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1997
Washington D.C. 20549
Form 10-KSB
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year
ended June 30, 1997; or
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File No. 333-11957
BIRMAN MANAGED CARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 62-1584092
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
502 Gould Drive
Cookeville, Tennessee 38506
(Address of principal executive offices; zip code)
(931) 432-6532; (931) 432-6536 (Telecopier)
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the Registrant has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports for such shorter period that the registrant was
required to file such reports, and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B is not contained herein,
and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-KSB.
[X]
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of September 24, 1997:
Common Stock, $.001 par value -- $24,734,889
The number of shares outstanding of each of the issuer's
classes of capital stock, as of September 24, 1997:
Common Stock, $.001 par value -- 24,734,889 shares
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format
YES [ ] NO [X]
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
Certain matters discussed in this Annual Report may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act") and as such may involve risks
and uncertainties. These forward-looking statements relate to, among other
things, expectations of the business environment in which the Company operates,
projections of future performance, perceived opportunities in the market and
statements regarding the Company's mission and vision. The Company's actual
results, performance, or achievements may differ significantly from the
results, performance, or achievements expressed or implied in such
forward-looking statements. For discussion of the factors that might cause
such a difference, see "Item 1. Business -- Business Considerations and Certain
Factors that May Affect Future Results of Operations and Stock Price."
OVERVIEW
The Company is a health care compliance assurance services, 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 currently provides its proprietary Quality Management
Program to 29 hospitals to educate their medical staffs on patient management.
Approximately 95% of the Company's revenues in the fiscal year ended June 30,
1997, were derived from its hospital-related consulting services. The Company
also operates, through its 69%-owned subsidiary Care3, Inc., a health plan in
the state of Mississippi and is pursuing health plans in other states, including
Tennessee. The Company believes it can apply its Quality Management Program
experience to improve the management and delivery of health care services in
managed care systems. 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. The Company will also
provide management services to its own and to independent health plans. The
Company's Mississippi health plan, which began enrolling members in August 1997,
expects to enroll sufficient members under two significant contracts to
contribute more than $2.5 million to the Company's gross revenues in the fiscal
year ending June 30, 1998. As the plan has only recently commenced operations,
it cannot yet be determined whether the plan will operate at a profit in fiscal
1998 or ever. The Company intends to concentrate its
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efforts on rural communities, particularly in the south-central, southeast, and
central United States, with an initial focus for its health plans on
Mississippi, where the development of health care management systems and managed
care programs has lagged behind other areas of the country.
In February of 1997, the Company completed an initial public offering
of 2,000,000 shares of Common Stock at $5.00 per share. The Company received
net proceeds of $7,548,697, after deducting underwriting commissions, discounts
and all related offering expenses.
THE QUALITY MANAGEMENT PROGRAM: The Company's Quality Management
Program provides regulatory compliance assurance services to its hospital-
clients and works to improve overall patient management by focusing on the
attending physician. The Company's Quality Management team at each
hospital-client is headed by a trained physician who consults directly with
attending physicians regarding their overall patient management program, as
systematized in the medical record. The Quality Management Program is designed
(i) to assure regulatory compliance on Medicare and Medicaid billing practices,
(ii) to 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, (iii) to reduce the cost to its
hospital-clients of patient care as a result of early intervention in identified
health problems, and (iv) to describe more accurately in the medical record the
severity and complexity of the patient's illness and the resources utilized to
treat the patient. Because of the improved accuracy of documentation of the
services and treatments provided, the Quality Management Program frequently
results in increased Medicare reimbursements for the Company's hospital-clients.
THE COMPANY'S HEALTH PLANS: 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
expects to 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
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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.
The Company's first health plan, under its Care3, Inc., subsidiary, was
licensed in Mississippi in March and began enrolling members in August. The
Company's plan now includes 843 enrolled members under contracts with eleven
companies, the largest of which is the Copa Club Casino with 748 members.
THE COMPANY
The Company was incorporated in 1994 in Tennessee under the name BA
Forum, Inc., which 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. 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 January 15, 1997, the Company acquired all of the issued and
outstanding shares of capital stock of Canton Management Group, Inc., a
development stage company which at the time was an inactive holder of a
certificate of authority to operate a HMO in Mississippi. Canton has been
renamed Care3, Inc.. As a result of the issuance of shares of Care3, Inc. to
certain of the founders of Canton, Care3, Inc. currently is a 69% subsidiary of
the Company. The Company may reduce its ownership percentage of Care3, Inc. to
60% by allowing selected physicians to acquire shares of Care3, Inc. common
stock. The Company anticipates that it will own not less than 60% of Care3,
Inc. The recent acquisition of Canton provides to the Company a Certificate of
Compliance to operate an HMO in certain counties in northern Mississippi. In
addition to those counties, the Mississippi Department of Insurance issued a
Certificate of Compliance dated February 10, 1997, for Care3 to operate an HMO
in the six-county southern Mississippi region on March 4, 1997. The Company's
Mississippi HMO commenced operations on or about March 18, 1997. Care3
currently has approximately 843 participants enrolled in its plans, with
virtually all of the participants coming from Care3's two major contracts.
Insufficient business activities have occurred to date for the Company to assess
the prospects for such 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
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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 fiscal year
1998.
Through another newly formed subsidiary, MMMC, Inc., the Company has
entered the management services organization ("MSO") business by signing an
administrative services agreement with a network of private medical
practitioners in the Gulfport, Mississippi area, MedSouth, Inc. ("MedSouth").
The Company holds a 90% interest in the MSO, with MedSouth owning the balance of
the capital stock.
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.
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, 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
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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 (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 the Health Care Finance Administration
("HCFA"), an agency of the federal Department of Health and Human Services.
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 spiraling 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. The prospective payment amount 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 the severity of illnesses it treats through appropriate
documentation in the medical record 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, 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.
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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
person who directs 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 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 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 low 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,
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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
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 use its experience from 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 help providers in rural areas
change successfully from traditional fee-for-service
reimbursement to capitated health care plans.
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QUALITY MANAGEMENT PROGRAM
Concept
Under its Quality Management Program, the Company's specially trained
physicians provide consultation both to its hospital-clients to assure
regulatory compliance and also to attending physicians regarding the overall
treatment of patients through improved documentation of that treatment. 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. This process
produces a complete, consistent, and legible medical record that is essential
to the accurate identification and prioritization of disease conditions and
treatment plans. As a consequence, patient care and patient satisfaction are
increased, the cost of health care is reduced by controlling resource
consumption, appropriate Medicare reimbursements are received from the more
accurate documentation produced, and malpractice claims are reduced. As the
accuracy of the medical record is improved, both hospitals and attending
physicians can more accurately track the efficacy and need for certain medical
tests and procedures.
The attending physician controls the treatment plan and resource
consumption of patients. The attending physician is directly responsible for
the initial patient contact, the initial evaluation of symptoms and conditions,
preliminary diagnosis, hospital admissions, referrals to specialists, ordering
laboratory services, and prescribing medication. This fact of modern health
care has the concurrent effect of placing the attending physician in the unique
position of influencing the hospital's reimbursement revenue, costs, and
liability both through the decisions made and by the thoroughness and accuracy
with which those decisions are documented. A significant aspect of the Quality
Management Program involves consultation and training of the attending
physician at the hospital to facilitate the efficient delivery of high-quality
health care while thoroughly and accurately recording the decisions made.
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 attending physician focuses on proper diagnosis and
thereby becomes more effective in measuring the severity of each patient's
illness and progress. The Quality Management Program also typically results in
more accurate reporting of the hospital's DRG elections, which often results in
increased Medicare reimbursement to the hospital.
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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. The Company provides a monthly
status report to the hospital's chief executive officer or chief financial
officer.
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 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 enables accurate tracking and diagnosis of the patient's illness while
simultaneously supporting the selection of coding options that provide
appropriate reimbursement. The attending physician and the hospital make all
final coding decisions. The physicians and allied health specialists employed
by the Company in its Quality Management Program do not treat patients, make
treatment or diagnostic decisions, or provide medical services in connection
with the Quality Management Program.
The Company knows of no principal competitor that features
peer-to-peer training of physicians-by-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.
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Fee Structures
Most of the Company's fee arrangements have been "results based"
agreements, although some "fixed fee" arrangements have been made. "Results
based" compensation arrangements have historically predominated in the Company's
field. They typically are influenced by increases in the hospital-client's
revenue attributable to increases in Medicare reimbursements, and are not based
on physician reimbursements. Recently, as a consequence of the announced
heightened federal scrutiny of any contract which provides greater compensation
for obtaining higher federal reimbursements, the Company has been shifting its
compensation to "fixed fee" arrangements. Of twenty-nine hospital contracts now
in force, eight have "fixed fee" compensation arrangements. The Company intends
to move towards the "fixed fee" arrangement on all of its contracts as rapidly
as practicable. 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 malpractice liability exposure. Hospitals historically
have had difficulty preparing and maintaining documentation to meet the
exacting requirements of federal Medicare reimbursement. They also generally
fail to record accurately all services rendered. Because the Quality
Management Program directly addresses these problems, the Company's
hospital-clients typically experience increased Medicare reimbursements of
between 7.6% AND 21% within the first year of the Company's engagement.
Considerable hospital-to-hospital variation nonetheless occurs which the
Company attributes to variation in such factors as hospital size and patient
population mix.
HEALTH PLANS
Concept
Drawing on the expertise and relationships established through the
Quality Management Program, the Company 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
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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. In order
to provide the PPO and point- of-service options, the Company has entered into
an alliance with National Benefits Resources, Inc. ("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, clarify and place time limits on the performance under the strategic
alliance. To this end, the Company entered into a managing underwriter
agreement with NBR in late February, 1997 for a five year term.
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. The Company has
also devoted substantial resources toward establishing provider networks in
Tennessee and is considering how best to utilize those networks.
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
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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 and has applied to
Mississippi to provide such services. Mississippi has recently enacted
legislation that encourages state welfare participation in managed care
programs.
The Company's MSOs will receive a percentage of the premiums
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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 administration, 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. When the Company has sufficient enrollees in a plan, 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
preauthorization 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. To accelerate entry into the health plan business in
Mississippi, the Company acquired Canton (renamed "Care3, Inc."), an inactive
holder of a certificate of authority to operate an HMO in certain counties in
northern Mississippi. It also arranged for MedSouth to provide health care
services through its provider network consisting of approximately 370
physicians, ten 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. The Company
obtained necessary state health department and insurance department
authorizations to provide HMO health care services to enrollees in six counties
in southern Mississippi. The Company intends to enlist other service
providers, primarily in the northern and the Delta regions of Mississippi. The
Company has applied for qualification to provide services to Medicaid
beneficiaries in Mississippi. The application is in the final stages of review
and is expected to be approved so that Care3 can enter the Medicaid program in
the fourth calendar quarter of 1997. Once a plan is so approved, the welfare
agency in each state assigns Medicaid-qualified residents to the Company's
health plan
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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. 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.
Care 3, Inc. has entered into two significant contracts to provide
health care services in Mississippi. The first, with the Imperial Palace Hotel
and Casino in Biloxi, Mississippi, became effective June 15, 1997 with a 15
month renewal. Upon the opening of the Imperial Palace, which is scheduled for
December 15, 1997, the Company anticipates monthly revenue of approximately
$340,000 for 3,000 enrolled individuals. The second, with the Copa Casino in
Gulfport, Mississippi, became effective September 1, 1997 with a 12 month
renewal. The Company anticipates revenue of $68,937 per month from 584
enrolled individuals. The Company has insufficient operating experience in the
HMO field to determine as yet whether these contracts will prove profitable to
the Company.
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 continuing to engage in investigative activities
geared towards contracting with hospitals and other providers to complete this
network.
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
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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 is now offering its first health plan.
The Company believes that eventually 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 90 hospitals located in 17 states. Currently, the Company is
providing its Quality Management Program at 29 hospitals in 14 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. The Company renewed 29.4% of all contracts
whose initial term expired in the fiscal year ended June 30, 1997. Out of
approximately 90 engagements, only six have been terminated prior to the end of
the contract term.
The Company has provided services to a number of hospitals operated by
a Quorum. Services provided to hospitals operated by Quorum resulted in
approximately 42% and 23% of the Company's revenue in fiscal 1996 and 1997,
respectively. Quorum operates 300 acute care facilities in 43 states. Over the
past five years, the Company has provided its Quality Management Program at 34
Quorum-operated facilities. Currently, the Company is providing Quality
Management Program services at 10 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. Quorum recently instructed its
hospitals to convert all "results-oriented" contracts to fixed fee contracts.
The Company recently renegotiated its contract to provide Quality
Management Program services to Community Medical Center in
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Toms River, New Jersey, under an agreement that provides for a fixed fee of
$140 per chart reviewed. The agreement with Community Medical Center has been
extended to July 1998 and contains an early termination clause. For fiscal
year ended June 30, 1997, services provided to Community Medical Center
represented 12.42% of the Company's revenue.
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 (i.e., physician-to-physician) 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
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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. 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
Various aspects of the delivery, administration and reimbursement of
health care services are subject to state and federal regulation. The business
of the Company is directly or indirectly affected or subject to these laws as
well as laws 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 regulation or 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. In addition to these proposals, the increased
funding of enforcement of existing laws, and the increased severity of fines
and threat of criminal prosecutions, has had the effect of inhibiting the
Company's ability to attract new hospital-clients and causing some current
hospital-clients to consider the impact of these developments on their business
relationships in general, including those with the Company. The Company cannot
determine at this time the duration of this situation or its ultimate effect on
the Company's prospects and revenues over the long term. In the near term,
this situation has and will adversely affect the Company's revenue and revenue
growth. The Company is developing alternative products and services to adapt
to this changed regulatory environment, which the Company believes will aid the
Company's growth and revenues.
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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 in which the Company conducts business maintain
prohibitions against business corporations employing physicians or otherwise.
Possible sanctions for violation of this restriction include loss of licensure
and civil and criminal penalties. These laws vary from state to state and are
often ambiguous. These laws have been seldom interpreted by the courts or
regulatory agencies, but are potentially subject to broad interpretation and
enforcement by courts and regulatory authorities. 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. Although the Company seeks to
structure its arrangements with health care providers to comply with state
corporate practice of medicine laws, and although the Company believes it is in
compliance with such laws, 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. Also, there can be no
assurance that such laws will not be interpreted broadly or amended to be more
expansive. In addition, 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.
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. Possible
sanctions for violation of these laws include civil, monetary and criminal
penalties and loss of licensure.
Many states have enacted laws that prohibit physicians and, in some
cases, all health care professionals, from splitting fees or referring patients
to entities with which such physician or health care professional have a
financial relationship, regardless of the patient's source of payment. There
are numerous exceptions under some of these laws which authorize certain
referrals, including
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without limitation, referrals for health care services performed by the
referring health care professional to provide health services personally or
within the health care professional's area of expertise as part of a group
practice, or referrals by physicians who have made investments in publicly
traded companies.
These statutes vary from state to state and are often ambiguous. The
scope of these state laws is broad and little precedent exists for their
interpretation or enforcement. The penalties for a violation of these law may
include civil or criminal penalties, prohibition on billing or collecting from
patients or third-party payers, or repayment of reimbursement for the services
related to the unlawful referral and, for the physician, a probation period, or
suspension or revocation of the physician's license.
Pursuant to the terms of some of the Quality Management Program
agreements, the Company will receive fees based upon increases in a
hospital-client's Medicare reimbursements. In addition, pursuant to the terms
of the management services agreement between the Company's subsidiary, MMMC,
Inc. and the Company's Mississippi health plan, Care3, Inc., the Company will
receive fees based upon a percentage of premiums.
The Company believes that its contractual arrangements comply in all
material respects with the fee splitting and referral prohibitions of the
states in which it currently operates or proposes to operate in the future.
However, there can be no assurance that the Company's contractual arrangements
will not be successfully challenged or that such state laws will be interpreted
by the courts in a manner consistent with the practices of the Company. Also,
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 other states may require it to comply with such
jurisdictions' regulations, which could require structural and organizational
changes to the Company's business in order to comply with that state's laws.
Such changes, if any, or a successful challenge of the Company's current laws
could have a material adverse effect on the Company. The Company seeks,
however, to structure its contractual arrangements to comply with these laws
and will continue to do so in the states in which it expands its operations.
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 without an insurance
or HMO license 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. Some state insurance commissioners may determine that contracts
for the provision of health care services with an entity not licensed to
provide insurance that contracts directly with a self-insured employer may be
deemed to be engaged in the
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business of insurance. The Company intends to obtain all required or
appropriate licenses for its health plan business operations as an HMO or,
where applicable, as a provider network. NBR has agreed to arrange licensed
insurers to provide indemnity coverage to enrollees in the Company's
point-of-service 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 these laws by courts or regulatory authorities in these
states, or in the states into which the Company may expand, will not require
additional regulatory approvals, 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 and qualified provider that desires to contract with the
organization. These requirements could undermine the Company's plans with
respect to the size of provider panels for its health plans and could increase
the administrative costs necessary to operate the health plans in those states
where any willing and qualified provider must have the opportunity to contract
with managed care organizations. The Company could incur liability in the
event a managed care organization under the Company's control fails so to
contract. In addition, the burden of complying with such requirements or the
liability for a failure to comply with such requirements may have a material
adverse effect on the Company's business.
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 or cause to be made false or fraudulent claims to the
government for payment. A violation of the False Claims Act may result in
liability for monetary penalties of up to $10,000 per false claim plus three
times the amount of damages the government sustains, and exclusion from the
Medicare and Medicaid programs.
In 1976, Congress established the Office of Inspector General at the
Department of Health and Human Services to identify and eliminate fraud, abuse
and waste in the health care programs it oversees and to promote the efficiency
in departmental operations. The Office of Inspector General carries out this
mission through a nationwide program of audits, investigations and inspections.
In order to provide guidance to health care providers on ways to engage in
legitimate business practices and avoid scrutiny under
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fraud and abuse laws, the Office of Inspector General has from time to time
issued special "fraud alerts" identifying aspects of transactions and
arrangements, which, if present, may indicate that the transaction or
arrangement violates fraud and abuse law. In January of 1997, the Office of
Inspector General issued a special fraud alert regarding consulting firms who
are paid a commission based upon increased lab billings under the Medicare
program. The fraud alert did not expressly state that paying consultants for
increasing Medicare revenues is per se a violation of fraud and abuse law;
however, the alert stated that because commission-based relationships provide
consultants with little incentive to correct coding errors, these arrangements
are ripe for upcoding (improper designation of DRG codes to obtain
reimbursements higher than justified by the diagnosis and treatment of the
patient), unbundling (billing separately for each distinct laboratory analysis
performed when, in fact, all such analyses were performed simultaneously by the
same equipment), and other abusive manipulation which increases costs to the
Medicare program. In this fraud alert, the Office of Inspector General
encouraged government agents to become aware of the implications of consulting
arrangements involving commission payments, to take steps to determine the
existence of these consulting arrangements, and to contact fiscal
intermediaries about any known commission-based consulting arrangement for the
purpose of developing patterns that could potentially implicate the False
Claims Act as well as other fraud and abuse laws.
The Company takes measures, including but not limited to, the
concurrent review of medical record documentation, 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 a large
portion of the Company's current revenue could be considered "by commission"
and 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 would have a material adverse effect on
the Company. In addition, the Company, as well as its hospital-clients, could
incur liabilities for violations of the False Claims Act that could have a
material adverse effect on the Company.
