<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 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 February 15, 1999 = 8,756,254
1
<PAGE> 2
BIRMAN MANAGED CARE, INC. & SUBSIDIARIES
FORM 10-QSB
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
EXHIBITS
EX-27.1 Financial Data Schedule, Six Months Ended December 31, 1998
EX-27.2 Financial Data Schedule, Six Months Ended December 31, 1997 -
Restated
2
<PAGE> 3
PART I.
ITEM 1. FINANCIAL STATEMENTS
BIRMAN MANAGED CARE, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(UNAUDITED) (AUDITED)
December 31, June 30,
1998 1998
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,112,251 $ 2,431,387
Accounts receivable, net of allowance for doubtful
accounts of $141,900 and $130,000, respectively 979,925 805,760
Prepaid expenses and other 74,609 38,516
Deferred income taxes 26,819 26,819
Income taxes receivable (Note 3) 1,051,864 1,234,634
Note receivable - related party 36,705 55,265
----------- -----------
Total Current Assets 3,282,173 4,592,381
Net assets of discontinued operations (Notes 1 and 9) 235,690 --
Property and equipment, net of accumulated depreciation of
$411,561 and $287,717, respectively 1,062,351 1,104,110
Goodwill 12,108 12,915
Other 106,155 126,282
----------- -----------
Total Assets $ 4,698,477 $ 5,835,688
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of notes payable and capital lease obligations $ 401,900 $ 205,700
Accounts payable 275,177 333,256
Accrued expenses 117,073 141,605
Net liabilities of discontinued operations (Notes 1 and 9) -- 102,546
----------- -----------
Total Current Liabilities 794,150 783,107
Note payable, less current portion -- 400,000
Deferred income taxes 34,083 34,083
----------- -----------
Total Liabilities 828,233 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 (5,853,583) (5,105,329)
----------- -----------
Total Stockholders' Equity 3,870,244 4,618,498
----------- -----------
Total Liabilities and Stockholders' Equity $ 4,698,477 $ 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 Six Months ended
December 31, December 31,
---------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Consulting revenues $ 1,923,640 $ 2,295,402 $ 3,901,107 $ 5,026,823
Cost of revenue 993,616 1,006,718 2,013,795 2,093,579
----------- ----------- ----------- -----------
Gross profit 930,024 1,288,684 1,887,312 2,933,244
General and administrative expenses 1,560,081 2,038,105 2,985,241 3,711,695
----------- ----------- ----------- -----------
Loss from continuing operations (630,057) (749,421) (1,097,929) (778,451)
----------- ----------- ----------- -----------
Other income (expense):
Interest and other income 19,600 93,592 46,838 206,167
Interest expense (3,994) (11,253) (8,401) (12,506)
Loss on disposal of assets -- (4,505) -- (4,355)
----------- ----------- ----------- -----------
15,606 77,834 38,437 189,306
----------- ----------- ----------- -----------
Loss from continuing operations before provision for
income taxes and extraordinary gain (614,451) (671,587) (1,059,492) (589,145)
Provision for income tax benefit (Note 3) 19,625 220,505 15,233 201,982
----------- ----------- ----------- -----------
Loss from continuing operations before
extraordinary gain (594,826) (451,082) (1,044,259) (387,163)
----------- ----------- ----------- -----------
Net loss from discontinued operations of
health plan, net of tax (Notes 1 and 9) -- (179,386) -- (367,605)
Gain on disposal of health plan, net of tax
(Notes 1 and 9) 75,000 -- 75,000 --
----------- ----------- ----------- -----------
Net loss before extraordinary gain (519,826) (630,468) (969,259) (754,768)
Extraordinary gain on debt extinguishment,
less applicable income taxes of $ 0 (Note 10) 221,005 -- 221,005 --
----------- ----------- ----------- -----------
Net loss $ (298,821) $ (630,468) $ (748,254) $ (754,768)
=========== =========== =========== ===========
Loss per common share - basic
Loss from continuing operations
before extraordinary gain $ (.08) $ (.06) $ (.13) $ (.05)
Loss from discontinued operations of health plan,
net of tax -- (.02) -- (.04)
Gain on disposal of health plan, net of tax .01 -- .01 --
Extraordinary gain on debt extinguishment, net of tax .03 -- .03 --
----------- ----------- ----------- -----------
Net loss $ (.04) $ (.08) $ (.09) $ (.09)
