<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON DC 20549

                                  FORM 10-KSB

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                    FOR THE FISCAL YEAR ENDED JUNE 30, 1999;

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                         COMMISSION FILE NO. 333-11957

                           BIRMAN MANAGED CARE, INC.
                 (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)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                           NAME OF EACH EXCHANGE
      TITLE OF EACH CLASS                                   ON WHICH REGISTERED
            NONE                                                   NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                         COMMON STOCK, $.003 PAR VALUE
                                (TITLE OF CLASS)

         Check whether the issuer: (1) filed all reports required to be filed
         by Section 13 or 15d of the Exchange Act during the past 12 months (or
         such shorter period that the registrant was required to file such
         reports), and (2) has been subject to such filing requirement for the
         past 90 days.. YES [X] NO [ ]

         Check if there is no disclosure of delinquent filers in response to
         Item 405 of Regulations S-B is not contained in this form, and no
         disclosure will be contained, to the best of registrant's knowledge,
         in definitive proxy or information statements incorporated by
         reference in Part III of the Form 10-KSB or any amendment to this Form
         10-KSB. [X]

         State issuer's revenues for its most recent fiscal year -- $ 6,080,861.

         The aggregate market value of the voting stock held by non-affiliates
         of the registrant as of October 1, 1999: Common Stock, $.003 par value
         -- $1,956,901.

         The number of shares outstanding of each of the issuer's classes of
         capital stock, as of October 1, 1999: Common Stock, $.003 par value -
         2,918,751 shares (reflects 1:3 reverse stock split July 7, 1999).

                            DOCUMENTS INCORPORATED BY REFERENCE
         None.

          Transitional Small Business Disclosure Format YES [ ] NO [X]

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                               TABLE OF CONTENTS

<TABLE>
<S>                            <C>
Part I

Item 1                         Business
Item 2                         Properties
Item 3                         Legal Proceedings
Item 4                         Submission of Matters to a Vote
                               of Security Holders

Part II

Item 5                         Market for Common Equity and
                               Related Stockholder Matters
Item 6                         Management's Discussion and
                               Analysis
Item 7                         Financial Statements
Item 8                         Changes in and Disagreements with
                               Accountants on Accounting
                                   And Financial Disclosure

Part III

Item 9                         Directors, Executive Officers,
                               Promoters and Control Persons;
                               Compliance with Section 16(a) of
                               Exchange Act
Item 10                        Executive Compensation
Item 11                        Security Ownership of Certain
                               Beneficial Owners and Management
Item 12                        Certain Relationships and Related
                               Party Transactions
Item 13                        Exhibits and Reports on Form 8-KSB
</TABLE>

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                                     PART 1

ITEM 1. DESCRIPTION OF BUSINESS

(a) GENERAL DEVELOPMENT

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 primarily through its
wholly-owned subsidiary, Birman Consulting Group, Inc. (formerly known as
Birman & Associates, Inc.), which 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, more accurately to document the
services rendered, by means of improved documentation to obtain appropriate
reimbursement for services and to comply with applicable government rules,
regulations and statutes. Unique among its competitors, Birman Consulting
Group, Inc. employs fully-trained physicians to deliver these services to its
hospital clients.

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 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. See, "Discontinued Operations." The Company also owned
and operated a utilization review company, Hughes & Associates, Inc., in
Jackson, Mississippi ("Hughes"), which it acquired in 1996. The Company sold
the business of Hughes to certain members of its senior management in June of
1999.

(b) BUSINESS

PRINCIPAL PRODUCTS AND SERVICES

The Company operates in an industry dominated by three factors: (1) patient
care pressures demanding state-of-the-art medical care, (2) cost pressures from
the reality of limited resources available for medical care, and (3)
ever-increasing government control of the delivery of medical care through cost
reimbursement mechanisms and ever-more-punitive sanctions for deviating from
the regulations implementing that control. The Company generates revenues
through its consulting services sold primarily to small and medium-sized
hospitals which, given their respective sizes, cannot generally afford to
employ full-time experts to provide services similar to the Company's. Unique
within the industry, the Company employs specially-trained physicians to
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deliver physician-to-physician education and consulting services. The Company
believes this "peer-to-peer" delivery of services results in especially
effective training and education of hospital staff physicians who may otherwise
be less receptive to advice and counsel from non-physicians. The Company's
physicians do not practice medicine or advise treatment programs for patients,
but, instead, educate and train the hospitals' staff physicians to improve
their documentation and treatment planning for each patient. The Company's
services are intended to accomplish two main goals: (1) improve the quality of
treatment of patients by implementing a program among physicians to improve the
planning of a patient's treatment and (2) capture more comprehensive
information in the medical record for each patient which in turn allows the
first goal to be accomplished and also results in more accurate billing for
services. The Company's program emphasizes early treatment planning and
follow-up, tracked through the medical record. As the Company's program is
implemented throughout the medical staff, the Company believes that its
experience over the last ten years demonstrates improved medical results,
reduced lengths of stay and increased revenues to the hospital as its services
are more accurately recorded and thus billed. The Company's program is built on
the practical reality that physicians often do not record all services rendered
with the completeness required to bill for them. Improved recording of
treatment and services improves the data base on each patient thereby improving
the treatment plan itself. Improved financial performance also follows. The
Company's marketing strategy thus relies in large part on cost justification
for its services. The Company believes that its services throughout the last
ten years have consistently met the standard of cost justification imposed by
hospital administrators. Because the Company employs physicians to deliver its
services, its costs and resulting fees are substantially greater that those
charged by others who purport to provide similar services. Other organizations
with whom the Company competes typically employ accountants and medical records
personnel who do not deal with hospital physicians, but concentrate their
efforts on clerical and record-keeping staff. Competitors thus typically have
much lower costs and can thus charge much lower fees. The Company believes this
approach fails to address a hospital's main problem - obtaining correct and
comprehensive input from the attending physician in the first place. The
Company believes that its methodology has been proven and is fully justified
from its experience with 120 hospitals in 22 states.

As hospitals throughout the United States face ever-increasing pressures to
reduce costs, the Company has experienced strong resistance to the pricing of
its services which are generally double or more those of its perceived
competitors. At hospitals where decision-makers focus exclusively on the fee
charged by the Company for its services, the Company typically will not receive
an engagement. At hospitals where decision-makers focus on the net benefit of
the Company's services, the Company typically receives the engagement. The
industry-wide emphasis on cost, as opposed to results achieved, has worked to
reduce the Company's revenues virtually by half over the last twelve months.
The Company has cut its costs by more than half during the same period, but has
been unable to generate an operating profit for nine calendar quarters and
expects operating losses for at least two more calendar quarters. The Company
has recently begun to add new hospital clients as decision-makers once again
come to realize the net advantage of retaining the Company. However, the
process has been slow and market resistance to the Company's fees pressures
remains strong.

For much of the past two years, the Company has also suffered from the results
of a 1997 federal government initiative to investigate all hospitals in the
United States over alleged over-billing. This initiative frightened many
hospitals and physicians into reducing voluntarily and without

<PAGE>   5

justification (apart from the fear of incurring regulatory enforcement costs
and sanctions) the fees charged for Medicare and Medicaid patients. This was
regularly done, they believed, to preempt criticism of their practices, even
though the law calls for them to bill accurately, not below accurate levels.
Because the Company's services typically result in improved hospital revenues,
hospitals tended to avoid the Company's services in order to avoid the
appearance of engaging in any conduct which would improve their revenues even
if such improvement was proper. The Company believes this pressure has subsided
recently as hospitals at which the Company rendered services have successfully
withstood government scrutiny of patients' records on which the Company
provided consulting services and as hospital operating losses force them to
seek to capture the proper amount of revenue for the services they render.

The Company's principal consulting service is its proprietary Quality
Management Program.

QUALITY MANAGEMENT PROGRAM

The Company's Quality Management Program ("QMP") is offered through its Birman
Consulting Group, Inc., subsidiary based in Cookeville, Tennessee. The QMP,
developed by Company founder and Chairman David N. Birman, M.D., recognizes the
reality that "It takes a doctor to teach a doctor." Accordingly, the Company
employs a specially-trained staff of field-based physicians
("physician-managers") and allied health personnel under the direction of the
physician-manager to implement the QMP on-site at client hospitals. To date,
the QMP has been implemented at 120 hospitals in 22 states. The Company
currently renders services at eighteen hospitals. The field staff -- physician
and allied health -- is supported by a central research, supervision,
administrative, quality control and compliance assurance staff in Cookeville
headed by the Company's Chief of Professional Services and its Corporate
Compliance Officer. Since its inception, the Company has engaged and relied on
special outside health care regulatory counsel to keep the Company apprised of
new developments in health care laws and regulations and to review the
activities of the Company for compliance with those laws and regulations.

The Company is aware of no other firm purporting to deliver similar consulting
services which employs physicians as the key personnel to deliver its services.
The Company's staff of specially-trained physicians and allied health personnel
work in client hospitals directly with the medical staff and medical records
staff to achieve the goals of the QMP. The central premises of the Quality
Management Program are (i) recognizing the physician as the primary director of
medical services for the patient and (ii)assisting the physician to develop a
problem-oriented format in the medical record. This process produces a
complete, consistent, and legible medical record that is essential to the
accurate identification and prioritization of disease conditions and treatment
plans. As a consequence, improved patient care and patient outcomes are
achieved, the cost of health care is impacted by appropriate management of
resource consumption, appropriate Medicare reimbursements are received from
accurate documentation produced, liability exposure is reduced and compliance
with regulatory and accrediting requirement is achieved. As the accuracy of the
medical record is improved, both hospitals and attending physicians can more
accurately track the efficiency and need for certain medical tests and
procedures.

By focusing on the attending physician (as opposed to non-medical personnel),
the QMP differs from services of other companies designed to produce similar
results. This focus follows logically from the fact that the attending
physician controls the treatment plan and clinical resource

<PAGE>   6

consumption of patients. The attending physician is directly responsible for
the initial patient contact, the initial evaluation of symptoms and conditions,
preliminary diagnosis, hospital admissions, referrals to specialists, ordering
laboratory services, and prescribing medication. The attending physician is in
the unique position of influencing the hospital's reimbursement revenue, costs,
and liability both through the decisions made and by the thoroughness and
accuracy with which those decisions are documented. A significant aspect of the
Quality Management Program involves consultation and education of the attending
physician at the hospital to facilitate the efficient delivery of high-quality
health care while thoroughly documenting and recording the decision process.

The medical record is the primary tool used by physicians to direct the medical
treatment of a patient, communicate instructions to other health care service
providers, evaluate the progress of the patient, support reimbursements from
third-party payers including Medicare, and evidence compliance with treatment
standards and professional responsibilities. The Company believes that
complete, systematized, and legible medical records enable physicians to
prepare and record appropriate treatment plans, similar to a business plan, to
address symptoms and conditions that affect the patient from admission to
discharge, and to prioritize, in writing, goals and objectives for appropriate
management. Through the formulation of appropriate treatment plans and improved
documentation, the attending physician focuses on proper diagnosis and thereby
becomes more effective in measuring the severity of each patient's illness and
progress. The Quality Management Program is focused on accurate reporting of
the hospital's DRG elections, which results in appropriate Medicare or other
payer reimbursement to the hospital and ensures compliance with third party
billing guidelines.

