrument was acknowledged before me this day of
-----
, 199 , by .
- --------------- --- ---------------------------------
---------------------------------
NOTARY PUBLIC
My Commission Expires:
----------------
STATE OF TENNESSEE
COUNTY OF PUTNAM
The foregoing instrument was acknowledged before me this day of
-----
, 199 , by .
- --------------- --- ---------------------------------
---------------------------------
NOTARY PUBLIC
My Commission Expires:
----------------
9
<PAGE> 1
Exhibit 10.23
CONSULTING AGREEMENT
Agreement made and entered into as of the ____ day of ______________,
1997 by and between BIRMAN MANAGED CARE, INC., a Delaware corporation, having
offices at 502 Gould Drive, Cookeville, Tennessee 38506 (the "Company"), and
ROYCE INVESTMENT GROUP, INC., a New York corporation, having offices at 199
Crossways Park Drive, Woodbury, New York 11797 (the "Consultant").
W I T N E S S E T H
WHEREAS, the Company desires to retain the Consultant and the
Consultant desires to be retained by the Company, all pursuant to the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants herein contained, it is agreed as follows:
1. Retention. The Company hereby retains the Consultant to perform
consulting services related to corporate finance and other financial service
matters, and the Consultant hereby accepts such retention and shall perform for
the Company the duties described herein, faithfully and to the best of its
ability. In this regard, Consultant shall devote such business time and
attention to matters on which the Company shall request its services, subject to
the direction of the Chairman of the Board of the Company, as shall be
determined by the Consultant.
2. Term. The Consultant's retention hereunder shall be for a term of
one year.
3. Compensation.
(a) The Consultant shall be compensated at the rate $150,000 per annum
payable to Royce Investment Group, Inc. The $150,000 payment under this
consulting agreement shall be due and payable in advance upon the execution of
this Agreement.
(b) The Company shall not be required to pay any out-of-pocket expenses
of the Consultant, unless approved in advance by the Company.
4. Termination. This Agreement may not be terminated by the Company,
except for the willful breach of the Agreement by the Consultant. This agreement
may be terminated by the Consultant at any time upon two weeks notice.
<PAGE> 2
5. Notices. Any notices hereunder shall be sent to the Company and the
Consultant at their respective addresses above set forth. Any notice shall be
given by registered or certified mail, postage prepaid, and shall be deemed to
have been given when deposited in the United States mail. Either party may
designate any other address to which notice shall be given, by giving written
notice to the other of such change of address in the manner herein provided.
6. Governing Law. This Agreement has been made in the State of New York
and shall be construed and governed in accordance with the laws thereof.
7. Entire Agreement. This Agreement contains the entire agreement
between the parties, may not be altered or modified, except in writing and
signed by the party to be charged thereby and supersedes any and all previous
agreements between the parties.
8. Binding Effect. This Agreement shall be binding upon the parties
hereto and their respective heirs, administrators, successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.
BIRMAN MANAGED CARE, INC.
By:______________________________
Its:_____________________________
ROYCE INVESTMENT GROUP, INC.
By:______________________________
Its:_____________________________
-2-
<PAGE> 1
Exhibit 10.24
____________, 1997
David N. Birman, M.D.
Birman Managed Care, Inc.
502 Guold Drive
Cookeville, TN 38506
Gentlemen:
You have agreed that Royce Investment Group, Inc. ("Royce") may act as
a finder or financial consultant for you in various transactions in which Birman
Managed Care, Inc. (the "Company") may be involved, such as mergers,
acquisitions, joint ventures, debt or lease placement and similar or other on or
off balance sheet corporate finance transactions, licensing arrangements,
research and development arrangements, or product or service sales. The Company
hereby agrees that in the event that Royce or an agent, representative or other
designee of Royce shall first introduce to the Company another party or entity,
and that as a result of such introduction, a transaction in the nature described
above is consummated (a "Consummated Transaction"), then for each such
Consummated Transaction the Company shall pay to Royce a finder's fee as
follows:
a. 5% of the first $1,000,000 of the consideration paid in such
transaction;
b. 4% of the second $1,000,000 of the consideration paid in such
transaction; and
c. 3% of any consideration in excess of $2,000,000.
