<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333--11957
BIRMAN MANAGED CARE, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 62-1584092
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1025 Highway 111 South
Cookeville, Tennessee 38501
(931) 372-7800
(Issuer's telephone number)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Number of shares outstanding as of May 1, 1998 = 8,756,254
<PAGE> 2
BIRMAN MANAGED CARE, INC.
FORM 10-QSB
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
EXHIBITS
EX-27.1 Financial Data Schedule (for SEC use only)
2
<PAGE> 3
PART I.
ITEM 1. FINANCIAL STATEMENTS
BIRMAN MANAGED CARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
March 31, June 30,
1998 1997
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,381,106 $ 8,515,572
Accounts receivable, net of allowance for doubtful accounts of $128,286 and 740,025 1,592,741
$49,436,respectively
Prepaid expenses and other 47,948 95,980
Deferred income taxes 73,356 14,800
Income taxes receivable 1,240,900 --
Note receivable - related party 14,327 --
------------ ------------
Total Current Assets 7,497,662 10,219,093
Property and equipment, net of accumulated depreciation 1,139,144 584,248
Goodwill 1,199,196 1,226,566
Other 460,244 486,948
Deferred income taxes 223,655 --
Restricted certificates of deposit 500,000 500,000
------------ ------------
Total Assets $ 11,019,901 $ 13,016,855
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of notes payable and capital lease obligations $ 210,136 $ 208,019
Accounts payable 366,535 263,351
Accrued expenses 441,200 136,094
Income taxes payable -- 208,587
------------ ------------
Total Current Liabilities 1,017,871 816,051
Note payable, less current portion 400,000 605,700
Deferred income taxes 7,343 92,775
------------ ------------
Total Liabilities 1,425,214 1,514,526
------------ ------------
Minority interest 141,659 201,085
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity:
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 issued and outstanding 8,756 8,756
Additional paid-in capital 9,715,071 9,715,071
Retained earnings (deficit) (270,799) 1,577,417
------------ ------------
Total Stockholders' Equity 9,453,028 11,301,244
------------ ------------
Total Liabilities and Stockholders' Equity $ 11,019,901 $ 13,016,855
============ ============
</TABLE>
The Accompanying Notes are an Integral Part of the Condensed Consolidated
Financial Statements
3
<PAGE> 4
BIRMAN MANAGED CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
March 31, March 31,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Consulting and health plan revenues $ 2,766,777 $ 3,707,850 $ 8,232,661 $ 8,804,132
Cost of revenue 1,755,657 1,214,825 4,298,020 3,104,205
----------- ----------- ----------- -----------
Gross profit 1,011,120 2,493,025 3,934,641 5,699,927
Selling, general and administrative expenses 2,752,926 1,742,924 7,184,400 4,388,309
----------- ----------- ----------- -----------
Income (loss) from operations (1,741,806) 750,101 (3,249,759) 1,311,618
----------- ----------- ----------- -----------
Other income (expense):
Interest and other income 78,225 53,327 300,978 114,937
Interest expense (3,858) (2,508) (18,867) (3,501)
Loss on disposal of assets (60,064) -- (64,418) --
----------- ----------- ----------- -----------
14,303 50,819 217,693 111,436
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes and
minority interest (1,727,503) 800,920 (3,032,066) 1,423,054
Provision for income tax (expense) benefit 621,794 (320,335) 1,124,425 (569,889)
Minority interest 12,260 1,890 59,425 1,890
=========== =========== =========== ===========
Net Income (Loss) $(1,093,449) $ 482,475 $(1,848,216) $ 855,055
=========== =========== =========== ===========
Per share data:
Basic Earnings (loss) per share $ (.14) $ .07 $ (.23) $ .14
=========== =========== =========== ===========
Basic weighted average common shares
outstanding 8,089,588 6,884,214 8,089,588 6,244,136
=========== =========== =========== ===========
Diluted earnings (loss) per share $ (.14) $ .06 $ (.23) $ .11
=========== =========== =========== ===========
Weighted average common shares outstanding,
assuming dilution 8,089,588 8,307,061 8,089,588 7,646,242
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of the Condensed Consolidated
Financial Statements
4
<PAGE> 5
BIRMAN MANAGED CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Common Stock Additional Retained Total
Stock Shares Amount Paid -In Earnings Stockholders'
Capital Deficit Equity
--------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996, (Audited) -- 6,931,082 $ 6,931 $ 1,780,612 $ 1,401,436 $ 3,188,979
Stock sales -- 2,000,000 2,000 7,546,697 -- 7,548,697
Stock retired in payment of debt -- (174,800) (175) (803,903) -- (804,078)
Retirement of fractional shares -- (28) -- -- -- --
Stock released -- -- -- 1,191,665 -- 1,191,665
Net income -- -- -- -- 175,981 175,981
--- ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1997 (Audited) -- 8,756,254 8,756 9,715,071 1,577,417 11,301,244
Net loss (Unaudited) -- -- -- -- (1,848,216) (1,848,216)
--- ------------ ------------ ------------ ------------ ------------
Balance at March 31, 1998
(Unaudited) -- 8,756,254 $ 8,756 $ 9,715,071 $ (270,799) $ 9,453,028
=== ============ ============ ============ ============ ============
</TABLE>
The Accompanying Notes are an Integral Part of the Condensed Consolidated
Financial Statements
5
<PAGE> 6
BIRMAN MANAGED CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,848,216) $ 855,055
----------- -----------
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 175,688 88,405
Loss on disposal of assets 64,418 --
Gain attributed to minority interest (59,426) --
Changes in assets and liabilities:
Accounts receivable 852,716 (744,092)
Prepaid expenses and other 48,032 (52,336)
Deferred income taxes (282,211) (24,000)
Income taxes receivable (1,240,900) --
Other assets 26,704 (16,601)
Accounts payable 103,184 246,612
Accrued expenses 305,106 204,773
Income taxes payable (208,587) (554,390)
Deferred income tax payable (85,432) --
----------- -----------
(300,708) (851,629)
----------- -----------
Net cash provided by (used in) operating activities (2,148,924) 3,426
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (767,781) (413,167)
Collection of note receivable - related parties 5,475 --
Advances for note receivable - related parties (19,802) (172,905)
Acquisition of Canton Management Group, Inc. -- (753,617)
Proceeds from sale of assets 150 --
----------- -----------
Net cash used in investing activities (781,958) (1,339,689)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of stock, net of issuance costs -- 7,614,736
Payments on debt and capital leases (213,719) (5,995)
Proceeds from note payable - related party 10,135 --
----------- -----------
Net cash provided by (used in) financing activities (203,584) 7,608,741
----------- -----------
Net (decrease) increase in cash and cash equivalents (3,134,466) 6,272,478
