<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, 1999
[ ] 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.
(Name of small business issuer 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
(Address of principal executive offices: zip code)
(931) 372-7800; (931) 372-7823 (Facsimile)
(Issuer's telephone number, including area code)
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 common stock shares outstanding as of May 15, 1999 = 8,756,254
1
<PAGE> 2
BIRMAN MANAGED CARE, INC. & SUBSIDIARIES
FORM 10-QSB
INDEX
<TABLE>
<S> <C>
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, Nine Months Ended March 31, 1999
EX-27.2 Financial Data Schedule, Nine Months Ended March 31, 1998 - Restated
</TABLE>
2
<PAGE> 3
PART I.
ITEM 1. FINANCIAL STATEMENTS
BIRMAN MANAGED CARE, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(UNAUDITED) (AUDITED)
March 31, June 30,
1999 1998
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,490,406 $ 2,431,387
Accounts receivable, net of allowance for doubtful accounts of $207,303 and $130,000,
respectively 957,594 805,760
Prepaid expenses and other 94,336 38,516
Deferred income taxes 26,819 26,819
Income taxes receivable (Note 3) 82,734 1,234,634
Note receivable - related party 29,923 55,265
----------- -----------
Total Current Assets 2,681,812 4,592,381
Property and equipment, net of accumulated depreciation of $483,807 and $287,717, respectively 990,106 1,104,110
Goodwill 11,704 12,915
Other 192,780 126,282
----------- -----------
Total Assets $ 3,876,402 $ 5,835,688
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of notes payable and capital lease obligations $ -- $ 205,700
Accounts payable 96,409 333,256
Accrued expenses 306,065 141,605
Income taxes payable 121,054 --
Net liabilities of discontinued operations (Notes 1 and 9) 52,146 102,546
----------- -----------
Total Current Liabilities 575,674 783,107
Note payable, less current portion -- 400,000
Note payable, related party 2,379 --
Deferred income taxes 34,083 34,083
----------- -----------
Total Liabilities 612,136 1,217,190
----------- -----------
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 deficit (6,459,561) (5,105,329)
----------- -----------
Total Stockholders' Equity 3,264,266 4,618,498
----------- -----------
Total Liabilities and Stockholders' Equity $ 3,876,402 $ 5,835,688
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of the
Condensed Consolidated Financial Statements
3
<PAGE> 4
BIRMAN MANAGED CARE, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
March 31, March 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Consulting revenues $ 1,820,050 $ 1,907,351 $ 5,721,157 $ 6,934,174
Cost of revenue 857,497 928,306 2,871,292 3,021,885
----------- ----------- ----------- -----------
Gross profit 962,553 979,045 2,849,865 3,912,289
General and administrative expenses 1,526,232 2,181,926 4,511,473 5,893,621
----------- ----------- ----------- -----------
Loss from continuing operations (563,679) (1,202,881) (1,661,608) (1,981,332)
----------- ----------- ----------- -----------
Other income (expense):
Interest and other income 10,004 61,554 56,842 267,721
Interest expense (6,408) (3,355) (14,809) (15,861)
Loss on disposal of assets -- (60,064) -- (64,419)
----------- ----------- ----------- -----------
3,596 (1,865) 42,033 187,441
----------- ----------- ----------- -----------
Loss from continuing operations before provision for
income taxes and extraordinary gain (560,083) (1,204,746) (1,619,575) (1,793,891)
Provision for income tax benefit (expense) (Note 3) (45,894) 433,709 (30,662) 635,692
----------- ----------- ----------- -----------
Loss from continuing operations before extraordinary gain (605,977) (771,037) (1,650,237) (1,158,199)
Net loss from discontinued operations of health plan, net
of tax -- (322,412) -- (690,017)
Gain on disposal of health plan, net of tax (Notes 1 and 9) -- -- 75,000 --
----------- ----------- ----------- -----------
Net loss before extraordinary gain (605,977) (1,093,449) (1,575,237) (1,848,216)
Extraordinary gain on debt extinguishment,
less applicable income taxes of $0 (Note 10) -- -- 221,005 --
----------- ----------- ----------- -----------
Net loss (605,977) $(1,093,449) $(1,354,232) $(1,848,216)
=========== =========== =========== ===========
Loss per common share - basic
Loss from continuing operations
before extraordinary gain $ (.07) $ (.10) $ (.20) $ (.14)
Loss from discontinued operations of health
plan, net of tax -- (.04) -- (.09)
Gain on disposal of health plan, net of tax -- -- .01 --
Extraordinary gain on debt extinguishment, net of tax -- .03 --
----------- ----------- ----------- -----------
Net loss $ (.07) $ (.14) $ (.16) $ (.23)
=========== =========== =========== ===========
Loss per common share - assuming dilution
Loss from continuing operations
before extraordinary gain $ (.07) $ (.10) $ (.20) $ (.14)
Loss from discontinued operations of health
plan, net of tax -- (.04) -- (.09)
Gain on disposal of health plan, net of tax -- -- .01 --
Extraordinary gain on debt extinguishment, net of tax -- -- .03 --
----------- ----------- ----------- -----------
Net loss $ (.07) $ (.14) $ (.16) $ (.23)
=========== =========== =========== ===========
Basic weighted average common stock shares
outstanding (Note 4) 8,089,588 8,089,588 8,089,588 8,089,588
=========== =========== =========== ===========
Weighted average diluted common stock shares
outstanding (Note 4) 8,089,588 8,089,588 8,089,588 8,089,588
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of the
Condensed Consolidated Financial Statements
4
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BIRMAN MANAGED CARE, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
Shares Amount Paid-In Earnings Stockholders'
Capital (Deficit) Equity
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997, 8,756,254 $ 8,756 $ 9,715,071 $ 1,577,417 $ 11,301,244
(Audited)
Net loss for year ended
June 30, 1998 (Audited) -- -- -- (6,682,746) (6,682,746)
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1998, 8,756,254 8,756 9,715,071 (5,105,329) 4,618,498
(Audited)
Net loss for the nine months ended
March 31, 1999 (Unaudited) -- -- -- (1,354,232) (1,354,232)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 1999
(Unaudited) 8,756,254 $ 8,756 $ 9,715,071 $ (6,459,561) $ 3,264,266
============ ============ ============ ============ ============
</TABLE>
The Accompanying Notes are an Integral Part of the
Condensed Consolidated Financial Statements
5
<PAGE> 6
BIRMAN MANAGED CARE, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,354,232) $(1,848,216)
Loss from discontinued operations (690,017)
Gain on disposal of health plan (Notes 1 and 9) 75,000 --
Extraordinary gain on debt extinguishment (Note 10) 221,005 --
----------- -----------
Net loss from continuing operations before extraordinary gain (1,650,237) (1,158,199)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 197,303 96,789