Prohibition on Assignment
The Medicare and Medicaid laws generally prohibit the assignment of
Medicare and Medicaid receivables with limited exceptions. The Company does
not anticipate structuring its relationship with health care providers to meet
any of the exceptions to the general prohibitions on the assignment of Medicare
and Medicaid receivables. As a result, the Company can 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 does not anticipate entering into relationships that would permit it to
pledge or assign its Medicare and Medicaid receivables as security
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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
to make or influence referrals to the health plan; (ii) 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
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that its proposed operations will violate the 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 would 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 pending with a target
for release in 1997. Although the Company believes its proposed health plan
operations will be in compliance with the Stark legislation, future
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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 and creates two
new federal crimes called "Health Care Fraud" and "False Statements Relating to
Health Care Matters." The Health Care Fraud statute is implicated when anyone
"knowingly or wilfully" executes or attempts to execute a scheme or artifice to
defraud any health care benefit program or to obtain, by means of false or
fraudulent pretenses or representations, any of the money owed by a health care
benefit program, in connection with the delivery of a payment for health care
benefits, items or services. A violation of the Health Care Fraud statute is a
felony and violators may be fined, imprisoned for up to ten (10) years or both.
The False Statements Relating to Health Care Matters statute is implicated when
anyone, in any matter involving a health care benefit program, "knowingly or
wilfully" falsifies, conceals or covers up by any trick, scheme or device a
material fact, or makes any false, fictitious or fraudulent statement or
representation, or makes or uses any false writing or document knowing the
writing contains false, fictitious or fraudulent statements in any matter within
the jurisdiction of any department or agency of the United States. A violation
of the False Statements Relating to Health Care Matters is a felony and may
result in fines, imprisonment or both. In addition, the Portability Act
expands the Civil Money Penalty Act by proscribing persons from knowingly
presenting (or causing to be presented) a claim for medical or other items or
services that the person knows was not provided, which expressly includes a
knowing and willful scheme of engaging in a pattern or practice of upcoding or
providing unnecessary care, in order 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 of up to
$10,000 for each item improperly billed and up to three times the amount
claimed. The Company takes measures designed to ensure that hospital-clients
of its Quality Management Program do not engage in schemes to defraud health
care programs, and the Company takes and intends to continue to take similar
protective measures with respect to its business. Because the Company's
current revenue relates to Medicare patients and the Company anticipates that
its 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 Health Care Fraud statute, False Statements, False Statements Relating to
Health Care statute, and
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other pertinent anti-fraud and abuse provisions of the Portability Act would
have a material adverse effect on the Company.
The Balanced Budget Act of 1997
The Balanced Budget Act of 1997 ("Balanced Budget Act") includes new
anti-fraud provisions. The Balanced Budget Act provides for the permanent
mandatory exclusion from any federal health care program for those convicted of
three health care-related crimes. In addition, the Balanced Budget Act creates
a new civil penalty for violations of the Anti-Kickback Statute or for
contracting with a person excluded from participation in a federal health care
program of $50,000 for each violation and up to three times the total amount of
remuneration offered, paid, solicited or received. Within its areas of
consulting, the Company takes measures designed to ensure that its
hospital-clients are not excluded from federal health care programs, do not
contract with persons excluded from federal health care programs and do not
violate the Anti- Kickback statute. The Company takes and intends to continue
to take similar protective measures with respect to its business.
Because the Company's current revenue relates to Medicare patients and
the Company anticipates that the health plan business could, in the future,
receive significant revenue from Medicare, an exclusion from the Medicare
program or liabilities as a result of a violation of pertinent provisions of
the Balanced Budget Act would have a material adverse effect on the Company.
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 and could potentially
implicate the prohibition against the corporate practice of medicine in those
states where the doctrine is applicable. 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 or the denial of services or products under 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 $3,000,000 in the aggregate and $3,000,000 per occurrence with a deductible
of $10,000. In its health plan business, the Company currently maintains a
special errors and omissions insurance of $3,000,000 in the aggregate and
$2,000,000 per occurrence with a deductible of $15,000, and the Company will
require physicians to maintain malpractice liability insurance in amounts which
it deems adequate for the types of medical services provided. In addition, the
Company also maintains general liability insurance of $2,000,000 in the
aggregate and $1,000,000 per occurrence with a deductible of $250. The Company
also maintains directors errors and omissions policies with two companies for a
total coverage of $8,000,000. There can be no
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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 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. The Trademark Office examiner has initially
rejected the "Birman" name, ruling that it is a surname without acquired
distinctiveness. The Company intends to file a responsive filing to demonstrate
the necessary showing. There is no assurance the Trademark Office will concur
that the revised showing is adequate. With respect to the Company's application
to register the mark, "Care3," Blue Cross and Blue Shield of Maryland have filed
an opposition to the Company's application. The Company expects presently to
received a Notice of Allowance of its registration, "WELLFIRST."
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EMPLOYEES
At June 30, 1997, the Company employed 76 persons plus it has
contractual arrangements with 25 physicians and other health care
professionals. A total of 24 employees are responsible for the administrative
affairs of the Company; 31 persons are employed or contracted by the Quality
Management Program business; and 21 persons are employed by the health plans
and the UR/QA business. 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 nine full-time employee-physicians and 25 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 16 full-time allied health specialist
employees.
BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS
Discussion of certain matters contained in this Form 10-KSB may
constitute forward-looking statements within the meaning of the Reform Act, and
as such, may involve risks and uncertainties. These forward-looking statements
relate to, among other things, expectations of the business environment in
which the Company operates, projections of future performance, percieved
opportunities in the market and statements regarding the Company's mission and
vision. The Company's actual results, performance and achievements may differ
materially from the results, performance or achievements expressed or implied
in such forward-looking statements. In addition to other information contained
in this Form 10-KSB, the following is a summary of some of the important factors
that could affect the Company's future results of operations and/or its stock
price, and should be considered carefully in evaluating the Company.
Trends or Uncertainties Which May Impact Revenues From Continuing Operations
The Company has recruited and trained an adequate number of qualified
physicians and allied health specialists to provide its Quality Management
Program consulting services at levels likely to be experienced during the next
two to three fiscal quarters. Until recently, the Company experienced rapid
growth in its Quality Management Program business which it largely sustained
throughout the first three quarters of the fiscal year ended June 30, 1997.
Commencing in the fourth quarter of this past fiscal year, the impact of
heightened government regulatory enforcement against the health care industry in
general, and the threat of such enforcement, appear to have created a climate of
hesitation among the Company's potential hospital clients. As a consequence,
the Company has not been able to add new hospital-clients at its previous rate.
The Company expects this condition to continue for at least one to two more
fiscal quarters and expects to experience operating losses of approximately
$100,000-$200,000 through the first half of fiscal year 1997-98.
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In response to the attitudinal change among hospitals and the
evolution of the health care industry, the Company is developing products and
services which the Company believes will complement and expand the Company's
existing business and range of services. The first of these services, a
Physicians' Office Management program, was introduced in September 1997, with
more to be introduced before the end of calendar year 1997.
Both the Company and its hospital clients are changing and will
continue to change billing arrangements from "results oriented" billing to
"fixed fee" agreements, resulting in lower revenues-per-discharge for the
Company in the near term. The long term impact of this change cannot be
determined as the Company's ability to provide regulatory compliance assurance
becomes a stronger factor in a hospital's decision to retain the
services of the Company.
With respect to the Company's health plan business, the Company has no
experience operating a health plan and it is uncertain whether it can
effectively or profitably manage this business. Further, the Company expects
the majority of its health plan revenue to come from employees of gaming
companies in the near-term -- a group which historically has generated high
claims relative to persons engaged in other work.
See "Item 1. Business -- Growth Strategy and Limitations on Growth."
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 (to
the extent a contract relies on "results oriented" billing as opposed to a
fixed fee), 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 "Item 6.
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")
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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 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, contingent fees, 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.
Heightened Federal Scrutiny of Medicare Providers
The Health Insurance Portability and Accountability Act of 1996,
effective January 1, 1997, established funding for a Medicare Integrity Program
to combat Medicare fraud. Federal enforcement agencies are now expected to have
funding sufficient to undertake anti-fraud enforcement investigations and
prosecutions of what were previously viewed as minor offenses resolved in a
regulatory or civil forum. The Office of Inspector General of the Department of
Health and Human Services released a special fraud alert, 97-01, which notifies
field agents to give special attention to consulting relationships under which
consultants are paid a commission for increasing the Medicare reimbursements of
a Medicare provider. A majority of the Company's contracts to date have largely
set the Company's contract revenues based on increasing Medicare reimbursements
to Medicare providers. Furthermore, the Balanced Budget Act of 1997 provides
additional civil and criminal penalties for provider activities that are in
violation of the federal fraud and abuse laws. Decisions regarding coding and
billing practices generally employed throughout the health care industry require
the exercise of judgment in ambiguous or previously unresolved situations. As a
consequence, there can be no assurance that practices heretofore deemed proper
will not be attacked by Federal regulators as a result of heightened Federal
scrutiny of those practices.
Principal Clients
In the fiscal year ended June 30, 1997, revenues from the Company's
Quality Management Program accounted for approximately 95% of Company revenues.
The Company has provided Quality Management Program services to various
hospitals operated by Quorum Health Resources, Inc. ("Quorum") since 1991.
Services to hospitals operated by Quorum produced approximately 42% and 23%
of the Company's revenue in fiscal 1996 and
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1997, respectively. 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's contract with Community Medical Center, Toms River,
New Jersey, was responsible for 12% of the Company's Quality Management
Program Revenue in fiscal 1997. The Company is continuing its efforts to
expand its Quality Management Program client base to reduce its dependence on
Quorum hospitals and Community Medical Center. Furthermore, in the fourth
quarter of the fiscal year ending June 30, 1997, Quorum directed all of its
hospitals to convert all results-oriented contracts to fixed fee arrangements.
Expansion Into New Business - Health Plans
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 "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Item 1.
Business -- Growth Strategy."
Growth Strategy and Limitations on Growth
The Company's growth strategy involves in part 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.
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
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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. Furthermore, the Company has enrolled a
substantial number of members engaged in the gaming industry -- an occupation
known for relative high claims on health care providers. 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 "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In addition to the challenge of controlling health care costs, the
Company will face pressure from payors under employer-sponsored and government
sponsored programs to contain premium costs by renegotiation. Fiscal concerns
regarding the continued viability of programs such as Medicare and Medicaid may
cause decreasing reimbursement rates for government-sponsored programs. The
Company's financial condition or results of operations could be adversely
affected by any limitation on the Company's ability to increase or maintain its
premium levels.
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 Medicaid enrollees upon approval of its Medicaid
application. 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 which is a stockholder in the Company and a Selling Shareholder in the
registration statement previously filed by the Company but not yet declared
effective, 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.
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
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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 "Item 1. 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 "Item 1.
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
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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 managed care and
insurance sectors of the health care industry. Both sectors are highly
competitive. They are characterized by the presence of a large number of
competitors which are dramatically larger and which have been known to
subsidize operating losses for years in order to retain market share. Many of
these competitors 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 "Item 1. Business -- Competition."
Risk 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. Initially the Company will pay its providers in Mississippi on a
discounted fee-for-services basis. The Company will attempt to introduce "per
member per month" capitated fees, to be paid by the HMO to the participating
providers, to reduce the Company's risks. At present, capitated contracts are
not generally used in Mississippi. 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
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reinsurance.
Provider Relations
The Company will contract with physicians, hospitals, and other
providers in order to manage health care costs and utilization and monitor the
quality of care being delivered by its health plans. In some geographic
markets, certain providers, particularly hospitals and multi-specialty
physician groups, may have significant market positions or even monopolies that
could make it difficult for the Company's health plans to negotiate favorable
contracts with those providers. In addition, many of these providers may
compete directly with the Company's health plans. If such providers refuse to
contract with the Company's health plans or utilize their market position to
negotiate contracts that are not favorable to the Company's health plans or
that place the Company's health plans at a competitive disadvantage, the
Company's ability to market health plans that will be profitable in those
geographic areas could be adversely affected. Initially, the Company will rely
upon its arrangements with MedSouth and other providers to service its
Mississippi health plan. Because certain physicians in MedSouth will own
equity interests in the MSO and Care3, Inc., the Company currently believes it
has a limited exposure to such provider relations issues in that geographic
region. In any particular market, however, providers could refuse to contract
with the Company, demand higher payments or take other actions that could
result in higher health care costs, less desirable products for customers or
enrollees, or difficulty meeting regulatory or accreditation requirements.
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
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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
available to pay such claims. Furthermore, there can be no assurance that
insurance coverage will continue to be available at acceptable rates. See
"Item 1. 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 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 Executive
The Company depends to a significant extent on the efforts and skills
of its chairman, president and chief executive officer David N. Birman, M.D.
The Company has entered into an employment agreement with Dr. Birman. The
loss, incapacity, or unavailability of Dr. Birman could adversely affect the
Company's operations. The Company has obtained a $1,000,000 key man insurance
policy on the life of Dr. Birman.
Future Capital Needs
Implementing the Company's growth strategy will require
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<PAGE> 38
substantial additional capital for the development of its health plans and for
the marketing and expansion of its Quality Management Program. In particular,
development of additional health plans will require significant capital for
organization licensure, marketing and meeting capital reserve requirements
imposed by various states. To date, the Company has financed its growth
primarily through operating income, a bank term loan, the proceeds of private
offerings of shares of Common Stock, the most recent offering being completed
in June 1996 and the proceeds of the Company's initial public offering of
Common Stock on February 12, 1997. The Company believes that its existing cash
resources, 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 in
part 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 and meet capital reserve requirements
imposed upon HMOs may be delayed, perhaps indefinitely, and its results of
operations for future periods could be adversely affected. See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ITEM 2. PROPERTIES.
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 the completion of the building, which is currently
expected to occur in 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.
ITEM 3. 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
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<PAGE> 39
& 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.
In August 1997, the Company filed suit in the Circuit Court for
Putnam County, Tennessee, for damages and injuntive relief against Mr. Riley and
his company, alleging that he and his company misappropriated the Company's
trade secrets and marketing materials. No answer to the complaint has been
filed and discovery has not commenced.
The Company's former general counsel and secretary, Robert D. Arkin, a
member of the Georgia State Bar, filed suit against the Company, its chairman,
president and chief executive officer, David N. Birman, M.D., and its executive
vice president and director, Sue D. Birman, in United States District Court for
the Northern District of Georgia, Atlanta Division, on May 8, 1997. Dr. Birman
and Mrs. Birman were dismissed from the complaint shortly after it was served.
The complaint alleges breach by the Company of a written employment agreement
drafted by Arkin while he was an attorney for the Company, which was executed
by the Company. On March 5, 1997, he was terminated by the Company for reasons
the Company believes constituted good cause. By his complaint, Arkin seeks all
of his future unearned compensation under the agreement, which calls for
payments to him of $206,250 per year for five years (plus annual CPI
adjustments), plus one additional year's salary if the contract is not renewed
- -- a total of over $1,230,000. In addition, Arkin asserts he is entitled to
his bonus compensation under the Company's executive bonus plan, which would be
approximately $75,000 through the date of his termination, and immediate
vesting of options granted him under the Company's 1995 Stock Option Plan to
acquire 194,504 shares of common stock of the Company for an exercise price of
$1.37 per share (which are in addition to 97,252 shares which have otherwise
vested). He also alleges various causes of action related to the facts giving
rise to his termination. Arkin's complaint also contains numerous other
disclosures and allegations which the Company believes are irrelevant to the
complaint and are protected by the Company's attorney/client privilege, which
disclosure is in violation of the Standards of Conduct of the Georgia State
Bar. The United States District Court for the Northern District of Georgia
granted the Company's motion to place the litigation under seal, agreeing with
the Company that Mr. Arkin's complaint disclosed matters which appear to be
covered by the attorney/client privilege.
The Company denies the material allegations of the complaint. The
Company has been advised that the complaint has no merit and
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<PAGE> 40
that it is likely to prevail on the complaint. Should Arkin prevail, it is
unclear whether Arkin would be entitled to some or all of the unearned and
unpaid compensation. It is further unclear whether such payment, if owed, would
be for a lump-sum payment of his claimed salary or whether the salary would be
paid in annual or monthly installments.
The Company believes that the employment agreement is not enforceable
against the Company and it further believes it has the right to rescind the
grant of stock options to Arkin, including the options to acquire 97,252 shares
which have otherwise vested. In connection with the drafting, negotiation and
execution of the employment agreement, the executive bonus plan and the stock
option agreement, Arkin acted as sole counsel to the Company as well as to
himself. At no time did he disclose to the Company the conflicts of interest
inherent in the transactions. He further failed fully to advise the Company of
its right to obtain independent representation with respect to those
transactions. Such disclosure and advice are required by the Standards of
Conduct of the Georgia State Bar. The Company also believes he failed to
provide the Company with an accurate employment history prior to becoming
employed by the Company. Even if the agreements are deemed enforceable, the
Company believes that Arkin was terminated "for cause," which terminates any
right he would otherwise have to additional compensation or vesting of stock
options.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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<PAGE> 41
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A) Market Information
Birman Managed Care's Stock is traded on the Nasdaq Stock Market, which bears
the symbol "BMAN". The monthly range of prices per share since the Company began
trading on February 12, 1997 is as follows:
Common Stock
High Low
February $ 7 3/4 $ 6
March $ 7 3/4 $ 7 5/32
April $ 7 5/8 $ 6 1/4
May $ 7 $ 6 1/4
June $ 7 $ 5 1/2
On September 25, 1997, the latest reported sales price of the Company's
Common Stock was $6.563 per share.
The approximate number of security holders of record as of June 30, 1997 was
1,600. 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.
<PAGE> 42
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS AND ORGANIZATION
The Company is a health care regulatory compliance assurance, 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 and health care services 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 plan in Mississippi 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 fiscal 1996 and
95% of the company's revenue in 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 acquired Canton, an inactive holder of a certificate of authority to
operate an HMO in certain counties in northern Mississippi. Also, the Company
has arranged for MedSouth Inc. to provide health care services through its
provider network consisting of approximately 370 physicians, ten hospitals, and
several ancillary health service providers in the Gulfport, Mississippi area.
The Company obtained a Certificate of Compliance dated February 10, 1997, for
Care3 to operate an HMO in the six-county southern Mississippi region beginning
March 4, 1997. The Mississippi HMO commenced operations in March,1997 in the six
county southern Mississippi region. In addition, the Company developed a
physician network in the Upper Cumberland area of Tennessee.
To position itself for future expansion, the Company was incorporated in
1994 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 and the Business
Considerations and Certain Factors That May Affect Future Results of Operations
included elsewhere in this annual report. 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.
<PAGE> 43
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 June 30,
--------------------------
1996 1997
------ ------
<S> <C> <C>
Revenue 100.0% 100.0%
Cost of revenue 27.1% 34.0%
--------------------------
Gross margin 72.9% 66.0%
Selling, general and administrative expenses 50.3% 48.3%
Stock Based Compensation -- 9.7%
--------------------------
Income from operations 22.6% 8.0%
Other income (expense):
Interest expense (.5%) --
Interest income .5% 1.9%
Loss on sale of assets (.1%) --
Minority Interest -- --
--------------------------
Income before provision for income taxes 22.5% 9.9%
Provision for income tax (expense) benefit (8.6%) (8.4%)
--------------------------
Net income 13.9% 1.5%
==========================
Net income, excluding charge for
stock based compensation 13.9% 11.2%
==========================
</TABLE>
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO THE FISCAL YEAR ENDED JUNE 30, 1996.