Cash and cash equivalents at beginning of period 8,515,572 1,872,343
----------- -----------
Cash and cash equivalents at end of period $ 5,381,106 $ 8,144,821
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the nine-months for:
Interest $ 5,992 4350
============== ==========
Taxes $ 674,968 $1,115,802
============== ==========
Supplemental disclosures of non-cash investing and financing activities:
Issuance of debt in acquisition of Canton Management Group, Inc. $ -- $ 819,000
============== ==========
Stock retired in payment of debt to the Company $ -- $ 804,078
============== ==========
</TABLE>
The Accompanying Notes are an Integral Part of the Condensed Consolidated
Financial Statements
6
<PAGE> 7
BIRMAN MANAGED CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The condensed consolidated balance sheet and statement of changes in
stockholders equity as of March 31, 1998 and the related condensed
consolidated statements of operations and cash flows for the quarters
and nine-month periods ended March 31, 1998 and 1997 have been prepared
by the Company, without audit; in the opinion of management, all
adjustments for a fair presentation of such condensed consolidated
statements have been made in accordance with generally accepted
accounting principles. Accordingly, with the instructions of Item 310(B)
of Regulation S-B, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. Operating results for the nine month
period ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending June 30, 1998. These
interim financial statements should be read in conjunction with the
consolidated financial statements and notes contained therein, included
in the Company's Form 10-KSB for the year ended June 30, 1997.
The Company was organized in 1994 to serve as the holding company of
Birman & Associates, Inc. and BMC Health Plans, Inc. 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. This represents a
change in legal entity, but not in the operations of the Company. The
Company acquired a third subsidiary on June 14, 1996, through an asset
purchase of Hughes & Associates, Inc. ("Hughes").
On January 15, 1997, the Company acquired substantially all of the
issued and outstanding shares of capital stock of Care3, Inc., a
Mississippi corporation ("formerly Canton Management Group, Inc."), 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. Care3, Inc. currently is a 69% owned
subsidiary of the Company. The Company may further reduce its ownership
percentage of Care3, Inc. to 60% by allowing selected physicians to
acquire shares of Care3, Inc. common stock. During the year ended June
30, 1997, the Company formed two new subsidiaries, TMMC, Inc. and MMMC,
Inc. MMMC, Inc. is 90% owned by the Company.
2. Nature of Operations:
The Company is a health care consulting and management company dedicated
to improving the quality, controlling the cost, and enhancing the
efficiency of the management and delivery of health care services by
focusing on the physician as the most important factor in the health
care system. In pursuing these goals, the Company currently provides its
proprietary "Quality Management Program" ("QMP") 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 health plan, as
well as other health plans. The Company also operates, through its
Care3, Inc. subsidiary, a health plan in the State of Mississippi and
may pursue licenses in other states. The Company concentrates its
efforts on rural communities, particularly in the south-central and
southeast United States, with an initial focus on managed care in
Mississippi where it believes that the development of health care
management systems and managed care programs has lagged behind other
areas of the country.
3. Income taxes:
The provision for income taxes for the nine-month period ended March 31,
1998 has been computed based on management's estimate of the tax rate
for the entire fiscal year of 38%. The variation between the statutory
tax rate and the effective tax rate is primarily due to permanent
differences between expenses allowed for income tax purposes and
financial reporting purposes as well as state income taxes.
4. Earnings Per Share:
Basic earnings per share are based upon the weighted average number of
shares outstanding for each of the respective periods. 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 completed an initial public
offering of its common stock on February 19, 1997. Pursuant to
Securities and Exchange Commission rules, shares of common stock issued
for consideration below the anticipated offering price per share during
the 12-month period prior to filing of the registration statement have
been included in the calculation of common share equivalent shares 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 current trading price per share, whether or
not exercisable, have been included in the earnings per share
calculation, assuming dilution, using the treasury stock method. After
completion of the public offering, 1,000,000 shares of common stock were
placed in escrow by David N. Birman, M.D. , of which 666,666 still
remain in escrow. These escrow shares are included in the calculation of
weighted average common shares assuming dilution.
The following data reflects the amount used in computing earnings per
share for the quarter and nine months ended March 31, 1998 and 1997, and
the effect on income and the weighted average number of shares of
dilutive potential of common stock:
7
<PAGE> 8
BIRMAN MANAGED CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Earnings Per Share (continued):
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income (loss) available to common
stockholders used in basic EPS $(1,093,449) $ 482,475 $(1,848,216) $ 855,055
Basic earnings (loss) per share:
Weighted average of common shares
outstanding 8,089,588 6,884,214 8,089,588 6,244,136
=========== =========== =========== ===========
Basic earnings (loss) per share $ (.14) $ .07 $ (.23) $ .14
=========== =========== =========== ===========
Diluted earnings (loss) per share:
Effect of dilutive securities:
Options and warrants -- 422,847 -- 402,106
Escrow shares -- 1,000,000 -- 1,000,000
----------- ----------- ----------- -----------
-- 1,422,847 -- 1,402,106
Weighted average of common shares
outstanding 8,089,588 6,884,214 8,089,588 6,244,136
----------- ----------- ----------- -----------
Weighted average common shares
outstanding, assuming dilution 8,089,588 8,307,061 8,089,588 7,646,242
=========== =========== =========== ===========
Diluted earnings (loss) per share $ (.14) $ .06 $ (.23) $ .11
=========== =========== =========== ===========
</TABLE>
Options and warrants to purchase 1,239,866 shares of common stock at
exercise prices ranging from $1.37 to $7.25 per share and 666,666 shares
of common stock in escrow were outstanding during the nine months ended
March 31, 1998, but were not included in the computation of diluted
earnings per share as they are anti-dilutive to the loss per share.