Loss on disposal of assets -- 64,418
Changes in assets and liabilities:
Accounts receivable (151,834) 852,716
Prepaid expenses and other (55,820) 48,032
Deferred tax asset -- (282,211)
Income taxes receivable 1,151,900 (1,240,900)
Other assets (66,498) 26,704
Accounts payable (236,847) 103,184
Accrued expenses 169,218 287,040
Income taxes payable 121,054 (208,587)
Deferred income taxes -- (85,432)
----------- -----------
1,128,476 (338,247)
----------- -----------
Net cash used in operating activities (521,761) (1,496,446)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (82,088) (767,781)
Payments from (advances for) note receivable - related parties 22,963 (4,192)
Investment in discontinued operations 24,600 (1,425,334)
----------- -----------
Net cash used in investing activities (34,525) (2,197,307)
----------- -----------
Cash flows from financing activities:
Payments on debt and capital leases (384,695) (213,719)
----------- -----------
Net cash used in financing activities (384,695) (213,719)
----------- -----------
Net decrease in cash and cash equivalents (940,981) (3,907,472)
Cash and cash equivalents at beginning of period 2,431,387 8,462,277
----------- -----------
Cash and cash equivalents at end of period $ 1,490,406 $ 4,554,805
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of the
Condensed Consolidated Financial Statements
6
<PAGE> 7
BIRMAN MANAGED CARE, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
The condensed consolidated balance sheet and statement of changes in
stockholders' equity as of March 31, 1999 and the related condensed
consolidated statements of operations and cash flows for the three
months and nine months ended March 31, 1999 and 1998 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 three months
and nine months ended March 31, 1999 are not necessarily indicative of
the results that may be expected for the year ending June 30, 1999.
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,
1998.
The accompanying condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern.
The Company has suffered losses from its consulting business due to
changes in the market which slowed the Company's ability to add new
hospital clients, which reduced the Company's profit margins on its
consulting engagements and which required a change in the Company's
billing practices. On June 30, 1998, management implemented a series
of steps to reduce the Company's operating expenses. These included a
reduction in employees, staff position consolidations, salary
reductions for most employees ranging from 10% to 30% of salary, and
other expense reduction initiatives. These measures did not return the
Company to profitability and the Company commenced further cost
reduction measures in January 1999 which are expected ultimately to
reduce operating and overhead costs by an additional $200,000 per
month beginning in February 1999. After these further reductions, the
Company believes that existing cash resources and available credit
facilities (see Note 6) will be sufficient to meet the Company's
working capital needs for the next twelve months.
The accompanying consolidated financial statements include the
accounts of Birman Managed Care, Inc. and its wholly-owned
subsidiaries Birman Consulting Group, Inc. (formerly named, "Birman &
Associates, Inc.") and Hughes & Associates, Inc. (collectively, the
"Company").
The Company has entered into a letter of intent to sell Hughes &
Associates, Inc. to certain members of the subsidiaries' management.
The sale, on which the Company expects to report a small gain, is
expected to close in mid- to late May 1999.
The health plan operations are reported as discontinued operations for
all periods presented (see Note 2). The condensed consolidated balance
sheets and condensed consolidated results of operations, cash flows
and notes to the condensed consolidated financial statements have been
restated to conform to the discontinued operations presentation. The
discontinued operations include Care3, Inc., a sixty-nine percent
(69%) owned subsidiary of Birman Managed Care, Inc., and the
operations of BMC Health Plans, Inc., TMMC, Inc., and MMMC, Inc., a
ninety percent (90%) owned subsidiary of Birman Managed Care, Inc. All
significant inter-company accounts and transactions have been
eliminated in consolidation.
Unless otherwise noted all note disclosures herein represent
activities and balances of continuing operations.
2. Nature of Operations:
Birman Managed Care, Inc. (the "Company" or "BMC") is a Delaware
corporation originally incorporated in Tennessee in 1994 as BA Forum,
Inc., which was changed to its current name in October 1995. The
Company reincorporated in Delaware in September 1996. The Company
completed its initial public offering of common shares in February
1997. The Company operates through two wholly-owned subsidiaries,
Birman Consulting Group, Inc. (formerly named, "Birman & Associates,
Inc.") and Hughes & Associates, Inc. Through Birman Consulting Group,
the Company assists hospitals and other health care providers to
improve the quality of the medical record, improve the efficiency of
the delivery of health care services, to more accurately document the
services rendered, by means of improved documentation to obtain
appropriate reimbursement for services and to comply with applicable
government rules, regulations and statutes. Unique among its
competitors, Birman Consulting Group, Inc. employs fully-trained
physicians to deliver these services to its hospital clients. Through
Hughes & Associates, Inc., the Company provides utilization review
services to self-insured employer groups and insurers.
7
<PAGE> 8
BIRMAN MANAGED CARE, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In addition to its consulting services, the Company formed and
operated a health maintenance organization ("HMO") in the state of
Mississippi, Care3, Inc. ("Care3"), of which it owns 69% of the common
stock and all of the preferred stock. The Company formed three
wholly-owned subsidiaries to service the HMO, BMC Health Plans, Inc.,
MMMC, Inc. and TMMC, Inc. Care3 experienced rapid member growth during
the third and fourth quarters of fiscal 1998, growing to 6,400
members. However, due to competitive pressures and capital
constraints, the Company elected in July of 1998 to cease making
additional capital contributions to Care3. After unsuccessfully
seeking additional capital partners or buyers for Care3 or the
Company's interest in it, with the Company's acquiescence, Care3 was
placed under statutory rehabilitation by the Mississippi Insurance
Department on August 7, 1998 effectively ending the Company's
involvement in direct ownership and management of an HMO. The
Company's health plan operations were thus discontinued and the
Company does not intend to reenter the HMO industry in a risk-assuming
capacity.