Net Income. For the fiscal year ended June 30, 1997 the company
reported income after taxes of $1,367,464 or $.17 per share, an increase of 17%
as compared with $1,171,781 or $.15 per share on fewer shares outstanding for
the fiscal year 1996. These results exclude a non-cash charge for stock-based
compensation of $1,191,665 or $.15 per share for the fiscal year ended June 30,
1997 resulting from the release of escrowed shares, which is offset on the
Company's balance sheet by a corresponding increase to paid-in capital. In
connection with the Company's initial public offering of Common Stock by
Prospectus dated February 12, 1997, David N. Birman, MD, an officer and Director
of the Company, deposited 1,000,000 shares of Common Stock into escrow. For the
fiscal year ended June 30, 1997, 333,333 of these shares were released from
escrow as the Company achieved the earnings target of $.17 per share as defined
in the escrow agreement. The release of the shares from escrow resulted in a
non-cash charge to operations for stock based compensation based on the fair
market value of the shares on June 30, 1997. Net income, excluding the charge
for stock-based compensation as a percentage of revenue decreased slightly to
11.2% for the fiscal year ended June 30, 1997 from 13.9% in the prior year. Net
Income for the fiscal year ended June 30, 1997, including the non-cash charge
for stock based compensation, was $175,981 or $.02 per share.
Revenues. Revenue for the Company increased by 47%, to approximately
$12,359,000 for the fiscal year ended June 30, 1997, from approximately
$8,417,000 in the prior year.
The Quality Management Program experienced a 40% growth rate which was
attributable to management's action to initiate engagements of new
hospital-clients and to specifically target larger hospital-clients for the
Quality Management Program. 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
<PAGE> 44
Medicare discharges is a factor of the size and number of hospital-clients. The
aggregate Medicare discharges of the hospital-clients increased by 58% to
approximately 57,000 for the fiscal year ended June 30, 1997, from approximately
36,000 in the prior year. Although the Company experienced significant growth in
revenue, the number of hospital-clients on contract was 29 at the end of both
years as the average hospital client sized has increased. In response to
requests made by new and existing hospital-clients, management has decided to
change its fee structure from contingency to fixed fee arrangements. As a result
of this, revenue per discharge has decreased by approximately 12% for the fiscal
year ended June 30, 1997. Management anticipates that revenue per discharge will
stabilize during the next fiscal year after all contingency contracts have been
converted to fixed fee contracts.
Revenue of $596,000 is attributable to the operations of Hughes and
Associates, Inc. which was acquired in June 1996 and not consolidated with the
financial statements in the comparable period of the prior year. The prior year
operating results of Hughes & Associates were not presented on a proforma basis
as they were considered immaterial. Revenue of $18,000 was attributed to health
plan premiums earned from the start up of Care3, the Company's Health Plan in
Gulfport, Mississippi in March 1997. Period to period changes in the volume of
the health plan business of the Company is measured in aggregate member months.
A "member month" is equivalent to one member for which the HMO recognized
premium revenue for one month. The aggregate health plan member months of Care3,
Inc. was 174 since the start up of the health plan in March 1997 through the end
of the fiscal year June 30, 1997. The Care3, Inc. health plan is anticipated to
experience significant growth over the next fiscal year and as of September 15,
1997, has grown to 843 members from 174 as of June 30, 1997.
Cost Of Revenue. The cost of revenue includes all costs directly associated
with the operations of the Quality Management Program and Hughes & Associates,
Inc., including compensation of physicians and allied medical specialists,
consulting staff travel and lodging, and other direct costs of the Quality
Management Program and the UR/QA division. Also included in cost of revenue are
medical expenses and claims associated with the operation of the Company's
health plan in Gulfport, Mississippi. Cost of revenue for the Company increased
by 85%, to approximately $4,208,000 for the fiscal year ended June 30, 1997,
from approximately $2,279,000 in the prior year. The Company's cost of revenue
as a percentage of revenue increased to 34.0% for the fiscal year ended June 30,
1997 from 27% for the year, an increase of 8% due primarily to (i) an increase
in recruitment and training costs for the Quality Management Program due to the
hiring of additional physicians and allied medical specialists for hospital
engagements scheduled or anticipated to start during the year, and (ii) an
increase in other costs related to the Quality Management Program, (iii) an
increase in costs associated with the operations of Hughes & Associates, Inc.
which was acquired in June 1996 and not consolidated with the financial
statements in the prior year end, (iv) medical expenses and claims associated
with operations of the Company's health plan in Gulfport, Mississippi which
began operations in March, 1997.
Gross Margin. Gross profit margin for the company increased by 33% to
approximately $8,151,000 for the fiscal year ended June 30, 1997, from
approximately $6,138,000 in the prior year. The Company's gross profit margin as
a percentage of revenue decreased to 66% for the fiscal year ended June 30, 1997
from 73% for the prior year. The decreased in gross profit margin was primarily
due to an increase in cost of revenue related to the Quality Management Program.
In addition, the Company's gross profit margin was moderately affected by the
consolidation of lower gross margin business from Hughes and Associates, Inc.
which was acquired in June 1996 and not consolidated with the financial
statements in the prior year and the consolidation of lower gross margin
business from the Company's health plan in Gulfport, Mississippi which began
operations in March 1997. The Company anticipates that gross profit margin as a
percentage of revenue will decrease over the next fiscal year due to (i) a
change in fee structure for the Quality Management Program which may result in
reduced gross profit margins and (ii) the expansion of the Company's health plan
business as health plans typically produce lower gross profit margins than the
Company's other business.
Selling, General And Administrative Expenses. Selling, general and
administrative expenses increased by 41%, to approximately $5,956,000 for the
fiscal year ended June 30, 1997, from approximately $4,237,000 in the prior
year. The increase in selling, general and administrative expenses for the
fiscal year ended June 30, 1997 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, and (iii) general and administrative costs associated with the Mississippi
health plan which began operations during the third quarter; and (iv) accrual of
bonuses pursuant to the Executive Bonus Plan. Selling general and administrative
expenses, as a percentage of revenue, decreased to 48.3% for the fiscal year
ended June 30, 1997 from 50.3% in the prior year.
<PAGE> 45
Stock Based Compensation. In connection with the Company's initial public
offering of Common Stock by Prospectus dated February 12, 1997, David N. Birman,
MD, an officer and Director of the Company, deposited 1,000,000 shares of Common
Stock into escrow. For the fiscal year ended June 30, 1997, 333,333 of these
shares were released from escrow as the Company achieved the earnings target of
$.17 per share as defined in the escrow agreement. The release of the shares
from escrow resulted in a non-cash charge to operations for stock based
compensation based on the fair market value of the shares on June 30, 1997. This
non-cash charge for stock based compensation was offset on the company's balance
sheet by a corresponding increase to paid-in capital and therefore; there is no
impact on stockholder's equity on the Company's financial statement as a result
of the release of the escrow shares. As a percentage of revenue, the charge for
stock based compensation was 9.7% for the fiscal year ended June 30, 1997. There
was no charge for stock based compensation in the prior fiscal year.
The remaining 666,667 shares of Common Stock held in escrow will be released if
the Company achieves the target earnings of $.26 per share for fiscal year
ending June 30, 1998 or earnings of $.39 per share for fiscal year ending June
30, 1999. The release of the remaining shares from escrow will result in a
non-cash charge to operations based on the fair market value of the shares in
either or both of the next two fiscal years.
Interest Income And Expense. Interest income increased to approximately
$230,000 for the fiscal year ended June 30, 1997, from approximately $47,000 in
the prior year. This increase was attributable to interest earned on the
increased balance of cash deposits held primarily in money market accounts,
certificates of deposit and commercial paper, and also on the increased balance
on loans made by the Company to Dr. Birman during the first and second quarters
in connection with the farm operations distributed to him in fiscal 1995.
Interest expense decreased to approximately $7,000 for the fiscal year ended
June 30, 1997, from approximately $44,000 in the prior year, as a result of the
Company repaying the entire outstanding principal of its term loan in June 1996.
Provision for Income Tax Expense. The provision for income tax expense
increased by 42% to approximately $727,000 in the prior year. This increase was
attributable to an increase in the Company's taxable income for the fiscal year
ended June 30, 1997, primarily related to the stock compensation charge of
$1,171,781, which is not deductible for income tax purposes. The provision for
income tax expense as a percentage of revenue decreased slightly to 8.4% for the
fiscal year ended June 30, 1997 from 8.6% in the prior year.
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 Medical discharges is as factor of the size and
number of hospital-clients. The aggregate Medicare discharges of the
hospital-clients increased form 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
<PAGE> 46
marketing effort. Management currently intends to continue to utilize the new
sales approach in the foreseeable future.
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 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. This note receivable from Dr. Birman was subsequently paid off on
February 12, 1997 through the redemption of 174,800 shares of common stock. See
"Certain Transactions."
RECENT ACQUISITION
The recent acquisition of Canton, which was renamed to Care3, Inc.,
provides to the Company a Certificate of Compliance to operate an HMO in certain
counties in northern Mississippi. In addition to those counties, the Department
of Insurance of the State of Mississippi issued a Certificate of Compliance
dated February 10, 1997, for Care3 to operate an HMO in the six-county southern
Mississippi region on March 4, 1997. The Company's Mississippi HMO commenced
operations on or about March 18, 1997. Insufficient business activities have
taken place for the Company to assess the prospects for such 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. Because the Company's health plan business will be in a "start-up" phase
for at least twelve 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 fiscal 1998. The
current and prior year operating results of Canton Management Group were not
presented on a proforma basis as the Company was a development stage company and
the results were immaterial.
SEASONALITY
Revenue and operating results from the Quality Management program have,
historically 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
and also the change of its Quality Management Program fee structure to fixed fee
arrangements.
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.
<PAGE> 47
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 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 fiscal year ended June 30, 1997, the Company financed its
operating and business development activities primarily through operating
revenue. For the fiscal year ended June 30, 1997, the company produced cash from
operating activities of approximately $822,000. The Company invested in the
purchase of property and equipment and repaid debt and capital leases using
proceeds from operating activities. During the first and second quarters, the
Company advanced approximately $173,000 against notes receivable from Dr. Birman
which was subsequently repaid on February 12, 1997 through the redemption of
174,800 shares of Common Stock. During the third quarter the Company collected
$804,078 on all outstanding notes receivable from Dr. Birman through the
redemption of 174,800 shares of his Common Stock, valued at $4.60 per share, at
the time of the closing of the IPO (February 12, 1997). On January 15, 1997 the
Company acquired all of the outstanding capital stock of Canton for $1,500,000,
of which $700,000 was paid in cash and $800,000 was paid by the issuance of
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 . For the
fiscal year ended June 30, 1997, the Company used cash for investing activities
of approximately $1,755,000. Additional capital of approximately $600,000 will
be required within the next two fiscal quarters to establish the reserves
required under Mississippi HMO regulations and to service an annual debt
installment related to the acquisition of the HMO license. The Company will
utilize approximately $200,000 within the next two fiscal quarters to furnish
and move to the new corporate office building in Cookeville, Tennessee.
Birman Managed Care, Inc. (the "Company"), successfully completed its
initial public offering of 2,000,000 shares of its common stock, par value $.001
per share, at a price of $5.00 per share sold under its registration statement
and prospectus dated February 12, 1997. The offering closed on February 19,
1997, and net proceeds of $7,549,000 were received by the Company.
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 receivables. 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 receivable.
The Company believes that the net proceeds from the initial public
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 18 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 18-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 remaining 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, in either or
both of the next two fiscal years 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
Statement of Financial Accounting Standards No. 121. "Accounting for the
Impairment of Long-Lived Assets and
<PAGE> 48
for Long-Lived Assets to be Disposed of" (SFAS No. 121) issued by the Financial
Accounting Standards Board is effective for financial statements for the fiscal
years beginning after December 15, 1995. The new standard established 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 adopted
this accounting standard on July 1, 1996, and its effects on the financial
position and results of the operation were immaterial.
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 31, 1995, while the disclosure 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 non-employees in exchange for equity instruments. The
Company adopted this accounting standard on July 1, 1996, and its effects on the
financial position and results of the operations were immaterial. The Company
will continue to account for employee purchase rights and stock options under
APB Opinion No. 25, "Accounting for Stock issued to Employees."
On March 3, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). This
pronouncement provides a different method of calculating earnings per share than
is currently used in accordance with APB 15, "Earnings per Share". SFAS 128
provides for the calculation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income by
the weighted average shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. This
pronouncement is effective for fiscal years and interim periods ending after
December 15, 1997; early adoption is not permitted. The Company has not
determined the effect, if any, of adoptions on its earnings per share
computations.
Statements of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 128. The Company does not expect adoption of SFAS No. 129
to have a material effect, if any, on its financial position or results of
operations.
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Company, has not determined the
effect on its financial position or results of operations, if any, from the
adoption of this statement.
Statements of Financial Accounting No. 131, "Disclosure about segments of
an Enterprise and Related Information" (SFAS No. 131) issued by the FASB is
effective for financial statements beginning December 15, 1997. The new standard
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements of the enterprise
and in condensed financial statements of interim periods issued to shareholders.
It also requires that public business enterprises report certain information
about their products and services, the geographic areas in which they operate
and their major customers. The Company does not expect adoption of SFAS No. 131
to have a material effect, if any, on its Results of Operations.
<PAGE> 49
ITEM 7. FINANCIAL STATEMENTS
The financial statements listed in Item 14 (a) (1) are
included in this Report beginning on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David N. Birman, M.D.(1) 45 Chairman of the Board of Directors,
President and Chief Executive Officer
Sue D. Birman(1) 39 Director, Executive Vice President and Secretary
John D. Higgins(2) 65 Director
James J. Rhodes 40 Director
Diedrich Von Soosten 57 Director
</TABLE>
- ---------------
(1) David N. Birman, M.D. and Sue D. Birman are husband and wife.
(2) Mr. Higgins was elected to the Board of Directors pursuant to the
Underwriting Agreement between the Company and the Representative of the
Underwriters, Royce Investment Group, Inc. ("Royce"), by which the Company
agreed to use its best efforts to elect a designee of Royce to the Board.
Mr. Higgins is Senior Vice President, Corporate Finance, of Royce.
Directors of the Company hold office until the next annual meeting of
shareholders or until their successors have been elected and qualified.
The executive officers of the Company, who serve at the discretion of the
Board of Directors, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David N. Birman, M.D 45 Chairman of the Board, President, and Chief Executive
Officer
Sue D. Birman 39 Executive Vice President, Corporate Secretary
Samuel S. Patterson 48 Senior Vice President, President and Chief Operating Officer
- Birman & Associates, Inc.
Jeffrey L. Drake 54 Senior Vice President of Corporate Development
Vincent W. Wong 38 President and Chief Executive Officer - BMC Health Plans,
Inc.
Douglas A. Lessard 36 Vice President, Treasurer, and Chief Financial Officer
Mark C. Wade 40 Executive Vice President, Sales and Marketing - BMC Health
Plans, Inc.
Rockey C. Talley, M.D 41 Executive Vice President, Chief of Professional Services
- Birman & Associates, Inc.
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
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
<PAGE> 50
corporations since May 1991 and served as their Chief Financial Officer from May
1991 until June 1996. She was elected Corporate Secretary in March, 1997. 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.
John D. Higgins was elected a director of the Company in March 1997. Since
1990, Mr. Higgins has been Senior Vice President - Corporate Finance of Royce
Investment Group, Inc., the Company's managing underwriter for its
recently-completed initial public offering of Common Stock. Mr. Higgins holds
BBA and MBA degrees from Hofstra University. He is also a director of Iatros
Health Network, Inc., a publicly-owned company which is a provider of health
care services and IRATA, Inc., a publicly-owned company which operates
amusement park phone booths. The company conducts no business with Iatros Health
Network, Inc. or IRATA, Inc.
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.
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.
Samuel S. Patterson has served as Senior Vice President of the Company and
as President and Chief Operating Officer of Birman & Associates, Inc. since July
1997. For approximately two years before joining Birman Managed Care, Inc., Mr.
Patterson was Vice President and Chief Marketing Officer of Foundation Health
Systems. From 1988 through 1995, Mr. Patterson served as Vice President of the
Ohio Region of Cigna.
Jeffrey L. Drake has served as Senior Vice President of Corporate
Development of the Company since July 1997. For approximately three years before
joining Birman Managed Care, Inc., Mr. Drake was Vice President, Managed Care
Sales and Marketing, of Coram Healthcare. From January 1992 through December
1993, Mr. Drake served as Executive Vice President for American Health Group,
Inc. From 1986 through 1991, Mr. Drake was an Executive Vice President with Blue
Cross and Blue Shield of Ohio.
Vincent W. Wong has served as President, Chief Executive Officer, 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.
Douglas A. Lessard has served as Vice President, Treasurer and 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 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 career fields. From March 1989
through September 1991, Mr. Lessard was employed as Controller of Arizona
Building and Development, Inc., a real estate development and management
company. Mr. Lessard is a Certified Public Accountant in the State of Arizona.
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
<PAGE> 51
administration services.
Rockey C. Talley, M.D., has served as Executive Vice President, Chief of
Professional Services, of Birman & Associates, Inc. since September 1997. Dr.
Talley joined Birman & Associates in 1996. Prior to joining the Company, Dr.
Talley served as President-elect and President, Board of Directors, of Southern
Plains Medical Center, Chickasha, Oklahoma, from 1993 to 1996. From 1991 to
1993, he served variously as Chairman of Medical Records, Utilization Review,
Quality Assurance and Internal Medicine Division of Grady Memorial Hospital,
also in Chickasha, Oklahoma. Dr. Talley is Board Certified in Internal
Medicine. He received his medical doctor degree from the University of Oklahoma
in 1984.
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 both 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 $2,000 for each Board meeting
that they attend. All non-employee directors are also entitled to receive awards
and options to purchase shares of Common Stock under the 1996 Non-Employee
Directors' Non-Qualified Stock Option Plan. See "Management -- Stock Option
Plans -- 1996 Directors' Option Plan."
<PAGE> 52
ITEM 10. EXECUTIVE COMPENSATION
The following table provides certain information concerning the
compensation earned by the Company's Executive Officers for services rendered in
all capacities to the Company for fiscal 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Other
Annual Awards/ All Other
Salary Bonus Compensation Options Compensation
Name and Then-Principal Position ($) ($) ($) (#) ($)
<S> <C> <C> <C>
David N. Birman, M.D................... 350,000 70,000 73,982 --- --
Chairman of the Board, President,
and Chief Executive Officer (1),(6)
Sue D. Birman.......................... 150,000 30,000 12,052 --- ---
Executive Vice President,
Secretary, Chief Financial Officer
(until May 1996), and Director (2), (6)
Douglas A. Lessard...................... 115,000 72,000 16,023 72,940 ---
Chief Financial Officer and Vice
President (3)
Vincent W. Wong......................... 182,970 --- 5,212 218,819 ---
President and Chief Executive
Officer
BMC Health Plans, Inc. (4)
Mark C. Wade............................ 165,000 --- 8,224 145,879 ---
Executive Vice President - Sales
and Marketing - BMC Health Plans, Inc.(5)
</TABLE>
<PAGE> 53
- -------------------
(1) Other Annual Compensation for David N. Birman, M.D. for fiscal 1997 was
$7,373 in medical insurance premiums, $43,103 in officer's life insurance
premiums, $21,711 in auto allowance, and $1,795 in 401(k) matching
contributions.
(2) Other Annual Compensation for Sue D. Birman for fiscal 1997 was $10,387 in
auto allowance and $1,665 in 401(k) matching contributions.
(3) Other Annual Compensation for Douglas A. Lessard for fiscal 1997 was $7,373
in medical insurance premiums, $7,500 in auto allowance, and $1,150 in
401(k) matching contributions.
(4) Other Annual Compensation for Vincent W. Wong for fiscal 1997 was $4,282 in
medical insurance premiums and $930 in 404(k) matching contributions.
(5) Other Annual Compensation for Mark C. Wade for fiscal 1997 was $6,574 in
medical insurance premiums and $1,650 in 401(k) matching contributions.
(6) Accrued bonuses of $140,000 were waived by Dr. Birman for fiscal 1997.
Accrued bonuses of $60,000 were waived by Sue D. Birman for fiscal 1997.