5. New Accounting Pronouncements Adopted:
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 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 Accounting Principles Board ("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). 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 available to common
shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity
unless anti-dilutive, similar to fully diluted earnings per share. This
pronouncement is effective for fiscal years and interim periods ending
after December 15, 1997. The Company has adopted this accounting
standard for its earnings per share computations beginning October 1,
1997.
8
<PAGE> 9
BIRMAN MANAGED CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Line of Credit:
In August, 1996, the Company arranged a $1,500,000 maximum principal
amount working capital revolving line of credit facility ("facility")
with American National Bank and Trust Company of Chicago. The facility
has a maturity date of October 31, 1998. The facility provides for the
accrual of interest at a floating annual rate equal to the lender's
prime rate on the unpaid principal balance. The facility is secured by a
pledge of the Company's Quality Management Program, utilization review,
and health plan premium accounts receivable. These accounts receivable
are obligations of the hospital clients to the Company, employer clients
of Hughes, and employer clients of Care3, Inc. and are not Medicare or
Medicaid receivable accounts. Under the terms of the facility, the
Company can borrow up to the lesser of: (i) $1,500,000, or (ii) the
maximum facility minus any letter of credit obligations, or (iii) the
"Borrowing Base", (i.e., up to 75% of the face amount of all then
existing eligible receivables), minus any letter of credit obligations.
At March 31, 1998, there was a zero balance on the line of credit.
7. Significant Customer:
The Company has provided QMP 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 24% and 20% of
the Company's Quality Management Program revenues for the three months
ended March 31, 1998 and 1997, respectively, and approximately 22% and
24% for the nine months ended March 31, 1998 and 1997, respectively.
The Company also provided QMP services through December 31, 1997, for
two hospitals owned by St. Barnabas Health System, which represents
approximately 19% and 11% of the Company's QMP revenues for the nine
months ended March 31, 1998 and 1997 respectively. St. Barnabas ended
the contracts effective December 31, 1997 in accordance with their
terms.
The Company's Care3, Inc. Health Plan (the "Health Plan") in Mississippi
has enrolled a substantial number of members from two large casino
groups and three other large groups. For the nine months ended March 31,
1998, the premium revenue from these five significant customers of the
Health Plan represent approximately 76% of total premium revenue.
8. Commitments and Contingencies:
The Company settled its dispute with Robert D. Arkin, its former
general counsel, secretary and chief operating officer under an
agreement which provides that he receives nothing in respect of his
employment contract and that the unvested options held by him to acquire
184,505 shares of the Company's common stock are canceled. As part of
that agreement, the Company repurchased Mr. Arkin's rights to purchase
97,252 shares of the Company's common stock by delivery of $291,756 on
May 14, 1998. The amount has been recorded as a settlement expense
during the quarter ended March 31, 1998.
In April, 1998, the Company supplied certain documents concerning its
business pursuant to an administrative subpoena issued under the Health
Insurance Portability Accountability Act of 1996. Birman & Associates,
Inc., the Company's health care consultant subsidiary, regularly serves
a number of hospitals in Tennessee and Kentucky. The federal government
is now reviewing many of the practices of most, if not all, hospitals in
those and other states. The Company has for many years supplied
additional documents from time-to-time to various state and federal
agencies concerning its work for hospitals, including supplying
supplemental materials to Peer Review Organizations in connection with
some of its recommendations to hospitals. As the federal government
continues to increase its scrutiny of the healthcare industry, the
Company anticipates that the number of document requests it receives
from regulatory agencies and the outside professional and other costs
related thereto may increase.
9
<PAGE> 10
BIRMAN MANAGED CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Legal Proceedings:
Medical Business Associates, LLC Litigation: In January 1998, the
Company dismissed its lawsuit filed in August 1997 against Medical
Business Associates, LLC and a former employee of the Company after
obtaining assurances that their use of the Company's materials had
ceased.
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
was 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
In July 1997, a suit was file against the Company arising out of a
child-support payment dispute between a former sales executive of the
Company and his former wife. The suit, entitled Charlotte Brown v.
Birman Managed Care. In., et al., filed in the Circuit Court of Putnam
County, Tennessee, alleges that the Company and its principal officers
provided incorrect salary information to the former wife. Compensatory
damages of $89,000 and punitive damages of $1,000,000 are sought. The
Circuit Court has ruled that all information provided regarding salary
was accurate and complete. The Company believes there is no merit to the
suit.
Arkin Litigation: As set forth in Footnote 8, the Company has settled
its litigation with its former general counsel, secretary and chief
operating officer, Robert D. Arkin.
10
<PAGE> 11
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
The following table sets forth the results of operations and percentage of
revenue represented by certain items reflected in the Company's Condensed
Statements of Operations for the periods indicated:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1998 MARCH 31, 1997
-------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 2,766,777 100% $ 3,707,850 100% $ 8,232,661 100% $ 8,804,132 100%
Cost of revenue 1,755,657 63% 1,214,825 33% 4,298,020 52% 3,104,205 35%
----------- ----- ----------- ------ ----------- ----- ----------- -----
Gross Profit 1,011,120 37% 2,493,025 67% 3,934,641 48% 5,699,927 65%
SG&A Expenses 2,752,926 99% 1,742,924 47% 7,184,400 87% 4,388,309 50%
----------- ----- ----------- ------ ----------- ----- ----------- -----
Income (loss)
from operations (1,741,806) (63)% 750,101 20% (3,249,759) (39)% 1,311,618 15%
Interest and other
income 78,225 3% 53,327 1% 300,978 4% 114,937 1%
Interest expense (3,858) -- (2,508) -- (18,867) -- (3,501) --
Loss on disposal
of assets (60,064) (2)% -- -- (64,418) (1)% -- --
----------- ----- ----------- ------ ----------- ----- ----------- -----
Income (loss) before
income taxes and
minority interest (1,727,503) (62)% 800,920 22% (3,032,066) (37)% 1,423,054 16%
Income tax (exp.)