3. Income taxes:
The provision for income taxes for the three months and nine months
ended March 31, 1999 has been computed based on management's estimate
of the tax rate for the entire fiscal year of 35% offset by a recorded
valuation allowance against net deferred tax assets related to federal
and state net operating loss carryforwards created in the current
period. 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 purposes as well as
state income taxes.
8
<PAGE> 9
BIRMAN MANAGED CARE, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Earnings Per Share:
The following table reconciles weighted average shares used in the
earnings per share calculation for the three months ended March 31,
1999 and 1998 for income from continuing operations:
<TABLE>
<CAPTION>
For the three months ended March 31, 1999
-----------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------------
<S> <C> <C> <C>
BASIC EPS - Loss from
continuing operations available to
common stockholders $ 605,977 8,089,588 $ (.07)
Effect of Dilutive Securities
None -- -- --
---------- --------- ----------
DILUTED EPS - Loss from
continuing operations available to
common stockholders $ 605,977 8,089,588 $ (.07)
========== ========= ==========
<CAPTION>
For the three months ended March 31, 1998
------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------------
<S> <C> <C> <C>
BASIC EPS - Loss from
continuing operations available to
common stockholders $ (771,037) 8,089,588 $ (.14)
Effect of Dilutive Securities
None -- -- --
---------- ---------- ---------
DILUTED EPS - Loss from continuing
operations available to common
stockholders $ (771,037) 8,089,588 $ (.14)
========== ========== =========
</TABLE>
9
<PAGE> 10
BIRMAN MANAGED CARE, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table reconciles weighted average shares used in the
earnings per share calculation for the nine months ended March 31,
1999 and 1998 for income from continuing operations:
<TABLE>
<CAPTION>
For the nine months ended March 31, 1999
------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------------
<S> <C> <C> <C>
BASIC EPS - Loss from
continuing operations available to
common stockholders $(1,650,237) 8,089,588 $ (.20)
Effect of Dilutive Securities
None -- -- --
----------- --------- ---------
DILUTED EPS - Loss from
continuing operations available to
common stockholders $(1,650,237) 8,089,588 $ (.20)
=========== ========= =========
<CAPTION>
For the nine months ended March 31, 1999
------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------------
<S> <C> <C> <C>
BASIC EPS - Loss from
continuing operations available to
common stockholders $(1,158,199) 8,089,588 $ (.14)
Effect of Dilutive Securities
None -- -- --
----------- --------- ---------
DILUTED EPS - Loss from continuing
operations available to common
stockholders $(1,158,199) 8,089,588 $ (.14)
=========== ========= =========
</TABLE>
Options and warrants to purchase 1,105,159 and 1,233,205 shares of
common stock were outstanding as of March 31, 1999 and March 31, 1998,
respectively, but were not included in the computation of diluted
earnings per share because they were anti-dilutive.
10
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BIRMAN MANAGED CARE, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Accounting Pronouncements:
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" in the first
quarter of 1998. The Company's comprehensive loss and net loss for the
three months and nine months ended March 31, 1999 and March 31, 1998
were equal.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits." These pronouncements were effective for financial
statements beginning after December 15, 1997. In March 1998, the FASB
issued Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." This
pronouncement will be effective for financial statements beginning
after December 15, 1998. In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
pronouncement will be effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company anticipates that the
adoption of these statements will not have a material impact on its
operating results or financial position.
6. Line of Credit:
The Company has available a working capital line of $1,500,000
(maximum principal) credit facility ("facility") with American
National Bank and Trust Company of Chicago. The facility matured on
October 31, 1998 and was subsequently renewed in November 1998 and
will expire on October 31, 1999. 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 and utilization review
accounts receivable. These accounts receivable are obligations of the
hospital clients to the Company and employer clients of Hughes 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. As of March 31, 1999 no amounts had been borrowed against
such line.
7. Significant Customer:
During the three months ended March 31, 1999 and 1998, approximately
14% of the Company's revenue was from hospital-clients owned or
managed by a national hospital management company. In addition,
approximately 17% of the Company's revenue for the three months ended
March 31, 1999 was from three hospitals owned by an Ohio non-profit
corporation.
During the nine months ended March 31, 1999 and 1998, approximately
20% and 17%, respectively, of the Company's revenue was from
hospital-clients owned or managed by a national hospital management
company. In addition, approximately 17% of the Company's revenue for
the nine months ended March 31, 1999 was from three hospitals owned by
an Ohio non-profit corporation.
The Ohio non-profit corporation's contract with the Company terminated
in accordance with its terms on May 6, 1999.
During the nine months ended March 31, 1998, approximately 14% of the
Company's revenue was from hospital-clients owned by a large New
Jersey based hospital system. The contract was terminated on December
31, 1997 in accordance with its terms.
8. Legal Proceedings:
In April, 1998, the Company supplied certain documents to the United
States Department of Justice ("DOJ") concerning its business pursuant
to an administrative subpoena, (the "Subpoena") served on February 24,
1998 issued under the Health Insurance Portability Accountability Act
of 1996. Since April, 1998, the Company has not been requested to
provide any further documents or information to the DOJ related to the
subpoena. The Company has received nine
11
<PAGE> 12
BIRMAN MANAGED CARE, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
requests or demands from current and former hospital clients regarding
bills prepared and submitted by those hospitals to the federal
Medicare program which bills have been challenged by federal
regulators. Some hospitals seek assistance in defending their
decisions before the regulators. Others demand complete
indemnification of all their costs incurred with regulators and
enforcement personnel. The Company's contracts generally limit the
Company's liability in such circumstances to assisting such hospitals
in defending before regulatory agencies billing decisions made by
those hospitals consistent with the Company's recommendations. The
Company readily assists its hospital clients in such defense. With
respect to indemnification, the Company believes it has no liability
for such indemnification as all billings submitted by a hospital are
the work product of the hospital, not the Company. To date, no
hospital has identified any conduct on the part of the Company which
the Company believes is actionable. The Company maintains professional
errors and omissions insurance for such claims in an amount believed
adequate for such purposes. The Company has tendered these requests
and demands to its insurance carrier. While the ultimate outcome of
these matters cannot be predicted, management believes that their
resolution will not have a significant impact on the Company's results
of operations or its financial position.
9. Discontinued Operations:
On July 31, 1998, the Company's Board of Directors approved a plan to
discontinue the health plan operations of the Company. The Company
determined that it would provide no additional capital to Care3, Inc.