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
<PAGE> 54
Company. As of June 30, 1997, options for the exercise of 812,061 shares have
been granted under the 1995 Option Plan at the exercise price of $1.37 per
share; 55,000 shares have been granted at an exercise price of $5.00; and
300,000 shares have been granted at an exercise price of $4.75. A total of
1,458,780 shares of Common Stock are reserved for issuance under the 1995 Option
Plan.
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 $5.00 per share and on March 18, 1997 Mr. Higgins was granted
options to purchase 3,000 shares of common stock under this plan at an exercise
price of $7.50 per share.
FISCAL 1997 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, 1997:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES TOTAL
UNDERLYING OPTIONS EXERCISE
OPTIONS GRANTED PRICE EXPIRATION
NAME OF DIRECTOR OR OFFICER GRANTED UNDER PLAN PER SHARE DATE
<S> <C> <C> <C> <C>
Douglas A. Lessard.......................... 72,940 6.2% $1.37 02/01/06
Vincent W. Wong............................. 218,819 18.6% $1.37 01/29/06
Mark C. Wade................................ 145,879 12.4% $1.37 11/01/05
William F. Barenkamp, II.................... 72,940 6.2% $1.37 02/01/06
James J. Rhodes............................. 6,000 .5% $5.00 09/30/06
Diedrich Von Soosten........................ 6,000 .5% $5.00 09/30/06
John D. Higgins............................. 3,000 .5% $7.50 04/30/07
</TABLE>
None of the persons named in the Summary Compensation Table exercised
options during the fiscal year ended June 30, 1997.
In July, 1997, the Company granted 150,000 shares each to Samuel S.
Patterson and Jeffrey L. Drake at an exercise price of $4.75 per share.
COMPANY ALTERNATIVE HEALTH PROGRAM
The Company maintains a plan by which under certain conditions employees
of the Company may seek and the Company will pay for medical treatment commonly
known as "alternative" health care. As part of this plan, employees are
required to report their treatments and allow the Company to monitor their
treatment and progress. The Company views this plan as a research project. The
Company spent approximately $80,000 on this plan in fiscal 1997. The Company
hopes that one or more of these treatments will prove effective enough to
attempt to incorporate into the Company's health plans. Approximately eleven
Company employees participated in this program in fiscal 1997.
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
<PAGE> 55
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.
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 July, 1997, the Company entered into an employment agreement with Samuel
S. Patterson for a term expiring July 13, 2000, pursuant to which Mr. Patterson
serves as Senior Vice President of the Company and President and COO of Birman &
Associates, Inc. The employment agreement provides for an initial base salary of
$185,000 per annum. The employment agreement also provides Mr. Patterson with
the opportunity to earn up to an additional $92,500 per annum based upon the
overall performance of the Company and also the performance of Birman &
Associates, Inc. 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. Patterson's employment is terminated for reasons
other than death, "cause", mutual agreement, or disability, he shall be entitled
to receive base salary (as most recently adjusted) payable over the six month
period following the severance of his employment, providing that he has served
the Company not less that one year. In the event the agreement is terminated for
any reason, all unvested options shall lapse. Additionally, the employment
agreement requires that Mr. Patterson is to relocate to Cookeville, Tennessee
and provides for moving expenses not to exceed $10,000, temporary living
expenses not to exceed $9,000, reimbursement for loss on sale of his house not
to exceed $25,000 plus broker's commission, and a temporary bridge loan of up to
$100,000. The bridge loan will be secured by Mr. Patterson's equity in his
existing home by a second deed of trust and is due and payable upon sale of Mr.
Patterson's home in Florida.
In July, 1997, the Company entered into an employment agreement with
Jeffrey L. Drake for a term expiring on July 20, 2000, pursuant to which Mr.
Drake serves as Senior Vice President of Corporate Development of the Company.
The employment agreement provides for an initial base salary of $185,000 per
annum. The employment agreement also provides Mr. Drake with the opportunity to
earn up to an additional $92,500 per annum based upon the overall performance of
the Company as a whole. 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. Drake's employment is terminated for reasons
other than death, "cause", mutual agreement, or disability, he shall be entitled
to receive base salary (as most recently adjusted) payable over the six month
period following the severance of his employment, providing that he has served
the Company not less that one year. In the event the agreement is terminated for
any reason, all unvested options shall lapse. Additionally, the employment
agreement requires that Mr. Drake is to relocate to Cookeville, Tennessee and
provides for moving expenses not to exceed $10,000, temporary living expenses
not exceed $9,000, reimbursement for loss on sale of his house not to exceed
$25,000 plus broker's commission, and a temporary bridge loan of up to
$100,000. The bridge loan will be secured by Mr. Drake's equity in his existing
home by a second deed of trust and is due and payable upon sale of Mr. Drake's
home in Georgia.
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.
<PAGE> 56
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 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 number of enrollees in health plans developed, managed, or operated by
the Company. Mr. Wade'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 General Corporation Law, 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 GCL; 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.
<PAGE> 57
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of June 30, 1997 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
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED
NUMBER PERCENT
<S> <C> <C>
David N. Birman, M.D.(1)...................... 5,081,606 56.08%
Sue D. Birman(1).............................. 5,081,606 56.08%
Douglas A. Lessard (2)........................ 24,313(5) *
William Barenkamp (2)......................... 24,313 *
Vincent Wong (2).............................. 72,940 *
Mark Wade (2)................................. 36,470 *
Richard M. Ross............................... 175,000 1.93%
John Higgins (3).............................. 0 *
James J. Rhodes(2)............................ 0 *
Diedrich Von Soosten(2)....................... 0 *
Directors and officers as a group (10 persons) 5,515,894 60.38%
</TABLE>
- ---------------------
* Less than 1%
(1) Includes 666,667 Escrow Shares. See "Principal Stockholders -- Escrow
Shares". David N. Birman, M.D. disclaims beneficial ownership as to 547,046
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, Cookeville, 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) Mr. Higgins was granted options under the Company's 1996 Directors' Options
Plan to acquire 3,000 shares of the Company's Common Stock at an exercise
price of $7.50 per share.
(4) Mr. Rhodes and Mr. Von Soosten were granted options under the Company's
1996 Directors' Option Plan to acquire 6,000 shares of the company's Common
Stock at an exercise price of $5.00 per share.
(5) Includes shares subject to options exercisable currently to acquire 24,313
shares by Mr. Lessard, and 229,274 for all officers and directors as a
group.
<PAGE> 58
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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 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 owned a
total of $775,000 to the Company. The Company made no further advances to Dr.
Birman to defray the operation and ownership costs of the farm. All amounts owed
to the Company by Dr. Birman, including interest at a rate of 7% per annum,
through August 31, 1996 and at the prime rate of American National Bank and
Trust Company of Chicago from September 1, 1996 to February 12, 1997, were
repaid by Dr. Birman on February 12, 1997 by tendering 174,800 shares of Common
Stock owned by him and valued at $4.60 per share. No additional loans will be
made by the Company to any member of management without approval of the
non-employee members of the Board of Directors of the Company.
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.
The employment agreement between the Company and Samuel S. Patterson
provides that the Company will lend him up to $100,000 in connection with his
acquisition of a residence in Cookeville, Tennessee, if he was previously unable
to sell his home in another state. The loan, if made, will be secured by deeds
of trust recorded against the residence in Cookeville, Tennessee, and his other
home. The loan, if made, will bear interest at the rate of eight percent (8%)
per annum, payable monthly in arrears, and will be repayable upon sale of his
other residence. The Company has agreed to reimburse Mr. Patterson 75% of any
loss he might sustain on the sale of his other residence, up to a maximum
reimbursement of $25,000 plus real estate broker's commission. Mr. Patterson
has advised the Company that he wishes the loan to be made and it is anticipated
that it will be made to him by the end of September, 1997.
The employment agreement between the Company and Jeffrey L. Drake contains
the same provision for a loan and possible reimbursement of certain losses on
the sale of his previous residence, which is also not in Tennessee. Mr. Drake
has not notified the Company that he wishes to take advantage of this provision.
John D. Higgins, a director of the Company, is Senior Vice President --
Corporate Finance of Royce Investment Group, Inc., the representative of the
underwriters for the Company's successful February 1997 initial public offering
of stock ("Royce"). Mr. Higgins was elected to the Board pursuant to a provision
in the Company's underwriting agreement with Royce which allowed Royce to
nominate one member of the Board of Directors. In addition to underwriting
commissions of $920,000, Royce and the other underwriters received in
<PAGE> 59
connection with the Company's initial public offering a non-accountable expense
allowance of $345,000. As part of the underwriting agreement, the Company also
agreed to sell to Royce and its designees, for nominal consideration, warrants
to purchase up to 200,000 shares of the Company's Common Stock. The warrants
will be exercisable until February 12, 2001 at an exercise price of $7.50 per
share (150% of the initial public offering price of the Common Stock). The
shares acquired upon exercise of the warrant may not be transferred or
hypothecated for one year after exercise. The Company has agreed to register the
shares so acquired at the Company's expense under the Securities Act of 1933.
The Company and Royce also entered into a one-year financial consulting
agreement under which the Company paid Royce a fee of $172,500, i.e., 1.5% of
the gross proceeds of the Company's initial public offering including the sale
of the overallotment. In addition, the Company and Royce entered into a
five-year agreement which provides that if Royce arranges for the sale of
substantially all of the assets of the Company or for a merger, consolidation,
or acquisition through and including February 12, 2001, Royce will receive a fee
based on a sinking 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 $3 million.
<PAGE> 60
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
*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.
*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.
<PAGE> 61
*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 6 Associates, Inc.
*10.17 Form of Indemnification Agreement for Birman Managed Care, Inc. to be
supplied by amendment.
<PAGE> 62
*10.18 Executive Bonus Plan to be supplied by amendment.
*10.19 Agreement by and between National Benefit Resources, Inc. and Birman
Managed Care, Inc. entered into on April 16, 1996. Agreement dated September
17, 1996 by and between Birman Managed Care, Inc. and Community Medical Center.
*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. to be supplied by amendment.
10.25 Employment Agreement by and between Birman Managed Care, Inc. and Samuel
S. Patterson.
10.26 Employment Agreement by and between Birman Managed Care, Inc. and Jeffrey
L. Drake.
*11.1 Calculation of Income (Loss) Per Share to be supplied by amendment.
*16.1 Letter from Semple & Cooper, P.L.C. Re: Change of public accountants.
*21.1 List of Subsidiaries.
27 Financial Data Schedule.
**99.1 State of Mississippi Dept. of Insurance Certificate of Authority dated
February 10, 1997.
* Incorporated by Reference from the Company's Registration Statement on Form
SB-2 (No. 333-111957).
** Incorporated by Reference from the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended December 31, 1996.
B. REPORTS ON FORM 8-K
None.
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: September 24, 1997 BIRMAN MANAGED CARE, INC.
By: /s/ DAVID N. BIRMAN, M.D.
--------------------------
David N. Birman, M.D.,
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ DAVID N. BIRMAN, M.D. Director, Chairman September 24, 1997
- ------------------------- of the Board,
David N. Birman, M.D. President and Chief
Executive Officer
/s/ SUE D. BIRMAN Director, Executive September 24, 1997
- ------------------------- Vice President and
Sue D. Birman Secretary
/s/ DOUGLAS A. LESSARD Vice President, September 24, 1997
- ------------------------- Treasurer, and Chief
Douglas A. Lessard Financial Officer
(Principal Financial
and Accounting
Officer)
/s/ JOHN D. HIGGINS Director September 24, 1997
- -------------------------
John D. Higgins
/s/ JAMES J. RHODES Director September 24, 1997
- -------------------------
James J. Rhodes
/s/ DIEDRICH VON SOOSTEN Director September 24, 1997
- -------------------------
Diedrich Von Soosten
<PAGE> 64
INDEX TO FINANCIAL STATEMENTS
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants ........................ F-1
Consolidated Balance Sheet as of June 30, 1997 and 1996 ................... F-2
Consolidated Statements of Operations for the years ended June 30,
1997 and 1996 .......................................................... F-3
Consolidated Statements of Changes in Stockholders' Equity for the years
ended June 30, 1997 and 1996 ........................................... F-4
Consolidated Statements of Cash Flows for the years ended June 30, 1997
and 1996 ................................................................ F-5
Notes to Consolidated Financial Statements................................. F-6
</TABLE>
<PAGE> 65
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, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the two years 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the two years then ended
in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Los Angeles, California
September 5, 1997
<PAGE> 66
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1997 and 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Notes 1 and 3) $ 8,515,572 $ 1,872,343
Accounts receivable, net of allowance for
doubtful accounts of $49,436 and $44,159,
respectively (Notes 1 and 8) 1,592,741 1,043,771
Prepaid expenses and other 95,980 9,903
Notes receivable - related party (Note 4) -- 22,323
Deferred tax asset (Notes 1 and 9) 14,800 95,549
----------- -----------
Total Current Assets 10,219,093 3,043,889
----------- -----------
Property and equipment, net of accumulated
depreciation (Notes 1, 5 and 6) 584,248 293,684
Deferred offering costs (Note 1) -- 25,000
Goodwill (Notes 1 and 15) 1,226,566 16,145
Note receivable - related party (Note 4) -- 631,173
Other (Note 22) 486,948 --
Restricted certificates of deposit (Note 21) 500,000 --
----------- -----------
Total Assets $13,016,855 $ 4,009,891
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable (Note 6) $ 207,600 $ 2,435
Current portion of capital lease obligations (Note 7) 419 1,540
Accounts payable 263,351 117,025
Accrued expenses 19,753 2,050
Accrued executive bonuses (Note 19) 116,341 --
Income taxes payable (Notes 1 and 9) 208,587 635,205
----------- -----------
Total Current Liabilities 816,051 758,255
Note payable, less current portion (Note 6) 605,700 5,028
Capital lease obligations, less current portion (Note 7) -- 2,009
Deferred income taxes (Notes 1 and 9) 92,775 55,620
----------- -----------
Total Liabilities 1,514,526 820,912
----------- -----------
Minority interest 201,085 --
----------- -----------
Commitments and Contingencies (Note 8) -- --
Stockholders' Equity: (Note 11)
Preferred stock, $.001 par value, 5,000,000
shares authorized, none issued or outstanding -- --
Common stock, $.001 par value, 15,000,000
shares authorized, 8,756,254 and 6,931,082
issued and outstanding, respectively 8,756 6,931
Additional paid-in capital 9,715,071 1,780,612
Retained earnings 1,577,417 1,401,436
----------- -----------
Total Stockholders' Equity 11,301,244 3,188,979
----------- -----------
$13,016,855 $ 4,009,891
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-2
<PAGE> 67
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Consulting and health plan revenues $ 12,358,647 $ 8,416,946
Cost of revenues 4,207,712 2,278,932
------------ ------------
Gross profit 8,150,935 6,138,014
General and administrative expenses,
including $1,191,665 non-cash
compensation in 1997 (Note 17) 7,160,192 4,236,607
------------ ------------
Income from operations 990,743 1,901,407
------------ ------------
Other income (expense):
Interest income 229,972 47,257
Interest expense (7,445) (44,835)
Loss on sale of assets (9,039) (5,065)
------------ ------------
213,488 (2,643)
------------ ------------
Minority interest 3,052 --
------------ ------------
Income before provision for income taxes 1,207,283 1,898,764
Provision for income tax expense (Note 9) 1,031,302 726,983
------------ ------------
Net Income (Note 2) $ 175,981 $ 1,171,781
============ ============
Per share data:
Primary net income per share (Note 1) $ .02 $ .17
============ ============
Primary weighted average common stock shares
outstanding (Note 1) 7,618,011 6,703,517
============ ============
Fully diluted net income per share (Note 1) $ .02 $ .15
============ ============
Fully diluted weighted average common stock
shares outstanding (Note 1) 8,284,678 7,703,517
============ ============
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-3
<PAGE> 68
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Additional Total
Preferred Common Stock Paid-In Retained Stockholders'
Stock Shares Amount Capital Earnings Equity
------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
Stock sales
(Notes 10
and 17) -- 2,000,000 2,000 7,546,697 -- 7,548,697
Stock retired
in payment of
debt (Note 17) -- (174,800) (175) (803,903) -- (804,078)
Retirement of
fractional
shares -- (28) -- -- -- --
Stock released
from escrow
(Note 17) -- -- -- 1,191,665 -- 1,191,665
Net income -- -- -- -- 175,981 175,981
------- ------------ ------------ ------------ ------------ ------------
Balance at
June 30, 1997 -- 8,756,254 $ 8,756 $ 9,715,071 $ 1,577,417 $ 11,301,244
======= ============ ============ ============ ============ ============
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-4
<PAGE> 69
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Net income $ 175,981 $ 1,171,781
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 142,735 73,814
Loss on sale of assets 9,039 5,065
Receivables written off as bad debt 22,323 --
Interest income added to note receivable (40,673) (28,011)
Gain attributed to minority interest (3,052) --
Stock released from escrow 1,191,665 --
Changes in Assets and Liabilities:
Accounts receivable (548,970) (547,706)
Prepaid expenses and other (86,077) (9,903)
Deferred tax asset 104,749 27,372
Other (38,405) --
Goodwill -- (16,145)
Accounts payable 148,407 (264,953)
Accrued expenses 134,044 (6,721)
Income taxes payable (426,618) 596,138
Deferred income taxes 37,155 213,421
----------- -----------
646,322 42,371
----------- -----------
Net cash provided by
operating activities 822,303 1,214,152
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (438,321) (107,035)
Advances for notes receivable - related party (132,232) (343,579)
Proceeds from sale of assets 8,629 2,325
Investment in licenses (318,435) --
Purchase of business (875,125) --
----------- -----------
Net cash used in
investing activities (1,755,484) (448,289)
----------- -----------
Cash flows from financing activities:
Deferred offering costs -- (25,000)
Proceeds from debt 19,000 81,548
Payments on debt (16,287) (565,444)
Proceeds from sale of stock 7,573,697 1,605,043
----------- -----------
Net cash provided by
financing activities 7,576,410 1,096,147
----------- -----------
Net increase in cash and cash equivalents 6,643,229 1,862,010
Cash and cash equivalents at beginning of year 1,872,343 10,333
----------- -----------
Cash and cash equivalents at end of year $ 8,515,572 $ 1,872,343
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-5
<PAGE> 70
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Corporate Summary:
Birman Managed Care, Inc. and Subsidiaries (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 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 managed care programs in association with physician networks,
hospitals, and other health care providers based upon its fundamental
belief in the importance of the physician-patient relationship. As part
of its managed care business, the Company organizes physicians into
independent practice associations, or networks, that will provide
services to the Company's as well as other health plans. The Company
also operates, through its Care3, Inc., subsidiary, a health plan in the
state of Mississippi and is pursuing licenses in other states, including
Tennessee. The Company concentrates its efforts on rural communities,
particularly in the south-central and southeast United States, with an
initial focus for managed care in Mississippi and Tennessee, where it
believes that the development of health care management systems and
managed care programs has lagged behind other areas of the country.
During the year ended June 30, 1997, the Company formed two new
subsidiaries, TMMC, Inc. and MMMC, Inc. MMMC, Inc. is ninety percent
owned by the Company. The Company also acquired a majority interest in
Canton Management Group, Inc., which was renamed Care3, Inc. through a
stock purchase.
1. Summary of Significant Accounting Policies:
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., Hughes & Associates, Inc.,
TMMC, Inc., MMMC, Inc., a ninety percent (90%) owned subsidiary of the
Company and Care3, Inc., a sixty-nine percent (69%) owned subsidiary of
the Company. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Cash and Cash Equivalents:
Cash and cash equivalents include all highly liquid investments (demand
deposits, certificates of deposit, money market funds, and other
short-term 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. The Company believes the amount of allowance for
doubtful accounts is adequate to cover future losses on the accounts
receivable as of June 30, 1997.