benefit 621,794 22% (320,335) (9)% 1,124,425 14% (569,889) (6)%
Minority interest 12,260 -- 1,890 -- 59,425 1% 1,890 --
----------- ----- ----------- ------ ----------- ----- ----------- -----
Net income (loss) $(1,093,449) (40)% $ 482,475 12% $(1,848,216) (22)% $ 855,055 10%
=========== ===== =========== ====== =========== ===== =========== =====
</TABLE>
FORWARD LOOKING STATEMENTS:
Certain statements contained in this section of the report, including those
under "Outlook are "forward-looking". While the Company believes that these
statements are accurate, the Company's business is dependent upon general
economic conditions and various conditions specific to its industry, and future
trends and results cannot be predicted with certainty. In particular:
The Company operates within a highly regulated industry, health care, which is
now the subject of expanded federal regulatory enforcement efforts. Although the
Company believes it is in full compliance with all applicable statutes,
regulations and administrative and court decisions, this area of the law is
evolving rapidly. There can be no assurance that such laws or decisions will not
in the future materially adversely affect the Company and its business.
The Company has engaged special health care regulatory counsel since 1989 to
review the Company's procedures and activities to assure compliance with those
laws. The Company's Board of Directors has adopted its resolution setting
compliance with those laws as the Company's main governing business principle.
Given the widespread federal enforcement activities in this industry, there can
be no assurance that the Company and/or its current and former officers will not
be made the subject of an investigation by federal enforcement personnel. In the
event of any such investigation or other regulatory or enforcement action, the
Company may experience a material adverse decline in its principal business.
While the Company believes any such action would be wholly unwarranted, the mere
fact of such action would cause the Company to incur substantial professional
fees for its defense and would damage its reputation and business activities
within its market.
Approximately 22% of the Quality Management Program ("QMP") business revenue for
the last three fiscal quarters has been from hospitals owned or managed by
Quorum. Those hospitals contract individually with the Company and there is no
"system wide" agreement with Quorum. Serious difficulties with any hospital
could adversely affect the Company's relations with Quorum; however, positive
relations could result in additional business for the Company.
Approximately 19% of the QMP business revenue for the last three fiscal quarters
has been from contracts with two St. Barnabas Health Care System hospitals.
These contracts ended in accordance with their terms on December 31, 1997. The
expiration of these two contracts has had an adverse effect on gross revenue and
earnings for the third fiscal quarter and will continue until new business is
secured to replace this revenue.
The Company's Care3, Inc. Health Plan (the "Health Plan") in Mississippi has
enrolled a substantial number of members from two large casino groups and three
other large groups. For the nine months ended March 31, 1998, the premium
revenue from these five significant customers of the Health Plan represent
approximately 76% of total premium revenue. Serious difficulties with any of
these large groups could adversely affect the performance of the Health Plan.
11
<PAGE> 12
QUARTER AND NINE MONTHS ENDED MARCH 31, 1998 COMPARED WITH QUARTER AND NINE
MONTHS ENDED MARCH 31, 1997:
REVENUE:
General
For the quarter ended March 31,1998, consolidated revenue decreased by 25% to
approximately $2,767,000, from approximately $3,708,000 in the comparable period
of the prior year. For the nine months ended March 31, 1998, consolidated
revenue decreased by 6% to approximately $8,233,000 from approximately
$8,804,000 in the comparable period of the prior year. In addition to a decrease
in consolidated revenue, there has been a change in the revenue distribution
between the various business segments of the Company. The decrease in revenue
from the QMP has been partially replaced with new revenue from the Health Plan
business. The following table shows revenue by business segment:
Table of Revenue by Business Segment (Unaudited)
<TABLE>
<CAPTION>
Quarter Quarter Nine Months Nine Months
ended ended ended ended
March 31, 1998 March 31, 1997 March 31, 1998 March 31, 1997
--------------------------------------------------------------
<S> <C> <C> <C> <C>
QMP Fees $1,638,736 $3,554,253 $6,275,841 $8,365,815
Utilization Review /Case Mgt 268,615 153,597 656,943 438,317
Health Plan Premium 859,426 -- 1,299,877 --
========== ========== ========== ==========
Consolidated Gross Revenue $2,766,777 $3,707,850 $8,232,661 $8,804,132
========== ========== ========== ==========
</TABLE>
Quality Management Program (QMP)
The QMP experienced a 54% decrease in revenue to approximately $1,639,000 for
the quarter ended March 31, 1998, from approximately $3,554,000 in the
comparable period of the prior year. For the nine months ended March 31, 1998
the QMP business experienced a 25% decrease in revenue to approximately
$6,276,000 from approximately $8,366,000 in the comparable period of the prior
year. This decrease in revenue for QMP business was a direct result of the
expiration of the contract with two St. Barnabas Health Care Systems hospitals
in the prior quarter (see significant customers - QMP) and the shift from
"results-oriented" compensation contracts to fixed fee compensation contracts.
Period to period changes in QMP business is measured by "per discharge" revenue.
In addition to a decrease in total revenue from QMP business, the Company has
experienced a decline in "per discharge" revenue recognized from its consulting
services. This decline in "per discharge" revenue is a result of the shift from
"results-oriented" compensation contracts to fixed fee compensation contracts.