("Care3"), the health maintenance organization ("HMO") licensed in
Mississippi of which it owned 69% of the common stock and 100% of the
preferred stock. Factors which were taken into account in making this
decision include the estimated future capital requirements of Care3,
the operating results and claims experience of Care3, and the
Company's current cash reserves. The Company was advised that the
other shareholders of Care3, Inc. had elected to provide no additional
capital to Care3. As a consequence, Care3, Inc. was not able to
maintain the required minimum net equity of $750,000 as set by state
regulations. On August 6, 1998, the Board of Directors of Care3 , Inc.
consented to place the HMO under administrative supervision of the
Mississippi Insurance Commissioner ("the Commissioner"). On August 7,
1998 (disposal date), Care3 was placed into statutory rehabilitation
in response to a petition by the Commissioner. Neither Care3 nor the
Company opposed the petition and both have and expect to continue to
cooperate fully with the Commissioner and the appointed rehabilitator.
The Care3 health plan is currently under the control of the
Commissioner and had no members as of September 30, 1998.
Net Assets (Liabilities) of the Health Plan Operations are as follows:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
3/31/99 6/30/98
------- -------
<S> <C> <C>
Current Assets $ -- $ 1,540,898
Property and Equipment, net -- 54,482
Income Taxes Receivable -- 320,223
Restricted Cash Deposit -- 500,000
Goodwill, net of Amortization -- --
Other Assets -- 127,698
Current Liabilities -- (1,434,379)
Minority Interest -- --
Estimated losses through disposal date and costs
to dispose of health plan (52,146) (1,211,468)
--------- -----------
Net Liabilities of Discontinued Operations $ (52,146) $ (102,546)
========= ==-========
</TABLE>
As of June 30, 1998, the net assets of the health plan operations
include a deferred tax asset of $1,511,118 for federal tax net
operating loss carryforwards. A valuation allowance of $1,511,118 was
recorded against this deferred tax asset and
12
<PAGE> 13
BIRMAN MANAGED CARE, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
resulted in a net deferred tax asset of zero. Such federal tax net
operating loss carryforwards will begin expiring June 30, 2013. The
valuation allowance was reduced to $1,484,868 during the three months
and nine months ended March 31, 1999, to reflect the decrease in net
deferred tax assets resulting from the gain on disposal of health plan
recognized in the same quarter and nine months ended. The discontinued
operations did not record any revenue during the nine months ended
March 31, 1999 and recorded revenue of $859,426 and $1,298,487 for the
three months and nine months ended March 31, 1999, respectively. Based
on proceedings in the Care3 rehabilitation to date, the Company has
reduced its estimated cost to dispose of the health plan by $75,000.
Such amount has been reflected as a gain on disposal of health plan
for the nine months ended March 31, 1999. The health plan operations
are reported as discontinued operations for all periods presented. The
condensed consolidated balance sheets and condensed consolidated
results of operations, cash flows and notes to the condensed
consolidated financial statements have been restated to conform to the
discontinued operations presentation. The discontinued operations
include Care3, Inc. and the operations of BMC Health Plans, Inc.,
TMMC, Inc., and MMMC, Inc., a ninety percent (90%) owned subsidiary of
the Company.
10. Extraordinary Gain:
For the nine months ended March 31, 1999, the Company reported an
extraordinary gain of $221,005. There were no applicable income tax
expenses related to the extraordinary gain. Such gain related to the
Company's extinguishment of debt and accrued interest to former
shareholders of Canton Management, Inc. (now "Care3, Inc.").
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table represents results from continuing operations and sets forth
percentage of revenue represented by certain items reflected in the Company's
Consolidated Statements of Operations for the periods indicated:
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, 1999 % MARCH 31, 1998 % MARCH 31, 1999 % MARCH 31, 1998 %
-------------- - -------------- - -------------- - -------------- -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 1,820,050 100 % $ 1,907,351 100 % $ 5,721,157 100 % $ 6,934,174 100 %
Cost of revenue 857,497 47 % 928,306 49 % 2,871,292 50 % 3,021,885 44 %
----------- --- ----------- --- ----------- --- ---------- ---
Gross profit 962,553 53 % 979,045 51 % 2,849,865 50 % 3,912,289 56 %
General & Administrative expenses 1,526,232 84 % 2,181,926 114 % 4,511,473 79 % 5,893,621 85 %
----------- --- ----------- --- ----------- --- ---------- ---
Loss from continuing operations (563,679) (31)% (1,202,881) (63)% (1,661,608) (29)% (1,981,332) (29)%
Other income (expense)
Interest income 10,004 -- % 61,554 3 % 56,842 1 % 267,721 4 %
Interest expense (6,408) -- % (3,355) -- % (14,809) -- % (15,861) -- %
Loss on disposal of assets -- -- % (60,064) (3)% -- -- % (64,419) (1)%
----------- --- ----------- --- ----------- --- ----------- ---
Loss from continuing operations before
income taxes and extraordinary gain (560,083) (31)% (1,204,746) (63)% (1,619,575) (28)% (1,793,891) (26)%
Income tax (expense) benefit (45,894) (2)% 433,709 23 % (30,662) (1)% 635,692 9 %
----------- --- ----------- --- ----------- --- ----------- ---
Net loss from continuing operations (605,977) (33)% (771,037) (40)% (1,650,237) (29)% (1,158,199) (17)%
Net loss from discontinued operations
net of tax -- -- % (322,412) (17)% -- -- (690,017) (10)
Gain on disposal of health plan,
net of tax -- % -- -- % 75,000 1 % -- -- %
----------- --- ----------- --- ----------- --- ----------- ---
Net loss before extraordinary gain (605,977) (33)% (1,093,449) (57)% (1,575,237) (28)% (1,848,216) (27)%
Extraordinary gain on debt
extinguishment, net of tax -- -- % -- -- % 221,005 4 % -- -- %
----------- --- ----------- --- ----------- --- ----------- ---
Net loss $ (605,977) (33)% $(1,093,449) (57)% $(1,354,232) (24)% $(1,848,216) (27)%
=========== === =========== === =========== === =========== ===
</TABLE>
FORWARD LOOKING STATEMENTS:
Certain statements contained in this section of the report, including those
under "Outlook" and "Financial Conditions" 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.