The fee due Royce shall be paid by the Company in cash at the closing
of the Consummated Transaction, without regard to whether the Consummated
Transaction involves payment in cash, in stock, or a combination of stock and
cash, or is made on an installment basis. By way of example, if the Consummated
Transaction involved securities of the acquiring entity (whether securities of
the Company, if the Company is the acquiring party, or securities of another
entity, if the Company is the selling party) having a value of $8,000,000, the
cash consideration to be paid by the Company to Royce at closing shall be
$270,000. The consideration paid in the Consummated Transaction shall include,
for purposes of calculating
POO1465D.WP5
<PAGE> 2
Royce's fee hereunder, assumption of liabilities by, and any payments or
distributions of cash or other assets made to the Company or to the principals
of the Company prior to, simultaneously with or subsequent to the Consummated
Transaction if such payments or distributions are made in contemplation of or in
connection with the Consummated Transaction. Notwithstanding the foregoing, in
the event the Consummated Transaction involves continuing payments to the
Company such as fees or royalties for services to a customer introduced to the
Company by Royce (a "Continuing Transaction"), the fee due Royce shall be
calculated as a royalty on net sales or royalty payments at the percentages set
forth above during the five year period following the first payment received by
the Company in connection with the Continuing Transaction.
In the event that for any reason the Company shall fail to pay to Royce
all or any portion of the finder's fee payable hereunder when due, interest
shall accrue and be payable on the unpaid cash balance due hereunder from the
date when first due through and including the date when actually collected by
Royce, at a rate equal to four percent (4%) above the prime rate of Citibank,
N.A., in New York, New York, computed on a daily basis and adjusted as announced
from time to time.
This agreement shall be effective on the date hereof and shall expire
on the fifth anniversary of the date hereof; provided, however, that the
obligation of the Company to pay fees in connection with a Continuing
Transaction shall survive termination of this agreement.
Notwithstanding anything herein to the contrary, if the Company shall,
within 180 days immediately following the termination of the five-year period
provided above, conclude a Consummated Transaction (which shall be deemed to
include the right to receive a payment in connection with a Continuing
Transaction) with any party introduced to the Company by Royce or its agent,
representative or other designee prior to the termination of said five-year
period, the Company shall also pay Royce the fee determined above.
The Company represents and warrants to Royce that Royce's engagement
hereunder has been duly authorized and approved by the Board of Directors of the
Company and this letter agreement has been duly executed and delivered by the
Company and constitutes a legal, valid and binding obligation of the Company.
This agreement has been executed and delivered in the State of New York
and shall be governed by the laws of such state, without giving effect to the
conflicts of laws rules thereunder. The Company hereby submits and consents to
the jurisdiction of the state or federal courts of New York in connection with
any action arising under this agreement.
This agreement shall be binding upon, and enforceable against, the
successors and assigns of each of the undersigned.
2
<PAGE> 3
Please sign this letter at the place indicated below, whereupon it will
constitute our mutually binding agreement with respect to the matters contained
herein.
Very truly yours,
ROYCE INVESTMENT GROUP, INC.
By:_____________________________
Its:____________________________
Agreed to and accepted:
BIRMAN MANAGED CARE, INC.
