<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT For the transition period from ________ to ______________
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 Identification No.)
incorporation or organization)
1025 Highway 111 South
Cookeville, Tennessee 38501
(Address of principal executive offices)
(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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 2,696,566
<PAGE> 2
BIRMAN MANAGED CARE, INC.
FORM 10QSB
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 2. Changes in Securities
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
EXHIBITS
EX-27.1 Financial Data Schedule, Quarter Ended September 30, 1999
EX-27.2 Financial Data Schedule, Quarter Ended September 30, 1998 - restated
<PAGE> 3
Item 1. Financial Statements
Birman Managed Care, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited) (Audited)
September 30, June 30,
1999 1999
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 604,333 $ 873,989
Accounts receivable, net of an allowance for doubtful of $125,000 717,277 998,687
Prepaid expenses and other 62,277 9,673
Current portion of notes receivable 37,500 37,500
Deferred tax assets 47,625 47,625
----------- -----------
Total current assets 1,469,012 1,967,474
----------- -----------
Notes receivable 107,105 112,500
Property and equipment, net of accumulated depreciation 816,512 856,718
Other assets 59,333 70,376
----------- -----------
Total assets $ 2,451,962 $ 3,007,068
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 47,880 38,708
Accrued expenses 77,519 125,950
----------- -----------
Total current liabilities 125,399 164,658
----------- -----------
Deferred income taxes payable 19,118 19,118
----------- -----------
Total liabilities 144,517 183,776
----------- -----------
Stockholders' Equity:
Common stock, $.001 par value, 15,000,000 shares authorized,
2,846,401 issued and outstanding 8,756 8,756
Additional paid-in capital 9,715,071 9,715,071
Retained deficit (7,416,382) (6,900,535)
----------- -----------
Total stockholders' equity 2,307,445 2,823,292
----------- -----------
Total liabilities and stockholders' equity $ 2,451,962 $ 3,007,068
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
Birman Managed Care, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months Ended September 30,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Consulting Revenues $ 886,428 $ 1,977,467
Cost of revenues 495,688 1,020,179
----------- -----------
Gross profit 390,740 957,288
General and administrative expenses 943,995 1,425,160
----------- -----------
Loss from continued operations (553,255) (467,872)
----------- -----------
Other income (expenses):
Interest and other income 8,088 27,238
Interest expense (282) (4,407)
Other income 29,602 --
----------- -----------
37,408 22,831
----------- -----------
Loss from operations before provision for income taxes (515,847) (445,041)
Provision for income taxes -- (4,392)
----------- -----------
Net loss $ (515,847) $ (449,433)
=========== ===========
Loss per common share - basic:
Net loss $ (0.19) $ (0.17)
=========== ===========
Loss per common share - assuming dilution:
Net loss $ (0.19) $ (0.17)
=========== ===========
Basic weighted average common stock shares outstanding, adjusted for reverse
stock split in 1999 2,696,566 2,696,529
=========== ===========
Weighted average diluted common stock shares outstanding, adjusted for reverse
stock split in 1999 2,696,566 2,696,529
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
Birman Managed Care, Inc.
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Retained Stockholders'
Shares Amount Capital Deficit Equity
--------- ------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance as of June 30, 1999 2,918,751 $8,756 9,715,071 (6,900,535) 2,823,292
Net loss (222,185) -- -- (515,847) (738,032)
--------- ------ --------- ---------- ---------
Balance as of September 30, 1999 2,696,566 $8,756 9,715,071 (7,416,382) 2,085,260
========= ====== ========= ========== =========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
Birman Managed Care, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months Ended
September 30,
--------------------------
1999 1998
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(515,847) $ (449,433)
Adjustments to reconcile net loss to net cash used by operating activities
Depreciation and amortization 44,911 60,868
Accounts receivable 281,410 (126,549)
Income taxes receivable -- 206,249
Prepaid expenses and other (52,604) (22,093)
Other assets 11,043 17,502
Accounts payable 9,172 (103,111)
Accrued expenses (48,431) (63,201)
--------- -----------
245,501 (30,335)
--------- -----------
Net cash used by operating activities (270,346) (479,768)
--------- -----------
Cash flows from investing activities:
Purchase of property and equipment (4,705) (76,625)
Advances from note receivable - related party 5,395 8,313
Investment in discontinued operations -- (171,318)
--------- -----------
Net cash provided (used) by investing activities 690 (239,630)
--------- -----------
Cash flows from financing activities:
Payments on debt -- (1,900)
Net cash used by financing activities -- (1,900)
--------- -----------
Net decrease in cash and cash equivalents (269,656) (721,298)
Cash and cash equivalents, beginning of period 873,989 2,431,387
--------- -----------
Cash and cash equivalents, end of period $ 604,333 $ 1,710,089
========= ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 7
Birman Managed Care, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
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
provides consulting services in the healthcare field through its
wholly-owned subsidiaries, Birman Consulting Group, Inc. ("BCG"). Through
BCG, the Company assists hospitals and other health care providers in more
accurately documenting the services rendered, obtaining appropriate
reimbursement for services, and complying with applicable government rules,
regulations, and statutes.
Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered losses
from its managed care operations and from restructuring the nature of its
consulting services. Subsequent to June 30, 1998, the Company disposed of
its managed care operations (see note 16). On June 30, 1998, management
implemented a series of steps designed to reduce the Company's operating
expenses. These steps 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. Management has
implemented further staff reductions and will implement further reductions
of its professional fees and other operating expenses. The aforementioned
steps and the disposal of the Company's managed care operations were
designed to eliminate many of the factors that caused losses during the
years ended June 30, 1999 and 1998.
Principles of Consolidation
The accompanying financial statements include the accounts of Birman
Managed Care, Inc. and its wholly-owned subsidiary Birman Consulting Group,
Inc. ( formerly known as "Birman & Associates, Inc.,").
Unless otherwise noted all note disclosures herein represent activities and
balances of continuing operations.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments (demand
deposits, certificates of deposit, money market funds, and other short-term
investments) purchased with an initial maturity of three months or less.