The treatment plans and documentation may be applied to clinical guidelines and
quality assessment procedures to increase the total quality of care and
evidence compliance with treatment standards. Recognition of the severity of
illness and well-documented records of treatment reduce the likelihood of
errors and omissions, thereby decreasing the risk of liability exposure to the
physician and the hospital.

IMPLEMENTATION

Following engagement, the Company assigns its trained physicians and additional
professional staff as required to each hospital-client. Company staff profiles
the client's patient medical records and identifies problem areas (such as
legibility, proper documentation of patients' histories and physical condition,
discharge summaries, and patient education) in order to identify the specific
hospital-client's needs. After an organized program introduction, the staff
interacts on a weekly basis with attending physicians and allied health
professionals in the hospital, on a peer-to-peer level, to assist them in
adopting in their daily routines the practice management methods underlying the
Quality Management Program. The Company provides a detailed monthly status
report on the program results to the hospital's chief executive officer or
chief financial officer.

The Quality Management Program emphasizes a clinical problem-solving approach.
Working with the hospital-client's medical records, the Company's physicians
conduct concurrent and retrospective reviews to train attending physicians to
present their findings of symptoms and conditions more thoroughly; to
prioritize treatment goals and objectives; to document properly and thoroughly
the process of patient management; and to use hospital-client resources
effectively.

<PAGE>   7

The Company's professional staff educate the hospital-client's allied health
staff regarding the reimbursement process, emphasize coding decisions
recognizing legitimate resource expenditures, and promote proper preparation
and maintenance of supporting documentation. As a result, this program supports
the provision of quality health care services, while creating medical record
documentation that enables accurate tracking and diagnosis of the patient's
illness while simultaneously supporting the selection of appropriate coding
options that provide proper reimbursement. The attending physician and the
hospital make all final coding decisions. The physicians and allied health
specialists employed by the Company in its Quality Management Program do not
treat patients, make treatment or diagnostic decisions, or provide medical
services in connection with the Quality Management Program.

The Company knows of no principal QMP competitor that features peer-to-peer
training of physicians by physicians. The Company believes that the use of
physicians as the lead component of its consulting staff underscores the
Company's focus on clinical knowledge and provides greater depth in addressing
client medical management needs. These factors distinguish the Company from
other firms offering competing services.

FEES

The Company's current QMP agreements provide for a fixed monthly fee. Before
early 1997, fee arrangements were primarily "results based". "Results based"
compensation arrangements dominated the Company's field until early 1997 when
the federal government announced that "special scrutiny" would be given to any
hospital consulting contract which provided for increased payment if greater
revenues were obtained from federal programs. The federal announcement did not
specifically apply to services such as those rendered by the Company, but
virtually the entire hospital industry applied the concept to all contracts.
Under the prior system of compensation, the Company's profit margins were
considerably greater than those realized under its current fixed-fee agreements
which is the only QMP payment arrangement offered by the Company. All eighteen
hospital contracts now in force have "fixed fee" compensation arrangements. The
Company receives an average monthly fee under all fee arrangements of
approximately $17,000 per client, a reduction of $8,000 per month per hospital
since the previous year. This reduction reflects the tremendous downward
pressure on the Company and other vendors and suppliers to the health care
industry. The Company generally enters into two-year agreements with each
hospital-client, with renewal options.



CUSTOMERS

Since 1991, the Company has provided its Quality Management Program to
approximately 120 hospitals located in 22 states. Currently, the Company is
providing its Quality Management Program to 18 hospitals in 11 states. The
Company's clients are located in rural and suburban metropolitan markets where
health care facilities lack the resources to develop internally the
capabilities offered by the Company. The Company seeks two-year agreements with
each Quality Management Program client.

The Company has provided Quality Management Program services to several
hospitals affiliated with

<PAGE>   8

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.

         See "Item 6. Management's Discussion and Analysis of Financial
         Condition and Results of Operations - Significant Customer -- QMP.

COMPETITION

The Company believes that among all similar or competitive services, its
Quality Management Program is unique in that it features a physician to lead
the consulting project. The Company competes for consulting business primarily
with revenue-optimization service companies which use mostly allied health
professionals, not physicians. While the focus of competitors' efforts rests
primarily on non-medical staff, the Company's QMP focuses intently on the
attending physician and employs specially-trained physicians so that the QMP is
a "peer-to-peer" function. This requires lengthy direct interaction with
attending physicians in a knowledgeable way to encourage better use of the
medical record. The Company believes this implicitly requires the attending
physician to improve recording his or her observations, diagnoses and treatment
plans thereby improving the quality of care rendered. By comparison, the
Company's competitors typically rely on non-physicians working with
non-physicians who simply look at the medical records and attempt to discern
its contents without improving the effort made in creating it. The Company's
emphasis is on an academic, professional medical approach, as opposed to the
clerical approach common in the industry.

Despite the entirely different approach to the problems addressed, the Company
is generally viewed as competing with "revenue optimization" companies of which
there are approximately 500 to 700 companies of varying size. Competitors
include the health care consulting practice groups of Andersen Consulting, the
Gailer Review Group, Health Care Management Advisors, Inc., Iameter, MC
Strategies, Inc., National Coding Service, Inc., Quality Medical Consultants,
Inc., and J.A. Thomas Consulting Group, Inc., an Ernst & Young preferred
provider. While prices for their services cover a wide range, the Company's
services are generally considerably more expensive due to its significantly
greater employee costs occasioned by employing physicians rather than
specialized clerical personnel and its central support activities. Most of
these firms have substantially greater financial, technical, marketing, and
management resources than the Company. The Company does not believe that any
single company commands a significant or dominant share of this market. Larger,
more established consulting firms may have an enhanced competitive position
due, in part, to established name recognition and direct access to
hospital-clients through the provision of other services. Smaller firms,
although not necessarily offering services comparable to those of the Company,
compete on the basis of price. Given the limited resources available for health
care, this price differential consistently places the Company at a disadvantage
in selling its product which the Company must overcome.



                          OTHER PRODUCTS AND SERVICES

Health care statutes, implementing regulations, interpretations of those
regulations and the actual

<PAGE>   9

practice of medicine change daily. To date, the Company has announced the
following new service products and alliances.

COMPLIANCE ASSESSMENT SERVICE - ALLIANCE WITH GOVERNMENTAL MANAGEMENT SERVICES,
INC.

The complexity of today's health care and general employment regulation argues
forcefully for regular independent review of a hospital's compliance with those
regulations. To address this need, the Company and Government Management
Services, Inc. ("GMS") of Washington, D.C. teamed up in the second quarter of
fiscal 1998 to offer hospitals an in-depth analysis of their clinical and
business compliance activities. GMS, headed by the former Inspector General of
the U.S. Department of Health and Human Services, Richard D. Kusserow, is one of
the nation's leading firms in performing diagnostic evaluations of health care
compliance programs. This new "Compliance Assessment Service" complements the
Company's premier product, its Quality Management Program ("QMP"). With this
Service, Company physicians provide the consulting base for the clinical
compliance assessment portion of the Compliance Assessment Service. The Company
has established a specific assessment tool to determine the existence of and
adherence to appropriate documentation policies and procedures. The result is a
benchmarking report that identifies the strengths and deficiencies in key
medical record compliance areas. Clients are provided a clear set of findings,
along with specific recommendations for corrective actions where necessary to
meet regulatory expectations. Under the administrative evaluations component
which is supplied by GMS, the Compliance Assessment Service provides a
comprehensive evaluation of the hospital's daily operational compliance
initiatives. The results are included in a benchmark compliance report that
compares the client hospital to a national database. Client hospitals receive a
complete analysis report on their administrative compliance status, including a
special scoring mechanism, indicating their compliance strengths of the hospital
as well as identifying opportunities for improvement. To date the Company has
marketed the Compliance Assessment Service in combination with its Quality
Management Program and has been successful in securing new QMP contracts for the
Company as a result of the interest generated through the Compliance Assessment
Service. The Company believes it will experience sales specific to the
Compliance Assessment Service in the current fiscal year and will continue to
market the service as part of its total compliance consulting package.


PHYSICIAN OFFICE MANAGEMENT RESOURCE

The Physician Office Management Resource (POMR"), introduced in April of 1998,
adapts the Company's QMP to physician offices. The POMR program is directed by
a board certified general surgeon who is also a Certified Procedural Coder
(CPC). POMR was developed in response to the national physician office practice
concerns generated from the same investigative oversight being implemented by
the Office of Inspector General, Health Care Finance Administration, HHS, and
FBI. The Government announced that it believes physician fraud and abuse
accounts for approximately 22% of the $23 billion overall fraud and false
claims alleged by the government to have been made in the Medicare and Medicaid
programs. The Health Insurance Portability Act of 1996 (Public Law 104-91) holds
physicians accountable in their office practices for inappropriate claims and
subjects them civil fines and other sanctions. Criminal penalties may be
applicable where an individual knowingly and willfully defrauds the Medicare,
Medicaid, or other federal benefit programs. POMR aids the physician in working
his or her way through the complexities of appropriate documentation to support
claims payment. The
<PAGE>   10

medical record may be used to validate the site of service, the medical
necessity and appropriateness of the diagnostic and/or therapy service provided
and that the services have been reported accurately. POMR also addresses
professional negligence in the practice of medicine by developing for the
physician an audit process for the physician's claim development and submission
process. Accurate patient record documentation is a prime component of the
physician office practice, just as it is in the hospital medical record
document process. Although the physician billing procedure code components vary
significantly from the hospital sector, the clinical insight and medical logic
capability developed by the QMP remain a common and vital link to the success
of the POMR service. POMR will be best suited to the physician in the group
model office setting consisting of 20 or more physicians. The Company will
charge a fixed fee for its POMR services.

POMR will be marketed to physician practice groups associated with current and
former QMP client hospitals, free standing independent group practices,
for-profit companies who are acquiring physician group practices around the
country, and similar not-for-profit-hospital organizations that are acquiring
physician practices and aggregating them into group settings. One physician
group, located in Kansas, has recently contracted for the POMR and is due to
commence presently.


CLINICAL RESOURCE MANAGEMENT PROGRAM

The Company believes that a regular by-product of its Quality Management
Program is a reduction in charges incurred in treating a patient caused by
improvement in patient outcomes and time to achieve those outcomes. The Company
believes this results from the QMP's emphasis on more thorough documentation,
hence more thorough analysis, of a patient's condition. The Company's
experience demonstrates that this improved analysis results in a more focused,
thus generally less expensive, treatment plan. The Company's Clinical Resource
Management Program allows the Company to recover a varying percentage of the
savings realized by a participating hospital. Under the program, unless the
Company successfully reduces physician charges, it is entitled to no fee.


                      COMPANY POSITION AND GROWTH STRATEGY

The Company's physician-based orientation and its core competency in
physician-to-physician interaction give it a unique position among those
providing consulting services to hospitals. Although substantially smaller than
many of its competitors, the Company believes this core competency allows the
Company physicians more effectively to serve as educators and catalysts to
assist clients in the achievement of improved clinical compliance measures and
best outcomes for the patient, both clinical and financial. The Company intends
to continue to build on its reputation as a physician-to-physician organization
focused on assisting hospitals and their medical staffs improve regulatory and
clinical compliance results and to achieve appropriate reimbursement from all
payers. The Company's goal is to align the interest of the treating physician
with those of the patient, to enhance the physician-patient relationship, and
to focus on best practice standards for optimal outcomes.