=========== =========== =========== ===========
Loss per common share - assuming
dilution
Loss from continuing operations
before extraordinary gain $ (.08) $ (.06) $ (.13) $ (.05)
Loss from discontinued operations of health
plan, net of tax -- (.02) -- (.04)
Gain on disposal of health plan, net of tax .01 -- .01 --
Extraordinary gain on debt extinguishment, net of tax .03 -- .03 --
----------- ----------- ----------- -----------
Net loss $ (.04) $ (.08) $ (.09) $ (.09)
=========== =========== =========== ===========
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>
Additional Retained Total
Common Stock Paid-In Earnings Stockholders'
Shares Amount Capital (Deficit) Equity
--------- ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997,
(Audited) 8,756,254 $8,756 $9,715,071 $ 1,577,417 $ 11,301,244
Net loss for year ended
June 30, 1998 (Audited) -- -- -- (6,682,746) (6,682,746)
--------- ------ ---------- ----------- ------------
Balance at June 30, 1998,
(Audited) 8,756,254 8,756 9,715,071 (5,105,329) 4,618,498
Net loss for the six months ended
December 31, 1998 (Unaudited) -- -- -- (748,254) (748,254)
--------- ------ ---------- ----------- ------------
Balance at December 31, 1998
(Unaudited) 8,756,254 $8,756 $9,715,071 $(5,853,583) $ 3,870,244
========= ====== ========== =========== ============
</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>
Six Months Ended
December 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (748,254) $ (754,768)
Loss from discontinued operations -- (367,605)
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 (1,044,259) (387,163)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 124,654 79,508
Loss on disposal of assets -- 4,355
Changes in assets and liabilities:
Accounts receivable (174,165) 586,733
Income taxes receivable 182,770 (101,216)
Prepaid expenses and other (36,093) (54,568)
Deferred tax asset -- (473,200)
Other assets 20,127 (62,780)
Accounts payable (58,079) 241,515
Accrued expenses (3,527) 1,683
Accrued executive bonuses -- (116,341)
Income taxes payable -- (541,473)
Deferred income taxes -- (19,175)
----------- -----------
55,687 (454,959)
----------- -----------
Net cash used in operating activities (988,572) (842,122)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (82,088) (613,923)
Payments from (advances to) note receivable - related parties 18,560 (6,424)
Investment in discontinued operations (263,236) (1,102,922)
----------- -----------
Net cash used in investing activities (326,764) (1,723,269)
----------- -----------
Cash flows from financing activities:
Payments on debt (3,800) (13,719)
----------- -----------
Net cash used in financing activities (3,800) (13,719)
----------- -----------
Net decrease in cash and cash equivalents (1,319,136) (2,579,110)
Cash and cash equivalents at beginning of period 2,431,387 8,462,277
----------- -----------
Cash and cash equivalents at end of period $ 1,112,251 $ 5,883,167
=========== ===========
</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 December 31, 1998 and the related condensed
consolidated statements of operations and cash flows for the three
months and six months ended December 31, 1998 and 1997 have been
prepared by the Company, without audit; in the opinion of management,
all adjustments for a fair presentation of such condensed consolidated
statements have been made in accordance with generally accepted
accounting principles. Accordingly, with the instructions of Item
310(B) of Regulation S-B, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. Operating results for the three months
and six months ended December 31, 1998 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 will 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
& Associates, Inc. and Hughes & Associates, Inc. (collectively, the
"Company").
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 & Associates, Inc. and Hughes & Associates, Inc. Through Birman
& Associates, 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 & Associates 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 six months
ended December 31, 1998 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 and a valuation allowance recorded against the
net deferred tax assets related to federal and state net operating
loss carryforwards created in the current period.