Accounts Receivable
Accounts receivable represent amounts earned but not collected in
connection with consulting services performed by the Company and are
reflected at their net realizable value.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided for on
the straight-line method over the estimated useful lives of the assets.
Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to expense as
incurred. Betterment or renewals are capitalized when incurred. The
estimated useful lives for asset classifications are as follows:
Computer equipment 3 years
Office equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements 10 years, or life of lease, if shorter
<PAGE> 8
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
Income Taxes
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." Under SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis and the utilization of the net
operating loss carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to be applied to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. Income tax expense and benefits are allocated to
continuing operations and discontinued operations in accordance with
intra-period tax allocation provisions described in SFAS No. 109.
Earnings Per Share
Net earnings (loss) per common share have been computed in accordance with
SFAS No. 128, "Earnings per Share." Basic net earnings (loss) per common
share is computed by dividing net earnings (loss) by the weighted average
number of common shares outstanding during the year. Diluted net earnings
(loss) per common share is computed by dividing net earnings (loss) per
common share by the weighted average number of common shares outstanding
during the year which includes the dilutive effects of stock options and
warrants and, if certain conditions are present, contingently issuable
common stock. See note 8 for a reconciliation of basic and diluted earnings
(loss) per share.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash, accounts
receivable, notes receivable and current maturities of notes payable and
capital lease obligations, accounts payable, and accrued expenses
approximate fair value due to their short maturity.
2. CONCENTRATION OF CREDIT RISK
The Company maintains cash and cash equivalents at four financial
institutions. Deposits not to exceed $100,000 at each financial institution
are insured by the Federal Deposit Insurance Corporation. At June 30, 1999,
the Company has uninsured cash and cash equivalents in the approximate
amount of $604,000.
Financial instruments which potentially subject the company to
concentrations of credit risk principally consist of accounts receivable.
The Company's accounts receivable primarily result from its consulting
services with rural hospitals primarily in the southeastern portion of the
United States. The receivable accounts are primarily billed monthly and are
unsecured. Ongoing credit evaluation and account monitoring procedures are
utilized to minimize the risk of loss.
3. NOTES PAYABLE
The Company is currently in negotiations with local financial institutions
to obtain a working capital line of credit facility. Management expects the
credit facility to be 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
Consulting Group, Inc. and are not Medicare or Medicaid receivable
accounts.
<PAGE> 9
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
4. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is currently leasing vehicles and office space under various
non-cancelable operating lease agreements, expiring in December 2007. The
terms of the lease agreements provide for monthly payments ranging from
$1,047 to $18,333. At September 30, 1999, a schedule of future minimum
lease payments due under the non-cancelable operating lease agreements is
as follows:
<TABLE>
<CAPTION>
September 30,
-------------
<S> <C>
2000 $ 196,238
2001 180,000
2002 180,000
2003 192,400
2004 204,960
Subsequent 852,468
----------
$1,806,066
==========
</TABLE>
The Company has leased excess facility space under a sublease agreement
expiring May 2001. The lease provides for annual rental income of $103,041.
The sublease is renewable for three successive one-year terms.
Employment Contracts
The Company has entered into employment contracts with certain key
employees, which provide for minimum annual salary, adjusted for
cost-of-living changes, and incentives based on the Company's attainment of
specified levels of sales and earnings. At September 30, 1999, the total
commitment through June 30, 2002, excluding incentives, was approximately
$1,000,000.
Other Commitments
Effective September 1, 1996, the Company entered into a consulting
agreement with a director. Under the terms of the agreement, the Company
will pay a fee of $120,000 per annum, payable in equal monthly
installments. The contract is renewable annually for up to five consecutive
years.
Effective April 15, 1999, the Company entered into a consulting agreement
with a former member of the board of directors. Under the terms of the
agreement, the Company will pay a monthly fee of $12,000, in addition to
stock options which will vest at various times over the agreement period.
Subsequent to June 30, 1999, this agreement was terminated.
The Company has entered into other consulting agreements which expire or
were terminated subsequent to year end. Future fees under these contracts
amount to $30,000.
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 is involved in a legal proceeding involving a former employee.
While the ultimate resolution of such dispute cannot be determined or
predicted, Company management believes that the ultimate resolution will
not have a significant impact on the Company's results of operations or its
financial position.
<PAGE> 10
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
5. INCOME TAXES AND DEFERRED INCOME TAXES
A valuation allowance was recorded against the deferred tax asset related
to federal and state net operating loss carryforwards created in the
current year. Realization of the deferred tax asset is dependent on
generating sufficient taxable income prior to expiration of the loss
carryforwards. State net operating loss carryforwards will begin expiring
June 30, 2013.
6. EARNINGS PER SHARE
The following table reconciles weighted average shares used in the earnings
per share calculation for fiscal years 1999 and 1998 for income from
continuing operations:
<TABLE>
<CAPTION>
Income (Loss) Shares
(Numerator) (Denominator)
----------- -------------
<S> <C> <C>
September 30, 1999
------------------
BASIC EPS - Income (loss) from continuing
operations available to Common Stockholders $(515,847) 2,696,566
Effect of Dilutive Securities -- --
--------- ---------
DILUTED EPS - Income (loss) from continuing
operations available to Common Stockholders $(515,847) 2,696,566
========= =========
September 30, 1998
------------------
BASIC EPS - Income (loss) from continuing
operations available to Common Stockholders $(449,433) 2,696,529
Effect of Dilutive Securities -- --
--------- ---------
DILUTED EPS - Income (loss) from continuing
operations available to Common Stockholders $(449,433) 2,696,529
========= =========
</TABLE>
Options and warrants to purchase 219,350 and 345,931 shares of common stock
were outstanding as of September 30, 1999 and 1998 but were not included in
the computation of diluted earnings per share because they were
anti-dilutive and because the exercise price was greater than the average
market price of the common shares.
7. STOCKHOLDERS' EQUITY
On September 9, 1996, the Company was reincorporated in Delaware by means
of a merger in which shareholders received 72.939 shares of common stock
for each 100 shares of common stock then outstanding. The accompanying
financial statements give retroactive effect to the aforementioned
reincorporation.