The Company's strategy is to continue to market its Quality Management Program,
Physician Outpatient Management Resource product, and its evolving Clinical
Resource Management Program to hospitals in the small- and medium-sized
category (100 - 200 beds). The Physician Outpatient

<PAGE>   11

Management Resource program activities will be predominately directed at
physician groups of 20 or more physicians.

The Company believes it can compete with the larger urban based health care
consulting firms because of the unique approach of the Company employing
physicians as the lead consultant in its services. Most competing consulting
firms rely on allied health or business management personnel rather than
trained physicians as consulting team leaders in hospitals. In addition, the
Company's experience in serving the rural and suburban population markets
through its Quality Management Program has resulted in the Company gaining a
reputation and relationship in these markets that enable it to compete with the
wide range of consulting organizations focused on this marketplace.

The Company has recently conducted discussions and made joint presentations
with a supplier of medical software and two major health care equipment firms.
The Company's intent is to enter the technological field by assisting in
training physicians to use the new equipment, software and reporting devices
which are entering the marketplace. No agreement has yet been reached on such
matters.

Nonetheless, the Company's use of physicians to deliver its services requires
that it charge higher fees than other companies which engage in nothing more
than coding and billing review. This will continue to present an initial
competitive disadvantage with prospective clients who insist on focusing on the
cost of the Company's services instead of the net cost after results of its
services are considered.

In addition to its hospital consulting practice, the Company was engaged to
provide expert assistance to a major law firm in the defense of a modest-sized
hospital chain against charges of violating the federal False Claims Act. The
Company believes that its services contributed to the successful defense of the
hospital chain's billing practices.

                             GOVERNMENT REGULATION

Various aspects of the delivery, administration and reimbursement of health
care services are subject to state and federal regulation. The business of the
Company is directly or indirectly affected or subject to these laws as well as
laws relating to business corporations in general. Although many aspects of the
Company's Quality Management Program and related consulting services have not
been the subject of state or federal regulation or regulatory interpretation,
the Company believes its current operations are, and its proposed operations
will be, in material compliance with applicable laws. There can be no
assurance, however, that a review of the Company's current or proposed
businesses by courts or regulatory authorities will not result in a
determination that could adversely affect the operations of the Company or that
the health care regulatory environment will not change so as to restrict the
Company's existing operations or their expansion.

In recent years, numerous legislative proposals have been introduced or
proposed in the United States Congress and in some state legislatures that
would effect major changes in the United States health care system at both the
national and state level. In addition to these proposals, the increased funding
of enforcement of existing laws, and the increased severity of fines and threat
of criminal prosecutions, has had the effect of causing some current
hospital-clients to consider the impact of

<PAGE>   12

these developments on their business relationships in general, including those
with the Company. The Company cannot determine at this time the duration of
this situation or its ultimate effect on the Company's prospects and revenues
over the long term. The Company is developing alternative products and services
to adapt to this changed regulatory environment, which the Company believes
will aid the Company's growth and revenues.

LICENSURE

All states impose licensing requirements on individual physicians and on
certain types of providers of health care services. While the performance of
consulting services to hospitals and management services on behalf of medical
practices does not currently require any regulatory approval on the part of the
Company, there can be no assurance that such activities will not be subject to
licensure in the future. If licensing requirements are imposed, the Company
will take the appropriate steps for compliance.

CORPORATE PRACTICE OF MEDICINE

Many states in which the Company conducts business maintain prohibitions
against business corporations employing physicians. Possible sanctions for
violation of this restriction include loss of licensure and civil and criminal
penalties. These laws vary from state to state and are often ambiguous. These
laws have been seldom interpreted by the courts or regulatory agencies, but are
potentially subject to broad interpretation and enforcement by courts and
regulatory authorities. The Company could incur liability in the event it fails
to enter into appropriate contractual arrangements with physicians or other
health care professionals in conjunction with its consulting activities.
Although the Company seeks to structure its arrangements with health care
providers to comply with state corporate practice of medicine laws, and
although the Company believes it is in compliance with such laws, there can be
no assurance that the Company's arrangements with health care providers will
not be successfully challenged as constituting the unauthorized practice of
medicine. Also, there can be no assurance that such laws will not be
interpreted broadly or amended to be more expansive. In

<PAGE>   13

addition, any expansion of the operations of the Company to astute with strict
corporate practice of medicine laws may require the Company to modify its
operations, resulting in increased financial risk to the Company.

STATE FEE-SPLITTING AND REFERRAL PROHIBITIONS

A number of states have enacted laws that prohibit the payment for referrals
and other types of kickback arrangements and prohibit physicians from splitting
professional fees. These statutes are sometimes quite broad and, as a result,
prohibit otherwise legitimate business arrangements. Possible sanctions for
violation of these laws include civil, monetary and criminal penalties and loss
of licensure.

Many states have enacted laws that prohibit physicians and, in some cases, all
health care professionals, from splitting fees or referring patients to
entities with which such physician or health care professional have a financial
relationship, regardless of the patient's source of payment. There are numerous
exceptions under some of these laws which authorize certain referrals,
including without limitation, referrals for health care services performed by
the referring health care professional to provide health services personally or
within the health care professional's area of expertise as part of a group
practice, or referrals by physicians who have made investments in publicly
traded companies.

These statutes vary from state to state and are often ambiguous. The scope of
these state laws is broad and little precedent exists for their interpretation
or enforcement. The penalties for a violation of these law may include civil or
criminal penalties, prohibition on billing or collecting from patients or
third-party payers, or repayment of reimbursement for the services related to
the unlawful referral and, for the physician, a probation period, or suspension
or revocation of the physician's license.

The Company believes that its contractual arrangements comply in all material
respects with the fee splitting and referral prohibitions of the states in
which it currently operates or proposes to operate in the future. However,
there can be no assurance that the Company's contractual arrangements will not
be successfully challenged or that such state laws will be interpreted by the
courts in a manner consistent with the practices of the Company. Further,
expansion of the operations of the Company to certain other states may require
it to comply with such jurisdictions' regulations, which could require
structural and organizational changes to the Company's business in order to
comply with that state's laws. Such changes, if any, or a successful challenge
of the Company's current laws could have a material adverse effect on the
Company. The Company seeks, however, to structure its contractual arrangements
to comply with these laws and will continue to do so in the states in which it
expands its operations.

FEDERAL MEDICARE AND MEDICAID RELATED REGULATION

Since the Company's Quality Management Business primarily focuses on Medicare
reimbursement, the Company is and will be subject to a number of federal laws
prohibiting certain activities and arrangements relating to services or items,
that are reimbursable by Medicare or Medicaid or other state-funded programs.

<PAGE>   14

In 1965, Congress enacted the Medicare and Medicaid programs as a part of the
Social Security Amendments. Medicare is a national health insurance program for
disabled and aged Americans that separates coverage for inpatient hospital
services and physician services, compensates physicians on a "usual and
customary" charge basis, and pays hospitals on a reasonable cost basis. In
general, most Americans who (i) are age 65 or older, (ii) receive disability
payments under Social Security, or (iii) need a kidney transplant or renal
dialysis, are entitled to inpatient hospital services, commonly known as
Medicare Part A benefits. By paying a monthly fee, any person entitled to Part
A benefits also may choose to receive additional coverage for physician and
outpatient ambulatory service coverage, commonly known as Medicare Part B. The
Medicare program is administered by the Health Care Finance
Administration("HCFA"), an agency of the federal Department of Health and Human
Services. HCFA has assigned most of the day-to-day administration of the
Medicare program to private enterprises, such as insurance companies, appointed
as fiscal intermediaries.

In response to spiraling increases in Medicare expenditures, significant
amendments were made to the Medicare program in 1983, including a conversion of
the Part A program to the prospective payment system. Under Part A of the
Medicare program, the Medicare program currently pays a hospital a preset
amount on a per-case basis based upon a prospectively assigned reimbursement
value. The prospective payment amount is established by classifying each
Medicare patient admitted by the hospital into one of 495 diagnosis-related
groups ("DRGs"). Each DRG is cost-weighted based on an index of average costs
set by HCFA. To determine the reimbursement rate for the hospital, the relative
cost weight for an assigned DRG is then multiplied by a blended rate assigned
to the hospital that takes into account various factors, such as location,
Medicare utilization, and community economics.

The average value of all DRGs assigned to cases within a given time frame is
referred to as the case mix index ("CMI"). The CMI represents the average
severity of the cases treated by a hospital. The greater the severity of
illness, the higher the CMI; the greater the CMI, the higher the Medicare
reimbursement. A hospital must efficiently provide high-quality care and
accurately report the severity of illnesses it treats through appropriate
documentation in the medical record in order to realize fair compensation under
the Medicare system.

Medicaid is a federal/state program that provides medical assistance for low
income individuals who are aged, blind, disabled, or eligible for Aid to
Families with Dependent Children assistance. In general, each state administers
its own Medicaid program. The amount of federal payments contributed to each
state's Medicaid program is based upon the state's per-capita income level. To
qualify for federal Medicaid funds, a state Medicaid program must meet minimum
requirements regarding coverage and services. States also may elect to extend
coverage to larger populations or offer a broader range of services. Under
Medicaid, hospitals are generally paid based on their reasonable costs or
variations on prospective payment systems and physicians are paid using a
charge-based system, fee schedules, or relative value scales.


THE FALSE CLAIMS ACT

The principal enforcement tool for the federal government against the medical
profession and health

<PAGE>   15

care industry is the False Claims Act, a Civil War-era law which imposes civil
liability on persons or corporations that make or cause to be made false or
fraudulent claims to the government for payment. A violation of the False
Claims Act may result in liability for monetary penalties of up to $10,000 per
false claim plus three times the amount of damages the government sustains, and
exclusion from the Medicare and Medicaid programs. As written, the law
prohibits underbilling as well as overbilling. In practice, overbilling errors
are the only ones challenged by the government. The government also tends not
to consider the net effect of a series of bills, but will focus exclusively on
alleged overbilling.

In 1976, Congress established the Office of Inspector General at the Department
of Health and Human Services to identify and eliminate fraud, abuse and waste
in the health care programs it oversees and to promote the efficiency in
departmental operations. The Office of Inspector General carries out this
mission through a nationwide program of audits, investigations and inspections.
In order to provide guidance to health care providers on ways to engage in
legitimate business practices and avoid scrutiny under fraud and abuse laws,
the Office of Inspector General has from time to time issued special "fraud
alerts" identifying aspects of transactions and arrangements, which, if
present, may indicate that the transaction or arrangement violates fraud and
abuse law. In January of 1997, the Office of Inspector General issued a special
fraud alert regarding consulting firms who are paid a commission based upon
increased lab billings under the Medicare program. The fraud alert did not
expressly state that paying consultants for increasing Medicare revenues is per
se a violation of fraud and abuse law; however, the alert stated that because
commission-based relationships provide consultants with little incentive to
correct coding errors, these arrangements are ripe for up-coding (improper
designation of DRG codes to obtain reimbursements higher than justified by the
diagnosis and treatment of the patient), un-bundling (billing separately for
each distinct laboratory analysis performed when, in fact, all such analyses
were performed simultaneously by the same equipment), and other abusive
manipulation which increases costs to the Medicare program. In this fraud
alert, the Office of Inspector General encouraged government agents to become
aware of the implications of consulting arrangements involving commission
payments, to take steps to determine the existence of these consulting
arrangements, and to contact fiscal intermediaries about any known
commission-based consulting arrangement for the purpose of developing patterns
that could potentially implicate the False Claims Act as well as other fraud
and abuse laws.