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 16% and 23% of the Quality Management Program ("QMP") business
revenue for the three months and nine months ended March 31, 1999, respectively
has been from hospitals owned or managed by Quorum Health Resources, Inc.
("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%
and 20% of the QMP business revenue for the three months and nine months ended
March 31, 1999, respectively, has been from a contract with The Health Alliance
of Greater Cincinnati relating to a contract with terms that expired on May 6,
1999.
14
<PAGE> 15
Outlook: The Company has experienced seven consecutive quarters of operating
losses and expects to suffer an operating loss in the fourth quarter, albeit a
much reduced operating loss. During the past three quarters, the Company has
discontinued its health maintenance operation, is in the process of divesting
itself of its utilization review business, has substantially reduced operating
costs and has taken actions to improve its operating margins in its consulting
business. In each instance where the Company proposes to render services to a
hospital, hospital group or chain, the Company encounters strong resistance to
its pricing, which cannot be reduced further due to the fact that the Company
employs physicians as the principal deliverers of its services. The Company
recently has made its first formal proposal to work to reduce costs as opposed
to capture appropriate revenue. If this consulting activity proves successful,
the Company expects to restore its previous level of revenues. There is no
assurance this consulting activity will be contracted by any entity. In
addition, the Company has proposals pending to license its proprietary programs
to various hospital groups under which the Company would train and monitor the
implementation of its Quality Management Program through such groups.
Regulatory pressure on hospitals continues to impede the Company's ability to
engage new hospital clients. Notwithstanding, the Company continues to achieve
good results for its current hospital clients and believes that its methodology
of assisting physicians improve the patient's medical record is valid.
15
<PAGE> 16
QUARTER ENDED AND NINE MONTHS ENDED MARCH 31, 1999 COMPARED WITH QUARTER ENDED
AND NINE MONTHS ENDED MARCH 31, 1998:
REVENUE
GENERAL
For the quarter ended March 31, 1999, consolidated revenue decreased by 5% to
$1,820,050, from $1,907,351 in the comparable quarter of the prior year. For
the nine months ended March 31, 1999, consolidated revenue decreased by 17% to
$5,721,157 from $6,934,174 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 business divisions of the Company. For the
nine months ended March 31, 1999, the Utilization Review business now
represents 14% of total revenue as compared to 10% of total revenue in the
comparable period of the prior year. The following table shows revenue by
business division:
TABLE OF REVENUE BY BUSINESS DIVISION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Quality Management Program $1,610,258 $1,633,685 $4,933,707 $6,269,585
Utilization review/case management 209,792 273,666 787,450 664,589
---------- ---------- ---------- ----------
Total revenue $1,820,050 $1,907,351 $5,721,157 $6,934,174
========== ========== ========== ==========
</TABLE>
QUALITY MANAGEMENT PROGRAM (QMP)
The Quality Management Program (QMP) experienced a 1% decrease in revenue to
$1,610,258 for the quarter ended March 31, 1999, from $1,633,685 in the
comparable quarter of the prior year. The QMP experienced a 21% decrease in
revenue to $4,933,707 for the nine months ended March 31, 1999, from $6,269,585
in the comparable period of the prior year. For the nine months ended March 31,
1999, approximately $500,000 of the decrease was due to the conversion from
"results-oriented" compensation contracts to lower fixed fee compensation
contracts. In addition, approximately $835,000 of the revenue decrease was from
lost business not replaced with new accounts.
Period to period changes in QMP business is measured in discharge volume and by
"per discharge" revenue. A "discharge" is a patient discharged from a hospital
whose medical record has been reviewed under the Company's Quality Management
Program. The Company experienced a decline in "per discharge" revenue
recognized from its consulting services to $136 per discharge in the nine
months ended March 31, 1999, as compared to $151 per discharge in the
comparable period of the prior year. This decline in "per discharge" revenue is
a result of the shift from "results-oriented" compensation contracts to fixed
fee compensation contracts made in response to the federal government's
announced initiative to scrutinize more closely any contracts with a health
care provider, such as hospitals, which include an incentive to increase
reimbursements from the Medicare program. Another factor which attributed to
the "per discharge" revenue decline is that the Company experienced a delay in
closing new business accounts due to the difficult business climate created by
the federal government's increased scrutiny of health care providers and the
Company's evolving marketing strategy to that environment. The actual discharge
volume decreased by 17% to 34,351 discharge records reviewed in the nine months
ended March 31, 1999 as compared to 41,372 discharge records reviewed in the
comparable period of the prior year.
During the nine months of the prior fiscal year, 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 started one new hospital account during the first
nine months of fiscal 1998. The Company started ten new hospital accounts
during the first nine months of fiscal 1999.
Outlook: During the third quarter of fiscal 1999, the Company's contracts with
six hospitals were canceled representing approximately $118,000 in monthly
billings. The largest cancellation was the Company's contract with The Health
Alliance of Greater Cincinnati which canceled its contract for reasons
unrelated to the Company's performance. Five other contracts were canceled for
reasons related primarily to the Company's recent cost reduction measures. The
Company continues to experience difficulty concluding new consulting agreements
with hospitals although it recently concluded contracts with two hospitals. The
Company now has consulting contracts with 21 hospitals. Factors contributing to
this difficulty include matters previously disclosed, such as the current
regulatory pressure, the Company's election not to offer "results-based"
(contingency) compensation arrangements, the cost of the Company's services
and, more recently, increasing consolidation and acquisition of hospitals by
chains. The Company's physician-to-physician nature continues to be its
strongest attribute in the market, distinguishing its services from
16
<PAGE> 17
non-physician "coding companies." In January 1999, the Company reorganized and
reduced its field force of physician managers and allied health personnel to
concentrate on "clusters" of hospitals and lower the cost to the Company of
providing services. By these measures, the Company hopes to restore previously
maintained profit margins on its services.
SIGNIFICANT CUSTOMERS -- QMP
The Company has provided services to a number of hospitals operated by Quorum
since 1991. Services provided to hospitals operated by Quorum generated
approximately 14% and 24%, respectively, of the Company's revenue in the
quarter ended March 31, 1999 and 1998. For the nine months ended March 31, 1999
and 1998, services provided to hospitals operated by Quorum generated
approximately 20% and 17%, respectively, of the Company's revenue. As of March
31, 1999, the Company is providing QMP services at seven Quorum-operated
facilities as compared to seven Quorum-operated facilities as of March 31,
1998.