During February 1997, the Company completed an initial public offering in
which it issued 2,000,000 shares of its common stock at a price of $5.00
per share. The shares were sold under its registration statement dated
February 12, 1997. The net proceeds of $7,548,697 received by the Company
were net of offering expenses of $2,451,303.
<PAGE> 11
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
8. STOCK OPTION PLANS
On October 31, 1995, the Company approved the 1995 Employee Stock Option
Plan (the"Plan"). The aggregate number of shares of common stock that may
be issued pursuant to the Plan will not exceed 486,260 shares. Pursuant to
the Plan, the Company has issued stock options to various key employees.
All stock options issued to employees have an exercise price not less than
the fair market value of the Company's common stock on the date of grant.
Options granted under the Plan have an expiration date of no later than ten
years following the date of grant and generally have vesting periods of
three or four years.
On September 9, 1996, the Company adopted the 1996 Non-Employee Directors
Non-Qualified Stock Option Plan (the "1996 Directors' Plan"). A total of
33,333 shares of common stock are reserved for issuance under the 1996
Directors' Plan. Under this plan, upon initial election to the Board of
Directors, all non-employee directors are awarded options to purchase 2,000
shares of common stock. Upon each subsequent election to the Board of
Directors, all non-employee directors receive option awards to purchase
1,000 shares of common stock. These options, which have an exercise price
equal to the fair market value of the shares of common stock as of the date
of grant, vest at the rate of 33.33% per year. All options awarded under
the 1996 Directors' Plan expire on the first to occur of (i) 10 years after
the date of grant or (ii) 90 days after the date the director is no longer
serving in such capacity for reasons other than death or disability.
Information relating to options at September 30, 1999 summarized by
exercise price is as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Range of Remaining Vested Average
Exercise Options Contractual Options Exercise
Prices Outstanding Life Outstanding Price
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 4.11 - 6.00 154,350 7.81 154,350 $ 4.27
12.00 - 15.00 61,000 9.35 47,444 13.62
$ 21.00 - 21.75 4,000 9.08 2,000 21.38
---------------------------------------------------------------------------
219,350 8.26 203,794 $ 7.19
===========================================================================
</TABLE>
In accordance with accounting for such options utilizing the intrinsic
value method, there is no related compensation expense recorded in the
Company's financial statements for the three months ended September 30,
1999 and 1998. As of September 30, 1999, none of these options have been
exercised and 203,794 were exercisable.
9. STOCK WARRANTS
As of September 30, 1999 and 1998, the Company had outstanding warrants to
purchase 7,112 shares of common stock at $4.11 per share. These warrants
were issued in July 1995 at the fair value at that date to certain
consultants of the Company. The warrants became exercisable in January 1997
and expire at various dates through December 2001.
The Company has issued to Royce Investment Group, Inc., as representative
of the several underwriters of the Company's initial public offering of
common stock, warrants (the "Representative's Warrants") to purchase 66,667
shares of common stock at a purchase price of $22.50 per share, which is
150% of the offering price of the common stock in the Company's initial
public offering. The holders of the Representative's Warrants will have the
right to require the Company to register the Representative's Warrants
under the Securities Act. The Representative's Warrants became exercisable
on February 18, 1998 and are exercisable until February 12, 2001.
10. EMPLOYEE BENEFIT PLAN
Effective January 1, 1994, the Company implemented a profit sharing plan
covering virtually all employees meeting certain eligibility requirements.
The plan is designed as a 401(k) profit sharing plan. Employees are
permitted to make voluntary contributions to the plan, for which the
Company is required to make a matching contribution up to certain
limitations.
<PAGE> 12
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
11. INITIAL PUBLIC OFFERING AND ESCROWED SHARES
The Company successfully completed its initial public offering ("IPO")
of 2,000,000 shares of its common stock, par value $.001 per share, at
a price of $5.00 per share sold under its registration statement and
prospectus dated February 12, 1997. The offering closed on February 19,
1997, and net proceeds of approximately $7,549,000 were received by the
Company.
12. SIGNIFICANT CUSTOMER
Approximately 14% in 1999 and 20% in 1998 of the Company's revenue, was
from hospital-clients owned or managed by a national hospital
management company, which the Company had engagements with during the
past five years. In addition, approximately 11% of the Company's
revenue for the First Quarter of Fiscal 2000 was from hospital-clients
owned by a large Texas based hospital system.
13. STOCK SPLIT
Subsequent to the end of fiscal 1999, the Company's Board of Directors
authorized and executed a reverse 1:3 common stock split. In accordance
with SFAS No. 128, the Company's outstanding common stock shares and
related disclosures, including those regarding options and warrants,
have been restated for years ended June 30, 1999 and 1998 to account
for the stock split. The effect of the restatement is to decrease
shares issued and outstanding from 8,756,254 to 2,918,751 and to
increase net loss per share from $(0.21) per share to $(0.61) per share
for the year ended June 30, 1999. For the year ended June 30, 1998,
weighted average common stock shares outstanding decreased from
8,089,588 to 2,696,529 and net loss per share increased from $(0.83)
per share to $(2.48).
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations:
The following table represents results from 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>
Three months Ended September 30,
----------------------------------------------------
1999 1998
----------- -----------
<S> <C> <C> <C> <C>
Consulting Revenues $ 886,428 100.0% $ 1,977,467 100.0%
Cost of revenues 495,688 55.9% 1,020,179 51.6%
----------- ------- ----------- -------
Gross profit 390,740 44.1% 957,288 48.4%
General and administrative expenses 943,995 106.5% 1,425,160 72.1%
----------- ------- ----------- -------
Loss from continued operations (553,255) (62.4)% (467,872) (23.7)%
----------- ------- ----------- -------
Other income (expenses):
Interest and other income 8,088 0.9% 27,238 1.4%
Interest expense (282) 0.0% (4,407) (0.2)%
Other income 29,602 3.3% -- --
----------- ------- ----------- -------
37,408 4.2% 22,831 1.2%
----------- ------- ----------- -------
Loss from operations before provision for income taxes (515,847) (58.2)% (445,041) (22.5)%
Provision for income taxes -- 0.0% (4,392) (0.2)%
----------- ------- ----------- -------
Net loss $ (515,847) (58.2)% $ (449,433) (22.7)%
=========== ======= =========== =======
</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 specific to its industry, and future
trends and results cannot be predicted with certainty.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of the results of operations and financial condition of
the Company should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto. Historical results and percentage
relationships among accounts are not necessarily an indication of trends in
operating results for any future period. The consolidated financial statements
present the continuing operations of Birman Managed Care, Inc. and its wholly
owned subsidiary. All significant inter-company balances and transactions have
been eliminated in consolidation.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1998:
Revenue:
General
For the quarter ended September 30, 1999 ("First Quarter of Fiscal 2000"),
consolidated revenue decreased by 55% to approximately $886,000, from
approximately $1,977,000 in the quarter ended September 30, 1998 ("First Quarter
of Fiscal 1999").