The Company takes measures, including but not limited to, the concurrent review
of medical record documentation, to ensure that hospital-clients of its Quality
Management Program do not submit false or fraudulent claims to the government.
Because a large portion of the Company's current revenue relates to Medicare
payments, an exclusion from the Medicaid and Medicare programs as a result of a
violation of the False Claims Act would have a material adverse effect on the
Company. In addition, the Company, as well as its hospital-clients, could incur
liabilities for violations of the False Claims Act that could have a material
adverse effect on the Company.



ANTI-KICKBACK STATUTE

Certain provisions of the Social Security Act prohibit the offer, payment,
solicitation, or receipt of any form of remuneration either (i) in return for
the referral of Medicare or state health program

<PAGE>   16

patients or patient care opportunities, or (ii) in return for the
recommendation, arrangement, purchase, lease, or order of items or services
that are covered by all federal health care programs, except the federal
employees health benefit plans (the "Anti-kickback Statute"). The Anti-kickback
Statute is broad in scope and has been broadly interpreted by courts in many
jurisdictions, potentially subjecting such arrangements to lengthy expensive
investigations and prosecutions initiated by federal and state governmental
officials. In particular, HCFA has expressed concern that physician ownership
in entities in a position to receive referrals from such physicians may violate
the Anti-kickback Statute.

Violation of the Anti-kickback Statute is a felony, punishable by fines up to
$25,000 per violation and imprisonment for up to five years. In addition, the
Department of Health and Human Services may impose civil penalties excluding
violators from participation in Medicare or state health programs. Although the
Company does not believe that its current operations violate or that its future
contemplated operations will violate the Anti-kickback Statute, there can be no
assurance that in the future regulatory authorities will not determine that the
Company's operations violate the Anti-kickback Statute.

THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996

The Health Insurance Portability and Accountability Act of 1996 (the
"Portability Act") expands the penalties for health care fraud and creates two
new federal crimes called "Health Care Fraud" and "False Statements Relating to
Health Care Matters." The Health Care Fraud statute is implicated when anyone
"knowingly or willfully" executes or attempts to execute a scheme or artifice
to defraud any health care benefit program or to obtain, by means of false or
fraudulent pretenses or representations, any of the money owed by a health care
benefit program, in connection with the delivery of a payment for health care
benefits, items or services. A violation of the Health Care Fraud statute is a
felony and violators may be fined, imprisoned for up to ten (10) years or both.
The False Statements Relating to Health Care Matters statute is implicated when
anyone, in any matter involving a health care benefit program, "knowingly or
willfully" falsifies, conceals or covers up by any trick, scheme or device a
material fact, or makes any false, fictitious or fraudulent statement or
representation, or makes or uses any false writing or document knowing the
writing contains false, fictitious or fraudulent statements in any matter
within the jurisdiction of any department or agency of the United States. A
violation of the False Statements Relating to Health Care Matters is a felony
and may result in fines, imprisonment or both. In addition, the Portability Act
expands the Civil Money Penalty Act by proscribing persons from knowingly
presenting (or causing to be presented) a claim for medical or other items or
services that the person knows was not provided, which expressly includes a
knowing and willful scheme of engaging in a pattern or practice of up-coding or
providing unnecessary care, in order to defraud any health care benefit
program, including Medicare and state health care programs. The penalties
include exclusion from the Medicare program and monetary penalties of up to
$10,000 for each item improperly billed and up to three times the amount
claimed. The Company takes measures designed to ensure that hospital-clients of
its Quality Management Program do not engage in schemes to defraud healthcare
programs, and the Company takes and intends to continue to take similar
protective measures with respect to its business. Because the Company's current
revenue relates to Medicare patients, an exclusion from the Medicare program as
a result of a violation of the Health Care Fraud statute, False Statements,
False

<PAGE>   17

Statements Relating to Health Care statute, and other pertinent anti-fraud and
abuse provisions of the Portability Act would have a material adverse effect on
the Company.

THE BALANCED BUDGET ACT OF 1997

The Balanced Budget Act of 1997 ("Balanced Budget Act") includes new anti-fraud
provisions. The Balanced Budget Act provides for the permanent mandatory
exclusion from any federal health care program for those convicted of three
health care-related crimes. In addition, the Balanced Budget Act creates a new
civil penalty for violations of the Anti-Kickback Statute or for contracting
with a person excluded from participation in a federal health care program of
$50,000 for each violation and up to three times the total amount of
remuneration offered, paid, solicited or received. Within its areas of
consulting, the Company takes measures designed to ensure that its
hospital-clients are not excluded from federal health care programs, do not
contract with persons excluded from federal health care programs and do not
violate the Anti- Kickback statute. The Company takes and intends to continue
to take similar protective measures with respect to its business.

Because the Company's current revenue relates to Medicare patients, an
exclusion from the Medicare program or liabilities as a result of a violation
of pertinent provisions of the Balanced Budget Act would have a material
adverse effect on the Company.


                       POTENTIAL LIABILITY AND INSURANCE

The Company may be exposed to potential professional liability claims by
hospital-clients and patients of providers that participate in the Company's
health plans as a result of the negligence or other acts of physicians. The
physicians employed by the Company as part of the Quality Management Program do
not treat patients, attend patient encounters, make any treatment or diagnosis
decisions, or provide any medical services in connection with that program.
However, any claims based on allegations that the Company's physicians are
engaged in the practice of medicine that ultimately are successful could result
in substantial damage awards to claimants, which may exceed the limits of any
applicable insurance coverage and could potentially implicate the prohibition
against the corporate practice of medicine in those states where the doctrine
is applicable. In connection with its Quality Management Program business, the
Company currently maintains special errors and omissions insurance of
$3,000,000 in the aggregate and $3,000,000 per occurrence with a deductible of
$15,000 for all claims except claims resulting from government regulatory
challenges. The deductible for government claims is $50,000. The Company
maintains general liability insurance of $2,000,000 in the aggregate,
$1,000,000 per occurrence with no deductible as well as a general liability
umbrella policy of $3,000,000. The Company also maintains a directors and
officers errors and omissions policy in the amount of $8,000,000. Although its
is aware of no such claims to date, the Company may be exposed to potential
professional liability claims by hospital-clients and patients of providers
that participated in the Company's Care3 health maintenance organization as a
result of the negligence or other acts of physicians. There can be no
assurance, however, that such insurance will be sufficient to cover potential
claims or that adequate levels of coverage will be available in the future at a
reasonable cost. In the event of a successful claim against the Company that is
partially or completely uninsured, the Company's financial condition and
reputation could be materially and

<PAGE>   18

adversely affected.

As various agencies of the federal government audit bills submitted by
hospitals throughout the country under the Medicare and Medicaid programs, it
is to be anticipated that these hospitals will include hospitals which have
retained the Company's Quality Management Program. If an audited hospital
agrees to refund any charges to the federal programs, that hospital may seek to
recover some or all of such amounts from Company under various theories. It is
the Company's position that it does not submit bills, control bills or prepare
bills and therefore has no liability for any such amounts. The Company
maintains liability insurance designed to insure against the costs of any such
claims. The Company typically provides in its contracts with many QMP hospitals
that, for a period of two (2) years after termination of a contract with a
hospital, to assist the hospital in defending any diagnosis submitted for
patients on whose medical records the Company consulted. To date, six (6) QMP
hospital clients have requested and received such assistance. Management
believes that the cost of providing such assistance has not had a material
impact on the Company's operations and does not expect it to have a material
impact in the future. On the other hand, the Company believes that offering
this assistance as part of its typical QMP contract gives the Company a
competitive advantage in competing for hospital clients. One former hospital
client of the Company, Cookeville Regional Medical Center, brought suit against
the Company in Tennessee state court seeking to recover the costs of providing
copies of medical records to the federal government and the cost of outside
counsel incurred in representing the hospital in the investigation of many
aspects of the operation of the hospital. The suit alleges no wrongful conduct
on the part of the Company and the Company has moved to dismiss the suit as
without merit. See, "Legal Proceedings."

            INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS, AND LICENSES

The Company regards certain features of its services and documentation as
proprietary and relies on a combination of contract, copyright, and trade
secret laws and other measures to protect its proprietary information. As part
of its confidentiality procedures, the Company generally obtains non-disclosure
agreements from its employees and hospital-clients and limits access to and
distribution of its software, documentation, and other proprietary information.
The Company believes that trade secret and copyright protection are less
significant than factors such as the knowledge, ability, and experience of the
Company's employees and the timeliness and quality of the services it provides.

                                   EMPLOYEES

As of June 30, 1999, the Company has 14 full-time and 13 part-time employees
distributed by position as follows: 7 management, administrative and marketing
personnel; 14 QMP Regional Physician Manager Consultants; 6 QMP Health
Information Specialists. The Company is not subject to any collective
bargaining agreements, and it considers its relations with employees to be
good.
<PAGE>   19

                  BUSINESS CONSIDERATIONS AND CERTAIN FACTORS
                  THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

Discussion of certain matters contained in this Form 10-KSB may constitute
forward-looking statements within the meaning of the 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-KSB, the following is a summary of some of the important factors that
could affect the Company's future results of operations and/or its stock price,
and should be considered carefully in evaluating the Company.

TRENDS OR UNCERTAINTIES WHICH MAY IMPACT REVENUES FROM CONTINUING OPERATIONS

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 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

<PAGE>   20

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.

         See "Item 1.  Description of Business - Other Products and Services."

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 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 for the last eight calendar quarters and
is likely to do so at least through the first two quarters of fiscal year 1999
- 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

<PAGE>   21

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 the first half 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.

         See "Item 6. Management's Discussion and Analysis."

Outlook: The Company expects operating losses to continue through the first
half of fiscal 1999-2000. Management has recently 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.
<PAGE>   22
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 1998 - 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 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
<PAGE>   23

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.

         See "Item 6. Management's Discussion and Analysis of Financial
         Condition and Results of Operations - Significant Customer - QMP."


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


<PAGE>   24

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.


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.

                  See "Item 1.  Business -- Competition."

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. Birman, M.D. The
Company has entered into an employment agreement with Dr. Birman. The loss,
incapacity, or unavailability of Dr. Birman could adversely affect the Company's
operations. The Company maintains a $1,000,000 key man insurance policy on his
life.
<PAGE>   25

DISCONTINUED OPERATIONS

The Company in fiscal year 1998 - 1999 discontinued all operations except its
hospital consulting and related consulting operations. The Company's 69%-owned
HMO in Mississippi, Care3, Inc. ("Care3"), is currently under the control of the
Mississippi Insurance Commissioner who is conducting winding down operations. In
April 1999, the Company sold substantially all of the assets of its Hughes &
Associates, Inc., subsidiary which provided utilization review services.

Outlook: The Company believes that concentrating on its core competency of
physician-to-physician training presents its best opportunity for business.
Management believes that this core competency can be applied to other services
in the delivery of health care services such as training physicians in the use
of new technology. The Company will continue to make limited attempts to find
other applications of its core competency.