In April 1998, the Company entered into a contract to provide 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 two hospitals began in May 1998. Services
provided under this contract with The Health Alliance resulted in approximately
17% of the Company's revenue for the quarter and nine months ended March 31,
1999. The Health Alliance terminated its contract with the Company effective
May 6, 1999.
During the prior fiscal year, the Company provided QMP services for two
hospitals owned by St. Barnabas Health System, which represents approximately
14% of the Company's revenues for the nine months ended March 31, 1998. The St.
Barnabas contract concluded activities effective December 31, 1997 in
accordance with its terms.
Outlook: The Company expects that revenue from contracts with Quorum hospitals
will continue to be a significant source of revenue through the next fiscal
quarter. The Health Alliance notified the Company by letter dated February 5,
1999, that it was exercising its right to terminate its contract with the
Company "without cause" effective May 6, 1999. The Company believes it achieved
excellent results for the Health Alliance and is uncertain about the reason for
the termination, which was not provided. The Company has also experienced the
cancellation of five other hospital contracts representing approximately
$152,000 of monthly gross revenues. During this period, the Company added three
major hospital contracts, and proposed on a number of other contracts.
UTILIZATION REVIEW/CASE MANAGEMENT
Revenue from the operations of Hughes and Associates, Inc., the Company's
utilization review (UR) business in Mississippi, decreased by 23%, to $209,792
for the quarter ended March 31, 1999, from $273,666 in the comparable quarter
of the prior year. For the nine months ended March 31, 1999, revenue increased
by 18% to $787,450 from $664,589 in the comparable period of the prior year. In
July 1998, Hughes & Associates executed a one year contract to provide medical
utilization review management services for The University of Mississippi
Medical Center.
Outlook:
The Company has entered into a letter of intent to sell the business of Hughes
& Associates, Inc. to members of the subsidiary's senior management. Closing of
the transaction is expected in mid- to late May 1999. Assuming the transaction
closes as contemplated, the Company expects to report a small gain on sale of
the business. Since acquiring Hughes, the Company has consistently invested
funds into the subsidiary to support its growth. Hughes has not contributed to
the Company's operating profit. Disposition of the Hughes' business will reduce
the Company's cash flow requirements by approximately $30,000 per month and
also allow the Company to focus exclusively on its consulting business.
17
<PAGE> 18
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, nurses, and
allied health specialists, consulting staff travel and lodging, and other
direct costs. The following table shows the cost of revenue by business
division:
TABLE OF COST OF REVENUE BY BUSINESS DIVISION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31, 1999
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Quality Management Program $690,402 $812,499 $2,351,875 $2,699,208
Utilization review/case management 167,095 115,807 519,417 322,677
-------- -------- ---------- ----------
Total cost of revenue $857,497 $928,306 $2,871,292 $3,021,885
======== ======== ========== ==========
</TABLE>
Cost of revenue as a percentage of total revenue decreased to 47% for the
quarter ended March 31, 1999 from 49% in the comparable quarter of the prior
year. For the nine months ended March 31, 1999, cost of revenue as a percentage
of total revenue increased to 50% from 44% in the comparable period of the
prior year. This was due to a shift from "results-oriented" compensation
contracts to fixed fee compensation contracts for the QMP, and due to the
climate of hesitation which currently exists among potential clients. As of
March 31, 1999, all but one of the QMP contracts were fixed fee contracts.
Outlook: Cost of revenue as a percentage of total revenue will decrease as a
result of cost reduction measures taken in January, 1999, which will reduce
operating costs by approximately $150,000 per month. The Company will also
reduce overhead by $50,000 per month. Management does not believe that these
steps will adversely affect the Company's ability to service its consulting
clients. Cost of revenue for the Company's new products remains undetermined as
the Company has not begun delivering a sufficient amount of those services to
determine accurately the ultimate cost of those services or the prices for
which those services can be provided.
GROSS PROFIT
For the quarter ended March 31, 1999, the Company's gross profit decreased by
$16,492 to $962,553 from $979,045 in the comparable quarter of the prior year.
For the nine months ended March 31, 1999, the Company's gross profit decreased
by $1,062,424 to $2,849,865 from $3,912,289 in the comparable period of the
prior year. The Company's gross profit margin increased to 53% of revenue for
the quarter ended March 31, 1999 from 51% of revenue in the comparable quarter
of the prior year. For the nine months ended March 31, 1999, the Company's
gross profit margin decreased to 50% of revenue from 56% of revenue in the
comparable period of the prior year.
The following chart shows gross margin percentages by business division:
TABLE OF GROSS PROFIT MARGIN BY BUSINESS DIVISION (UNAUDITED)
<TABLE>
<CAPTION>
% OF REVENUE % OF REVENUE
QUARTER ENDED NINE MONTHS ENDED,
MARCH 31, MARCH 31,
-------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Quality Management Program 57% 50% 52% 57%
Utilization review/case management 20% 58% 34% 51%
Total gross margins 53% 51% 50% 56%
</TABLE>
Gross profit margin for the QMP increased to 57% in the quarter ended March 31,
1999 from 50% in the comparable quarter of the prior year. For the nine months
ended March 31, 1999, gross profit margin for the QMP decreased to 52% from 57%
in the comparable period of the prior year. This decrease in gross profit was
due to decreased revenues from the QMP as a result of a shift from
"results-oriented" compensation contracts to fixed fee compensation contracts
and due to the climate of hesitation which currently exists among potential
clients. Gross profit margin for the Utilization Review/Case Management
business also decreased to 20% for the quarter ended March 31, 1999 from 58%
for the comparable quarter of the prior year. For the nine months ended March
18
<PAGE> 19
31, 1999, gross profit margin for the UR business decreased to 34% from 51% in
the comparable period of the prior year. This decrease in gross profit was due
to additional costs incurred as a result of the contract to provide medical
utilization review management services for the University of Mississippi Medical
Center.
Outlook: Due to the cost reduction measures begun in January, 1999, the QMP
business is anticipated to produce a gross profit margin of 55% to 65% of
revenue in the near term.