Through most of the previous fiscal year the Company experienced rapid growth in
its QMP business. In the last three fiscal quarters, the decrease in revenue has
been due to a delay in closing new business caused by a change in marketing
strategy to increase emphasis of the regulatory compliance assurance benefit of
the QMP product, along with the lead time necessary to effectively train a new
marketing and sales team. During the first and second quarters, the impact of
heightened government regulatory enforcement against the health care industry in
general created a climate of hesitation among the Company's potential hospital
clients. As a consequence, the Company only started one new hospital account
during the first two quarters. The Company has started 5 new hospital accounts
during the quarter ended March 31, 1998. Although the number of hospital-clients
on contract has decreased to 24 as of March 31, 1998 from 33 in the prior year,
the average size of the hospital-client has increased.
Outlook: During the next fiscal quarter, the Company will realize revenue from a
new contract to provide QMP, compliance, training, and other services for three
large hospitals managed and operated by The Health Alliance of Greater
Cincinnati, an Ohio non-profit corporation. (See Significant Customer - QMP).
Work will begin at two of the hospitals during May 1998 with the third hospital
to begin during the first quarter of the next fiscal year (summer 1998). When
work at all three hospitals has commenced, the monthly revenue is estimated at
$150,000 to $175,000 per month for the first nine months.
Despite the recent downturn, the Company believes that the current government
regulatory climate will ultimately create additional opportunities for its
services and has announced several new product offerings which are designed to
position the Company for increased business. These products include the
Company's new Physician Outpatient Management Resources (POMR) which utilizes
the QMP technologies in the private practice setting. In addition, the Company
has formed an alliance with Government Management Services (GMS) to develop a
product which brings together the administrative and the clinical side of
compliance into one combined product called Compliance Assessment Service. The
Company has also taken the hospital QMP product and divided it into incremental
services to provide prospective customers with a wider choice of QMP services
with varying pricing arrangements while preserving margins desired by the
Company. There can be no assurance given as to the ultimate success of these new
products. In addition, there can be no assurance as to the ultimate decline in
"per discharge" revenues resulting from the shift from "results-oriented"
compensation to fixed fee compensation. Competitive and regulatory pressures may
cause further declines in these revenues.
12
<PAGE> 13
Significant Customer - QMP
The Company has provided QMP 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 24% and 20% of the Company's QMP
revenues for the three months ended March 31, 1998 and 1997, respectively, and
approximately 22% and 24% for the nine months ended March 31, 1998 and 1997,
respectively.
The Company also provided QMP services through December 31, 1997, for two
hospitals owned by St. Barnabas Health System, which represents approximately
19% and 11% of the Company's QMP revenues for the nine months ended March 31,
1998 and 1997, respectively. St. Barnabas ended the contract effective December
31, 1997 in accordance with their terms.
In April 1998, the Company entered into a contract to provide the QMP,
compliance, training, and other services for three large hospitals managed and
operated by The Health Alliance of Greater Cincinnati (the "Health Alliance"),
an Ohio non-profit corporation. Work at the two hospitals will begin in May 1998
with the third hospital to begin in summer 1998. The contract has three phases
to the program with a decreasing level of consulting services and related fees.
Phase I provides for full implementation and training under the QMP. Phase II
and III provides further training and education and then a transition to
monitoring and maintenance of a Health Alliance-operated compliance program.
This two-year contract is valued at approximately $2.6 million and will be a
significant customer to the Company in future quarters.
Outlook: The expiration of the two St. Barnabas Health Care System hospital
contracts has had an adverse effect on gross revenue and gross profit during the
current fiscal quarter. The Health Alliance contract will replace a large
percentage of the revenue and gross profit lost as a result of the expiration of
the St. Barnabas contracts.
Health Plan Revenue
The Company's Health Plan in Gulfport, Mississippi began operations in March
1997 and had no revenue in the comparable period of the prior year. The Health
Plan revenue grew to approximately $859,000 for the quarter ended March 31, 1998
and represented 31% of consolidated revenue. For the nine months ended March 31,
1998, the Health Plan revenue was approximately $1,300,000 and represented 16%
of consolidated revenue.
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 8,043 "member months"
for the three months ended March 31, 1998 and 12,541 "member months" for the
nine months ended March 31, 1998.
Outlook: The Care3, Inc. ("Care3") Health Plan will continue to experience
significant growth in the next fiscal quarter and has grown to 64 groups and
3,689 members as of April 1, 1998 from 174 members as of June 30, 1997. The
Company has enrolled a substantial number of members from the casino gaming
industry, an occupation with recognized potential health care concerns. The
Company has enrolled another large casino group effective May 1, 1998 with
approximately 400 employees. Like all enrolled groups to Care3, the Company will
apply appropriate clinical case management standards through its Hughes &
Associates utilization and case management subsidiary to assure clinical quality
and cost management procedures are attained. The Health Plan is in the start-up
stage and there can be no assurance that the Health Plan will achieve or
maintain profitability in the future.
Significant Customer - Health Plan
The Care3, Inc. Health Plan has enrolled a substantial number of members from
two large casino groups and several other large groups. The following table
shows premium revenue from significant customers of the Care3, Inc. Health Plan
for the quarter ended and nine months ended March 31, 1998:
Table of Significant Customers - Care3, Inc. Health Plan
Percentage of Premium Revenue (Unaudited):
<TABLE>
<CAPTION>
Quarter Nine Months
ended ended
March 31, 1998 March 31, 1998
-------------------- ------------------
<S> <C> <C>
Ash Corporation 7.9% 8.6%
Copa Casino 25.9% 41.7%
Fayard Freight 16.2% 10.7%
Gulfshores Inn 13.4% 8.9%
Imperial Palace Casino 8.0% 5.9%
-------------------- ------------------
Totals: 71.4% 75.8%
</TABLE>
Outlook: The Imperial Palace Casino added approximately 800 new members to the
Health Plan in March, 1998 and, therefore, is expected to be more significant in
the next fiscal quarter. The Company is in the growth stage and is adding other
groups to reduce the dependence on a few large groups. The Company has enrolled
another large casino group effective May 1, 1998 with approximately 400
employees.