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 nine quarters and expects them to continue
at or about that level for at least the first half of fiscal year 1999 - 2000.
Management believes that it can achieve break-even or nearly break-even
operating results by the end of the second quarter of fiscal 1999 - 2000. Unless
the Company is able to reduce its monthly operating losses dramatically, it will
experience cash shortages before the end of fiscal year 1999 - 2000. The Company
still has an unused $1.5 million line of credit which expires on October 28,
1999. The Company has had this line for over two years and has never drawn
against it. The Company intends to apply to extend the credit facility for
another twelve months but has not yet done so. There is no assurance the credit
line will be extended another year. The Company may also 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.

         See "Item 6. Management's Discussion and Analysis -- Liquidity and
Capital Resources."

<PAGE>   26

ITEM 2.  DESCRIPTION OF PROPERTY

The Company is headquartered in Cookeville, Tennessee, approximately 90 miles
east of Nashville, Tennessee. During fiscal 1998, the Company moved into a
20,000 square foot building which was built to the Company's specifications
under a lease agreement. The term of the lease is ten years commencing January
1, 1998. The Company has an option to purchase the new building. In addition,
effective June 1, 1999, the Company subleased 8,532 square feet of office space
to an unaffiliated third party. The sublease is for an initial term of two years
and can be renewed for three successive years, one year at a time. All office
space occupied by the Company is leased from unaffiliated third parties and the
Company believes facilities are adequate.

ITEM 3.   LEGAL PROCEEDINGS

The Company currently is not a party to any material legal proceedings except as
follows:

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.

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. \

In August, 1998, the Company's 69%-owned health maintenance organization, Care3,
Inc., was placed in voluntary rehabilitation by the Mississippi Insurance
Commissioner. The case was recently converted to a liquidation proceeding. The
Company monitors developments in the matter but is not actively engaged in the
proceeding.

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.
<PAGE>   27

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company submitted no matters to a vote of shareholders in fiscal year 1998 -
1999. A majority of shares acting by written consent voted on July 6, 1999 voted
to effect a reverse 1:3 stock split combining each three shares of common stock
into one share and thereby increasing the par value of each share from $0.001
per share to $0.003 per share.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(A) MARKET INFORMATION

The Company's Stock is traded on the NASDAQ Stock Market, which bears the symbol
"BMAN". On July 6, 1999, a majority of the Company's shares voted to effect a
1:3 reverse stock split of the common shares combining each three shares of
common stock into one share and concurrently increasing the par value of each
share from $0.001 per share to $0.003 per share. The following information does
not reflect the 1:3 reverse stock split. The quarterly range of prices per share
since the Company began trading on February 12, 1997 is as follows:


<TABLE>
<CAPTION>
QUARTER                                                COMMON STOCK
                                                     ------------------
                                                       HIGH        LOW
                                                       ----        ---
<S>                                                  <C>         <C>
Fiscal Year Ended June 30, 1997:
    June 30, 1997                                    $ 7  5/8    $ 5 1/2
Fiscal Year Ended June 30, 1998
   September 30, 1997                                $ 7  0/0    $ 4 3/8
   December 31, 1997                                 $ 7  5/8    $ 5 0/0
   March 31, 1998                                    $ 6  1/2    $ 3 1/2
   June 30, 1998                                     $ 6  1/2    $ 4 0/0
Fiscal Year Ended June 30, 1999
   September 30, 1998                                $ 5 13/16   $ 4 1/32
   December 31, 1998                                 $ 6  3/8    $ 4 3/4
   March 31, 1999                                    $ 5  1/4    $ 1 1/8
   June 30, 1999                                     $ 1  1/4    $   5/8
</TABLE>

The NASDAQ Stock Market requires a minimum tangible net worth of $4,000,000 and
a minimum per-share bid price of $5.00 per share in order to remain listed. The
Company's stock was delisted from the NASDAQ Stock Market in July 1999 and now
trades on the NASDAQ Small Cap Market. The NASDAQ Small Cap Market requires a
minimum tangible net worth of $2,000,000 and a minimum bid price of $1.00 per
share. The Company's tangible net worth as of June 30, 1999 was $2,823,292. The
Company effected the 1:3 reverse stock split in July to comply with the minimum
bid price for the NASDAQ Small Cap Market. Its shares have traded substantially
below $1.00 per share recently.
<PAGE>   28

The approximate number of security holders of record as of June 30, 1999 was
1,500. To date, the Company has not paid any cash dividends on its Common Stock.
The payment of dividends in the future will be within the discretion of the
Board of Directors and will depend on the Company's earnings, capital
requirements, financial condition, and other relevant factors. The Company does
not intend to declare any cash dividends in the foreseeable future, but instead
intends to retain earnings for use in the Company's business operations.


ITEM 6.  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 and the Business Considerations and
Certain Factors That May Affect Future Results of Operations included elsewhere
in this annual report. Historical results and percentage relationships among
accounts are not necessarily an indication of trends in operating results for
any future period. The consolidated financial statements present the continuing
operations of Birman Managed Care, Inc. and its wholly owned subsidiaries. All
significant inter-company balances and transactions have been eliminated in
consolidation.


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>
                                          FISCAL YEAR                  FISCAL YEAR
                                             ENDED                        ENDED
                                         JUNE 30, 1999      %          JUNE 30, 1998      %
                                         -------------     ---         -------------     ---
<S>                                      <C>               <C>         <C>               <C>
Revenue                                  $ 6,080,861       100%         $ 7,817,881      100%
Cost of revenue                            2,899,955        48%           3,566,164       46%
                                         -----------       ---          -----------      ---
Gross Profit                               3,180,906        52%           4,251,717       54%
SG&A Expenses                              5,346,503        88%           7,373,417       94%
                                         -----------       ---          -----------      ---

Loss from continuing operations           (2,165,597)      (36%)         (3,121,700)     (40%)
Other Income (expense)
    Interest income                           70,962         1%             316,373        4%
    Interest expense                         (15,463)       --              (19,590)      --
    Gain (loss) on disposal
       of assets                             149,343         3%             (42,973)      (1%)
                                             -------       ---           ----------
Loss from continuing operations
before provision for income taxes         (1,960,755)      (32%)         (2,867,890)     (37%)
and before extraordinary item

Income tax benefit                                --                        793,684       10%
                                         -----------                    -----------      ---
Loss before discontinued operations
  and before extraordinary item           (1,960,755)      (32%)         (2,074,206)     (27%)
Loss from Discontinued operations            (55,454)       (1%)         (3,623,567)     (46%)
Loss on Disposal of Health Plan business                                   (984,973)     (13%)

Extraordinary gain on
   forgiveness of debt                       221,003         3%                  --       --
                                         -----------       ---          -----------      ---
Net loss                                 $(1,795,206)      (30%)        $(6,682,746)     (86%)
                                         ===========       ====         ===========      ===
</TABLE>

<PAGE>   29

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.


FISCAL YEAR ENDED JUNE 30, 1999 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1998:

REVENUE:

GENERAL

For fiscal 1999 (fiscal year ended June 30, 1999), consolidated revenue
decreased by 22% to approximately $6,081,000, from approximately $7,818,000 in
fiscal 1998 (fiscal year ended June 30, 1998).

QUALITY MANAGEMENT PROGRAM (QMP)

The Quality Management Program (QMP) experienced a 22% decrease in revenue to
approximately $6,081,000 for fiscal 1999, from approximately $7,818,000 in
fiscal 1998. The revenue decrease was primarily from lost business not replaced
with new accounts. The Company experienced a delay in closing new business
accounts during 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 $145
per discharge in fiscal 1999 as compared to $147 per discharge in fiscal 1998.
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 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. The actual discharge volume decreased by 21% to 42,237
discharge records reviewed in fiscal 1999 as compared to 53,291 discharge
records reviewed in fiscal 1998.

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 fiscal 1999. The Company
started four new hospital accounts

<PAGE>   30

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. The number of hospital-clients on contract
has decreased to 18 as of June 30, 1999, from 23 in the prior year.

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 engagements. 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 fiscal 1999 - 2000 due to the development of a more tactically
refined sales process. Per discharge revenue is expected to remain stable during
fiscal 2000.

         See "Item 1.  Description of Business - New Products and Services."


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 6 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
<PAGE>   31

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.

During the prior fiscal year, the Company provided QMP services for two
hospitals owned by St. Barnabas Health System, which represents approximately
14% of the Company's revenue for the nine months ended March 31, 1998. The St.
Barnabas contract concluded activities effective December 31, 1997 in accordance
with its terms.


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 fiscal year 1999, the cost of revenue decreased by 19% to approximately
$2,900,000, from approximately $3,566,000 in fiscal year 1998.

The cost of revenues declined by approximately $666,000 or 11% of revenues. The
Company was unable to reduce overall physician compensation in relation to the
decline in revenues in order to maintain adequately trained staff, thus the
overall increase in the cost of revenues to revenues. The shift from
"results-oriented" compensation contracts to fixed fee compensation contracts
for the Quality Management Program, also resulted in decreased profit margins.
At the end of fiscal 1999, all QMP contracts were fixed fee contracts.

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 minimum 50% growth 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 $2,026,914 or 27%, to
approximately $5,346,503 for fiscal 1999.

The decrease in selling, general, and administrative expenses 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 fiscal 1999. The Company also implemented another round of
substantial overhead and cost reduction measures at the beginning of the third
quarter of 1999 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



<PAGE>   32

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. On June 30, 1998,
and again in January and March of 1999, the Company implemented a series of
steps designed to reduce the Company's other selling, 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 overhead expenses.

INTEREST INCOME AND EXPENSE:

Interest income decreased to approximately $71,000 for fiscal 1999 from
approximately $316,000 in the prior fiscal year. This decrease was attributable
to interest earned on the reduced balance of cash deposits held primarily in
money market and other short-term investment accounts. Interest expense
decreased to approximately $15,000, for fiscal 1999 from approximately $20,000
in the prior fiscal year.

PROVISION FOR INCOME TAX BENEFIT

The provision for income tax benefit from continuing operations was
approximately $794,000 for fiscal 1998. This benefit was attributable to the
Company's ability to carry back its operating loss for fiscal 1998 to obtain a
tax refund.


NET INCOME (LOSS) FROM CONTINUING OPERATIONS:

For fiscal 1999 the Company reported a net loss from continuing operations of
approximately $1,961,000, as compared to a net loss of $2,074,000 in the prior
fiscal year.

The net loss from continuing operations for fiscal 1999 was primarily from a
decrease in revenue and gross margin from the Quality Management Business. In
addition, the Company experienced a 27% decrease in selling, general and
administrative expense as a result of cost reduction measures implemented in the
first and third quarters.

Outlook: The Company anticipates lower net operating losses in the first two
quarters 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 has been beyond its control. There is no
assurance that the Company will reduce its net operating losses in the near
future.

<PAGE>   33


LOSS FROM DISCONTINUED OPERATIONS:

For fiscal 1998, the Company reported loss, net of tax, for discontinued
operations of $3,623,567. 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.

LOSS ON DISPOSAL OF HEALTH PLAN:

For fiscal 1998, the Company reported a loss, net of tax, of $984,973 on
disposal of the health plan operations of the Company. This item includes the
capital invested in Care3, Inc., the health plan in Mississippi, and the related
health plan management subsidiaries of MMMC, Inc., BMC Health Plans, Inc., and
TMMC, Inc., and costs to wind down operations net of any recoveries.

EXTRAORDINARY GAIN:

During the quarter ended December 31, 1998, the Company reported an
extraordinary gain of $221,003. 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.