QUALITY MANAGEMENT PROGRAM (QMP)
The Quality Management Program (QMP) experienced a 55% decrease in revenue to
approximately $886,000 for First Quarter of Fiscal 2000, from approximately
$1,977,000 in First Quarter of Fiscal 1999. The revenue decrease was from lost
business not replaced with new accounts. The Company experienced a delay in
closing new business accounts during First Quarter of Fiscal 1999 due to the
hostile business climate created by the federal government's increased scrutiny
of health care providers, resistance from potential clients to the level of fees
charged by the Company and the need to adapt the Company's marketing strategy to
that environment.
Period to period changes in QMP business is measured in discharge volume and by
"per discharge" revenue. The Company experienced a slight decline in "per
discharge" revenue recognized from its consulting services to approximately $143
per discharge in First Quarter of Fiscal 2000 as compared to $145 per discharge
in First Quarter of Fiscal 1999. As long as the Company's compensation was based
entirely upon results, the Company's fees had not been a material impediment to
closing new consulting agreements. With the practical
<PAGE> 14
need to convert to fixed fee arrangements, the cost of the Company's services
became an issue as many hospitals viewed the Company as competitive with lower
cost "coding companies." The need to distinguish the Company's
physician-to-physician services from those non-medical clerically-oriented
companies required substantially more effort and time. The Company also was
required to re-orient its marketing personnel to stress the regulatory
compliance value of the QMP, a feature not generally found with lower-cost
services.
Throughout the 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
only started twelve new hospital accounts during First Quarter of Fiscal 1999.
Outlook: The Company believes that the hostile government regulatory climate
which has impeded the Company's efforts to obtain new hospital client
engagements has subsided somewhat but has been replaced by substantial pressure
on the Company's fees. The Company believes it cannot charge rates for its
services any lower than now charged but remains at a competitive disadvantage
against less-sophisticated "coding companies" which cannot offer the regulatory
compliance services or physician-to-physician credibility provided by the
Company's staff. The Company firmly believes that its services result in greater
net benefit to a hospital than those provided by the coding companies, but this
analysis is often lacking among hospital administrators who focus primarily on
cost as opposed to net result. With hospitals whose administrators focus on cost
and principal criterion for analyzing consultants, the Company generally does
not obtain an engagement. With hospitals whose administrators focus on the net
benefit to the hospital, the Company generally obtains the engagement. The
Company will continue to differentiate itself from these non-medical clerical
services against which the Company is forced by the market to compete. Although
this continues adversely to affect the Company's revenues, the Company believes
that for the long term, its substantial investment in physicians and in
regulatory research, updating and communication will provide a substantial
competitive advantage. In addition, the Company continues to develop new
consulting products geared to the different aspects of the health care industry.
The Company believes that it will be successful at closing additional new
contracts during First Quarter of Fiscal 1999 - 2000 due to the development of a
more tactically refined sales process. Per discharge revenue is expected to
remain stable during First Quarter of Fiscal 2000.
SIGNIFICANT CUSTOMERS - Q M P
The Company has provided services to a number of hospitals operated by Quorum
Health Resources, Inc. ("Quorum") since 1991. Services provided to hospitals
operated by Quorum generated approximately 22% and 20% respectively, of the
Company's revenue in both fiscal 1998 and 1999. Over the past five years, the
Company has provided its Quality Management Program at 38 Quorum-operated
facilities. Currently, the Company is providing Quality Management Program
services at 3 Quorum-operated facilities.
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. The Health Alliance announced operating losses in excess of $30 million
in March 1999. The Company believes that its contract was terminated as part of
a system-wide exclusion of all outside consultants despite strong financial
results achieved by the Company for the Health Alliance.
COST OF REVENUE AND GROSS PROFIT:
The cost of revenue includes all costs directly associated with the operations
of the QMP business, including compensation of physicians, nurses, and allied
health specialists, consulting staff travel and lodging, and other direct costs.
For the First Quarter of Fiscal year 2000, the cost of revenue decreased by 51%
to approximately $496,000, from approximately $1,020,000 in First Quarter of
Fiscal year 1999.
Outlook: Cost of revenue as a percentage of total revenue will be more stable as
minimal impact should be seen from the shift to fixed fee contracts. Management
anticipates no further decline in its gross profit rate as it is currently
pricing its product to achieve a 52% profit margin. Cost of revenue for the
Company's new products remains undetermined as the Company has not begun
delivering sufficient of those services to determine accurately the ultimate
cost of those services or the prices for which those services can be provided.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses decreased by approximately $481,000
or 34%, to approximately $944,000 for First Quarter of Fiscal 2000.
This was due to a decrease in salary and benefit expenses attributable to the
elimination of several positions and pay reductions implemented at the beginning
of the first quarter of the fiscal year. The Company also implemented another
round of substantial overhead and cost reduction measures at the beginning of
the third quarter that contributed to the decrease in selling, general, and
administrative expenses.
Outlook: The Company anticipates that selling, general, and administrative
expense will remain at current levels through at least the next two fiscal
quarters. The Company does not anticipate any non-recurring charges for the next
fiscal year. The Company anticipates that legal and professional fees will
decrease substantially for the coming year when compared to the prior year due
to the settlement of all material pending litigation during fiscal 2000,
completion of special accounting work caused by the discontinuance of the
Company's health maintenance operation and the change from a national accounting
firm to a local accounting firm. These steps included a reduction in force and
staff position consolidations which eliminated eight staff positions, an
across-the-board pay reduction
<PAGE> 15
for most employees ranging from 10% to 30% of salary, and a reduction in certain
overhead expenses.