By:_______________________________
Its:______________________________
3
<PAGE> 1
EXHIBIT 11.1
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
COMPUTATION OF EARNING PER SHARE
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
YEARS ENDED ENDED
JUNE 30, SEPTEMBER 30,
----------------------- -----------------------
1995 1996 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Primary Earnings Per Share:(1)
Common stock equivalents
Options and warrants granted and
unexercised.............................. 1,076,371 1,076,371 1,076,371 1,076,371
Assumed buyback of options(2)............... (303,936) (303,936) (303,936) (303,936)
--------- --------- --------- ---------
772,435 772,435 772,435 772,435
Total weighted average shares issued.......... 5,931,082 5,931,082 5,931,082 5,931,082
--------- --------- --------- ---------
Weighted average shares outstanding........... 6,703,517 6,703,517 6,703,517 6,703,517
========= ========= ========= =========
Fully Diluted Earnings Per Share:(1)
Common stock equivalents
Options and warrants granted and
unexercised.............................. 1,076,371 1,076,371 1,076,371 1,076,371
Escrow shares(3)............................ -- 1,000,000 1,000,000 1,000,000
Assumed buyback of options(2)............... (303,936) (303,936) (303,936) (303,936)
--------- --------- --------- ---------
772,435 1,772,435 1,772,435 1,772,435
Total weighted average shares issued.......... 5,931,082 5,931,082 5,931,082 5,931,082
--------- --------- --------- ---------
Weighted average shares outstanding........... 6,703,517 7,703,517 7,703,517 7,703,517
========= ========= ========= =========
</TABLE>
- ---------------
(1) Earnings per share are based upon the weighted average number of shares
outstanding for each of the respective years. All weighted average shares
outstanding give retroactive effect to the 1,000 to 1 stock split in
October, 1995 and the 72.939 for 100 exchange in September 1996. The Company
is planning an initial public offering of its common stock. Pursuant to
Securities and Exchange Commission rules, common stock issued for
consideration below the anticipated offering price per share during the
12-month period prior to filing of the registration statement has been
included in the calculation of common share equivalent shares, using the
treasury stock method, as if they had been outstanding for all periods
presented.
(2) Buyback of stock options under the treasury stock method is at the assumed
IPO price of $5.00 per share.
(3) Shares deposited into escrow by Dr. Birman pursuant to the Underwriting
Agreement are included in fully diluted earnings per share unless they are
anti-dilutive.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Birman Managed Care, Inc. and Subsidiaries
Cookeville, Tennessee
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated August 2, 1996, relating
to the consolidated financial statements of Birman Managed Care, Inc. and
Subsidiaries for the year ended June 30, 1996 which is contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
Los Angeles, California
January 14, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Canton Management Group, Inc.
(A Development Stage Company)
Jackson, Mississippi
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated August 7, 1996, relating
to the financial statements of Canton Management Group, Inc. (A Development
Stage Company) for the year ended June 30, 1996 which is contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
Los Angeles, California
January 14, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Birman Managed Care, Inc. and Subsidiaries
Cookeville, Tennessee
As independent certified public accountants, we hereby consent to the
inclusion of our report dated July 19, 1996, on the consolidated financial
statements of Birman Managed Care, Inc. and Subsidiaries for the year ended June
30, 1995, in the Company's Form SB-2 Registration Statement for the year then
ended, and to the reference to us under the caption "Experts" contained in the
Prospectus.
/s/ SEMPLE & COOPER, P.L.C.
--------------------------------------
Semple & Cooper, P.L.C.
Certified Public Accountants
Phoenix, Arizona
January 14, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Canton Management Group, Inc.
(A Development Stage Company)
Jackson, Mississippi
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated August 7, 1996, relating
to the financial statements of Canton Management Group, Inc. (A Development
Stage Company) for the year ended June 30, 1995 which is contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
Semple & Cooper, P.L.C.
Phoenix, Arizona
January 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1997
<PERIOD-END> JUN-30-1996 SEP-30-1996
<CASH> 1,872,343 1,449,652
<SECURITIES> 0 0
<RECEIVABLES> 1,087,930 1,037,062
<ALLOWANCES> 44,159 44,159
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,043,889 2,614,151
<PP&E> 475,136 617,216
<DEPRECIATION> 181,452 203,913
<TOTAL-ASSETS> 4,009,891 4,341,661
<CURRENT-LIABILITIES> 758,255 851,467
<BONDS> 7,037 4,404
0 0
0 0
<COMMON> 6,931 6,931
<OTHER-SE> 3,182,048 3,423,239
<TOTAL-LIABILITY-AND-EQUITY> 4,009,891 4,341,661
<SALES> 0 0
<TOTAL-REVENUES> 8,416,946 2,372,137
<CGS> 2,278,932 0
<TOTAL-COSTS> 4,236,607 888,516
<OTHER-EXPENSES> 2,643 1,169,119
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 44,835 247
<INCOME-PRETAX> 1,998,764 352,593
<INCOME-TAX> 726,983 111,402
<INCOME-CONTINUING> 1,171,781 241,191
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,171,781 241,191
<EPS-PRIMARY> .17 .04
<EPS-DILUTED> .15 .03
</TABLE>