In the third quarter, the Company sold substantially all of the assets and
operations of Hughes & Associates, Inc., the Company's utilization review
service, to its senior management. The sale was closed on April 30, 1999
(disposal date), and resulted in a gain on disposal of approximately $90,000. As
substantially all assets and liabilities were sold, the Company has not accrued
any loss reserves and is aware of no grounds on which claims against the Company
can be based.

NET LOSS:

For fiscal 1999, the Company reported a net loss of $1,795,000 as compared to a
net loss of $6,683,000 in the prior fiscal year. The decrease in net loss of
$4,888,000 in 1999 was primarily due to losses from the Company's health plan
operations which were discontinued in 1998.

LIQUIDITY AND CAPITAL RESOURCES:

For the year ended June 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 invested
$82,000 in property and equipment and used $406,000 to pay down debt and capital
lease obligations during the fiscal year. The Company received an income tax
refund of $1,245,000 during January 1999 from the carryback of operating losses
against earnings from its consulting business in prior years.
<PAGE>   34

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 matures on October 31, 1999. No
request to renew the credit facility has been made, although Management intends
to do so. The credit facility is secured by a pledge of the Company's Quality
Management Program accounts receivable. These accounts receivable are
obligations of the hospital clients of Birman Consulting Group, Inc., and are
not Medicare or Medicaid receivable accounts.

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 $120,000 per
month of additional revenue and must also refrain from incurring additional
overhead costs. The Company's credit facility expires on October 31, 1999 and no
request has been submitted to renew it, although such a request is expected.
There is no assurance that the credit facility will 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.


ESCROWED SHARES

As part of the underwriting agreement for the Company's initial public offering,
the Company's founder, chairman and chief executive officer, David N. Birman,
M.D., agreed to place in escrow one million shares of the Company's common stock
owned by him to be released to him only in the event that the Company met
certain earnings-per-share targets. The Company met the target for fiscal year
1996 - 1997 and 333,333 shares were released to Dr. Birman with the Company thus
incurring a substantial non-cash charge against earnings for that year as
required by applicable accounting rules. The Company failed to meet the target
earnings results for the fiscal years ended June 30, 1998 and June 30, 1999 and
the remaining 666,667 shares held in escrow will be returned to the Company as
authorized but unissued shares. The escrow agreement thus terminates and Dr.
Birman will not be able to receive any of the remaining shares.

         See "Principal Stockholders -- Escrow Shares."

IMPACT OF ACCOUNTING STANDARDS

Statement of Financial Accounting Standards "SFAS" No. 129, "Disclosure of
Information about Capital Structure" issued by the FASB is effective for
financial statements ending after December 15, 1997. The new standard reinstates
various securities disclosure requirements previously in effect under Accounting
Principles Board Opinion No. 15, which has been superseded by SFAS No. 128. The
adoption of SFAS No. 129 had no material effect on the Company's consolidated
financial statements as of and for the year ended June 30, 1998.


<PAGE>   35

SFAS No. 130, "Reporting Comprehensive Income" issued by the FASB is effective
for financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Company, has not determined the
effect on its financial position or results of operations, if any, from the
adoption of this statement.

SFAS No. 131, "Disclosure about segments of an Enterprise and Related
Information" issued by the FASB is effective for financial statements beginning
December 15, 1997. The new standard requires that public business enterprises
report certain information about operating segments in complete sets of
financial statements of the enterprise and in condensed financial statements of
interim periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate and their major customers. The Company
does not expect adoption of SFAS No. 131 to have a material effect, if any, on
its Results of Operations.

SFAS No. 132 "Employers' disclosures about Pensions and Other Postretirement
Benefits" is effective for financial statements beginning after December 15,
1997. SFAS No. 132 revises employers' disclosures about pension and other
postretirement benefit plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminate certain
disclosures. The Company does not expect adoption of SFAS No. 132 to have a
material effect, if any, on its financial position or results of operations.

SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" is
effective for all fiscal quarters beginning after June 15, 1999. Earlier
application is encouraged. The statement establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company does not expect adoption of SFAS No. 133 to have a material effect, if
any, on its financial position or results of operations.

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>   36

ITEM 7.  FINANCIAL STATEMENTS

The financial statements required by item 310(a) of Regulation S-B are included
in this Report beginning on Page F-1.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

On March 26, 1999, Deloitte & Touche LLP resigned from its position as the
independent auditors of the Company. The reports of Deloitte & Touche LLP on the
Company's financial statements for the past one year did not contain an adverse
opinion or a disclaimer of opinion, and were not qualified or modified as to
uncertainty audit scope, or accounting principles. During the Company's most
recent fiscal year and the interim periods ending September 30, 1998 and
December 31, 1998, there were no disagreements with Deloitte & Touche LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Deloitte & Touche LLP, would have caused Deloitte & Touche LLP
to make reference to the subject matter of the disagreements in connection with
their reports. The Company is aware of no such disagreements with Deloitte &
Touche LLP for the current period. During these periods, there were no
"reportable events" as that term is defined in Item 304 (a)(1)(v) of Regulation
S-K. On June 23, 1999, the Company, with the approval of the Board of Directors,
and upon recommendation of the Audit Committee of the Board of Directors,
retained the accounting firm of Marlin & Edmondson, P.C., Nashville, Tennessee,
as independent accountants for the Company.


                                    PART III


ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The Directors of the Company are:

<TABLE>
<CAPTION>
NAME                       AGE              POSITION
----                       ---              --------
<S>                        <C>              <C>
David N. Birman, M.D.(1)   47               Chairman of the Board of Directors, President
                                              and Chief Executive Officer
Sue D. Birman(1)           41               Director, Executive Vice President and Secretary
John D. Higgins(2)         67               Director
James J. Rhodes            42               Director
Warren E. Aut              66               Director
</TABLE>

<PAGE>   37

(1)   David N. Birman, M.D. and Sue D. Birman are husband and wife.

(2)   Mr. Higgins was elected to the Board of Directors pursuant to the
      Underwriting Agreement between the Company and the Representative of the
      Underwriters, Royce Investment Group, Inc. ("Royce"), by which the Company
      agreed to use its best efforts to elect a designee of Royce to the Board.
      Mr. Higgins is Senior Vice President, Corporate Finance, of Royce.

Directors of the Company hold office until the next annual meeting of
shareholders or until their successors have been elected and qualified. The
Company's by-laws now provide for five (5) directors.

The executive officers of the Company, who serve at the discretion of the Board
of Directors, are as follows:



<TABLE>
<CAPTION>
         NAME                      AGE               POSITION
         ----                      ---               --------
<S>                                <C>               <C>
David N. Birman, M.D.               47               Chairman of the Board, President, and Chief
                                                        Executive Officer
Sue D. Birman                       41               Executive Vice President, Corporate Secretary
</TABLE>

DIRECTORS AND EXECUTIVE OFFICERS

David N. Birman, M.D. has served as Chairman of the Board of Directors,
President, and Chief Executive Officer of the Company and its predecessor
corporations since May 1991. From February 1990 to mid-1991, Dr. Birman served
as Chairman of the Board of Birman, Mathes & Associates, Inc., a consulting
company providing quality management and Medicare reimbursement review services
to rural hospitals. From April 1989 until January 1990, Dr. Birman served as a
consultant, providing quality management and Medicare reimbursement review
services to five rural hospitals. Previously, Dr. Birman was employed by
Whitwell Medical Center, Whitwell, Tennessee where, as a physician assistant, he
performed certain clinical duties and developed patient care management
techniques and reporting strategies that formed the basis for development of the
Quality Management Program. Dr. Birman received his M.D. from the Universidad
Tecnologica de Santiago; his BA, with honors in Biology from Occidental College;
and certification as a physician assistant in primary care and surgery from the
University of Southern California School of Medicine.

Sue D. Birman has served as Executive Vice President and a director of the
Company and its predecessor corporations since May 1991 and served as their
Chief Financial Officer from May 1991 until June 1996. She was elected Corporate
Secretary in March, 1997. From February 1990 to mid-1991, Ms. Birman assisted
Dr. Birman in the financial aspects and business development of Birman, Mathes &
Associates, Inc. From April 1989 until January 1990, Ms. Birman assisted Dr.
Birman in the operation of his consulting firm. Ms. Birman is the spouse of
David N. Birman, M.D.
<PAGE>   38
John D. Higgins was elected a director of the Company in March 1997. Since
1990, Mr. Higgins has been Senior Vice President - Corporate Finance of Royce
Investment Group, Inc., the Company's managing underwriter for its
recently-completed initial public offering of Common Stock. Mr. Higgins holds
BBA and MBA degrees from Hofstra University. Mr. Higgins also is a director of
Digital Recorders, Inc., a public-owned company which manufactures and
distributes technology products. The company conducts no business with Digital
Recorders, Inc.

James J. Rhodes became a director of the Company in September 1996. Since 1986,
Mr. Rhodes has served as a Regional Manager in the pension division of ManuLife
Financial (The Manufacturer's Life Insurance Company (USA)), a global financial
services company offering annuities, insurance, and investment products.

Rear Admiral Warren E. Aut (USN, Ret.) was appointed to the Board of Directors
in October of 1998. During his 35-year career in the United States Navy, Admiral
Aut served as Commander of Mediterranean Fleet Air Operations, Chief of Staff to
the Supreme Allied Command Atlantic, of NATO, Commander of the Naval Training
Center, San Diego, California. While serving as Commander of Mediterranean Fleet
Air Operations, he commanded five naval hospitals and helped develop the naval
hospital administrative corps. After retiring from the U.S. Navy in 1985, he
served on the Board of Directors of Welcorp, a publicly-traded HMO, and as
president of chief executive officer of a number of privately-held corporations.
Currently, he is Managing Director of ISSG, Inc., a privately-held company now
developing new camera technology for use in television. From 1995 to 1997, he
was President of Organization Assessment Company during which time he completed
a world-wide speaking tour presenting The Art of War in the Corporate World.
Prior to this, Admiral Aut was Senior Advisor to a simulator development company
and President of a financial investment company in Dallas, Texas. Admiral Aut
holds a Bachelor of Science degree in Naval Science and earned his Master of
Business Administration at the Naval Post Graduate School.

BOARD COMMITTEES

There are two committees of the Board of Directors: the Compensation Committee
and the Audit Committee. The Compensation Committee determines the Company's
executive compensation policies and practices and changes in compensation and
benefits for senior management. The Compensation Committee also administers the
Company's 1995 Stock Option Plan. The Audit Committee reviews the internal
accounting procedures of the Company, consults with the Company's independent
accountants, and reviews the services provided by such accountants. Messrs.,
Rhodes and Higgins currently serve as the members of both the Compensation
Committee and Audit Committee.

<PAGE>   39
COMPENSATION OF DIRECTORS

All directors receive reimbursement for reasonable expenses incurred in
connection with their attendance at Board of Directors and committee meetings.
In addition, all non-employee directors receive $2,000 for each Board meeting
that they attend. All non-employee directors are also entitled to receive
awards and options to purchase shares of Common Stock under the 1996
Non-Employee Directors' Non-Qualified Stock Option Plan. See "Management --
Stock Option Plans -- 1996 Directors' Option Plan."

FORM 3

Each of the directors filed their respective Form 3 with the Securities and
Exchange Commission on or about April 28, 1998, or thereafter.