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 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>
<CAPTION>
<S> <C>
Computer equipment 5 years
Office equipment and motor vehicles 5 years
Furniture and fixtures 5 years
Leasehold improvements 10 years, or life of lease,
if shorter
</TABLE>
F-6
<PAGE> 71
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
Capital Lease Obligations:
The Company is the lessee of phone equipment under a capital lease
agreement which expires in April, 1998. The assets and liabilities under
the capital lease are recorded at the lower of the present value of the
minimum lease payments or the fair market value of the assets. The
assets are depreciated over the lower of their related lease term or
their estimated productive lives. Depreciation of the assets under the
capital lease agreement is included in depreciation expense for the
years ended June 30, 1997 and 1996.
Deferred Offering Costs:
Deferred offering costs represent costs incurred in connection with the
Company's initial public offering of common stock. Deferred offering
costs were netted against the proceeds from the offering, which was
completed on February 12, 1997.
Goodwill:
Goodwill of $16,145 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 (5) years. Goodwill of $1,220,756
represents the excess of the cost of acquiring the stock of Canton
Management Group, Inc. (renamed Care3, Inc.) at the date of acquisition,
January 15, 1997, and will be amortized on the straight-line method over
35 years commencing when operations begin. For the year ended June 30,
1997, amortization expense of $10,335 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:
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.
Fair Value of Financial Instruments:
The Financial Accounting Standards Board issued SFAS No. 107,
Disclosures about Fair Value of Financial Statements, which is effective
December 31, 1995. This statement requires the disclosure of estimated
fair values for all financial instruments for which it is practicable to
estimate fair value.
The carrying amounts of financial instruments including cash; accounts
receivable, prepaid expenses and other current maturities of notes
payable and capital lease obligations, accounts payable, accrued
expenses and accrued executive bonuses approximate fair value because of
their short maturity.
The carrying amount of long-term notes payable and capital lease
obligations approximate fair value because the interest rates on these
instruments approximate the rate the Company could borrow at June 30,
1997 and 1996, except for Notes payable to former shareholders of Canton
Management Group, Inc. (Note 6) for which the fair value is estimated at
$677,265 based on the approximate rate the Company could borrow at June
30, 1997.
F-7
<PAGE> 72
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
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 recently completed an initial
public 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 twelve 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 placed in escrow upon completion of the
public offering, which are common stock equivalents, have been included
in the calculation of fully diluted earnings per share.
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
adopted this accounting standard on July 1, 1996, and its effects on the
financial position and results of the operations were immaterial.
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 disclosure 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
non-employees in exchange for equity instruments. The Company adopted
this accounting standard on July 1, 1996, and its effects on the
financial position and results of the operations were immaterial. The
Company will continue to account for employee purchase rights and stock
options under APB Opinion No. 25, "Accounting for Stock Issued to
Employees."
On March 3, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS 128). This pronouncement provides a different method of
calculating earnings per share than is currently used in accordance with
APB 15, "Earnings per Share." SFAS 128 provides for the calculation of
basic and diluted earnings per share. Basic earnings per share includes
no dilution and is computed by dividing income by the weighted average
shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in the earnings of
an entity, similar to fully diluted earnings per share. This
pronouncement is effective for fiscal years and interim periods ending
after December 15, 1997; early adoption is not permitted. The Company
has not determined the effect, if any, of adoption on its earnings per
share computations.
F-8
<PAGE> 73
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
New Accounting Pronouncements: (Continued)
Statements of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB
is effective for financial statements ending after December 15, 1997.
The new standard reinstates various securities disclosure requirements
previously in effect under Accounting Principles Board Opinion No. 15,
which has been superseded by SFAS No. 128. The Company does not expect
adoption of SFAS No. 129 to have a material effect, if any, on its
financial position or results of operations.
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15,
1997. Earlier application is permitted. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The
Company has not determined the effect on its financial position or
results of operations, if any, from the adoption of this statement.
Statements of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" )SFAS No. 131) issued
by the FASB is effective for financial statements beginning after
December 15, 1997. The new standard requires that public business
enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also
requires that public business enterprises report certain information
about their products and services, the geographic areas in which they
operate and their major customers. The Company does not expect adoption
of SFAS No. 131 to have a material effect, if any, on its Results of
Operations.
2. Net income of $175,981 for the year ended June 30, 1997 includes a
non-cash charge of $1,191,665 for stock based compensation resulting
from the release of 333,333 escrowed shares to Dr. Birman (See Note 17).
Excluding this non-cash charge, net income for the year ended June 30,
1997 would have been $1,367,646.
3. 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, 1997 and 1996, the Company has uninsured cash and cash
equivalents in the approximate amounts of $870,000 and $1,790,000,
respectively.
4. Related Party Transactions:
Notes Receivable:
Included in notes receivable at June 30, 1997 and 1996 are the following
related party notes and interest receivable:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
6.25% note receivable from related party,
due November, 1996. $ - $ 22,323
7% notes receivable from David N.
Birman, M.D., due on demand -- 556,586
Interest receivable - David N. Birman, M.D. -- 74,587
-------- --------
-- 653,496
Less: current portion of long-term notes
receivable - related party -- 22,323
-------- --------
$ -- $631,173
======== ========
</TABLE>
These notes were paid in a non-cash transaction whereby Dr. Birman
tendered 174,800 shares of his stock to the Company (See Note 17).
F-9
<PAGE> 74
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Property and Equipment:
At June 30, 1997 and 1996, property and equipment consist of the
following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Computer and office equipment $ 509,508 $ 303,000
Furniture and fixtures 336,225 125,286
Vehicles 36,299 44,306
Leasehold improvements -- 2,544
--------- ---------
882,032 475,136
Less accumulated depreciation and amortization (297,784) (181,452)
--------- ---------
$ 584,248 $ 293,684
========= =========
</TABLE>
For the years ended June 30, 1997 and 1996, depreciation expense was
$130,088 and $73,814, respectively.
6. Notes Payable:
At June 30, 1997 and 1996, notes payable consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
--------- ---------
<S> <C> <C>
Note payable to Trinity Computer Services, Inc.,
due April, 1999, non-interest bearing;
collateralized by computer software $ 13,300 $ --
Note payable to former shareholders of Canton Management Group, Inc.
$200,000 due on the first anniversary of the closing and $100,000 due on
the second anniversary of the closing of the acquisition, interest at 2%;
guaranteed by Birman Managed Care, Inc. (See Note 15) 300,000 --
Note payable to former shareholders of Canton Management Group, Inc.
$100,000 due on the second anniversary of the closing and $200,000 due on
the third and fourth anniversaries of the closing of the acquisition,
interest at 2%; unsecured. (See Note 15) 500,000 --
Note payable to Toyota Motor Credit Corp., with interest at 12.5%;
collateralized by a vehicle. Prior to June 30, 1997, the note balance was
transferred to accounts payable and subsequently paid in full -- 7,463
--------- ---------
813,300 7,463
Less current portion of long-term notes payable (207,600) (2,435)
--------- ---------
$ 605,700 $ 5,028
========= =========
The aggregate maturities of notes payable are as follows:
</TABLE>
<TABLE>
<CAPTION>
June 30, Amount
-------- ----------
<S> <C>
1998 $ 207,600
1999 205,700
2000 200,000
2001 200,000
----------
$ 813,300
==========
</TABLE>
F-10
<PAGE> 75
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. 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, 1997, minimum future lease payments due under the capital
lease agreement for the next year, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Total minimum lease payments $ 419
Less amount representing interest -
----------
Present value of net minimum lease payments 419
Less current portion (419)
----------
Long-term maturities of capital lease
obligations $ -
==========
</TABLE>
8. Commitments and Contingencies:
Operating Leases:
The Company is currently leasing vehicles and office space under various
non-cancellable operating lease agreements, expiring in December, 2007.
The terms of the lease agreements provide for monthly payments ranging
from $389 to $18,333. At June 30, 1997, a schedule of future minimum
lease payments due under the non-cancellable operating lease agreements,
is as follows:
<TABLE>
<CAPTION>
June 30,
--------
<S> <C>
1998 $ 191,479
1999 209,113
2000 180,000
2001 180,000
2002 180,000
Subsequent 1,126,575
----------
$2,067,167
==========
</TABLE>
Rent expense under the foregoing operating lease agreements for the
years ended June 30, 1997 and 1996 was $91,960 and $110,588,
respectively.
During the year ended June 30, 1997, the Company entered into a lease
agreement for approximately a 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 expected to occur in the fourth quarter of calendar year 1997.
Future minimum lease payments under this agreement are included in the
future minimum payment schedule above.
Employment Contracts:
The Company has entered into employment contracts with certain key
employees, 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, 1997, the total
commitment through June 30, 2001, excluding incentives, was
approximately $5.6 million.
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.
F-11
<PAGE> 76
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Commitments and Contingencies: (Continued)
Employment Termination:
On March 5, 1997, the Company terminated the employment of Robert D.
Arkin as general counsel, secretary and chief operating officer, for
reasons the Company believes constituted good cause. On May 8, 1997, Mr.
Arkin filed a complaint in United States District Court in Atlanta,
Georgia, against the Company, its chief executive officer, David N.
Birman, M.D., and its executive vice president, Sue D. Birman, seeking
to enforce a written employment agreement between the Company and Mr.
Arkin, which was drafted by Mr. Arkin, and other related causes of
action. Dr. Birman and Mrs. Birman were dismissed from the complaint
shortly after it was served.
In the complaint, Mr. Arkin seeks his unearned future compensation under
the employment agreement of $206,250 per year for five years; one
additional year's salary for non-renewal; bonus compensation of
approximately $75,000 accrued through the date of termination; and
immediate vesting of options to acquire 291,758 shares of the Company's
common stock at $1.37 per share, as well as other relief.
Counsel to the Company has advised that the complaint is without merit,
and that the Company is likely to prevail. This is based upon their
belief that the termination was with cause and that the employment
agreement is unenforceable due to omissions by Mr. Arkin, the Company's
former outside counsel, of certain disclosures of conflicts of interest
and notification to the Company of its right to seek independent counsel
which he was obligated to make prior to entering into a business
relationship with his client, the Company.
On May 14, 1997, the Company filed suit in Tennessee State Court against
Mr. Arkin, seeking a judicial determination that Mr. Arkin is entitled
to no additional compensation from the Company, to rescind his 97,252
vested stock options, and for other related relief.
The accompanying financial statements contain no accrual for the
additional compensation sought by Mr. Arkin. In addition, the earnings
per share calculations as of June 30, 1997, contemplate only 97,252
options as outstanding, representing a potential one-third vested
portion of the total options previously granted to Mr. Arkin.
The Company intends vigorously to defend its position that Mr. Arkin was
terminated with cause and that no part of his employment contract is
still enforceable, including the previous grant of options, whether
vested or not at the time of termination.
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.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk principally consist of accounts
receivable. The Company's accounts receivable primarily result from its
consulting services with rural hospitals primarily in the southeastern
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-12
<PAGE> 77
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Taxes and Deferred Income Taxes:
The provision for income taxes consists of the following for the years
ended June 30:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Current:
Federal $ 702,526 $ 359,386
State 186,872 103,755
---------- ----------
889,398 463,141
Deferred 141,904 263,842
---------- ----------
$1,031,302 $ 726,983
========== ==========
</TABLE>
The provision for income tax expense differs from the amount obtained by
applying the statutory federal income tax rate to income before taxes
due to permanent differences between expenses allowed for income tax
purposes and financial purposes, primarily related to stock compensation
charge (see Note 17).
The temporary differences that give rise to the deferred tax asset and
liability at June 30, 1997 and 1996, are presented below:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
-------- --------
<S> <C> <C>
Deferred Tax Asset - Current:
Allowance for doubtful accounts $ 21,260 $ 18,990
Adjustment due to change from the cash method
of reporting income for income taxes to the
accrual method (25,520) 76,559
Officer bonuses 19,060 --
-------- --------
$ 14,800 $ 95,549
======== ========
Deferred Tax Liability - Long-Term:
Adjustment due to change from the cash method
of reporting income for income taxes to the
accrual method $ 25,520 $ --
Excess of depreciation for income tax reporting
purposes over depreciation for financial
reporting purposes 67,255 55,620
-------- --------
$ 92,775 $ 55,620
======== ========
</TABLE>
10. Statements of Cash Flows:
For the year ended June 30, 1997, the Company made payments for interest
and taxes in the amounts of $847 and $1,366,143, respectively.
For the year ended June 30, 1996, 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.
During the years ended June 30, 1997 and 1996, the Company recognized
investing and financing activities that affected assets and liabilities,
but did not result in cash receipts or payments.
F-13
<PAGE> 78
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Statements of Cash Flows: (Continued)
For the year ended June 30, 1997, these non-cash activities are as
follows:
The Company financed the acquisition of Care3, Inc. in the
amount of $800,000.
The Company recorded the minority interest in Care3, Inc. in the
amount of $201,085.
The Company received 174,800 shares of common stock from David
N. Birman, M.D. as payment on a note receivable and interest in
the amount of $804,078.
The Company released to Dr. Birman 333,333 shares of common
stock from escrow, valued at $1,191,665.
During February, 1997, the Company completed an initial public
offering (the "IPO") (see Note 11). In connection with the IPO,
the Company transferred $25,000 previously capitalized deferred
offering costs into additional paid-in capital.
For the year ended June 30, 1996, these non-cash activities are as
follows:
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.
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.
During February, 1997, the Company completed an initial public offering
in which it issued 2,000,000 shares of its common stock at a price of
$5.00 per share. The shares were sold under its registration statement
dated February 12, 1997. The net proceeds of $7,548,697 received by the
Company were net of offering expenses of $2,451,303.
F-14
<PAGE> 79
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Stock Option Plan:
On October 31, 1995, the Company approved the 1995 Stock Option Plan
(the "Plan"). The aggregate number of shares 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>
Weighted
Average
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
Options granted 55,000 5.00 275,000
Options forfeited (194,505) 1.37 (266,472)
---------- ----- ----------
Balance at June 30, 1997 867,061 1.60 $1,388,528
========== ===== ==========
Options exercisable at
June 30, 1997 258,531 1.37 $ 354,187
========== ===== ==========
</TABLE>
In July, 1997, the Company granted 150,000 shares each to two officers
of the Company at an exercise price of $4.75 per share.
The above options are granted at fair market value at the date of grant,
become exercisable over a three (3) year period, except for 145,879
shares which become exercisable over a four (4) year period, or as
determined by the Board of Directors, and expire over periods not
exceeding five years.
As of June 30, 1997 and 1996, none of these options have been exercised
and 194,505 options have been forfeited. As of June 30, 1997, options
to acquire 867,061 shares were outstanding.
Information relating to options at June 30, 1997 summarized by exercise
price is as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------------------- --------------------------------
Exercise Price Number Weighted Average Number Weighted Average
Per Share Outstanding Life(Year) Exercise Price Outstanding Exercise Price
-------------- ----------- ---------- -------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.37 812,061 10 $1.37 258,531 $1.37
$5.00 55,000 10 5.00 -- 5.00
----- ------- -- ----- ------- -----
867,061 10 $1.60 258,531 $1.37
======= == ===== ======= =====
</TABLE>
All stock options issued to employees have an exercise price not less
than the fair market value of the Company's common stock on the date of
grant. In accordance with accounting for such options utilizing the
intrinsic value method, there is no related compensation expense
recorded in the Company's financial statements for the years ended June
30, 1997 and 1996. Had compensation cost for stock-based compensation
been determined based on the fair value of the options at the grant
dates consistent with the method of SFAS 123, the Company's net income
and earnings per share for the years ended June 30, 1997 and 1996, would
have been reduced to the pro forma amounts presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net Income
As reported $ 175,981 $ 1,171,781
Pro forma $ 101,516 $ 1,133,139
Net Income per Share (Primary)
As reported $ .02 $ .17
Pro forma $ .01 $ .17
</TABLE>
F-15
<PAGE> 80
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Stock Option Plan: (Continued)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net Income per Share (Fully Diluted)
Reported $ .02 $ .15
Pro forma $ .01 $ .15
</TABLE>
The fair value of option grants is estimated as of the date of grant
utilizing the Black-Scholes option-pricing model with the following
weighted average assumptions for grants in 1997 and 1996: expected life
of options of three (3) years, expected volatility of 0%, risk-free
interest rates of 8.0%, and a 0% dividend yield. The weighted average
fair value at date of grant for options granted during 1997 and 1996
approximated $1.05 and $.29, respectively.
13. Stock Warrants:
As of June 30, 1996 and 1997, the Company had outstanding warrants to
purchase 21,355 shares of common stock at $1.43 per share and 36,470
shares of common stock at $1.37 per share. These warrants were issued in
July, 1995 at the then fair value. The warrants became exercisable in
January, 1997, and expire at various dates through December, 2001.
The Company has issued to Royce Investment Group, Inc., as
representative of the several underwriters of the Company's initial
public offering of common stock, warrants (the "Representative's
Warrants") to purchase 200,000 shares of common stock at a purchase
price of $7.50 per share, which is 120% of the offering price of the
common stock in the Company's initial public offering. The holders of
the Representative's Warrants will have the right to require the Company
to register the Representative's Warrants under the Securities Act. The
Representative/s Warrants may be exercised on February 18, 1998 and for
four years thereafter.
14. Employee Benefit Plan:
Effective January 1, 1994, the Company implemented a profit sharing plan
covering virtually all employees meeting certain eligibility
requirements. The plan is designed as a 401(K) profit sharing 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, 1997 and 1996, the
Company made contributions in the amounts of $17,630 and $9,482,
respectively, to the plan.
15. Recent Acquisition:
On January 15, 1997, the Company acquired substantially all of the
issued and outstanding shares of capital stock of Canton Management
Group, Inc., a Mississippi corporation ("Canton"), for $1,500,000, of
which $700,000 was paid in cash and $800,000 was paid by the issuance of
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. The acquisition was accounted for as a stock purchase and
resulted in goodwill in the amount of $1,220,756. Goodwill represents
the excess of the cost of acquiring companies over the fair value of the
net assets acquired at the date of acquisition. Amortization expense has
been recorded for the acquisition of Canton for the year ended June 30,
1997, in the amount of $8,719. Canton is an inactive holder of a
certificate of authority to operate an HMO in Mississippi. Canton was
renamed Care3, Inc. As a result of the issuance of shares of Care3, Inc.
to certain founders of Canton, Care3, Inc. currently is a 69% subsidiary
of the Company. The Company may reduce its ownership percentage of
Care3, Inc. to 60% by allowing selected physicians to acquire shares of
Care3, Inc. common stock. The Company anticipates that it will own not
less than 60% of Care3, Inc. The prior year operating results of Canton
were not presented on a proforma basis as the Company was a development
stage company and the results were immaterial.
16. 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.
F-16
<PAGE> 81
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Initial Public Offering and Escrowed Shares:
Birman Managed Care, Inc. (the "Company"), successfully completed its
initial public offering of 2,000,000 shares of its common stock, par
value $.001 per share, at a price of $5.00 per share sold under its
registration statement and prospectus dated February 12, 1997. The
offering closed on February 19, 1997, and net proceeds of approximately
$7,549,000 were received by the Company.
In connection with the IPO, Dr. Birman, the Company's principal
stockholder, 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 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, Dr. Birman tendered
174,800 shares of his common stock, valued at $4.60 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.
During the year ended June 30, 1997, the Company met the specified
criteria for the release of 333,333 shares of common stock from escrow
to Dr. Birman. The aforementioned release resulted in additional
compensation expense in the amount of $1,191,665 for the year ended June
30, 1997, which reduced fully diluted earnings per share from $.17 to
$.02. This charge is not deductible for income tax purposes.