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 December 31,
1998 and 1997 for income from continuing operations:
<TABLE>
<CAPTION>
For the three months ended December 31, 1998
---------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
--------- --------- -------
<S> <C> <C> <C>
BASIC EPS - Loss from
continuing operations available to
common stockholders $(594,826) 8,089,588 $ (.08)
Effect of Dilutive Securities
None -- -- --
--------- --------- -------
DILUTED EPS - Loss from
continuing operations available to
common stockholders $(594,826) 8,089,588 $ (.08)
========= ========= =======
</TABLE>
<TABLE>
<CAPTION>
For the three months ended December 31, 1997
---------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
--------- --------- -------
<S> <C> <C> <C>
BASIC EPS - Loss from
continuing operations available to
common stockholders $(451,082) 8,089,588 $ (.06)
Effect of Dilutive Securities
None -- -- --
--------- --------- -------
DILUTED EPS - Loss from continuing
operations available to common
stockholders $(451,082) 8,089,588 $ (.06)
========= ========= =======
</TABLE>
9
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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 six months ended December 31,
1998 and 1997 for income from continuing operations:
<TABLE>
<CAPTION>
For the six months ended December 31, 1998
---------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
--------- --------- -------
<S> <C> <C> <C>
BASIC EPS - Loss from
continuing operations available to
common stockholders $(1,044,259) 8,089,588 $ (.13)
Effect of Dilutive Securities
None -- -- --
----------- --------- -------
DILUTED EPS - Loss from
continuing operations available to
common stockholders $(1,044,259) 8,089,588 $ (.13)
=========== ========= =======
</TABLE>
<TABLE>
<CAPTION>
For the six months ended December 31, 1997
---------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
--------- --------- -------
<S> <C> <C> <C>
BASIC EPS - Loss from
continuing operations available to
common stockholders $(387,163) 8,089,588 $ (.05)
Effect of Dilutive Securities
None -- -- --
--------- --------- -------
DILUTED EPS - Loss from continuing
operations available to common
stockholders $(387,163) 8,089,588 $ (.05)
========= ========= =======
</TABLE>
Options and warrants to purchase 1,105,159 and 1,233,205 shares of
common stock were outstanding as of December 31, 1998 and December 31,
1997, 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 six months ended December 31, 1998 and December 31, 1997
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 December 31, 1998, no amounts had been borrowed against such
line.
7. Significant Customer:
During the three months ended December 31, 1998 and 1997, approximately
22% and 19%, respectively, of the Company's revenue was from
hospital-clients owned or managed by a national hospital management
company. In addition, approximately 15% of the Company's revenue for
the three months ended December 31, 1998 was from three hospitals owned
by an Ohio non-profit corporation.
During the six months ended December 31, 1998 and 1997, approximately
22% and 20%, respectively, of the Company's revenue was from
hospital-clients owned or managed by a national hospital management
company. In addition, approximately 18% of the Company's revenue for
the six months ended December 31, 1998 was from three hospitals owned
by an Ohio non-profit corporation.
During the three months and six months ended December 31, 1997,
approximately 25% and 24%, respectively, 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 six
11
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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)
12/31/98 6/30/98
--------- -----------
<S> <C> <C>
Current Assets $ -- $ 1,540,898
Property and Equipment, net -- 54,482
Income Taxes Receivable 320,223 320,223
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 (84,533) (1,211,468)
--------- -----------
Net Assets (Liabilities) of Discontinued Operations $ 235,690 $ (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
deferred tax asset and valuation allowance were reduced to $1,484,868
during the three months and six months ended December 31, 1998, to
reflect the decrease resulting from the gain on disposal of health plan
recognized in the same quarter and six months ended. The discontinued
operations did not record any revenue during the six months ended
December 31, 1998 and recorded revenue of $322,429 and $439,061 for the
three months and six months ended December 31, 1997, 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 quarter and six months ended December 31, 1998. 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 quarter and six months ended December 31, 1998, the Company
reported an extraordinary gain of $221,005. There were no applicable
income tax effects 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 THREE SIX SIX