GENERAL AND ADMINISTRATIVE EXPENSES
For the quarter ended March 31, 1999, general and administrative expenses
decreased by $655,694 or 30%, to $1,526,232 from $2,181,926 in the comparable
quarter of the prior year. For the nine months ended March 31, 1999, general
and administrative expenses decreased by $1,382,148 or 23% to $4,511,473 from
$5,893,621 in the comparable period of the prior year. This was due to a
decrease in salary and benefit expense attributable to the elimination of
several positions and pay reductions implemented at the beginning of the fiscal
year.
Outlook: The Company anticipates that general and administrative expense will
decrease through the next fiscal quarter. On June 30, 1998, the Company
implemented a series of steps designed to reduce the Company's other general
and administrative expense and cash operating requirements. These steps
included a reduction in force and staff position consolidations which
eliminated eight staff positions, an across-the-board pay reduction for most
employees ranging from 10% to 30% of salary, and a reduction in certain
expenses. In addition, the Company took steps in January, 1999 to further
reduce selling, general and administrative expense by approximately $50,000 per
month. The Company has sublet approximately one-half of its corporate
headquarters in Cookeville, Tennessee to an unrelated company further reducing
monthly expense by approximately $9,000 per month. Management believes these
steps have had no impact on the Company's business to date and will not
adversely affect the Company's ability to service its consulting clients and to
continue to attract new clients.
INTEREST INCOME
Interest income decreased to $10,004 for the quarter ended March 31, 1999 from
$61,554 in the comparable quarter of the prior year. For the nine months ended
March 31, 1999, interest income decreased to $56,842 from $267,721 in the
comparable period of the prior year. This was due to the decrease in cash
deposits held primarily in money market and other short-term investment
accounts.
NET LOSS FROM CONTINUING OPERATIONS
For the quarter ended March 31, 1999 the Company reported a net loss from
continuing operations of $605,977 as compared to a net loss of $771,037 in the
comparable quarter of the prior year. For the nine months ended March 31, 1999,
the Company reported a net loss from continuing operations of $1,650,237 as
compared to a net loss of $1,158,199 in the comparable period of the prior
year.
The net loss from continuing operations for the quarter and nine months ended
March 31, 1999 was primarily from a decrease in revenue and gross margin from
the Quality Management Program.
DISCONTINUED OPERATIONS
For the nine months ended March 31, 1999, the Company reported a gain on
disposal of health plan of $75,000 as compared with a loss, net of tax, from
discontinued operations of $322,412 and $690,017, respectively, in the
comparable quarter and nine months ended March 31, 1998. (see Note 9 to the
Condensed Consolidated Financial Statement.). This item includes all revenue
and expenses from the operations of Care3, Inc., the health plan in
Mississippi, and the related health plan management subsidiaries of MMMC, Inc.,
BMC Health Plans, Inc. and TMMC, Inc.
EXTRAORDINARY GAIN
For the nine months ended March 31, 1999, the Company reported an extraordinary
gain of $221,005. This item consists of the gain recognized by the Company for
extinguishment of debt and accrued interest related to notes payable to former
shareholders of Canton Management Group, Inc.
19
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended March 31, 1999, the Company funded its continuing
operations and business development activities primarily through operating
revenue and cash on deposit and cash equivalents of approximately $941,000. The
Company invested $82,000 in property and equipment and used $385,000 to pay
down debt and capital lease obligations during the nine months ended March 31,
1999. The Company received an income tax refund of $1,245,000 during January
1999 from the carryback of operating losses.
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 which has not been used. The facility matured on October 31, 1998 and
was subsequently renewed in November for a period of one year. The credit
facility is secured by a pledge of the Company's Quality Management Program and
utilization review accounts receivable. These accounts receivable are
obligations of the hospital clients of Birman & Associates and employer clients
of Hughes & Associates, Inc. and are not Medicare or Medicaid receivable
accounts.
Outlook: In January 1999, the Company took steps to reduce its monthly
operating and overhead costs by approximately $200,000 by February 1999. After
these reductions, the Company believes that its existing cash resources and
available credit facilities will be sufficient to meet the Company's
anticipated working capital needs for the next twelve months. The Company has
not drawn on its line of credit and it has been renewed through October 31,
1999. 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.
The Company has reduced its monthly operating and overhead costs to the minimum
level it believes it can achieve while still providing satisfactory service to
its clients. The Company must obtain new hospital consulting engagements to
replace lost consulting contracts.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information." In February 1998, the
FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." These pronouncements will be effective for financial
statements beginning after December 15, 1997. In March 1998, the FASB issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This pronouncement will be effective
for financial statements beginning after December 15, 1998. In June 1998, the
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This pronouncement will be effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company anticipates that the
adoption of these Statements will not have material impact on its operating
results or financial position.
YEAR 2000 ISSUES
The Company uses PC hardware equipment and packaged software in the operations
of the consulting business and utilization review business. An initial
evaluation has been performed to assess the impact of the year 2000 issue on
all software and hardware. It has been determined that all existing hardware
equipment is Year 2000 compliant, except for certain equipment scheduled to be
retired. Various packaged software applications are used as tools in running
the Company's accounting operations and for general business functions.
Management plans to implement any necessary software vendor upgrades and
modifications to ensure continued functionality with the Year 2000. The
Company's business is not dependent upon computer systems of any significant
customers, vendors or other third parties in the course of normal business. At
present, management does not expect software upgrade costs or software
replacement costs to exceed $50,000 in the aggregate. The Company has not yet
established a contingency plan, but intends to formulate one to address
unavoidable risks by July 1999.
The discontinued operations of the Company are not expected to cause Year 2000
compliance issues for the Company. The Care3 health plan in Mississippi is
under the control of the Department of Insurance and is currently being closed
down. The Company does not expect any remaining impact as the health plan will
no longer be operational and all contracts with third parties will have fully
expired by the year 2000.
20
<PAGE> 21
PART II
Item 1: Legal Proceedings
The Company currently is not a party to any material legal proceedings.