13
<PAGE> 14
Utilization Review/Case Management
Revenue from the operations of Hughes and Associates, Inc., the Company's
utilization review (UR) business in Mississippi, increased by 75%, to
approximately $269,000 for the three months ended March 31, 1998, from
approximately $154,000 in the comparable period of the prior year. For the nine
months ended March 31, 1998, the UR business increased by 50% to approximately
$657,000 from approximately $438,000 in the comparable period of the prior year.
Outlook: The Company expects the UR business to continue to show growth in
revenue. The revenue and earnings from Hughes & Associates, Inc. is not expected
to contribute materially to consolidated revenue or earnings of the Company.
COST OF REVENUE:
The cost of revenue includes all costs directly associated with the operations
of the QMP and UR business, including compensation of physicians and allied
health specialists, consulting staff travel and lodging, and other direct costs.
Also included in cost of revenue are medical claims for the Health Plan,
including a reserve for claims incurred but not reported.
Total cost of revenue for the Company increased by 45%, to approximately
$1,756,000 for the three months ended March 31, 1998, from approximately
$1,215,000 in the comparable period of the prior year. For the nine months ended
March 31, 1998, total cost of revenue increased by 38% to approximately
$4,298,000 from $3,104,000 in the comparable period of the prior year. This
increase was due to the consolidation of the Company's Health Plan in Gulfport,
Mississippi which began operations in March 1997 and reported medical claims
expense of approximately $788,000 for the quarter and $1,214,000 for the nine
months ended March 31, 1998. Medical claims expense includes an increase in
reserves for claims incurred but not reported of approximately $247,000 for the
quarter and $400,000 for the nine months ended March 31, 1998.
Total cost of revenue as a percentage of total revenue increased to 63% for the
three months ended March 31, 1998 from 33% for the comparable period of the
prior year. For the nine months ended March 31, 1998, total cost of revenue as a
percentage of total revenue increased to 52% from 35% in the comparable period
of the prior year.
While the QMP and UR business direct costs continue at 40% to 50% of QMP and UR
revenue, the growth in the medical claims expense from Company's Health Plan has
caused total cost of revenue to increase as a percentage of total revenue. The
following table shows the cost of revenue by business segment:
Table of Cost Of Revenue By Business Segment (Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
ended ended ended ended
March 31, 1998 March 31, 1997 March 31, 1998 March 31, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
QMP $ 812,500 $1,141,849 $2,699,208 $2,894,448
Utilization Review /Case Mgt 115,806 72,976 322,677 209,757
Health Plan - Medical Claims 788,027 -- 1,213,852 --
Health Plan - Management 39,324 -- 62,283 --
========== ========== ========== ==========
Consolidated Cost of Revenue 1,755,657 1,214,825 4,298,020 3,104,205
========== ========== ========== ==========
</TABLE>
Outlook: Total cost of revenue will continue to increase significantly as more
medical claims are incurred for the Company's Health Plan in Mississippi due to
membership growth. Total cost of revenue as a percentage of total revenue is
anticipated to continue to increase as the revenue from the Health Plan becomes
a larger portion of the total revenue.
GROSS PROFIT:
For the quarter ended March 31, 1998, the Company's gross profit decreased to
approximately $1,011,000 from $2,493,000 in the comparable period of the prior
year. The Company's gross profit margin decreased to 37% of revenue for the
quarter ended March 31, 1998 from 67% of revenue in the comparable period of the
prior year.
For the nine months ended March 31, 1998, the Company's gross profit decreased
to approximately $3,935,000 from $5,700,000 in the comparable period of the
prior year. The Company's gross profit margin decreased to 48% of revenue for
the nine months ended March 31, 1998 from 65% of revenue in the comparable
period of the prior year.
The large decrease in gross profit was due to decreased revenues from the
Quality Management Program as a result of the expiration of a contract with two
St. Barnabas Health Care Systems hospitals in the prior quarter (see Significant
Customers-QMP). Gross profit for the Quality Management Program also decreased
due to the shift from "results-oriented" compensation contracts to fixed fee
compensation contracts. In addition, gross profit margin (as a percentage of
total revenue) has also decreased because of the addition of the lower gross
profit margin from Care3.
While the QMP and UR businesses continue to operate with gross margins of 50% to
60% of QMP and UR revenue, the addition of the Company's Health Plan business
has caused overall gross margins to decrease. The following chart shows gross
margin percentages by business segment:
14
<PAGE> 15
GROSS PROFIT (CONTINUED):
Table of Gross Profit Margin By Business Segment: (Unaudited)
<TABLE>
<CAPTION>
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
March 31, 1998 March 31, 1997 March 31, 1998 March 31, 1997
% of Revenue % of Revenue % of Revenue % of Revenue
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
QMP 50% 68% 57% 65%
Utilization Review/Case Management 56% 51% 50% 52%
Health Plan 4% N/A 2% N/A
Consolidated Gross Margins 37% 67% 48% 65%
</TABLE>
Outlook: The QMP and UR businesses are anticipated to produce gross profit
margins of 50% to 60% of revenue in the near term. The Company expects the
Health Plan to eventually produce gross profit margins of 10% to 18% of premium
revenue, which is typical for the industry. Gross margin percentages on a
consolidated basis will, therefore, continue to decrease as the revenue from the
Health Plan becomes a larger portion of total revenue. The Health Plan gross
profit margins as a percentage of premium revenue will never equal the margin
percentages experienced from the Company's other businesses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses increased by $1,010,000 or 58%, to
approximately $2,753,000 for the current quarter. For the nine months ended
March 31, 1998, selling, general and administrative expense increased by
$2,796,000 or 64%, to approximately $7,184,000.
This increase includes a non-recurring charge of $291,000 related to the
settlement of the Arkin lawsuit (see Legal Proceedings). In addition, the
Company expensed $167,000 of capitalized development costs for the Tennessee
health plan network. These costs have been expensed in the current quarter
because the Company has postponed further development of the Tennessee health
plan in order to focus on expansion of the Mississippi health plan. Excluding
the non-recurring charge, selling, general, and administrative expenses
increased by 32% for the quarter ending March 31, 1998 and 53% for the nine
months ended March 31, 1998.