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 % 1997 % 1998 % 1997 %
----------- --- ----------- --- ----------- --- ----------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ..................... $ 1,923,640 100% $ 2,295,402 100% $ 3,901,107 100% $ 5,026,823 100%
Cost of revenue ............. 993,616 52% 1,006,718 44% 2,013,795 52% 2,093,579 42%
----------- --- ----------- --- ----------- --- ----------- ---
Gross profit ................ 930,024 48% 1,288,684 56% 1,887,312 48% 2,933,244 58%
General & Administrative
expenses .................. 1,560,081 81% 2,038,105 89% 2,985,241 76% 3,711,695 74%
----------- --- ----------- --- ----------- --- ----------- ---
Loss from continuing
operations ................ (630,057) (33%) (749,421) (33%) (1,097,929) (28%) (778,451) (16%)
Other income (expense)
Interest income ........... 19,600 1% 93,592 4% 46,838 1% 206,167 4%
Interest expense .......... (3,994) -- (11,253) (1%) (8,401) -- (12,506) --
Loss on disposal of
assets .................. -- -- (4,505) -- -- -- (4,355) --
----------- --- ----------- --- ----------- --- ----------- ---
Loss from continuing
operations before
income taxes and
extraordinary gain ........ (614,451) (32%) (671,587) (30%) (1,059,492) (27%) (589,145) (12%)
Income tax benefit .......... 19,625 1% 220,505 10% 15,233 -- 201,982 4%
----------- --- ----------- --- ----------- --- ----------- ---
Loss from continuing
operations before
extraordinary gain......... (594,826) (31%) (451,082) (20%) (1,044,259) (27%) (387,163) (8%)
----------- --- ----------- --- ----------- --- ----------- ---
Net loss from discontinued
operations, net of tax .... -- -- (179,386) (8%) -- -- (367,605) (7%)
Gain on disposal of health
plan, net of tax .......... 75,000 4% -- -- 75,000 2% -- --
----------- --- ----------- --- ----------- --- ----------- ---
Net loss before extraordinary
gain ...................... (519,826) (27%) (630,468) (28%) (969,259) (25%) (754,768) (15%)
Extraordinary gain on debt
extinguishment, net of tax 221,005 11% -- -- 221,005 6% -- --
----------- --- ----------- --- ----------- --- ----------- ---
Net loss .................... $ (298,821) (16%) $ (630,468) (28%) $ (748,254) (19%) $ (754,768) (15%)
=========== === =========== === =========== === =========== ===
</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 25% and 26% of the Quality Management Program ("QMP") business
revenue for the three months and six months ended December 31, 1998,
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 17% and 21% of the QMP business revenue for the three
months and six months ended December 31, 1998, respectively, has been from a
contract with The Health Alliance of Greater Cincinnati relating to a contract
with terms that run through May 2000.
14
<PAGE> 15
QUARTER ENDED AND SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH QUARTER ENDED
AND SIX MONTHS ENDED DECEMBER 31, 1997:
REVENUE
GENERAL
For the quarter ended December 31, 1998, consolidated revenue decreased by 16%
to approximately $1,924,000, from approximately $2,295,000 in the comparable
quarter of the prior year. For the six months ended December 31, 1998,
consolidated revenue decreased by 22% to approximately $3,901,000 from
$5,027,000 in the comparable period of the prior year. In addition to a decrease
in consolidated revenue, there has been a change in the revenue distribution
between the business divisions of the Company. For the six months ended December
31, 1998, the Utilization Review business now represents 15% of total revenue as
compared to 8% 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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Quality Management Program $1,673,000 $2,089,000 $3,323,000 $4,637,000
Utilization review/case management 251,000 206,000 578,000 390,000
---------- ---------- ---------- ----------
Total revenue $1,924,000 $2,295,000 $3,901,000 $5,027,000
========== ========== ========== ==========
</TABLE>
QUALITY MANAGEMENT PROGRAM (QMP)
The Quality Management Program (QMP) experienced a 20% decrease in revenue to
approximately $1,673,000 for the quarter ended December 31, 1998, from
approximately $2,089,000 in the comparable quarter of the prior year. The QMP
experienced a 28% decrease in revenue to approximately $3,323,000 for the six
months ended December 31, 1998, from approximately $4,637,000 in the comparable
period of the prior year. For the six months ended December 31, 1998,
approximately $465,000 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 approximately $134 per discharge in the six
months ended December 31, 1998, as compared to $154 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 23% to 23,128 discharge records reviewed in the six months
ended December 31, 1998 as compared to 30,009 discharge records reviewed in the
comparable period of the prior year.