The remaining 666,667 shares of Common Stock held in escrow will be
released if the Company achieves the target earnings of $.26 per share
for fiscal year ending June 30, 1998 or earnings of $.39 per share for
fiscal year ending June 30, 1999. The release of the remaining shares
from escrow will result in a non-cash charge to operations based on the
fair market value of the shares in either or both of the next two fiscal
years.
18. 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.
<TABLE>
<CAPTION>
Number of Exercise Aggregate
Shares Price Value
<S> <C> <C> <C>
Balance at June 30, 1996 - $ - $ -
Options granted 12,000 5.00 60,000
3,000 7.50 22,500
------- ----------
Balance at June 30, 1997 15,000 $ 82,500
======= ==========
</TABLE>
As of June 30, 1997, none of these options have been exercised and no
options have been forfeited. As of June 30, 1997, options to acquire
15,000 shares were outstanding under the plan.
For the year ended June 30, 1997, no expense had been recorded in
relation to the Directors' options, as the amount was immaterial to the
overall presentation of the financial statements.
F-17
<PAGE> 82
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Executive Bonus Plan:
Effective beginning June 30, 1997, the Company adopted an Executive
Bonus Plan (the "Executive Bonus Plan") pursuant to which executive
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. For the year ended June 30,
1997, bonuses under the plan totalled $172,000, of which $116,341 was
unpaid. For the year ended June 30, 1997, Dr. and Mrs. Birman waived a
total of $200,000 of their executive bonuses.
20. Significant Customer:
The Company has provided Quality Management Program services to various
hospitals owned and/or managed by Quorum Health Care, Inc. ("Quorum")
since 1991. Hospitals owned and/or managed by Quorum represented
approximately 23% and 20% of the Company's Quality Management Program
revenues for the fiscal years ended June 30, 1997 and 1996,
respectively. The Company also provides Quality Management Program
services to Community Medical Center, which represents approximately
12% of the Company's Quality Management Program revenues for the fiscal
year ended June 30, 1997.
21. Restricted Certificates of Deposit:
As of June 30, 1997, the Company held two (2) $250,000 certificates of
deposit bearing interest rates of 4.9%, and having a maturity date of
September 15, 1997. The certificates of deposit are restricted for use
as insolvency reserves to meet the minimum net worth requirements of the
State of Mississippi.
22. Other:
Included in other assets at June 30, 1997, were costs capitalized by the
Company in relation to the formation of health care networks in
Mississippi and Tennessee, in the amount of $318,435. The costs will be
amortized over a 35 year period once operations of the health plans
commence. As of June 30, 1997, the Tennessee network had not yet
commenced operations, therefore, no amortization has been recorded in
relation to that plan. The Mississippi network commenced operations on
April 1, 1997. For the year ended June 30, 1997, the Company recorded
amortization expense in the amount of $1,367, in relation to the
Mississippi network.
F-18
<PAGE> 1
EXHIBIT 10.25
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into as of the _____ day
of ___________, 199__ (the "Agreement Date"), by and between SAMUEL S.
PATTERSON, an individual, (hereinafter "Executive"), and BIRMAN & ASSOCIATES,
INC., a Tennessee corporation (hereinafter "Company").
WITNESSETH
WHEREAS, Company is a Tennessee corporation which is a wholly-owned
subsidiary of Birman Managed Care, Inc. (the "Parent"), a Delaware corporation
whose shares of capital stock are registered with the Securities and Exchange
Commission under Section 12g of the Securities Exchange Act of 1934; and
WHEREAS, Company requires the services of an experienced individual to
serve as its President and Chief Operating Officer; and
WHEREAS, Executive is experienced in management positions in
the health care industry and Executive has represented to Company that he is
possessed of certain experience and capabilities which qualify him to perform
the duties of President and Chief Operating Officer for the Company and that he
is capable of performing such duties; and
WHEREAS, Company desires to employ Executive to render services to it
and to serve as its President and Chief Operating Officer; and
WHEREAS, Executive desires to serve as the President and Chief
Operating Officers of the Company.
NOW THEREFORE, in consideration of the mutual promises contained
herein, and for other good and valuable consideration, the sufficiency and
receipt of which are hereby acknowledged, the parties hereto agree as follows:
1. Employment: Effective upon the Commencement Date, Executive shall
faithfully serve and be employed by Company on a full time basis as its
President and Chief Operating Officer. Executive shall devote substantially all
his professional time and effort to the duties of such position. Executive shall
also be elected a Senior Vice President of the Parent. Executive's duties for
the Parent shall be coextensive with those for the Company and Executive shall
receive no additional compensation therefor.
2. Term: This Agreement shall commence upon Executive's arrival for
work at the Company's headquarters in Cookeville, Tennessee (the "Commencement
Date") and shall continue for three (3) years unless sooner terminated in
accordance with the
Page 1 Initials: Employer _____
Executive ____
<PAGE> 2
provisions of this Agreement. The Commencement Date shall be not later
than , 1997.
3. Residence of Executive: A material inducement to the Company to
employ Executive is Executive's promise promptly to relocate to the Company's
headquarters in Cookeville, Tennessee. Executive shall relocate his family,
residence and domicile to Cookeville, Tennessee, or its immediate environs, as
soon as practicable and in no event more than three (3) months from the
Commencement Date. Executive shall thereafter maintain his primary residence and
domicile in such location for so long as Executive remains employed by the
Company unless the Company otherwise determines.
a. SALE AND ACQUISITION OF PRINCIPAL RESIDENCE. Executive now owns a
home in Ft. Lauderdale, Florida, which he will sell as soon as is reasonably
practicable at a fair and reasonable price. Executive will purchase a home in
the Cookeville, Tennessee, area. In order to expedite Executive's relocation to
Cookeville, Tennessee, the Company agrees as follows:
(1) APPRAISAL: The Company and Executive will obtain a current
appraisal of Executive's home from two independent appraisers, each of whom
shall be a member of the Master Appraisers Institute and each of whom shall
be on the "approved list" for at least four (4) recognized major Florida
banks or federally-chartered savings banks. The two appraisers shall
appraise Executive's property at the Company's expense. The average of
their two appraisals shall be the "Agreed Value" of Executive's home.
(2) LOAN TO VALUE: The Company shall lend Executive (the "Equity
Loan") an amount which shall not exceed One Hundred Thousand Dollars
(USD$100,000.00) provided such amount does not exceed eighty percent (80%)
of the value of Executive's equity in his home, with such equity determined
by subtracting all liens and encumbrances from the Agreed Value. In no
event shall any Equity Loan exceed eighty percent (80%) of Executive's
equity in his home. Executive shall apply all of the proceeds of the Equity
Loan towards the purchase price of Executive's new home in the Cookeville,
Tennessee, area. The Equity Loan shall be secured by a second deed of trust
on both Executive's current Florida home and the new home to be purchased
in Tennessee. The Equity Loan shall bear interest at the rate of eight
percent (8%) per annum, which shall be paid by Executive monthly in
arrears. The Equity Loan shall be due and payable upon sale of Executive's
home in Florida.
(3) SALE OF FLORIDA HOME: Executive shall take all reasonable
steps to sell his Florida home within ninety (90) days of the Commencement
Date of this Agreement. Executive shall set an asking price for his home
which is reasonable in light of the Agreed Value and advice from his
listing realtor. As soon as it is executed, Executive shall provide the
Company with a copy of the signed listing agreement to sell his Florida
home any any supplements, replacements or amendments
Page 2 Initials: Employer _____
Executive ____
<PAGE> 3
thereto. Should such home not be sold within such period, Executive may
request that the Company extend such period for an additional ninety (90)
days. As a condition to granting such extension, Executive shall set the
"asking price" for his Florida home at an amount not to exceed the Agreed
Value as determined above. In the event the gross purchase price realized
is less than the Agreed Value, then the Company shall concurrently with the
sale of Executive's Florida home reimburse to Executive seventy-five
percent (75%) of the difference between the gross sales price realized and
the Agreed Value up to a maximum of twenty-five thousand dollars
($25,000.00). Executive shall promptly provide the Company with true and
correct copies of all closing documents.
4. Scope of Duties: Executive shall be responsible for implementation
of the general operating policies and directives of the President and Board of
Directors of the Parent, including management and general supervision of the
operations of the Company, as more particularly set forth in Exhibit A hereto.
Executive shall render those services customarily rendered by an executive in
such position in accordance with the policies, budgets and decisions of the
Company's Board of Directors and the Board of Directors of the Parent and
subject to the general supervision and direction of the President of the
Company. The Executive shall perform such duties faithfully, diligently, and to
the best of his ability consistent with the highest and best standards of the
industry of Company, subject to the policies established by the Company's Board
of Directors. Executive acknowledges that Company is relying upon Executive's
knowledge and expertise in the health care industry and in his devotion of time
as set forth herein.
5. Compensation: Executive shall receive and the Company shall pay
throughout the term hereof a salary in accordance with the following (less all
applicable taxes withheld and other authorized or required deductions
therefrom):
a. BASE COMPENSATION: One Hundred Eighty-five Thousand Dollars
($185,000.00) per year, payable in accordance with the regular executive
compensation pay period policy of Company, but in no event less often than once
each calendar month (the "Base Compensation"); and
b. ANNUAL ADJUSTMENTS: The Base Compensation shall be adjusted (the
"Annual CPI Adjustments") on each anniversary of the Commencement Date by
increasing (but not decreasing) the Base Compensation in accordance with the
cumulative increases in the Consumer Price Index ("CPI") published by the United
States Department of Labor Bureau of Labor Statistics (or such successor index
as is adopted by the United States Government in lieu thereof) for the Standard
Metropolitan Statistical Area in which Cookeville, Tennessee, is located.
Specifically, on each anniversary of this Agreement, the Base Compensation for
the first year of this Agreement (the "Original Base Compensation") shall be
multiplied by the cumulative percentage increase in the CPI from the first year
of this Agreement to the year of such adjustment. For example, if the Original
Base Compensation is 100, and the CPI
Page 3 Initials: Employer _____
Executive ____
<PAGE> 4
increase during the first year of this Agreement is 4%, then the Base
Compensation for the second year of this Agreement will be 104. If the CPI
increase for the second year of this Agreement is 5%, then the Base Compensation
for the third year of this Agreement will be 109. (100 + 4 + 5). All CPI
Adjustments shall be made to the Original Base Compensation.
c. BONUS COMPENSATION: In addition to the compensation set forth in
subparagraph a, above, Executive may receive a bonus of up to fifty percent
(50%) of the Base Compensation for each year (the "Maximum Bonus Opportunity").
The Maximum Bonus Opportunity shall be divided as follows: up to thirty percent
(30%) of the Base Compensation shall be eligible for inclusion in the Parent's
Executive Bonus Plan. An additional bonus of up to twenty percent (20%) of the
Base Compensation shall be awarded, if at all, depending upon achievement of the
results of the Company as determined by the Compensation Committee of the Board
of Directors of the Parent, as set forth on Exhibit A hereto and incorporated
herein by this reference. Awards and payments of bonuses are at the discretion
of the Board of Directors and are subject, among other things, to the cash flow
requirements of the Company as a whole.
d. ANNUAL REVIEW: The Board of Directors of the Company shall, at
its first meeting of each fiscal year during the term of this Agreement, review
the performance of Executive for the previous fiscal year and, in its sole
discretion, consider modification of the bonus compensation provided hereunder
as it shall deem appropriate.
e. STOCK OPTIONS: The Company shall award Executive options
("Options") to acquire one hundred fifty thousand (150,000) shares of common
stock of the Company at an exercise price equal to the closing market "asked"
price as quoted on July 14, 1997 on the National Association of
Securities Dealers Automated Quotation system ("NASDAQ") stock market. Such
options shall vest one-fourth on each anniversary of this Agreement. In the
event this Agreement is terminated for any reason or is not employed under this
Agreement on the anniversary date of this Agreement, all unvested Options shall
lapse. Executive shall have three (3) years from the date of vesting in which to
exercise his Options. The award of Options shall be more comprehensively set
forth in a separate document of even date herewith. The Company shall have no
obligation to register any shares purchased pursuant to the Options.
6. Representations and Warranties. The Company and Executive represent
and warrant to each other as follows. The representations and warranties
contained herein shall survive termination of this Agreement.
a. WARRANTIES BY COMPANY: The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Tennessee with all powers to conduct its business as currently conducted. This
Agreement has been duly authorized by the Company and is enforceable against the
Company in
Page 4 Initials: Employer _____
Executive ____
<PAGE> 5
accordance with its terms, except as enforceability may be limited by laws
applicable to creditors rights, bankruptcy and equity. The Parent is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware with all powers to conduct its business as currently
conducted. This Agreement and the Stock Option Agreement of even date herewith
have been duly adopted by the Parent and are enforceable against the Parent in
accordance with their terms, except as enforceability may be limited by laws
applicable to creditors rights, bankruptcy and equity.
b. WARRANTIES BY EXECUTIVE: Executive represents and warrants that
he has fully disclosed to the Company all material facts regarding: his
availability to accept employment hereunder, his past employment history, his
health as it may pertain to his ability to discharge the duties assumed
hereunder, and any matters of personal financial or other concern which could
affect performance of his duties hereunder. Executive represents and warrants
that his acceptance of employment hereunder does not violate any agreement by
which he is bound. Executive represents and warrants that he has not disclosed
to the Company and will not disclose to the Company any confidential information
of any other company or business the confidentiality of which he is obligated to
protect.
7. Vacation. Executive shall be entitled to paid vacation to accrue at
the rate of three (3) weeks vacation per year commencing upon commencement of
this Agreement and for each successive Company year in which this Agreement
remains in effect. Executive shall not be entitled to vacation pay in lieu of
vacation. Any vacation time accrued but not used in any one year may not be
carried over to the following year by Executive but shall be deemed waived by
Executive. Executive shall schedule and take his vacation so as not materially
to disrupt or to impair the operations of the Company and shall take all
feasible steps to ensure that the operations of the Company proceed unimpaired
by his absence. Business-related trips for education, conventions and similar
activities shall not be deemed "vacations."
8. Expenses. Company recognizes that Executive will incur, from time to
time, for Company's benefit and in furtherance of Company's business, various
expenses. Accordingly, Company agrees to pay certain expenses as set forth below
either directly on behalf of Executive or to reimburse Executive for such
expenses; provided, however, that such payment or reimbursement is contingent
upon Executive supplying such documentary and other evidence required to support
the deduction of such expenses on Company's federal income tax return. Any
deductions disallowed by the Internal Revenue Service shall be considered
additional compensation to the Executive.
a. Entertainment, travel, including meals while traveling, and
promotion relating to the Company;
b. Conventions and meeting expenses for conventions and meetings
related, directly or indirectly, to the
Page 5 Initials: Employer _____
Executive ____
<PAGE> 6
business of the Company; and
c. Fees for membership in and expenses incurred in attending
meetings of professional and business organizations as shall be approved by the
President of the Company; and
d. An automobile allowance of six hundred dollars ($600.00) per
month.
9. Other Benefits.
a. MOVING EXPENSES: The Company shall reimburse Executive for his
moving expenses up to the maximum amount of ten thousand dollars ($10,000.00)
provided Executive obtains three (3) separate bids for such moving and the
contract is awarded to the moving company approved by the Chief Financial
Officer of the Parent.
b. TEMPORARY LIVING EXPENSES: The Company agrees to pay or reimburse
Executive temporary living expenses and travel expenses between Executive's
current home in Florida and the Cookeville, Tennessee environs, up to a maximum
of nine thousand dollars ($9,000.00). Such reimbursement shall be limited to
travel and temporary housing costs for Executive and his family, and
reimbursement shall be made only for expenses which are incurred solely as a
result of the relocation and not to pay expenses which Executive would have
incurred anyway regardless of the relocation to Cookeville. The Company shall
not pay any more under this paragraph at such time as the Company makes the
Equity Loan.
c. MEDICAL: Company shall pay for Executive's participation in the
medical insurance plans maintained by the Company for its employees in general
and provide Executive with participation in such plan(s) on the same terms and
conditions as are extended to Company's employees in general.
d. LIFE INSURANCE: To the extent the Company provides life insurance
as part of its benefits provided to employees in general, Company shall provide
such to Executive with benefits payable as Executive shall direct.
e. OTHER BENEFITS: Executive shall be entitled to participate with
other employees of the Company in such other fringe benefits as may be offered
generally to the employees of the Company from time-to-time.
10. Employment Conduct. At all times during the term of this Agreement,
Executive shall:
a. Work for Company on a full time basis except for such absences
as are herein provided;
b. Participate fully (which includes recorded interviews with
counsel) in the Company's ongoing regulatory compliance audit process, including
entry and exit interviews, conducted to assure that all of the Company's
activities comply
Page 6 Initials: Employer _____
Executive ____
<PAGE> 7
fully with all federal and state laws and regulations applicable to the health
care industry;
c. Devote his best efforts and all of his business time and
attention to Company's business, and shall not, without the prior written
consent of Company acting through its Board of Directors, engage in any other
business activity whatsoever;
d. Observe and conform to all the laws, statutes, regulations and
administration requirements applicable to the Company and its business;
e. Be aware that his conduct and actions, whether in public or
private, reflect upon the goodwill of Company and not partake in any conduct
that is detrimental to himself or Company; and
f. Report promptly to the Board of Directors of the Parent and
outside counsel of the Parent any facts of which Executive becomes aware which
would lead a reasonable person to suspect that the Company, the Parent or any of
its officers, directors, employees, agents, representatives or clients is
engaged, has engaged, or is about to engage, in any conduct which violates or
may violate any law, rule, statute or regulation applicable to the Company, the
Parent, or the business of either.
11. Company Accounts. Executive shall render, as often as may be
necessary or appropriate, a true account of all money received by him on account
of Company, and shall deposit all such money promptly to Company's account.
12. Conditions of Termination.
a. TERMINATION FOR CAUSE: Company may terminate this Agreement at
any time, without further obligation or liability to Executive, in the event
Company determines in good faith that:
(1) The Executive is grossly negligent in the performance of his
duties;
(2) The Executive is convicted of a violation of any State or
Federal law and is fined One Thousand Dollars ($1,000.00) or more and sentenced
to prison or jail term for one year or more; including suspended sentences;
(3) The Executive or the Executive's conduct becomes the subject
of an administrative, judicial or regulatory enforcement proceeding brought by
the Health Care Finance Administration, the Office of Inspector General of the
United States Department of Justice, or by any regulatory body, agency or
corporation having jurisdiction over the business of the Company, or any
successor thereto (unless Executive shall have engaged in such conduct in
accordance with and on the advice of Company counsel and in accordance with
Company policy);
(4) The Executive commits any material
Page 7 Initials: Employer _____
Executive ____
<PAGE> 8
violation of this Agreement including, without limitation, paragraph 3 hereof,
"Residence of Executive"; or
(5) The Executive disobeys any lawful order or instruction of
the Board of Directors of the Parent or the President of the Parent.
b. OTHER EVENTS OF TERMINATION:
(1) By Agreement: This Agreement shall terminate at any time by
Agreement in writing between Company and Executive;
(2) By Death: This Agreement shall terminate upon the death of
Executive, in which case his heirs and beneficiaries shall be entitled to all
accrued but unpaid compensation hereunder, including any unused vacation time
for the current year;
(3) Unilaterally by Executive: The obligations of Company to
Executive hereunder shall terminate immediately upon the unilateral termination
of this Agreement by Executive, which shall be deemed a breach of the Agreement
by Executive unless Executive gives Company ninety (90) days prior written
notice and continues to discharge his duties and obligations to the utmost
during such time;
(4) By Notice to Executive: The obligations of the Company to
Executive hereunder shall terminate upon six (6) months prior written notice to
Executive;
(5) By Expiration: The obligations of Company hereunder shall
terminate upon the expiration of this Agreement.