ITEM 10.  EXECUTIVE COMPENSATION

The following table provides certain information concerning the compensation
earned by the Company's Executive Officers for services rendered in all
capacities to the Company for fiscal 1999 (the "Named Executive Officers").



                           SUMMARY COMPENSATION TABLE



<TABLE>
<CAPTION>
                                                                                      Long Term Compensation

Name and  Principal Position               Salary      Bonus Other Annual   Awards/ Options (#)   All Other

<S>                                       <C>          <C>   <C>            <C>                   <C>
Current Officers:

David N. Birman, M.D                      $275,986      --     $72,554               --                --
Chairman of the Board, President,
and Chief Executive Officer, (1)(3)


Sue D. Birman                             $146,790      --     $21,744               --                --
Executive Vice President, Secretary,
and Director (2)(3)
</TABLE>

(1)      Other Annual Compensation for David N. Birman, M.D. for fiscal 1999
         was $1,911 in medical insurance premiums, $43,794 in officer's life
         insurance premiums, $24,849 in auto allowance, and $2,000 in 401(k)
         matching contributions.
(2)      Other Annual Compensation for Sue D. Birman for fiscal 1999 was $1,911
         in medical insurance premiums, $17,970 in auto allowance and $1,863 in
         401(k) matching contributions.
(3)      David N. Birman and Sue D. Birman borrowed $18,000.00 from the Company
         during fiscal year 1998 - 1999 at 10% interest. The principal amount
         and accrued interest is due and payable on December 12, 1999.


EXECUTIVE BONUS PLAN

The Company has adopted an Executive Bonus Plan (the "Executive Bonus Plan")
pursuant to which officers of the Company are eligible to receive cash bonuses
after the close of each fiscal year of the Company. The Executive Bonus Plan is
administered by the Compensation Committee of the Board of Directors. Bonuses
are determined on the basis of (i) the operating profit of the Company,(ii) net
revenue growth of the Company achieved as a percentage of the goal established
by the Company at the beginning of the fiscal year, and (iii) the officer's


<PAGE>   40

individual performance and contribution to the Company. An officer's bonus for
any fiscal year may not exceed such officer's annual base salary multiplied by
the Target Bonus Percentage as defined in the Executive Bonus Plan in such
fiscal year.


STOCK OPTION PLANS

1995 Employee Stock Option Plan: The Company adopted the 1995 Employee Stock
Option Plan (the "1995 Option Plan") pursuant to which key employees, including
officers and directors who are employees, and consultants of the Company are
eligible to receive incentive stock options as well as non-qualified stock
options and stock appreciation rights ("SARs"). The Plan, which expires in
October 2005, is administered by the Compensation Committee of the Board of
Directors. Incentive stock options granted under the Plan are exercisable for a
period of up to 10 years from the date of grant at an exercise price which is
not less than the fair market value of the Common Stock on the date of the
grant, except that the term of an incentive stock option granted under the Plan
to a stockholder owning more than 10% of the outstanding Common Stock may not
exceed five years and the exercise price of an incentive stock option granted
to such a stockholder may not be less than 110% of the fair market value of the
Common Stock on the date of the grant. Non-qualified stock options may be
granted on terms determined by the Compensation Committee of the Board of
Directors. SARs, which give the holder the privilege of surrendering such
rights for an amount of stock equal to the appreciation in the Common Stock
between the time of grant and the surrender, may be granted on any terms
determined by the Compensation Committee of the Board of Directors. The Plan
also permits the grant of new stock options to participants who tender shares
of the Company's Common Stock as payment of the exercise price of stock options
or the payment of withholding tax ("Reload Options"). The Reload Options will
be granted at the fair market value of a share of Common Stock on the date of
the grant and will be exercisable six months following the date of the grant.
The Plan also includes limited option valuation rights upon a change of control
of the Company.

1996 Directors' Option Plan: On September 9, 1996, the Company adopted the 1996
Non-Employee Directors' Non-Qualified Stock Option Plan (the "1996 Directors'
Plan"). A total of 100,000 shares of Common Stock are reserved for issuance
under the 1996 Directors' Plan. Under this plan, upon initial election to the
Board of Directors, non-employee directors are awarded options to purchase
6,000 shares of Common Stock. Upon each subsequent election to the Board of
Directors, non-employee directors receive option awards to purchase 3,000
shares of Common Stock. These options, which have an exercise price equal to
the fair market value of the shares of Common Stock as of the date of grant,
vest at the rate of 33.33% per year. All options awarded under the 1996
Directors' Plan expire on the first to occur of(I) 10 years after the date of
grant, or (ii) 90 days after the date the director is no longer serving in such
capacity for reasons other than death or disability.


Information relating to options outstanding of the Company's two fixed stock
option plans at June 30, 1999 is presented below:


<PAGE>   41

<TABLE>
<CAPTION>
                                              WEIGHTED                          WEIGHTED
RANGE OF                   OPTIONS             AVERAGE          VESTED          AVERAGE
EXERCISE                   OUTSTANDING        REMAINING         OPTIONS         EXERCISE
PRICES                     JUNE 30, 1999        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>

FISCAL 1999 OPTION GRANTS

The following table sets forth certain information concerning individual grants
of incentive stock options to executive officers and directors during the fiscal
year ended June 30, 1999:

<TABLE>
<CAPTION>
                         NUMBER OF     PERCENTAGE
                          SHARES        OF TOTAL
                        UNDERLYING       OPTIONS            EXERCISE
NAME OF DIRECTOR         OPTIONS         GRANTED              PRICE          EXPIRATION
OR OFFICER               GRANTED       UNDER PLAN           PER SHARE            DATE
----------               -------       ----------           ---------            ----


<S>                      <C>           <C>                  <C>              <C>
Jeffrey L. Drake         20,000                              $    6.00        8/12/08
Rockey Talley, M.D       20,000                              $    6.00        8/12/08

James J. Rhodes           3,000            0.6%              $    7.00       12/01/07
John D. Higgins           3,000            1.2%              $    7.00       12/01/07
Warren E. Aut             6,000                              $   15.00       10/01/98
</TABLE>

None of the persons named in the Summary Compensation Table exercised options
during the fiscal year ended June 30, 1999.


EMPLOYMENT AGREEMENTS

The Company has employment agreements with each of its current executive
officers. The employment agreements provide for annual salaries that generally
are subject to annual adjustments for increases in the Consumer Price Index;
participation in employee deferred compensation plans, stock options and
retirement and insurance plans; and include customary non competition,
nondisclosure, and severance provisions. Set forth below is a summary of other
principal provisions of those employment agreements:

In March 1996, the Company entered into an employment agreement with David N.
Birman, M.D. for a term expiring June 30, 2001, pursuant to which Dr. Birman
serves as Chief Executive Officer of the Company. The employment agreement
provides for an initial base salary of $350,000 per annum, participation in the
Executive Bonus Plan, and other compensation not to exceed $60,000 per annum.
The employment agreement provides for severance benefits upon termination as a
result of death, for "cause," by mutual agreement, and as a result of
disability. If Dr. Birman's employment is terminated for reasons other than
death, "cause," mutual agreement,


<PAGE>   42

or disability, he shall be entitled to receive his base salary (as most
recently adjusted) for the remainder of the initial term or the applicable
renewal term and all unvested stock options granted to him under 1995 Option
Plan shall accelerate and become vested. If Dr. Birman's employment is not
renewed following expiration of the initial term or the applicable renewal
term, he shall be entitled to receive, as severance, his base salary (as last
adjusted)payable over the 12-month period following the severance of his
employment. In July 1998, as part of a cost reduction program, Dr. Birman
accepted a temporary 30% salary reduction.

In March 1996, the Company entered into an employment agreement with Sue D.
Birman for a term expiring June 30, 2001, pursuant to which Ms. Birman serves
as Executive Vice President of the Company. The employment agreement provides
for an initial base salary of $150,000 per annum, participation in the
Executive Bonus Plan, and other compensation not to exceed $10,000 per annum.
The employment agreement provides for severance benefits upon termination as a
result of death, for "cause," by mutual agreement, and as a result of
disability. If Ms. Birman's employment is terminated for reasons other than
death, "cause," mutual agreement, or disability, she shall be entitled to
receive her base salary (as most recently adjusted) for the remainder of the
initial term or the applicable renewal term and all unvested stock options
granted to her under 1995 Option Plan shall accelerate and become vested. If
Ms. Birman's employment is not renewed following expiration of the initial term
or the applicable renewal term, she shall be entitled to receive, as severance,
her base salary (as last adjusted) payable over the 12-month period following
the severance of her employment. In July 1998, as part of a cost reduction
program, Ms. Birman accepted a 20% salary reduction.


INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company's Certificate of Incorporation limits, to the maximum extent
permitted by the Delaware General Corporation Law, the personal liability of
directors for monetary damages for breach of their fiduciary duties as
directors other than for liabilities arising from (I) any breach of the
directors' duty of loyalty to the Company and its stockholders; (ii) acts or
omissions that involve intentional misconduct, fraud, or knowing violations of
law; (iii) the payment of distributions in violation of the Delaware GCL; or
(iv) transactions in which the director received an improper personal benefit.
The Company's Bylaws require the Company to indemnify directors and officers
for all costs reasonably incurred in connection with any action, suit, or
proceeding in which such director or officer is made a party by virtue of his
or her being a director or officer of the Company except where such director or
officer is finally adjudged to have been derelict in the performance of his or
her duties as such director or officer.

The Company has entered into indemnification agreements with its directors and
executive officers, which contain provisions which are in some respects broader
than the specific indemnification provisions contained in the Company's
Certificate of Incorporation and Bylaws. The indemnification agreements require
the Company, among other things, to indemnify such directors and officers
against certain liabilities that may arise by reason of their status as
directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to carry
directors' and officers' insurance, if available on reasonable terms.


<PAGE>   43

The Company believes these indemnification agreements are necessary to attract
and retain qualified persons as directors and officers. It is the opinion of
the staff of the Securities and Exchange Commission that indemnification
provisions such as those that are contained in these indemnification agreements
have no effect on a director's or officer's liability under the federal
securities laws.

Except for the legal action described under "Business - Legal Proceedings,"
there is no pending litigation or proceeding involving any director, officer,
employee, or agent of the Company where indemnification will be required or
permitted. The Company is not aware of any threatened litigation or other
proceeding that may result in a claim for such indemnification.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of June 30, 1999 with respect to
the beneficial ownership of shares of Common Stock by (I) each person (or group
of affiliated persons) who is known by the Company to own beneficially more
than 5% of the Common Stock; (ii) each of the Named Executive Officers; (iii)
each of the directors; and (iv) all directors and executive officers of the
Company as a group. (Note: none of the share amounts have been adjusted to
reflect the Company's 1:3 reverse stock split approved July 6, 1999).