During the six 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
six months of fiscal 1998. The Company started seven new hospital accounts
during the first six months of fiscal 1999.
Outlook: The Company continues to experience difficulty concluding new
consulting agreements with 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 non-physician "coding companies." In
January 1999, the Company reorganized and reduced its field force of physician
managers and allied health personnel to
15
<PAGE> 16
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 22% and 19%, respectively, of the Company's revenue in the quarter
ended December 31, 1998 and 1997. For the six months ended December 31, 1998 and
1997, services provided to hospitals operated by Quorum generated approximately
22% and 20%, respectively, of the Company's revenue. As of December 31, 1998,
the Company is providing QMP services at seven Quorum-operated facilities as
compared to six Quorum-operated facilities as of December 31, 1997.
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 with a third
hospital to begin possibly sometime during the third quarter of fiscal 1999. The
contract has three phases to the program with a decreasing level of consulting
services and related fees. Phase I provides for full implementation and training
under the QMP. Phase II and III provides further training and education and a
transition to monitoring and maintenance of a Health Alliance-operated
compliance program. Services provided under this contract with The Health
Alliance resulted in approximately 15% and 18%, respectively, of the Company's
revenue for the quarter and six months ended December 31, 1998.
During the prior fiscal year, the Company provided QMP services for two
hospitals owned by St. Barnabas Health System, which represents approximately
25% and 24%, respectively, of the Company's revenues for the quarter and six
months ended December 31, 1997. The St. Barnabas contract concluded activities
effective December 31, 1997 in accordance with its terms.
Outlook: The Company expects that revenue from contracts with the Health
Alliance and 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" after ninety days. The
Company believes it has achieved excellent results for the Health Alliance and
is uncertain about the reason for the termination, which was not provided.
Executives of the Company and the Health Alliance have agreed to meet presently
to discuss the matter. There is no assurance that the Health Alliance will
rescind its termination of the contract.
UTILIZATION REVIEW/CASE MANAGEMENT
Revenue from the operations of Hughes and Associates, Inc., the Company's
utilization review (UR) business in Mississippi, increased by 20%, to
approximately $251,000 for the quarter ended December 31, 1998, from
approximately $206,000 in the comparable quarter of the prior year. For the six
months ended December 31, 1998, revenue increased by 48% to approximately
$578,000 from approximately $390,000 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. This contract represents 27% and 23%, respectively, of Hughes'
revenue for the quarter and six months ended December 31, 1998.
Outlook: The Company expects the UR business to continue to show growth in
revenue through fiscal 1999, but at a slower growth rate. Hughes may report
additional revenue as more lives are added to the contract with the University
of Mississippi Medical Center. As part of the Company's new Self-Insured Medical
Cost Management program, Hughes & Associates is expected to play a larger role
in the Company as a whole. Should this program experience rapid growth, Hughes &
Associates may experience similarly rapid growth.
16
<PAGE> 17
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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Quality Management Program $827,000 $ 897,000 $ 1,661,000 $ 1,887,000
Utilization review/case management 167,000 110,000 353,000 207,000
-------- ---------- ----------- -----------
Total cost of revenue $994,000 $1,007,000 $ 2,014,000 $ 2,094,000
======== ========== =========== ===========
</TABLE>
Cost of revenue as a percentage of total revenue increased to 52% for the
quarter ended December 31, 1998 from 44% in the comparable quarter of the prior
year. For the six months ended December 31, 1998, cost of revenue as a
percentage of total revenue increased to 52% from 42% 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
December 31, 1998, all but two 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.