The following table provides detail of the major increases in selling, general
and administrative expenses for the quarter ended and nine months ended March
31, 1998:
Table of Major Increases in Selling, General and Administrative Expense
(Unaudited)
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1998
------------- --------------
<S> <C> <C>
Salaries, benefit and relocation expense related to the expansion of the $ 92,500 $786,500
management team, additional marketing executives for the QMP and
UR business and other administrative support personnel
An increase in legal and professional fees related to regulatory and 205,000 630,000
compliance advice and on-going litigation
Expenses incurred as a new publicly held company for public 147,000 450,000
reporting, directors expense, and D&O liability insurance
Overhead related to the new health plan in Gulfport Mississippi 202,000 551,000
Non-Recurring Items:
Arkin settlement expense 291,000 291,000
Write-off of Tennessee network development costs 167,000 167,000
</TABLE>
Outlook: The Company anticipates that selling, general, and administrative
expense will continue at the current level through the next fiscal quarter. The
Company does not anticipate non-recurring charges for the next fiscal quarter.
As a percentage of total revenue, the Company expects a decrease in future
quarters as revenue is realized from the Health Plan and other business
development.
15
<PAGE> 16
INTEREST INCOME AND EXPENSE:
Interest income increased to approximately $78,000 for the quarter ended March
31, 1998 from approximately $53,000 in the comparable period of the prior year.
For the nine months ended March 31, 1998, interest income increased to
approximately $ 297,000 from approximately $115,000 in the comparable period of
the prior year. This increase was attributable to interest earned on the
increased balance of cash deposits held primarily in money market and other
short-term investment accounts.
Interest expense increased to approximately $4,000, for the quarter ended March
31, 1998 from approximately $3,000. For the nine months ended March 31, 1998,
interest expense increased to approximately $19,000 from approximately $4,000.
This increase was due to the accrual of interest on a note payable for the
acquisition of Care3 in January 1997.
NET INCOME:
For the three months ended March 31, 1998, the Company reported a net loss of
($1,093,449), as compared with net income of $482,475 in the comparable period
of the prior year. For the nine months ended March 31, 1998, the Company
reported a net loss of ($1,848,216), as compared with net income of $855,055 in
the comparable period of the prior year.
The increase in net loss both for the quarter and nine months ended March 31,
1998 was primarily from a decrease in gross profit from the 54% decrease in
revenue from the Quality Management Business. In addition, the Company
experienced a increase in selling, general and administrative expense as a
result of pre-tax non-recurring charges of $458,000 and the staffing additions
to the Company's management team, new product development, startup of the
Company's HMO in Mississippi, increase in legal and professional fees, and
expenses incurred as a new publicly held Company.
Outlook: The Company anticipates lower net operating losses into the fourth
quarter as (i) revenue is realized from the additional contracts and customers
added during the third fiscal quarter (ii) revenue is realized from the
investment made in additional marketing personnel for QMP and new product
development and (iii) the health plan continues to grow and move closer to
profitability. The Company expects that the operating loss for the fourth fiscal
quarter will be in the range of $750,000 to $950,000.
LIQUIDITY AND CAPITAL RESOURCES:
During the nine months ended March 31, 1998, the Company funded its operating
and business development activities primarily through operating revenue and cash
on deposit of approximately $2,149,000. The Company invested approximately
$768,000 to furnish and improve the Company's new office building. During the
nine months ended March 31, 1998, the Company repaid approximately $214,000 of
debt and capital leases.
The Company will use $750,000 to $950,000 of cash resources during the next
fiscal quarter to fund anticipated operating losses for the quarter.
The Company has available a working capital line of a $1,500,000 (maximum
principal) credit facility with American National Bank and Trust Company of
Chicago. The facility has a maturity date of October 31, 1998. The credit
facility is secured by a pledge of the Company's Quality Management Program,
utilization review and premium receivable accounts receivable. These accounts
receivable are obligations of the hospital clients to the Company, employer
clients of Hughes & Associates, Inc., and employer clients of Care3, Inc. and
are not Medicare or Medicaid receivable accounts.
Outlook: The Company believes the net proceeds from the initial public offering
in February, 1997, 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 12 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
twelve month period. There can be no assurance that acceptable financing for
future transactions can be obtained.
YEAR 2000 ISSUES:
The Company utilizes various computer software packages as tools in running its
accounting operations and for general business functions. Management plans to
implement any necessary vendor upgrades and modifications to ensure continued
functionality with respect to the widely discussed software problems associated
with the Year 2000. At present, management does not expect that material
incremental costs will be incurred in the aggregate or in any single future
year.
16
<PAGE> 17
PART II
Item 1: Legal Proceedings
MEDICAL BUSINESS ASSOCIATES, LLC LITIGATION: As reported in its Report on Form
10-QSB for the quarter ended December 31, 1997, in January 1998, the Company
dismissed its lawsuit filed in August 1997 against Medical Business Associates,
LLC and a former employee of the Company after obtaining assurances that their
use of the Company's materials had ceased.
ARKIN DISPUTE SETTLEMENT: As reported in its Report of Form 10-QSB for the
quarter ended December 31, 1997, the Company settled its dispute with Robert D.
Arkin, its former general counsel, secretary and chief operating officer under
an agreement which provides that he receives nothing in respect of his
employment contract and that his unvested options to acquire 184,505 shares of
the Company's common stock are canceled. As part of that agreement, the Company
repurchased Mr. Arkin's rights to purchase 97,252 shares of the Company's
common stock at $1.37 per share by delivery of $291,756.00 to him on May 14,
1998.
OTHER LITIGATION: As reported in footnote 9 of the Condensed Consolidated
financial statements for the quarter ended March 31, 1998, the Company is
subject to certain other litigation. The Company believes there is no merit to
these suits against the Company.