NET LOSS FROM CONTINUING OPERATIONS:
For First Quarter of Fiscal 2000 the Company reported a net loss of $515,847, as
compared to a net loss of $449,433 in the first quarter of prior fiscal year.
The net loss from continuing operations for First Quarter of Fiscal 2000 was
primarily from a decrease in revenue and gross margin from the Quality
Management Business.
Outlook: The Company anticipates lower net operating losses in the second
quarter of fiscal 2000 as (i) revenue is realized from the additional contracts
from the investment made in retaining and refocusing marketing personnel for QMP
and (ii) selling, general and administrative costs decrease due to steps taken
by the Company in the first and third quarters of fiscal year 1999 to reduce
overhead. The Company has regularly anticipated a reduction in its operating
losses but has, to date, failed to achieve those results for a variety of
reasons which the Company believes have been beyond its control. There is no
assurance that the Company will reduce its net operating losses in the near
future.
LIQUIDITY AND CAPITAL RESOURCES:
For the period ended September 30, 1999, the Company funded its continuing
operations and business development activities primarily through operating
revenue and cash on deposit and cash equivalents of approximately $874,000.
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 has expired and will not be
renewed.
Outlook: In order for the Company's cash resources, including currently
available credit facilities, to be sufficient to meet the Company's anticipated
working capital needs for the next twelve months, the Company must successfully
attract hospital consulting contracts generating approximately $517,000 per
month of additional consulting revenue and must also refrain from incurring
additional overhead costs. The Company's credit facility expired on October 31,
1999 and will not be renewed. The Company, however, may attempt to 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 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 to address
other risks, but intends to formulate one to address unavoidable risks by
November 1999.
<PAGE> 16
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
The Company currently is not a party to any material legal proceedings except as
follows:
In August of 1999, the Company was named a defendant in an action for
declaratory relief filed by the City of Cookeville, Tennessee, dba Cookeville
Regional Medical Center seeking a declaration that the Company is liable for all
costs, including outside legal costs, incurred by the plaintiff in responding to
requests for information served by the United States Department of Justice. The
suit alleges no actionable conduct on the part of the Company, but simply
alleges that the Company in some unidentified manner is responsible for the
charges and costs incurred by the hospital in providing documents to the federal
government. The Company filed a motion to dismiss the suit, which is pending. In
the meantime, the Company continues to offer to assist Cookeville Regional
Medical Center and any of its other hospital clients in defending any bills
submitted by the hospital consistent with recommendations made by the Company.
The Company believes the suit is without merit.
ITEM 2. CHANGES IN SECURITIES
During the First Quarter of Fiscal 2000, the Company's Board of Directors as
approved by the shareholders authorized and executed a reverse 1:3 common stock
split.
ITEM 5. OTHER INFORMATION
Discussion of certain matters contained in this Form 10-QSB may constitute
forward-looking statements within the meaning of the Securities Reform Act of
1996, and as such, may involve risks and uncertainties. These forward-looking
statements relate to, among other things, expectations of the business
environment in which the Company operates, projections of future performance,
perceive opportunities in the market and statements regarding the Company's
mission and vision. Such forward-looking statements are labeled "Outlook." The
Company's actual results, performance and achievements may differ materially
from the results, performance or achievements expressed or implied in such
forward-looking statements. In addition to other information contained in this
Form 10-QSB, the following is a summary of some of the important factors that
could affect the Company's future results of operations and/or its stock price,
and should be considered carefully in evaluating the Company.
TRENDS OR UNCERTAINTIES WHICH MAY IMPACT REVENUES FROM CONTINUING OPERATIONS
Through most of fiscal 1997 the Company experienced rapid growth in its QMP
business. Under contracts then in effect, the Company would typically be
compensated by a hospital client only in the event it generated increased
revenue for that hospital. This "the risk is on us" policy made it simpler to
obtain new hospital clients. In January 1997, the Federal Government issued a
"fraud alert" announcing that it would examine with heightened scrutiny any
contract with a health care provider which provided a financial incentive to
obtain more funds from the Medicare program. This announcement, along with
highly-publicized initiatives of the federal government to examine, challenge
and prosecute hospitals, physicians, medical executives, medical laboratories
and others caused hospitals throughout the United States to reduce or cease
outside contracting for consulting services such as the Company provides.
Although the Company's Quality Management Program has always concentrated
heavily on regulatory compliance, many hospital clients were primarily attracted
by its generally positive financial results. As hospitals' awareness of
enforcement against regulatory violations increased, the Company highlighted the
regulatory compliance aspects of its QMP and changed its predominant billing
arrangements from "results oriented" to fixed fee billings with most of its
hospitals in fiscal 1998. The combination of eliminating "results oriented"
billing and the near standstill in hospitals' willingness to enter into new
contracts caused a decrease in revenue per discharge and a significant decrease
in the rate of adding new hospital clients. As a consequence, the Company only
started twelve new hospital accounts during First Quarter of Fiscal 1999. The
Company started four new hospital accounts during the first quarter and four
during the second quarter. Three new hospital accounts were started during the
third quarter. Only one new hospital account was started in the fourth quarter.
Federal regulators make widely disseminated pronouncements threatening severe
sanctions, both civil and criminal, against health care providers. Federal
enforcement officials have also engaged in practices the Company believes
constitutes retroactive application of regulatory interpretations which differ
significantly from interpretations widely accepted and applied in the industry
for many years. The Company's agreements with its hospital clients generally
obligate the Company defend its recommendations for a period of up to two years
after the end of each contract. The Company may be called upon to do this on an
increasing basis. The ultimate impact this will have on the Company's operations
cannot be determined with any certainty.