13. Compensation in the Event of Termination. Executive shall be
entitled to receive the following compensation, as compensation in full, upon
the occurrence of the following events of termination:
a. VOLUNTARY TERMINATION BY EXECUTIVE: In the event Executive
terminates his employment hereunder, he shall be entitled to receive his earned
but unpaid Base Compensation and a prorated portion of the Bonus otherwise
payable to Executive for that portion served of the year in which he terminates
plus payment for any vacation time accrued but unused during the year in which
Executive so terminates; the Company shall pay, or shall reimburse Executive
for, any expenses incurred but not paid through the date of termination pursuant
to this Agreement.
b. TERMINATION BY COMPANY: The compensation called for by the
following two subparagraph shall be the only compensation to which Executive
shall be entitled in the event he is terminated by the Company.
(1) Termination for Cause: In the event Executive is
terminated for cause (as defined in this Agreement),
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Executive shall be entitled to receive his earned but unpaid Base Compensation
through the date of termination, but not beyond; Executive shall receive payment
for any accrued (but not carried over) but unused vacation time, and shall
receive reimbursement for any properly and reasonably incurred but unpaid
expenses incurred or paid in accordance with Company policy; Executive shall
receive no award of any Bonus and all awarded but unvested or unexercised
options to acquire stock of the Company shall thereupon terminate.
(2) Termination Not for Cause: In the event Executive is
terminated by the Company not for cause, Company shall pay executive upon such
termination: (A) all accrued but unpaid Base Compensation to the date of
termination, plus (B) provided Executive has served with the Company not less
than one (1) year an amount equal to six (6) months Base Compensation payable in
six (6) equal monthly installments. Provided the Company pays Executive all sums
due under this paragraph 13(b)(2), Executive shall be restricted as provided in
paragraph 17 of this Agreement.
c. OTHER BENEFITS AND EXPENSES: In the event of termination of
employment under this Agreement for any reason, the Company shall permit
Executive to assume direct payment of any insurance policies, health care plans
or other benefits which under their terms permit or provide for individual
assumption upon termination of employment by the Company. The Company shall give
written notice to Executive ten (10) days before the lapse of any such benefits
or policies, which notice shall be deemed given when received by Executive, in
order to permit Executive to assume payment of such policies and benefits.
Failure by Executive to assume payment of such policies and benefits within said
ten (10) days shall be deemed a waiver by Executive of his right to assume
payment of such policies and benefits but does not waive his rights under COBRA.
14. Confidentiality and Trade Secrets. Executive agrees as follows:
a. Executive acknowledges that the Proprietary Information (as
defined herein) of Company is a special, valuable and unique asset of Company,
and has been compiled at great expense to Company, and Executive agrees at all
times during the period of this Agreement and thereafter to keep in confidence
and trust all Proprietary Information which has heretofore been disclosed and
which will hereafter be disclosed by Company to Executive or which Executive in
the performance of services hereunder may learn.
b. Executive agrees that during the period of this Agreement and
for a period of three (3) years thereafter, he will not, directly or indirectly,
use the Proprietary Information other than in the course of performing duties as
an Executive of Company, nor will Executive directly or indirectly disclose any
Proprietary Information or anything relating thereto to any person or entity,
except in the course of performing duties as an Executive of Company and with
the consent of the Board of Directors of Company.
c. Executive further understands and acknowledges that Company's
confidential data and trade secrets constitute
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Company's Proprietary Information which is not to be used, disclosed, or
duplicated in any manner or fashion as would injure Company's rights to the
Proprietary Information. Executive will observe and obey the policies of
Company, as established from time to time, for the protection of its Proprietary
Information.
d. As used in this Agreement, "Proprietary Information" means any
and all information of a confidential, proprietary, or secret nature which is or
may be either applicable to, or related in any way to: (i) the business, present
or future, of Company or any subsidiary; (ii) the research and development or
investigations, present or future, of Company or of any subsidiary. Proprietary
Information includes, without limitation, in any form or medium, trade secrets,
financial information not distributed to the public generally, training manuals,
training and management programs, rate information, customer lists, pricing
information, processes, procedures, formulas, data, technical expertise,
proprietary software, drawings, plans, photographs, writings, methods,
procedures, machine and mechanical specifications, engineering and test data,
production and management techniques, equipment and installation data,
application data, improvements, inventions, flow charts, logic diagrams,
experimental developments, techniques, marketing plans and strategies, and
information concerning customers and vendors.
e. It is understood and agreed, however, that the restrictions set
forth in this paragraph shall not apply to any part of the Proprietary
Information that was known to Executive prior to his employment by the Company
(from sources other than the Company) or that is or becomes generally known
within the Company's industry, through no fault, action or inaction on the part
of Executive.
f. Executive acknowledges and agrees that the breach of the
provisions of this Section would cause irreparable harm to the Company and
further acknowledges and agrees that damages would be an inadequate remedy to
protect Company against such breach and, accordingly, Executive agrees that the
Company shall be entitled to obtain injunctive relief should any breach of this
Section 12 be threatened or made by Executive.
15. Disclosure of Information and Testimony. Executive agrees that he
will not directly or indirectly, without the Company's prior written consent,
voluntarily provide information, documents or testimony to any entity, person or
governmental agency (except to his counsel and immediate family) regarding: (a)
Executive's employment with, or termination of employment from, the Company or
the Parent (except in connection with Executive's application for employment
with another employer, or Executive's application for any insurance, retirement,
disability or unemployment benefits); (b) any other person's employment with, or
termination of employment from, the Company or the Parent; or (c) any
information or documents concerning the Company or the Parent. In the event that
a subpoena or other lawful process is properly served upon Executive requiring
production or disclosure of information or documents concerning the foregoing
matters,
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Executive shall promptly notify the Company's human resources department, in
writing, and provide it with copies of any subpoena or other process served upon
him. Executive agrees to meet, telephonically or in person, with attorneys or
agents designated by the Company, at a time and place designated by the Company
and prior to the testimony, for the purpose of discussing such testimony.
Nothing herein shall give the Company the right to control or dictate the
content of any testimony given by Executive, or any documents produced by him
pursuant to subpoena or other lawful process. It is understood that Executive
shall provide all information lawfully required of him. In the event that the
Company requires any information or testimony from Executive in connection with
any claim made against the Company, or any claims made by the Company against
persons or entities not party to this Agreement, Executive agrees to cooperate
fully with the Company, including: (a) appearing at any trial, hearing,
deposition or arbitration; (b) meeting telephonically or in person with
attorneys or agents designated by the Company, at a time and place designated by
the Company and prior to the testimony, for the purpose of discussing such
testimony and any other matters relating to the claim; and (c) providing the
Company with any documentation in Executive's custody or control. The Company
agrees to pay or reimburse Executive for any reasonable travel, telephone,
photocopy and other out-of-pocket expenses incurred as a result of any requests
made of him by the Company under this paragraph. The provisions of this
paragraph shall not apply to any action brought under this Agreement between
Executive and Company and/or Parent.
16. Return of Materials. Executive agrees to return promptly to Company
upon termination of this Agreement, whether or not for cause or whatever the
reason, all documents, data, records, and other information pertaining to his
services provided hereunder, and Executive shall not take any documents or data,
in any form or medium, or any reproduction or excerpt of any such documents or
data, containing or pertaining to any Proprietary Information of Company. This
provision shall not apply to personal effects and personal records of Executive
which may be located on the premises of Company.
17. Competition after Termination. For a period of one year after
Executive's termination of employment under this Agreement, Executive shall not
directly or indirectly own, manage, operate, control, be employed by,
participate in, or be connected in any manner with the ownership, management,
operation, or control of any company which (1) provides consulting or management
services to the health care industry relative to billing, coding or preparing
documentation related to medical records; and (2) which solicits such business
from any individual hospital site operated by a hospital or medical facility
currently doing business with or being serviced by the Company or with which the
Company is negotiating to provide such services as evidenced by written
correspondence at the time of Executive's termination of services under this
Agreement; Provided, if Company's contract or active negotiation for a contract
is to provide services to a health care system, then this non-competition
provision extends to all hospitals or medical facilities within the system;
Provided this
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restriction shall not prohibit an investment by Executive not exceeding five
percent (5%) of the outstanding securities of a publicly traded company. In the
event of Executive's actual or threatened breach of this paragraph, Company
shall be entitled to a preliminary restraining order and injunction restraining
Executive from violating its provisions. Nothing in this Agreement shall be
construed to inhibit Company from pursuing any other available remedies for each
breach of threatened breach, including the recovery of damages from Executive.
18. Employment by Client of Company: Notwithstanding any other
provision of this Agreement or in law to the contrary, Executive agrees that he
will not seek or accept employment or payment for services, directly or
indirectly, from any hospital, hospital system or health care provider which has
retained or paid the Company in respect of the Company's Quality Program
excepting only payment from the Company pursuant hereto.
19. Amendment. No modification of this Agreement, or waiver of any of
its provisions, shall be valid or enforceable unless in writing and signed by
each of the parties.
20. Binding Agreement. Except as otherwise specifically provided
herein, this Agreement shall be binding on the parties and their heirs,
executors, distributees, legal representatives, successors and assigns.
21. Notices. All notices under this Agreement shall be in writing and
shall be delivered by hand or deposited into the United States Mail, first class
mail, postage prepaid, to the parties at their respective addresses as each
party shall inform the other. Unless otherwise provided herein, the effective
date of any such notice shall be the date of delivery in the case of notices
delivered by hand and five (5) days after mailing in the case of mailed notices.
22. Entire Agreement. This Agreement contains the entire agreement
between the parties hereto with respect to the subjects and matters addressed
herein and supersedes and replaces any other agreement, whether oral or written,
between the parties hereto. Except as provided herein, each party to this
Agreement acknowledges that no representations, inducements, promises or
agreement, oral or otherwise, have been made by any party or anyone acting on
behalf of any party which are not set forth herein and that no other agreement
shall be valid or binding.
23. Assignment by Executive. Executive shall not assign this Agreement
or any rights contained hereunder and any such attempted assignment is void.
24. Agreement to Perform Necessary Acts. The parties shall execute and
deliver all documents and perform all other and further acts as may be
reasonably necessary to effect this Agreement.
25. Headings. The headings of the several sections of
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this Agreement are inserted for convenience of reference only and are not
intended to be a part of or affect the meaning or interpretation of this
Agreement.
26. Severability. If any part, paragraph, section or provision of this
Agreement should be invalid, such part, paragraph, section or provision hereof
shall be deemed stricken from this Agreement then all remaining parts,
paragraphs, sections and provisions shall continue to be fully effective.
27. Waivers. The waivers by any party of a breach of any provisions of
this Agreement shall not operate or be construed as a waiver of any subsequent
breach.
28. Good Faith; Further Acts. Executive and Company agree to act in
good faith in the execution of the provisions of this Agreement and to take such
other further actions as may be necessary or advisable to effect the intent of
this Agreement.
29. Counterparts. This Agreement may be executed in multiple
counterparts, each of which when so executed and delivered shall be an original
instrument, but together shall constitute a single agreement.
30. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the state of Tennessee applicable to contracts
entered into and to be performed entirely within said state and without regard
to choice of law principles.
31. Representation. The parties hereto acknowledge and agree that each
has been independently represented by counsel of his or its own choosing in
connection herewith and that all provisions hereof are to be construed as having
been jointly drafted such that no ambiguity or perceived or alleged ambiguity
shall be construed for or against any party hereto.
32. No Other Parties Benefitted. This Agreement is for the exclusive
benefit of the Company, the Parent and the Executive. No other party of any
nature whatsoever or whomsoever shall be deemed entitled to the benefit of the
provisions of this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first written above.
"Parent" BIRMAN MANAGED CARE, INC.
A Delaware Corporation
By:____________________________
Authorized Officer
"Company" BIRMAN & ASSOCIATES, INC.
A Tennessee Corporation
By:____________________________
Authorized Officer
"Executive" SAMUEL S. PATTERSON
_______________________________
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EXHIBIT 10.26
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into as of the _____ day
of June, 1997, by and between JEFFREY L. DRAKE, an individual, (hereinafter
"Executive"), and BIRMAN MANAGED CARE, INC., a Delaware corporation (hereinafter
"Company").
WITNESSETH
WHEREAS, Company is a Delaware corporation whose shares of capital
stock are registered with the Securities and Exchange Commission under Section
12g of the Securities Exchange Act of 1934; and
WHEREAS, Company requires the services of an experienced individual to
serve as its Senior Vice President of Corporate Development; and
WHEREAS, Executive is experienced in management positions in the health
care industry and Executive has represented to Company that he is possessed of
certain experience and capabilities which qualify him to perform the duties of
Senior Vice President of Corporate Development for the Company and that he is
capable of performing such duties; and
WHEREAS, Company desires to employ Executive to render services to it
and to serve as its Senior Vice President of Corporate Development; and
WHEREAS, Executive desires to serve as the Senior Vice President of
Corporate Development of the Company.
NOW THEREFORE, in consideration of the mutual promises contained
herein, and for other good and valuable consideration, the sufficiency and
receipt of which are hereby acknowledged, the parties hereto agree as follows:
1. Employment: Effective upon the Commencement Date, Executive shall
faithfully serve and be employed by Company on a full time basis as its Senior
Vice President of Corporate Development. Executive shall devote all his
professional time and effort to the duties of such position.
2. Term: This Agreement shall commence upon Executive's arrival for
work at the Company's headquarters in Cookeville, Tennessee (the "Commencement
Date") and shall continue for three (3) years unless sooner terminated in
accordance with the provisions of this Agreement. The Commencement Date shall be
not later than July 21, 1997 or this Agreement may be declared void at the
option of the Company.
3. Residence of Executive: A material inducement to the Company to
employ Executive is Executive's promise promptly to
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relocate to the Company's headquarters in Cookeville, Tennessee. Executive shall
relocate his family, residence and domicile to Cookeville, Tennessee, or its
immediate environs, as soon as practicable and in no event more than three (3)
months from the Commencement Date. Executive shall thereafter maintain his
primary residence and domicile in such location for so long as Executive remains
employed by the Company unless the Company otherwise determines.
a. SALE AND ACQUISITION OF PRINCIPAL RESIDENCE. Executive now owns a
home in Alpharetta, Georgia, which he will sell as soon as is reasonably
practicable at a fair and reasonable price. Executive will purchase a home in
the Cookeville, Tennessee, area. In order to expedite Executive's relocation to
Cookeville, Tennessee, the Company agrees as follows:
(1) APPRAISAL: The Company and Executive will obtain a current
appraisal of Executive's home from two independent appraisers, each of whom
shall be a member of the Master Appraisers Institute and each of whom shall
be on the "approved list" for at least four (4) recognized major Georgia
banks or federally-chartered savings banks. The two appraisers shall
appraise Executive's property at the Company's expense. The average of
their two appraisals shall be the "Agreed Value" of Executive's home.
(2) LOAN TO VALUE: The Company shall lend Executive (the "Equity
Loan") an amount which shall not exceed One Hundred Thousand Dollars
(USD$100,000.00) provided such amount does not exceed eighty percent (80%)
of the value of Executive's equity in his home, with such equity determined
by subtracting all liens and encumbrances from the Agreed Value. In no
event shall any Equity Loan exceed eighty percent (80%) of Executive's
equity in his home. Executive shall apply all of the proceeds of the Equity
Loan towards the purchase price of Executive's new home in the Cookeville,
Tennessee, area. The Equity Loan shall be secured by a second deed of trust
on both Executive's current Georgia home and the new home to be purchased
in Tennessee. The Equity Loan shall bear interest at the rate of eight
percent (8%) per annum, which shall be paid by Executive monthly in
arrears. The Equity Loan shall be due and payable upon sale of Executive's
home in Georgia.
(3) SALE OF GEORGIA HOME: Executive recently purchased a home in
Georgia for which he paid One Hundred Ninety-Six Thousand Five Hundred
Dollars (USD$196,500.00) ("Executive's Purchase Price"). Executive shall
take all reasonable steps to sell his Georgia home within one hundred
twenty (120) days of the Commencement Date of this Agreement. Executive
shall set an asking price for his home which is reasonable in light of the
Agreed Value and advice from his listing realtor. As soon as it is
executed, Executive shall provide the Company with a copy of the signed
listing agreement to sell his Georgia home and any supplements,
replacements or amendments thereto. Should such home not be sold within
such period, Executive may request that the Company extend such period and
the time required to relocate his family to Cookeville, Tennessee for
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an additional ninety (90) days, the approval of which shall not be
unreasonably withheld. As a condition to granting such extension, Executive
shall set the "asking price" for his Georgia home at an amount not to
exceed the appraised value. In the event the net purchase price realized by
Executive is less than Executive's Purchase Price, then the Company shall
concurrently with the sale of Executive's Georgia home reimburse to
Executive seventy-five percent (75%) of the difference between the net
sales price realized (gross sales price less 7% broker fee) and
Executive's Purchase Price up to a maximum of twenty-five thousand dollars
($25,000.00). Executive shall promptly provide the Company with true and
correct copies of all closing documents evidencing such sale.
4. Scope of Duties: Executive shall assist the President of the Company
and shall be responsible for the strategic planning, analysis and identification
of new business opportunities including but not limited to the identification,
recommendation, analysis and implementation of business activities complementary
and supplemental to the Company's current activities, as more particularly set
forth in Exhibit A hereto. The Executive may be assigned other duties for the
Company. Executive shall render those services customarily rendered by an
executive in such position in accordance with the policies, budgets and
decisions of the Company's Board of Directors and subject to the general
supervision and direction of the President of the Company. The Executive shall
perform such duties faithfully, diligently, and to the best of his ability
consistent with the highest and best standards of the industry of Company,
subject to the policies established by the Company's Board of Directors.
Executive acknowledges that Company is relying upon Executive's knowledge and
expertise in the health care industry and in his devotion of time as set forth
herein.
5. Compensation: Executive shall receive and the Company shall pay
throughout the term hereof a salary in accordance with the following (less all
applicable taxes withheld and other authorized or required deductions
therefrom):
a. BASE COMPENSATION: One Hundred Eighty-five Thousand ($185,000.00)
per year, payable in accordance with the regular executive compensation pay
period policy of Company, but in no event less often than once each calendar
month (the "Base Compensation"); and
b. ANNUAL ADJUSTMENTS: The Base Compensation shall be adjusted (the
"Annual CPI Adjustments") on each anniversary of commencement of this Agreement
by increasing (but not decreasing) the Base Compensation in accordance with the
cumulative increases in the Consumer Price Index ("CPI") published by the United
States Department of Labor Bureau of Labor Statistics (or such successor index
as is adopted by the United States Government in lieu thereof) for the Standard
Metropolitan Statistical Area in which Cookeville, Tennessee, is located.
Specifically, on each anniversary of this Agreement, the Base Compensation for
the first year of this Agreement (the "Original Base Compensation") shall be
multiplied by the cumulative
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percentage increase in the CPI from the first year of this Agreement to the year
of such adjustment. For example, if the Original Base Compensation is 100, and
the CPI increase during the first year of this Agreement is 4%, then the Base
Compensation for the second year of this Agreement will be 104. If the CPI
increase for the second year of this Agreement is 5%, then the Base Compensation
for the third year of this Agreement will be 109. (100 + 4 + 5). All CPI
Adjustments shall be made to the Original Base Compensation.
c. BONUS COMPENSATION: In addition to the compensation set forth in
subparagraph a, above, Executive may receive a bonus of up to fifty percent
(50%) of the Base Compensation for each year (the "Maximum Bonus Opportunity"),
which percentage shall be eligible for inclusion into the Company's Executive
Bonus Plan. Awards and payments of bonuses are at the discretion of the Board of
Directors and are subject, among other things, to the cash flow requirements of
the Company as a whole.
d. ANNUAL REVIEW: The Board of Directors of the Company shall, at
its first meeting of each fiscal year during the term of this Agreement, review
the performance of Executive for the previous fiscal year and, in its sole
discretion, consider modification of the bonus compensation provided hereunder
as it shall deem appropriate.
e. STOCK OPTIONS: The Company shall award Executive options
("Options") to acquire one hundred fifty thousand (150,000) shares of common
stock of the Company at an exercise price equal to the closing market "asked"
price as quoted on the date of this Agreement on the National Association of
Securities Dealers Automated Quotation system ("NASDAQ") stock market. Such
options shall vest one-fourth on each anniversary of this Agreement. In the
event this Agreement is terminated for any reason or is not employed under this
Agreement on the anniversary date of this Agreement, all unvested Options shall
lapse. Executive shall have three (3) years from the date of vesting in which to
exercise his Options. The award of Options shall be more comprehensively set
forth in a separate document of even date herewith. The Company shall have no
obligation to register any shares purchased pursuant to the Options.