Item 5: Other Information
On April 22, 1998, Samuel S. Patterson, senior vice president of the Company,
was named president and chief operating officer of BMC Health Plans, Inc., a
wholly-owned subsidiary of the Company. Its previous president, Vincent Wong,
resigned from the Company for personal reasons on April 3, 1998. Mr.
Patterson's duties as president and chief operating officer of Birman &
Associates, Inc., the Company's health care consulting subsidiary, have been
assumed by David N. Birman, M.D., the Company's chairman, president and chief
executive officer.
Company to Supply Documents: In April 1998, the Company supplied certain
documents concerning its business pursuant to an administrative subpoena issued
under the Health Insurance Portability Accountability Act of 1996. Birman &
Associates, Inc., the Company's health care consultant subsidiary, regularly
serves a number of hospitals in Tennessee and Kentucky. The federal government
is now reviewing many of the practices of most, if not all, hospitals in those
and other states. The Company has for many years supplied additional documents
from time-to-time to various state and federal agencies concerning its work for
hospitals, including supplying supplemental materials to Peer Review
Organizations in connection with some of its recommendations to hospitals. As
the federal government continues to increase its scrutiny of the healthcare
industry, the Company anticipates that the number of document requests it
receives from regulatory agencies and the outside professional and other costs
related thereto may increase.
Change of Accountants
On February 6, 1998, the Company, with the approval of the Board of Directors
and upon recommendation of the audit committee of the Board of Directors,
advised BDO Seidman, LLP, that it was dismissing such accounting firm and was
retaining the accounting firm of Deloitte & Touche, LLP, as independent public
accountants for the Company and its subsidiaries for the remaining two fiscal
quarters of the fiscal year ending June 30, 1998. The decision to retain
Deloitte & Touche, LLP, was made because of that firm's closer proximity to the
Company's headquarters in Cookeville, Tennessee and that firm's extensive
experience in health care related industries. The dismissal and replacement was
not motivated by any disagreements between the Company and BDO Seidman, LLP
concerning any accounting matter. During the entire period of BDO Seidman, LLP's
engagement with the Company, there were no disagreements on any matter relative
to accounting principles or practices, financial statement disclosure, or
auditing scope or procedures which, if not resolved to the satisfaction of BDO
Seidman, LLP, would have resulted in a reference to the subject matters of the
disagreement in connection with its report. The reports of BDO Seidman, LLP on
the Company's financial statements have not contained an adverse opinion or a
disclaimer of opinion, nor were the opinions qualified or modified as to
uncertainty, audit scope, or accounting principles, nor were there any events of
the type requiring disclosure under Item 304 (a) (1) (iv) of Regulation S-B of
the Securities and Exchange Commission promulgated under the Securities Act of
1933 and the Securities Exchange Act of 1934. During the two year period prior
to February 6, 1998, the Company did not consult Deloitte & Touche, LLP
concerning any matter or the type of opinion that might be rendered.
17
<PAGE> 18
Item 6: Exhibits and Reports on Form 8-K
(a.) Exhibits
<TABLE>
<S> <C>
*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 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., and 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.
*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.
*10.9 Consulting Agreement by and between Richard M. Ross, RRCG, LLC,
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 Sadler, M.D., James Goodman, Ph.D., Vic Caracci,
Michael T. Caracci, Robert T. Teague, M.S.W., Vincent Caracci, Charlie Hill,
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.
*10.17 Form of Indemnification Agreement for Birman Managed Care, Inc.
*10.18 Executive Bonus Plan.
*10.19 Agreement by and between National Benefit Resources, Inc. and
Birman Managed Care, Inc. entered into on April 16, 1996.
*10.20 Agreement dated September 17, 1996 by and between Birman Managed
Care, Inc. and Community Medical Center.
*10.21 Form of Escrow Agreement.
*10.22 Lease dated December 2, 1996 between Arc Builders, LLC and Birman
Managed Care, Inc.
*10.23 Form of Consulting Agreement between Birman Managed Care, Inc. and
Royce Investment Group, Inc.
*10.24 Form of Merger and Acquisition Agreement between Birman Managed
Care, Inc. and Royce Investment Group, Inc.
**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.
***16.1 Letter on Change in Certifying Accountant.
27.1 Financial Data Schedule.
</TABLE>
(b.) Reports on Form 8-K
Form 8-K was filed by the Company on December 22,1997 and March 23,
1998.
- --------------------
* Incorporated by reference from the Company's Registration Statement on
Form SB-2 (No. 333-111957).
** Incorporated by reference from the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1997.
*** Incorporated by reference from the Company's quarterly report on Form
10-QSB for the fiscal quarter ended December 31, 1997.
<PAGE> 19
SIGNATURES
Pursuant to the requirements 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.
BIRMAN MANAGED CARE, INC.
May 15, 1998 /s/ DAVID N. BIRMAN
------------------------------------
David N. Birman
Chairman of the Board, President and
Chief Executive Officer
May 15, 1998 /s/ DOUGLAS A. LESSARD
------------------------------------
Douglas A. Lessard
Vice President, Treasurer and Chief
Financial Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BIRMAN MANAGED CARE, INC. FOR THE NINE MONTHS ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 5,381,106
<SECURITIES> 0
<RECEIVABLES> 868,311
<ALLOWANCES> 128,286
<INVENTORY> 0
<CURRENT-ASSETS> 7,497,662
<PP&E> 1,292,270
<DEPRECIATION> 153,126
<TOTAL-ASSETS> 11,019,901
<CURRENT-LIABILITIES> 1,017,871
<BONDS> 400,000
0
0
<COMMON> 8,756
<OTHER-SE> 9,444,272
<TOTAL-LIABILITY-AND-EQUITY> 11,019,901
<SALES> 0
<TOTAL-REVENUES> 8,232,661
<CGS> 0
<TOTAL-COSTS> 11,482,420
<OTHER-EXPENSES> (236,560)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,667
<INCOME-PRETAX> (3,032,066)
<INCOME-TAX> 1,124,425
<INCOME-CONTINUING> (1,848,216)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,848,216)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