Outlook: The Company has encountered extremely strong resistance to obtaining
new clients for its services during the past two years. For the past two years,
most of this pressure could be attributed to the January 1997 federal "fraud
alert" aimed at discouraging hospitals from entering into any contracts in which
compensation was based directly or indirectly on obtaining more money from the
federal Medicare program. The federal government announced that any such
contracts, while not illegal per se, would received "heightened scrutiny." The
federal government enforced this policy by challenging many years of bills
previously submitted by hospitals which the hospitals believed complied in all
material respects with applicable regulations. Nonetheless, through the device
of alleging federal "False Claims Act" violations and threatening severe civil
and criminal sanctions, federal regulators have obtained substantial money from
hospitals and their officers and physicians throughout the country. Often, these
settlements were compelled by high cost of defense and the severity of the
sanctions threatened. This created a climate hostile to expanding the Company's
client base because the Company's services, which focus in part on accurately
capturing the true level of services rendered by a hospital, have frequently
resulted in revenue gains for hospitals. This fact placed the Company in a
category of service providers who were generally suspect under the federal
government's enforcement initiative. The Company believed
<PAGE> 17
and continues to believe that its services have been in compliance with all
applicable statutes and regulations. The Company believes that most hospitals
have now reviewed their practices sufficiently to gain confidence in their
record keeping and billing, thus reducing the resistance the Company must
overcome from this regulatory and enforcement pressure. This federal regulatory
pressure against obtaining new engagements for the Company has been replaced by
tremendous cost-cutting pressure on hospital administrators. The Company's fees
for its services are substantially greater, often double or more, of those of
other companies and consultants perceived by hospital administrators to be its
competitors. The Company has encountered strong resistance to the level of its
fees, but believes it cannot lower its charges any more than it has already
done. This places the Company at a severe disadvantage with hospital considering
retaining consultants. On the other hand, the pressure on hospitals to reduce
costs is accompanied by an equally great pressure to increase revenues. Based on
its ten-year history, the Company must be considered a high-cost provider of
services, but with an even higher net return for the hospitals served. With
hospitals solicited by the Company whose administrators base their decisions on
the net results achieved by the Company's services (that is, the benefit netted
against the cost), the Company typically obtains an engagement. With other
hospitals whose administrators focus more on cost alone, the Company typically
does not obtain the engagement. The Company has suffered substantial operating
losses and is likely to do so at least through the second quarter of fiscal year
2000. Management has elected to attempt to generate sufficient new revenue from
new hospital engagements to achieve break-even financial results, rather than
reduce costs more. There is no assurance that this highly risky strategy can
succeed in the current market for hospital related services. In addition to
attempting to obtain more hospital clients, the Company has explored a number or
arrangements with major hospital equipment manufacturers and software suppliers
to apply its "physician-to-physician" core competency in other areas. To date,
no agreements have been reached for providing services in these areas. The
Company believes its sales efforts will continue to add new hospital clients to
its prospective client list. The Company expects to add a net of approximately
six to ten new hospital clients in through the third quarter of fiscal 1999 -
2000 and further expects to reach agreement with at least one major medical
equipment supplier to provide consulting services. There is no assurance it will
be able to do so as financial pressures mount on U.S. hospitals. For the long
term, the Company continues to believe that its physician-oriented philosophy,
its strong expenditures in regulatory compliance and its greater medical
sophistication will allow it to survive.
POTENTIAL FLUCTUATION IN OPERATIONS AND OPERATING RESULTS
The Company's operating results could vary from period to period as a result of
seasonality in discharges of Medicare patients by Quality Management Program
hospital-clients, fluctuations in severity of illness, changes in the Medicare
prospective payment system, the expiration of contracts to provide Quality
Management Program services coupled with a failure to replace such contracts
with comparable engagements, under performing contract engagements, and changes
in governmental regulations.
Outlook: The Company expects operating losses to continue through the second
quarter of fiscal 2000. Management has elected to pursue a policy of increasing
revenues to reach profitability to the exclusion of more extensive cost
reductions, believing that it has cut its costs as much as it can and still
maintain its services. The principal obstacle to achieving revenue targets is
overcoming the practical difficulties of obtaining final contract approval
before commencing a new hospital engagement. Primary among these is the
practical difficulty of obtaining contractual concurrence with both the
administration and medical staff of a prospective hospital. In simple terms, it
takes a long time to meet with enough staff physicians, educate them on the key
aspects of the Quality Management Program, and wait for meetings (typically held
only once a month) of the medical staff in order to complete the contracting
process. The Company has reduced its sales force to one full time salesman and
its chairman, Dr. Birman, is involved almost exclusively in attempting to obtain
new hospital client engagements. Experience has shown, however, that a larger
sales force does not translate into more hospital engagements. The Company has
been able to maintain a relatively steady gross profit margin of around fifty
percent of fees billed and it has been able to make substantial reductions in
corporate and support staff overhead. Despite these reductions, the Company
continues to experience operating losses because Management believes it cannot
reduce support staff costs and overhead sufficiently to operate within the gross
profit generated by operations in the field by the current number of hospitals
it now serves. Management is attempting to obtain sufficient new engagements to
cover its operating overhead. There is no assurance this strategy will succeed.
If the Company does not substantially increase its revenues, Management's
current plan does not allow the Company to operate at a profit.
RISK OF MEDICARE AUDITS ON QUALITY MANAGEMENT PROGRAM BUSINESS
Hospitals and physicians providing services under Medicare are subject to
regulatory responsibilities imposed by the Health Care Financing Administration
("HCFA"). Peer Review Organizations ("PROs") engaged by HCFA in each state
routinely review and audit reimbursement requests, including patient admissions,
quality of care, and appropriateness of diagnostic-related group("DRG")
selections, among other things. The depth of review varies from hospital to
hospital. There is always a risk that PRO attention may focus with increased
scrutiny on reimbursement requests submitted by hospital-clients of the Company
that achieve increased reimbursements as a result of the Quality Management
Program. In addition, HCFA investigates allegations of fraud and abuse of
Medicare and Medicaid and has instituted a multi-state program called "Operation
Restore Trust" to punish persons engaged in fraud and abuse of Medicare and
Medicaid, recover funds, identify areas of vulnerability, and prevent fraud.
Among the areas of investigatory interest to HCFA are billing code fraud,
billing schemes, contingent fees, and kickbacks involving providers.