6. Representations and Warranties. The Company and Executive represent
and warrant to each other as follows. The representations and warranties
contained herein shall survive termination of this Agreement.
a. WARRANTIES BY COMPANY: The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware with all powers to conduct its business as currently conducted. This
Agreement has been duly authorized by the Company and is enforceable against the
Company in accordance with its terms, except as enforceability may be limited by
laws applicable to creditors rights, bankruptcy and equity.
b. WARRANTIES BY EXECUTIVE: Executive represents
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and warrants that he has fully disclosed to the Company all material facts
regarding: his availability to accept employment hereunder, his past employment
history, his health as it may pertain to his ability to discharge the duties
assumed hereunder, and any matters of personal financial or other concern which
could affect performance of his duties hereunder. Executive represents and
warrants that his acceptance of employment hereunder does not violate any
agreement by which he is bound. Executive represents and warrants that he has
not disclosed to the Company and will not disclose to the Company any
confidential information of any other company or business the confidentiality of
which he is obligated to protect.
7. Vacation. Executive shall be entitled to paid vacation to accrue at
the rate of three (3) weeks vacation per year commencing upon commencement of
this Agreement and for each successive Company year in which this Agreement
remains in effect. Executive shall not be entitled to vacation pay in lieu of
vacation. Any vacation time accrued but not used in any one year may not be
carried over to the following year by Executive but shall be deemed waived by
Executive. Executive shall schedule and take his vacation so as not materially
to disrupt or to impair the operations of the Company and shall take all
feasible steps to ensure that the operations of the Company proceed unimpaired
by his absence. Business-related trips for education, conventions and similar
activities shall not be deemed "vacations."
8. Expenses. Company recognizes that Executive will incur, from time to
time, for Company's benefit and in furtherance of Company's business, various
expenses. Accordingly, Company agrees to pay certain expenses as set forth below
either directly on behalf of Executive or to reimburse Executive for such
expenses; provided, however, that such payment or reimbursement is contingent
upon Executive supplying such documentary and other evidence required to support
the deduction of such expenses on Company's federal income tax return. Any
deductions disallowed by the Internal Revenue Service shall be considered
additional compensation to the Executive.
a. Entertainment, travel, including meals while traveling, and
promotion relating to the Company;
b. Conventions and meeting expenses for conventions and meetings
related, directly or indirectly, to the business of the Company; and
c. Fees for membership in and expenses incurred in attending
meetings of professional and business organizations as shall be approved by the
President of the Company; and
d. An automobile allowance of six hundred dollars ($600.00) per
month.
9. Other Benefits.
a. MOVING EXPENSES: The Company shall reimburse
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Executive for his moving expenses up to the maximum amount of ten thousand
dollars ($10,000.00) provided Executive obtains three (3) separate bids for such
moving and the contract is awarded to the moving company approved by the Chief
Financial Officer of the Company.
b. TEMPORARY LIVING EXPENSES: Until Executive relocates, the
Company agrees to pay or reimburse Executive temporary living expenses and
travel expenses between Executive's current home in Georgia and such location(s)
as the Company may request, up to a maximum of nine thousand dollars
($9,000.00). Such reimbursement shall be limited to travel and temporary housing
costs for Executive and his family, and reimbursement shall be made only for
expenses which are incurred solely as a result of the relocation and not to pay
expenses which Executive would have incurred anyway regardless of the relocation
to Cookeville.
c. MEDICAL: Company shall pay for Executive's participation in the
medical insurance plans maintained by the Company for its employees in general
and provide Executive with participation in such plan(s) on the same terms and
conditions as are extended to Company's employees in general.
d. LIFE INSURANCE: To the extent the Company provides life
insurance as part of its benefits provided to employees in general, Company
shall provide such to Executive with benefits payable as Executive shall direct.
e. OTHER BENEFITS: Executive shall be entitled to participate with
other employees of the Company in such other fringe benefits as may be offered
generally to the employees of the Company from time-to-time.
10. Employment Conduct. At all times during the term of this Agreement,
Executive shall:
a. Work for Company on a full time basis except for such absences
as are herein provided;
b. Participate fully (which includes recorded interviews with
counsel) in the Company's ongoing regulatory compliance audit process, including
entry and exit interviews, conducted to assure that all of the Company's
activities comply fully with all federal and state laws and regulations
applicable to the health care industry;
c. Devote his best efforts and all of his business time and
attention to Company's business, and shall not, without the prior written
consent of Company acting through its Board of Directors, engage in any other
business activity whatsoever;
d. Observe and conform to all the laws, statutes, regulations and
administration requirements applicable to the Company and its business;
e. Be aware that his conduct and actions, whether
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in public or private, reflect upon the goodwill of Company and not partake in
any conduct that is detrimental to himself or Company; and
f. Report promptly to the Board of Directors of the Company and
outside counsel of the Company any facts of which Executive becomes aware which
would lead a reasonable person to suspect that the Company or any of its
officers, directors, employees, agents, representatives or clients is engaged,
has engaged, or is about to engage, in any conduct which violates or may violate
any law, rule, statute or regulation applicable to the Company or its business.
11. Company Accounts. Executive shall render, as often as may be
necessary or appropriate, a true account of all money received by him on account
of Company, and shall deposit all such money promptly to Company's account.
12. Conditions of Termination.
a. TERMINATION FOR CAUSE: Company may terminate this Agreement at
any time, without further obligation or liability to Executive, in the event
Company determines in good faith that:
(1) The Executive is grossly negligent in the performance of his
duties;
(2) The Executive is convicted of a violation of any State or
Federal law and is fined One Thousand Dollars ($1,000.00) or more and sentenced
to prison or jail term for one year or more; including suspended sentences;
(3) The Executive or the Executive's conduct becomes the subject
of an administrative, judicial or regulatory enforcement proceeding brought by
the Health Care Finance Administration, the Office of Inspector General of the
United States Department of Justice, or by any regulatory body, agency or
corporation having jurisdiction over the business of the Company, or any
successor thereto (unless Executive shall have engaged in such conduct in
accordance with and on the advice of Company counsel and in accordance with
Company policy);
(4) The Executive commits any material violation of this
Agreement; or
(5) The Executive disobeys any lawful order or instruction of
the Board of Directors of the Company or the President of the Company.
b. OTHER EVENTS OF TERMINATION:
(1) By Agreement: This Agreement shall terminate at any time by
Agreement in writing between Company and Executive;
(2) By Death: This Agreement shall terminate
Page 7 Initials: Employer _____
Executive ____
<PAGE> 8
upon the death of Executive, in which case his heirs and beneficiaries shall be
entitled to all accrued but unpaid compensation hereunder, including any unused
vacation time for the current year;
(3) Unilaterally by Executive: The obligations of Company to
Executive hereunder shall terminate immediately upon the unilateral termination
of this Agreement by Executive, which shall be deemed a breach of the Agreement
by Executive unless Executive gives Company ninety (90) days prior written
notice and continues to discharge his duties and obligations to the utmost
during such time;
(4) By Notice to Executive: The obligations of the Company to
Executive hereunder shall terminate upon six (6) months prior written notice to
Executive;
(5) By Expiration: The obligations of Company hereunder shall
terminate upon the expiration of this Agreement.
13. Compensation in the Event of Termination. Executive shall be
entitled to receive the following compensation, as compensation in full, upon
the occurrence of the following events of termination:
a. VOLUNTARY TERMINATION BY EXECUTIVE: In the event Executive
terminates his employment hereunder, he shall be entitled to receive his earned
but unpaid Base Compensation and a prorated portion of the Bonus otherwise
payable to Executive for that portion served of the year in which he terminates
plus payment for any vacation time accrued but unused during the year in which
Executive so terminates; the Company shall pay, or shall reimburse Executive
for, any expenses incurred but not paid through the date of termination pursuant
to this Agreement.
b. TERMINATION BY COMPANY: The compensation called for by the
following two subparagraph shall be the only compensation to which Executive
shall be entitled in the event he is terminated by the Company.
(1) Termination for Cause: In the event Executive is terminated
for cause (as defined in this Agreement), Executive shall be entitled to receive
his earned but unpaid Base Compensation through the date of termination, but not
beyond; Executive shall not receive payment for any accrued but unused vacation
time, which shall be deemed waived and Executive shall not receive reimbursement
for any incurred but unpaid expenses; Executive shall receive no award of any
Bonus and all awarded but unvested or unexercised options to acquire stock of
the Company shall thereupon terminate.
(2) Termination Not for Cause: In the event Executive is
terminated by the Company not for cause, Company shall pay executive upon such
termination: (A) all accrued but unpaid Base Compensation to the date of
termination, plus (B) provided Executive have served with the Company not less
than one (1) year
Page 8 Initials: Employer _____
Executive ____
<PAGE> 9
an amount equal to six (6) months Base Compensation payable in six (6) equal
monthly installments. Provided the Company pays Executive all sums due under
this paragraph 13 b.(2). Executive shall not accept employment with any other
company which conducts a business which competes directly or indirectly with the
Company within a radius of fifty (50) miles from any hospital which itself is,
or any hospital which is a member of the same chain or owned by the same
corporation is, a client of the Company.
c. OTHER BENEFITS AND EXPENSES: In the event of termination of
employment under this Agreement for any reason, the Company shall permit
Executive to assume direct payment of any insurance policies, health care plans
or other benefits which under their terms permit or provide for individual
assumption upon termination of employment by the Company. The Company shall give
notice to Executive ten (10) days before the lapse of any such benefits or
policies, which notice shall be deemed given when received by Executive, in
order to permit Executive to assume payment of such policies and benefits.
Failure by Executive to assume payment of such policies and benefits within said
ten (10) days shall be deemed a waiver by Executive of his right to assume
payment of such policies and benefits.
14. Confidentiality and Trade Secrets. Executive agrees as follows:
a. Executive acknowledges that the Proprietary Information (as
defined herein) of Company is a special, valuable and unique asset of Company,
and has been compiled at great expense to Company, and Executive agrees at all
times during the period of this Agreement and thereafter to keep in confidence
and trust all Proprietary Information which has heretofore been disclosed and
which will hereafter be disclosed by Company to Executive or which Executive in
the performance of services hereunder may learn.
b. Executive agrees that during the period of this Agreement and
for a period of three (3) years thereafter, he will not, directly or indirectly,
use the Proprietary Information other than in the course of performing duties as
an Executive of Company, nor will Executive directly or indirectly disclose any
Proprietary Information or anything relating thereto to any person or entity,
except in the course of performing duties as an Executive of Company and with
the consent of the Board of Directors of Company.
c. Executive further understands and acknowledges that Company's
confidential data and trade secrets constitute Company's Proprietary Information
which is not to be used, disclosed, or duplicated in any manner or fashion as
would injure Company's rights to the Proprietary Information. Executive will
observe and obey the policies of Company, as established from time to time, for
the protection of its Proprietary Information.
d. As used in this Agreement, "Proprietary Information" means any
and all information of a confidential, proprietary, or secret nature which is or
may be either applicable to, or related in any way to: (i) the business, present
or future,
Page 9 Initials: Employer _____
Executive ____
<PAGE> 10
of Company or any subsidiary; (ii) the research and development or
investigations, present or future, of Company or of any subsidiary. Proprietary
Information includes, without limitation, in any form or medium, trade secrets,
financial information not distributed to the public generally, training manuals,
training and management programs, rate information, customer lists, pricing
information, processes, procedures, formulas, data, technical expertise,
proprietary software, drawings, plans, photographs, writings, methods,
procedures, machine and mechanical specifications, engineering and test data,
production and management techniques, equipment and installation data,
application data, improvements, inventions, flow charts, logic diagrams,
experimental developments, techniques, marketing plans and strategies, and
information concerning customers and vendors.
e. Executive acknowledges and agrees that the breach of the
provisions of this Section would cause irreparable harm to the Company and
further acknowledges and agrees that damages would be an inadequate remedy to
protect Company against such breach and, accordingly, Executive agrees that the
Company shall be entitled to obtain injunctive relief should any breach of this
Section 12 be threatened or made by Executive.
15. Disclosure of Information and Testimony. Executive agrees that he
will not directly or indirectly, without the Company's prior written consent,
voluntarily provide information, documents or testimony to any entity, person or
governmental agency (except to his counsel and immediate family) regarding: (a)
Executive's employment with, or termination of employment from, the Company
(except in connection with Executive's application for employment with another
employer, or Executive's application for any insurance, retirement, disability
or unemployment benefits); (b) any other person's employment with, or
termination of employment from, the Company; or (c) any information or documents
concerning the Company. In the event that a subpoena or other lawful process is
properly served upon Executive requiring production or disclosure of information
or documents concerning the foregoing matters, Executive shall promptly notify
the Company's human resources department, in writing, and provide it with copies
of any subpoena or other process served upon him. Executive agrees to meet,
telephonically or in person, with attorneys or agents designated by the Company,
at a time and place designated by the Company and prior to the testimony, for
the purpose of discussing such testimony. Nothing herein shall give the Company
the right to control or dictate the content of any testimony given by Executive,
or any documents produced by him pursuant to subpoena or other lawful process.
It is understood that Executive shall provide all information lawfully required
of him. In the event that the Company requires any information or testimony from
Executive in connection with any claim made against the Company, or any claims
made by the Company against persons or entities not party to this Agreement,
Executive agrees to cooperate fully with the Company, including: (a) appearing
at any trial, hearing, deposition or arbitration; (b) meeting telephonically or
in person with attorneys or agents designated by the Company, at a time and
place designated by the Company and prior to the testimony, for the purpose of
Page 10 Initials: Employer _____
Executive ____
<PAGE> 11
discussing such testimony and any other matters relating to the claim; and (c)
providing the Company with any documentation in Executive's custody or control.
The Company agrees to pay or reimburse Executive for any reasonable travel,
telephone, photocopy and other out-of-pocket expenses incurred as a result of
any requests made of him by the Company under this paragraph. The provisions of
this paragraph shall not apply to any action brought under this Agreement
between Executive and Company.
16. Return of Materials. Executive agrees to return promptly to Company
upon termination of this Agreement, whether or not for cause or whatever the
reason, all documents, data, records, and other information pertaining to his
services provided hereunder, and Executive shall not take any documents or data,
in any form or medium, or any reproduction or excerpt of any such documents or
data, containing or pertaining to any Proprietary Information of Company. This
provision shall not apply to personal effects and personal records of Executive
which may be located on the premises of Company.
17. Competition after Termination. For a period of one year after
Executive's termination of employment under this Agreement, Executive shall not
directly or indirectly own, manage, operate, control, be employed by,
participate in, or be connected in any manner with the ownership, management,
operation, or control of any company which provides consulting or management
services to the health care industry relative to billing, coding or preparing
documentation related to medical records which conducts such business from any
branch located within a radius of twenty (50) miles from (i) any hospital which
is a client of the Company or (ii) which lies within a one hundred fifty (150)
mile radius of any business, hospital, site operated by a hospital system,
affiliated group of hospitals, or medical facility, doing business with or being
serviced by the Company, or with which the Company is negotiating to provide
Quality Program services at the time Physician's services hereunder are
terminated by either party hereto or otherwise. In the event of Executive's
actual or threatened breach of this paragraph, Company shall be entitled to a
preliminary restraining order and injunction restraining Executive from
violating its provisions. Nothing in this Agreement shall be construed to
inhibit Company from pursuing any other available remedies for each breach of
threatened breach, including the recovery of damages from Executive.
18. Employment by Client of Company: Notwithstanding any other
provision of this Agreement or in law to the contrary, Executive agrees that he
will not seek or accept employment or payment for services, directly or
indirectly, from any hospital, hospital system or health care provider which has
retained or paid the Company in respect of the Company's Quality Program
excepting only payment from the Company pursuant hereto.
19. Amendment. No modification of this Agreement, or waiver of any of
its provisions, shall be valid or enforceable unless in writing and signed by
each of the parties.
Page 11 Initials: Employer _____
Executive ____
<PAGE> 12
20. Binding Agreement. Except as otherwise specifically provided
herein, this Agreement shall be binding on the parties and their heirs,
executors, distributees, legal representatives, successors and assigns.
21. Notices. All notices under this Agreement shall be in writing and
shall be delivered by hand or deposited into the United States Mail, first class
mail, postage prepaid, to the parties at their respective addresses as each
party shall inform the other. Unless otherwise provided herein, the effective
date of any such notice shall be the date of delivery in the case of notices
delivered by hand and five (5) days after mailing in the case of mailed notices.
22. Entire Agreement. This Agreement contains the entire agreement
between the parties hereto with respect to the subjects and matters addressed
herein and supersedes and replaces any other agreement, whether oral or written,
between the parties hereto. Except as provided herein, each party to this
Agreement acknowledges that no representations, inducements, promises or
agreement, oral or otherwise, have been made by any party or anyone acting on
behalf of any party which are not set forth herein and that no other agreement
shall be valid or binding.
23. Assignment by Executive. Executive shall not assign this Agreement
or any rights contained hereunder and any such attempted assignment is void.
24. Agreement to Perform Necessary Acts. The parties shall execute and
deliver all documents and perform all other and further acts as may be
reasonably necessary to effect this Agreement.
25. Headings. The headings of the several sections of this Agreement
are inserted for convenience of reference only and are not intended to be a part
of or affect the meaning or interpretation of this Agreement.
26. Severability. If any part, paragraph, section or provision of this
Agreement should be invalid, such part, paragraph, section or provision hereof
shall be deemed stricken from this Agreement then all remaining parts,
paragraphs, sections and provisions shall continue to be fully effective.
27. Waivers. The waivers by any party of a breach of any provisions of
this Agreement shall not operate or be construed as a waiver of any subsequent
breach.
28. Good Faith; Further Acts. Executive and Company agree to act in
good faith in the execution of the provisions of this Agreement and to take such
other further actions as may be necessary or advisable to effect the intent of
this Agreement.
29. Counterparts. This Agreement may be executed in multiple
counterparts, each of which when so executed and delivered shall be an original
instrument, but together shall constitute a
Page 12 Initials: Employer _____
Executive ____
<PAGE> 13
single agreement.
30. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the state of Tennessee applicable to contracts
entered into and to be performed entirely within said state and without regard
to choice of law principles.
31. Representation. The parties hereto acknowledge and agree that each
has been independently represented by counsel of his or its own choosing in
connection herewith and that all provisions hereof are to be construed as having
been jointly drafted such that no ambiguity or perceived or alleged ambiguity
shall be construed for or against any party hereto.
32. No Other Parties Benefitted. This Agreement is for the exclusive
benefit of the Company and the Executive. No other party of any nature
whatsoever or whomsoever shall be deemed entitled to the benefit of the
provisions of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first written above.
"Company" BIRMAN MANAGED CARE, INC.
A Delaware Corporation
By:____________________________
Authorized Officer
"Executive" JEFFREY L. DRAKE
_______________________________
Page 13 Initials: Employer _____
Executive ____
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