In April, 1998, the Company supplied certain documents to the United States
Department of Justice ("DOJ") concerning its business pursuant to an
administrative subpoena, (the "Subpoena") served on February 24, 1998 under the
Health Insurance Portability and Accountability Act of 1996. Since April, 1998,
the Company has not been requested to provide any further documents or
information to the DOJ related to the subpoena. The Company has received nine
requests or demands from current and former hospital clients regarding bills
prepared and submitted by those hospitals to the federal Medicare program which
bills have been challenged by federal regulators. Some hospitals seek
assistance in defending their decisions before the regulators. Others demand
complete indemnification of all their costs incurred with regulators and
enforcement personnel. The Company's contracts generally limit the Company's
liability in such circumstances to assisting such hospitals in defending before
regulatory agencies billing decisions made by those hospitals consistent with
the Company's recommendations. The Company readily assists its hospitals
clients in such defense. With respect to indemnification, the Company believes
it has no liability for such indemnification as all billings submitted by a
hospital are the work product of the hospital, not the Company. To date, no
hospital has identified any conduct on the part of the Company which the
Company believes is actionable. The Company maintains professional errors and
omissions insurance for such claims in an amount believed adequate for such
purposes. The Company has tendered these requests and demands to its insurance
carrier. While the ultimate outcome of these matters cannot be predicted,
management believes that their resolution will not have a significant impact on
the Company's results of operations or its financial position.
Item 5: Other Information
Outlook: On December 18, 1998, the Company's "lock up" agreements with holders
of its common stock acquired in non-public transactions expired. These
agreements prohibited those shareholders from selling any of their shares of
the Company's common stock until on or after December 18, 1998. With the
expiration of these agreements, the number of the Company's shares eligible for
public trading increased from 2,200,000 shares to 8,756,254 shares.
The Company's chief financial officer, Douglas A. Lessard, resigned effective
November 30, 1998 to pursue other interests. Mr. Lessard received a severance
agreement which provides for approximately $70,000 of additional compensation
and vesting of previously unvested options to acquire 24,313 1/3 shares of the
Company's common stock on February 1, 1999. On such date, Mr. Lessard would
have options to acquire 72,940 shares of stock at $1.37 per share on a cashless
basis as provided in the Company's 1995 Stock Option Plan. The Company is
seeking a replacement for Mr. Lessard.
The Company's independent public accountants, Deloitte & Touche, LLC, resigned
as the Company's auditors during the third quarter. The Company reported that
it had no disagreements with said firm regarding any accounting issues for any
periods during which said firm reported on the Company's financial statements
and knew of no such disagreements up to the date of said firm's resignation.
Deloitte & Touche LLC confirmed the Company's statement by letter to the
Securities and Exchange Commission. The Company expects to engage an accounting
firm of equivalent reputation presently.
Representatives of the Company will appear before a panel of the Nasdaq Stock
Market on June 3, 1999 to appeal Nasdaq's delisting of the Company's common
stock from the Nasdaq National Market. Based on results of operations in the
third quarter, the Company does not believe that it will be able to demonstrate
compliance with Nasdaq's maintenance criteria for continued listing on Nasdaq's
National Market. The Company instead will attempt to persuade Nasdaq to list
the Company's common stock on Nasdaq's Small Cap market. The Company currently
does not meet a number of Nasdaq National Market listing criteria including: $4
million minimum net tangible assets, value of the shares in the public float
(shares which may be publicly traded not owned by officers, directors or
affiliates) and minimum price per share of $1.00. With respect to the Nasdaq
Small Cap market, the Company now meets all maintenance criteria except the
minimum price per share of $1.00. There is no assurance that Nasdaq will
continue to list the Company's stock on its Small Cap market.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
A. EXHIBITS
<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 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.
*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, 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 American National
Bank and Trust Company of Chicago and
Hughes & Associates, Inc.
*10.17 Form of Indemnification Agreement for Birman Managed Care, Inc.
*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.
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C>
*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.
***16.1 Letter on Change in Certifying Accountants.
****16.2 Letter from Deloitte & Touche LLP dated April 1, 1999 on Change in
Certified Accountant.
*21.1 Subsidiaries of the Registrant.
27.1 Financial Data Schedule, quarter ended March 31, 1999
27.2 Financial Data Schedule, quarter ended March 31, 1998 - Restated
</TABLE>
B. REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on April 21, 1999 stating that
the Company has received written notice that the Nasdaq Stock Market,
Inc. intends to de-list the Company's common stock from the Nasdaq
National Market on April 22, 1999. The Company promptly appealed the
de-listing, which will not take effect until after an oral hearing
before Nasdaq estimated to be held within 45 days.
The Company filed a report on Form 8-K on April 1, 1999 stating that
Deloitte & Touche LLP resigned from its position as the independent
auditors of Birman Managed Care, Inc.
The Company filed a report on Form 8-K on January 28, 1999 to report
cost reduction measures effected in that month.
* 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.
*** Incorporated by reference from the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended December 31, 1997.
**** Incorporated by reference from the Company's Report on Form 8-K dated
April 1, 1999.
23
<PAGE> 24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
BIRMAN MANAGED CARE, INC.
May 14, 1999 /s/ DAVID N. BIRMAN
--------------------------------------
David N. Birman
Chairman of the Board, President
and Chief Executive Officer
May 14, 1999 /s/ SUE D. BIRMAN
--------------------------------------
Sue D. Birman
Executive Vice President, Secretary
(Principal Accounting Officer)
24
<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, 1999 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-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,409,406
<SECURITIES> 0
<RECEIVABLES> 1,164,897
<ALLOWANCES> 207,303
<INVENTORY> 0
<CURRENT-ASSETS> 2,681,812
<PP&E> 1,473,913
<DEPRECIATION> 483,807
<TOTAL-ASSETS> 3,876,402
<CURRENT-LIABILITIES> 575,674
<BONDS> 0
0
0
<COMMON> 8,756
<OTHER-SE> 3,255,510
<TOTAL-LIABILITY-AND-EQUITY> 3,876,402
<SALES> 0
<TOTAL-REVENUES> 5,721,157
<CGS> 0
<TOTAL-COSTS> 2,871,292
<OTHER-EXPENSES> 4,511,473
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,809
<INCOME-PRETAX> (1,619,575)
<INCOME-TAX> (30,662)
<INCOME-CONTINUING> (1,650,237)
<DISCONTINUED> 75,000
<EXTRAORDINARY> 221,005
<CHANGES> 0
<NET-INCOME> (1,354,232)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
<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>
<RESTATED>
<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> 6,934,174
<CGS> 0
<TOTAL-COSTS> 3,021,885
<OTHER-EXPENSES> 5,893,621
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,861
<INCOME-PRETAX> (1,793,891)
<INCOME-TAX> 635,692
<INCOME-CONTINUING> (1,158,199)
<DISCONTINUED> (690,017)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,848,216)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