17
<PAGE> 18
GROSS PROFIT
For the quarter ended December 31, 1998, the Company's gross profit decreased by
$359,000 to approximately $930,000 from $1,289,000 in the comparable quarter of
the prior year. For the six months ended December 31, 1998, the Company's gross
profit decreased by $1,046,000 to approximately $1,887,000 from $2,933,000 in
the comparable period of the prior year. The Company's gross profit margin
decreased to 48% of revenue for the quarter ended December 31, 1998 from 56% of
revenue in the comparable quarter of the prior year. For the six months ended
December 31, 1998, the Company's gross profit margin decreased to 48% of revenue
from 58% 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 SIX MONTHS ENDED,
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Quality Management Program 51% 57% 50% 59%
Utilization review/case management 33% 47% 39% 47%
Total gross margins 48% 56% 48% 58%
</TABLE>
Gross profit margin for the QMP decreased to 51% in the quarter ended December
31, 1998 from 57% in the comparable quarter of the prior year. For the six
months ended December 31, 1998, gross profit margin for the QMP decreased to 50%
from 59% 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 33% for the quarter ended December 31, 1998 from 47% for the
comparable quarter of the prior year. For the six months ended December 31,
1998, gross profit margin for the UR business decreased to 39% from 47% 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 and
UR businesses are anticipated to produce gross profit margins of 55% to 65% of
revenue in the near term.
GENERAL AND ADMINISTRATIVE EXPENSES
For the quarter ended December 31, 1998, general and administrative expenses
decreased by $478,000 or 23%, to approximately $1,560,000 from $2,038,000 in the
comparable quarter of the prior year. For the six months ended December 31,
1998, general and administrative expenses decreased by $727,000 or 20% to
approximately $2,985,000 from $3,712,000 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 two fiscal quarters. 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 will also
sublease approximately one-half of its corporate headquarters in Cookeville,
Tennessee. Management does not believe that these steps will adversely affect
the Company's ability to service its consulting clients and to continue to
attract new clients.
INTEREST INCOME
Interest income decreased to approximately $14,000 for the quarter ended
December 31, 1998 from approximately $92,000 in the comparable quarter of the
prior year. For the six months ended December 31, 1998, interest income
decreased to approximately $41,000 from approximately $205,000 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.
18
<PAGE> 19
NET LOSS FROM CONTINUING OPERATIONS
For the quarter ended December 31, 1998 the Company reported a net loss from
continuing operations of $595,000 as compared to a net loss of $451,000 in the
comparable quarter of the prior year. For the six months ended December 31,
1998, the Company reported a net loss from continuing operations of $1,044,000
as compared to a net loss of $387,000 in the comparable period of the prior
year.
The net loss from continuing operations for the quarter and six months ended
December 31, 1998 was primarily from a decrease in revenue and gross margin from
the Quality Management Program.
DISCONTINUED OPERATIONS
For the quarter and six months ended December 31, 1998, 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 $179,000 and $368,000, respectively, in the
comparable periods of the prior year (see Note 9 to the Condensed Consolidated
Financial Statements). 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.
19
<PAGE> 20
EXTRAORDINARY GAIN
For the quarter and six months ended December 31, 1998, 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.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended December 31, 1998, the Company funded its continuing
operations and business development activities primarily through operating
revenue and cash on deposit of approximately $1,319,000. The Company invested
approximately $263,000 in discontinued operations to fund the wind-down of the
health plan management operations and also $82,000 to purchase property and
equipment.
The Company received an income tax refund of $1,245,000 during January 1999 from
the carryback of operating losses. During the third fiscal quarter, the Company
expects to use approximately $250,000 of additional cash resources for operating
losses to be incurred prior to implementation of the January cost reductions and
for related severance expenses.
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.
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.
20
<PAGE> 21
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.
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 six
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.
21
<PAGE> 22
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.
*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.
22
<PAGE> 23
*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, quarter ended December 31, 1998
27.2 Financial Data Schedule, quarter ended December 31, 1997
- Restated
B. REPORTS ON FORM 8-K
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.
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.
February 15, 1999 /s/ DAVID N. BIRMAN
------------------------------------
David N. Birman
Chairman of the Board, President and
Chief Executive Officer
February 15, 1999 /s/ SUE D. BIRMAN
------------------------------------
Sue D. Birman
Executive Vice President, Secretary
(Principal Accounting Officer)
24
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