Historically, the Quality Management Program has not been the cause of a focused
review or audit by a PRO or a formal investigation by HCFA. However, there can
be no assurance that focused reviews, audits, or investigations will not occur
in the future. A denial of reimbursement requests submitted by a hospital-client
could result in one or more hospital-clients seeking to withdraw from their
contracts, and could result in a formal investigation by HCFA. Such events could
have a material adverse effect on the Company.
Outlook: The Company received demands for indemnification against
federally-imposed fines and expenses from six of its current and past hospital
clients during the latter half of fiscal 1999. No such claim has resulted in
litigation except the claim asserted by Cookeville Regional Medical Center,
discussed below. The Company has assisted each such hospital in the defense of
the bills challenged by
<PAGE> 18
federal regulators. The Company is aware of no hospital which has been
sanctioned as a result of the Company's services. The Company believes it has
successfully defended its work, and thus the hospitals, in these matters. The
Company may receive other claims for indemnification for billings submitted by a
hospital through the PRO and to the HCFA if such billings result in denials or
formal investigations. It is the Company's position that such a claim has no
basis in law as the Company makes no billing decisions for any hospital. The
Company prepares no bills, handles no billing, and has no authority - legal or
otherwise - for billings for a hospital. All billings submitted by a hospital
are those of the hospital, not the Company. In the case of each claim, the
Company notified its insurance carrier of the claim and, in addition, offered to
assist each hospital in the defense of any diagnosis made by a hospital in its
billing consistent with a recommendation made by the Company. One hospital,
Cookeville Regional Medical Center, filed suit in Tennessee state court seeking
a declaration that the Company is liable for all costs of responding to federal
demands for more information regarding billing. The suit does not allege any
misconduct on the part of the Company and the Company believes the suit is
without merit. See, "Legal Proceedings."
HEIGHTENED FEDERAL SCRUTINY OF MEDICARE PROVIDERS
The Health Insurance Portability and Accountability Act of 1996, effective
January 1, 1997, established funding for a Medicare Integrity Program to combat
Medicare fraud. Federal enforcement agencies are now expected to have funding
sufficient to undertake anti-fraud enforcement investigations and prosecutions
of what were previously viewed as minor offenses resolved in a regulatory or
civil forum. The Office of Inspector General of the Department of Health and
Human Services released a special fraud alert, 97-01, which notifies field
agents to give special attention to consulting relationships under which
consultants are paid a commission for increasing the Medicare reimbursements of
a Medicare provider. A majority of the Company's contracts to date have largely
set the Company's contract revenues based on increasing Medicare reimbursements
to Medicare providers. Furthermore, the Balanced Budget Act of 1997 provides
additional civil and criminal penalties for provider activities that are in
violation of the federal fraud and abuse laws. Decisions regarding coding and
billing practices generally employed throughout the health care industry require
the exercise of judgment in ambiguous or previously unresolved situations. As a
consequence, there can be no assurance that practices heretofore deemed proper
will not be attacked by Federal regulators as a result of heightened Federal
scrutiny of those practices.
PRINCIPAL CLIENTS
The Company has provided Quality Management Program services to several
hospitals affiliated with a common management company or hospital system. The
Company is continuing its efforts to expand its Quality Management Program
client base to reduce its dependence on hospitals which are affiliated with one
common management company or hospital system.
GOVERNMENT REGULATION
The Quality Management Program hospital-clients are subject to substantial
regulation at both the federal and state levels. The Company is subject to a
number of laws governing issues as diverse as relationships between health care
providers and their referral sources, prohibitions against providers referring
patients to an entity with which the provider has a financial relationship,
licensure and other regulatory approvals, the corporate practice of medicine,
and regulation of unprofessional conduct by providers, including fee-splitting
arrangements. Although the Company believes that its current operations comply,
and its proposed operations will comply, with relevant federal and state laws,
many aspects of the relationships between the Company and its hospital-clients
have not been the subject of judicial or administrative interpretation. An
adverse review or determination by any court or applicable administrative agency
or changes in the regulatory requirements could have a material adverse effect
on the operations and financial condition of the Company.
The Company has engaged special health care regulatory counsel since its
inception 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.
DEPENDENCE UPON REIMBURSEMENT BY THIRD-PARTY PAYORS
Clients for the Company's Quality Management Program derive substantial revenue
from third party payors. The health care industry is undergoing cost-containment
pressures as third-party payors seek to impose lower reimbursement and
utilization rates and to negotiate reduced rate payments with medical service
providers. The Company believes that this trend will continue. Reductions in
payments to hospitals or other changes in reimbursements for health care
services could have a direct or indirect material adverse effect on the Company,
including increasing demand for the Company's services.
<PAGE> 19
SUBSTANTIAL COMPETITION
The Company's Quality Management Program competes for hospitals as clients in a
highly competitive environment. Many of these competitors have substantially
greater financial, marketing, and management resources than the Company.
Although the Company believes the acceptance of its Quality Management Program
and related professional services and its familiarity with and reputation in
medium size hospitals will enable it to compete successfully. There can be no
assurance that the Company will be able to compete effectively against existing
competitors or that additional competitors will not enter the markets the
Company plans to serve.
LIABILITY AND INSURANCE
The physicians and allied health specialists employed by the Company in its
Quality Management Program do not treat patients, make any treatment or
diagnostic decisions, or provide any medical services. Although the Company
believes that the Quality Management Program activities of its physicians do not
constitute the practice of medicine or establish physician-patient relationships
for which the Company could incur liability, the Company may be exposed to the
risk that professional liability claims could be brought against the Company by
third parties.
DEPENDENCE ON KEY EXECUTIVE
The Company depends to a significant extent on the efforts and skills of its
Chairman, President and Chief Executive Officer, David N., M.D. The
Company has entered into an employment agreement with Dr. Birman. The loss,
incapacity, or unavailability of Dr. Birman could adversely affect the Company's
operations. The Company maintains a $1,000,000 key man insurance policy on his
life.
FUTURE CAPITAL NEEDS
The Company is concentrating its efforts on achieving break-even financial
performance. These efforts consist primarily of attempting to obtain new
hospital-client engagements and reducing costs. Management believes that costs
have been reduced as much as feasible. Accordingly, it is not pursuing any
expansion or diversification initiatives which would involve the expenditure of
any material amounts of its capital. The Company consumed a substantial portion
of its cash reserves in fiscal 1998 - 1999. Its future capital needs will be
primarily dependent upon its ability to attract new hospital client engagements
and to achieve additional cost reductions. To date, the Company has financed its
growth primarily through operating income, the proceeds of private offerings of
shares of Common Stock, and the proceeds of the Company's initial public
offering of Common Stock on February 12, 1997.
Outlook: The Company has experienced average operating losses in excess of
$100,000 per month for approximately ten quarters and expects them to continue
at or about that level for at least the second quarter of 2000. Management
believes that it can achieve break-even or nearly break-even operating results
by the end of the second quarter of fiscal 2000. Unless the Company is able to
reduce its monthly operating losses dramatically, it will experience cash
shortages before the end of fiscal year 2000. The Company may seek additional
capital or explore other alternatives should its capital recourse prove
inadequate. There can be no assurance that the Company will be able to secure
such financing, if necessary, on favorable terms. If the Company is unable to
secure additional financing in the future, its results of operations for future
periods could be adversely affected.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
*3.1 Certificate of Incorporation of Birman Managed Care, Inc.
*3.2 By-laws of Birman Managed Care, Inc.
*3.3 Certificate of Merger dated September 9, 1996 by and between
Birman Managed Care, Inc. - Delaware and Birman Managed Care,
Inc.
*4.1 Reference is made to Exhibits 3.1 through 3.3.
*10.1 Employment Agreement by and between Birman Managed Care, Inc.
and David N. Birman, M.D. entered into on March 1, 1996.
*10.2 Employment Agreement by and between Birman Managed Care, Inc.
and Sue D. Birman entered into on March 1, 1996.
*10.3 Employment Agreement by and between Birman Managed Care, Inc.
and Robert D. Arkin entered into on March 1, 1996; Amendment
No. 1 by and between Birman Managed Care, Inc. and Robert D.
Arkin entered into on March 1, 1996.
*10.4 Employment Agreement by and between Birman Managed Care, Inc.
BMC Health Plans, Inc. and Vincent W. Wong entered into on
March 1, 1996.
*10.5 Employment Agreement by and between Birman Managed Care, Inc.
and Douglas A. Lessard entered into on March 1, 1996;
Amendment No. 1 by and between Birman Managed Care, Inc. and
Douglas A. Lessard entered into on March 1, 1996; Amendment
No. 2 by and between Birman Managed Care, Inc. and Douglas A.
Lessard entered into on September 1, 1996.
<PAGE> 20
*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.
*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.
*21.1 Subsidiaries of the Registrant.
27.1 Financial Data Schedule, Three months ended September 30,
1999.
27.2 Financial Data Schedule, Three months ended September 30,
1998.
B. Reports on Form 8-K
No reports on Form 8-K was filed by the Company during the last quarter
of the fiscal year ended June 30, 1998. During fiscal year 1999, the
Company filed the following reports on form 8-K:
July 2, 1998 - To report certain cost reduction measures taken to
reduce cash operating requirements.
August 7, 1998 - To report the discontinuance of the Company's health
plan operations.
January 28, 1999 - To report additional cost reduction measures taken
to reduce cash operating requirements.
April 1, 1999 - To report that Deloitte and Touche LLP resigned from
its position as the independent auditors of the Company.
April 21, 1999 - To report that NASDAQ intended to de-list the
Company's common stock due to the Company's failure to comply with
NASDAQ Quantitative Maintenance Criteria.
<PAGE> 21
June 10, 1999 - To report the sale of Hughes and Associates, which was
a wholly-owned Subsidiary of the Company.
July 7, 1999 - To report that the Company effected a one for three
reverse stock split.
July 30, 1999 - To report greater than anticipated operating losses for
the fourth quarter of the fiscal year ended June 30, 1999.
* 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
<PAGE> 22
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, there unto duly
authorized.
Birman Managed Care, Inc.
---------------------------------------
(Registrant)
/s/ David N. Birman, Chairman of the
Board, President, & Chief Executive
Date November 15, 1999 Officer
- ------------------------------------ ---------------------------------------
(Signature)
Date November 15, 1999 /s/ Sue Birman, Treasurer
- ------------------------------------ ---------------------------------------
(Signature)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BIRMAN MANAGED CARE, INC. FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 604,333
<SECURITIES> 0
<RECEIVABLES> 754,777
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,469,012
<PP&E> 816,512
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,451,962
<CURRENT-LIABILITIES> 125,399
<BONDS> 0
0
0
<COMMON> 8,756
<OTHER-SE> 9,715,071
<TOTAL-LIABILITY-AND-EQUITY> 2,451,962
<SALES> 886,428
<TOTAL-REVENUES> 886,428
<CGS> 495,688
<TOTAL-COSTS> 943,995
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 282
<INCOME-PRETAX> (514,847)
<INCOME-TAX> 0
<INCOME-CONTINUING> (514,847)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (514,847)
<EPS-BASIC> (.19)
<EPS-DILUTED> (.19)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FORM THE FINANCIAL
STATEMENTS OF BIRMAN MANAGED CARE, INC. FOR THE THREE MONTHS ENDED SEP-30-1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,710,089
<SECURITIES> 0
<RECEIVABLES> 932,089
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,805,163
<PP&E> 1,120,270
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,115,497
<CURRENT-LIABILITIES> 512,349
<BONDS> 0
0
0
<COMMON> 8,756
<OTHER-SE> 9,715,071
<TOTAL-LIABILITY-AND-EQUITY> 5,115,497
<SALES> 1,977,467
<TOTAL-REVENUES> 1,977,467
<CGS> 1,020,179
<TOTAL-COSTS> 1,425,160
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,407
<INCOME-PRETAX> (445,041)
<INCOME-TAX> (4,392)
<INCOME-CONTINUING> (449,433)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (449,433)
<EPS-BASIC> (.17)
<EPS-DILUTED> (.17)
</TABLE>