<TABLE>
<CAPTION>
                                                                    COMMON SHARES
                                                                  BENEFICIALLY OWNED
                                                                  ------------------
NAME AND ADDRESS OF BENEFICIAL OWNER                            NUMBER         PERCENT
------------------------------------                            ------         -------

<S>                                                             <C>            <C>
David N. Birman, M.D.(1)                                        4,916,606      56.15%
Sue D. Birman(1)                                                4,916,606      56.15%
John Higgins (2)                                                    1,000          *
James J. Rhodes(3)                                                  2,000          *
Directors and officers as a group (4)                           4,919,606      56.18%
</TABLE>

*     Less than 1%

(1)      Includes 666,667 Escrow Shares, which were forfeited effective July 1,
         1999 as a consequence of the Company's failure to reach certain
         earnings-per-share targets. See "Principal Stockholders - Escrow
         Shares". David N. Birman, M.D. disclaims beneficial ownership as to
         550,693 shares beneficially owned by Sue D. Birman individually. Sue
         D. Birman disclaims beneficial ownership as to 3,936,010 shares
         beneficially owned by David N. Birman, M.D. individually. The address
         of Dr. and Mrs. Birman is c/o the Company at 1025 Highway 111 South,
         Cookeville, Tennessee 38501.

(2)      Mr. Higgins was granted options under the Company's 1996 Directors'
         Options Plan to acquire 3,000 shares of the Company's Common Stock at
         an exercise price of $7.50 per share and 6,000 shares at an exercise
         price of $7.00 per share.

(3)      Mr. Rhodes was granted options under the Company's 1996 Directors'
         Option Plan to acquire 6,000 shares of the company's Common Stock at
         an exercise price of $5.00 per share and 3,000 shares at an exercise
         price of $7.00 per share.

(4)      Includes shares subject to options exercisable currently to acquire
         219,350 for all officers and directors as a group.


<PAGE>   44

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


Richard M. Ross served as Vice-Chairman and as a director of the Company from
February 1994 to August 1996. Effective September 1, 1996, Mr. Ross retired as
Vice-Chairman and a newly formed company controlled by Mr. Ross was engaged as
a consultant to the Company pursuant to a consulting agreement (the "Consulting
Agreement"). While serving as Vice-Chairman of the Company, Mr. Ross was
actively involved in policy-making matters relating to day-to-day operations of
the Company and corporate finance. As a consultant, Mr. Ross will undertake
special assignments designated by Dr. Birman and the Board of Directors
including, among other things, developing business plans for acquired companies
and evaluating acquisition candidates. The Consulting Agreement provides for
Mr. Ross to serve as the provider of consulting services thereunder, provides
for a fee to be paid to the consultant firm of $120,000 per annum payable in
equal monthly installments over the 12-month term of the agreement, and
provides for termination of the Consulting Agreement by mutual agreement, upon
the occurrence of an uncured material breach, upon the death of Mr. Ross, or 10
days after receipt of notice of termination from the consultant. Except as
otherwise provided or as otherwise agreed to by the parties, the Consulting
Agreement will be renewed annually by the Company for up to an additional five
consecutive years.

The chairman and executive vice president of the Company, respectively, David
N. Birman, M.D. and Sue D. Birman, borrowed a total of $18,000.00 from the
Company over a period of months during fiscal 1999. The loan bears interest at
the rate of ten percent (10%) per annum and is due and payable on December 12,
1999.

In October 1997, the Company agreed to buyout the residences of two executives
through a third party relocation company to allow the executives to move to
Cookeville TN. The Company bought Mr. Drake's residence in Georgia and
subsequently resold the residence in December 1997, at a net cost to the
Company of $27,525. The Company bought Mr. Patterson's residence in Florida and
subsequently resold the property in August 1998, at a net cost to the Company
of $119,700.

John D. Higgins, a director of the Company, is Senior Vice President -Corporate
Finance of Royce Investment Group, Inc., the representative of the underwriters
for the Company's successful February 1997 initial public offering of stock
("Royce"). Mr. Higgins was elected to the Board pursuant to a provision in the
Company's underwriting agreement with Royce which allowed Royce to nominate one
member of the Board of Directors. In addition to underwriting commissions of
$920,000, Royce and the other underwriters received in connection with the
Company's initial public offering a non-accountable expense allowance of
$345,000. As part of the underwriting agreement, the Company also agreed to
sell to Royce and its designees, for nominal consideration, warrants to
purchase up to 200,000 shares of the Company's Common Stock. The warrants will
be exercisable until February 12, 2001 at an exercise price of $7.50 per share
(150% of the initial public offering price of the Common Stock). The shares
acquired upon exercise of the warrant may not be transferred or hypothecated
for one year after exercise. The Company has agreed to register the shares so
acquired at the Company's expense under the Securities Act of 1933. The Company
and Royce also entered into a one-year financial


<PAGE>   45

consulting agreement under which the Company paid Royce a fee of $172,500,
i.e., 1.5% of the gross proceeds of the Company's initial public offering
including the sale of the over allotment. In addition, the Company and Royce
entered into a five-year agreement which provides that if Royce arranges for
the sale of substantially all of the assets of the Company or for a merger,
consolidation, or acquisition through and including February 12, 2001, Royce
will receive a fee based on a sinking scale ranging from 5% of the first $1.0
million of consideration, 4% of the consideration between $1.0 million and $2.0
million, and 3% of the consideration in excess of $3 million.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
         A. EXHIBITS

         <S>      <C>
          *3.1    Certificate of Incorporation of Birman Managed Care, Inc.

          *3.2    By-laws of Birman Managed Care, Inc.

          *3.3    Certificate of Merger dated September 9, 1996 by and between
                  Birman Managed Care, Inc. - Delaware and Birman Managed Care,
                  Inc.

          *4.1    Reference is made to Exhibits 3.1 through 3.3.

         *10.1    Employment Agreement by and between Birman Managed Care, Inc.
                  and David N. Birman, M.D. entered into on March 1, 1996.

         *10.2    Employment Agreement by and between Birman Managed Care, Inc.
                  and Sue D. Birman entered into on March 1, 1996.

         *10.3    Employment Agreement by and between Birman Managed Care, Inc.
                  and Robert D. Arkin entered into on March 1, 1996; Amendment
                  No. 1 by and between Birman Managed Care, Inc. and Robert D.
                  Arkin entered into on March 1, 1996.

         *10.4    Employment Agreement by and between Birman Managed Care, Inc.
                  BMC Health Plans, Inc. and Vincent W. Wong entered into on
                  March 1, 1996.

         *10.5    Employment Agreement by and between Birman Managed Care, Inc.
                  and Douglas A. Lessard entered into on March 1, 1996;
                  Amendment No. 1 by and between Birman Managed Care, Inc. and
                  Douglas A. Lessard entered into on March 1, 1996; Amendment
                  No. 2 by and between Birman Managed Care, Inc. and Douglas A.
                  Lessard entered into on September 1, 1996.

         *10.6    Employment Agreement by and between Birman Managed Care, Inc.
                  and Mark C. Wade entered into on July 1, 1995; Amendment No.
                  1 by and between Birman Managed Care, Inc., BMC Health Plans,
                  Inc. and Mark C. Wade entered into on October 30,1995;
                  Amendment No. 2 by and between Birman Managed Care, Inc. and
                  Mark C. Wade entered into on September 1, 1996.
</TABLE>


<PAGE>   46

<TABLE>
         <S>      <C>
         *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.
</TABLE>


<PAGE>   47

<TABLE>
       <S>        <C>
        **10.25   Employment Agreement by and between Birman Managed Care, Inc.
                  and Samuel S. Patterson.

        **10.26   Employment Agreement by and between Birman Managed Care, Inc.
                  and Jeffrey L. Drake.

       ***16.1    Letter on Change in Certifying Accountants.

      ****16.2    Letter from Deloitte & Touche LLP dated April 1, 1999 on
                  Change in Certified Accountant.

         *21.1    Subsidiaries of the Registrant.

          27.1    Financial Data Schedule, Fiscal Year Ended June 30, 1999.

          27.2    Financial Data Schedule, Fiscal Year Ended June 30, 1998 - Restated.
</TABLE>



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.

         June 10, 1999 - To report the sale of Hughes and Associates, which was
         a wholly-owned Subsidiary of the Company.
<PAGE>   48

*        Incorporated by Reference from the Company's Registration Statement on
         Form SB-2 (No. 333-111957).

**       Incorporated by Reference from the Company's Quarterly Report on Form
         10-QSB for the quarterly period ended December 31, 1996.

***      Incorporated by Reference from the Company's Quarterly Report on Form
         10-QSB for the fiscal quarter ended December 31, 1997.

****     Incorporated by Reference from the Company's Report on Form 8-K dated
         April 1, 1999.



                                   SIGNATURES




In accordance with Section 13 or 15(d) 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.

                                              By: /s/ DAVID N. BIRMAN, M.D
                                                  ------------------------
                                              David N. Birman, M.D.,
                                              Chairman of the Board,
                                              President and Chief
                                              Executive Officer

Date:  October 6, 1998

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                           TITLE                              DATE
---------                           -----                              ----

<S>                                 <C>                                <C>
By:/s/ DAVID N. BIRMAN, M.D.        Director, Chairman of the          October 8, 1999
----------------------------        Board President and Chief
David N. Birman, M.D.               Executive Officer



By:/s/ SUE D. BIRMAN                Director, Secretary and            October 8,1999
----------------------------        Executive Vice President
Sue D. Birman


By:/s/ JOHN D. HIGGINS              Director                           October 8, 1999
----------------------------
John D. Higgins

BY:/s/ JAMES J. RHODES              Director                           October 8, 1999
----------------------------
James J. Rhodes

By:/s/ WARREN E. AUT                Director                           October 8, 1999
----------------------------
Warren E. Aut
</TABLE>


<PAGE>   49


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES


                                Table of Contents

<TABLE>
<CAPTION>
                                                                     Page Number
                                                                     -----------
<S>                                                                  <C>
Independent Auditors' Report.......................................      F-2

Consolidated Balance Sheets........................................      F-3

Consolidated Statements of Operations..............................      F-4

Consolidated Statements of Changes in Stockholders' Equity.........      F-5

Consolidated Statements of Cash Flows..............................      F-6

Notes to Consolidated Financial Statements.........................   F-7-F-20
</TABLE>












                                      F-1
<PAGE>   50













                          INDEPENDENT AUDITORS' REPORT


Birman Managed Care, Inc. and Subsidiaries
Cookeville, Tennessee:

We have audited the accompanying balance sheet of Birman Managed Care, Inc. and
Subsidiaries, (the "Company") as of June 30, 1999, and the related statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of the Company as of June 30, 1998, were
audited by other auditors whose report dated September 18, 1998, expressed an
unqualified opinion on those statements.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 1999 financial statements referred to above present fairly,
in all material respects, the financial position of Birman Managed Care, Inc.
and Subsidiaries at June 30, 1999, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.







Nashville, Tennessee
September 10, 1999







                                      F-2
<PAGE>   51


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets

                             June 30, 1999 and 1998

<TABLE>
<CAPTION>
                  Assets                                                    1999            1998
                  ------                                                    ----            ----
<S>                                                                      <C>             <C>
Current Assets:
     Cash and cash equivalents (notes 1 and 2)                           $   873,989      2,431,387
     Accounts receivable, net of allowance for doubtful
       accounts of $125,000 and $130,000 respectively (notes 1 and 4)        998,687        805,760
     Prepaid expenses                                                          9,673         38,516
     Notes receivable - related party                                             --         55,265
     Current portion of notes receivable (notes 1 and 16)                     37,500             --
     Income taxes receivable (notes 1 and 6)                                      --      1,234,634
     Deferred tax asset (notes 1 and 6)                                       47,625         26,819
                                                                         -----------     ----------

              Total current assets                                         1,967,474      4,592,381
                                                                         -----------     ----------

Property and equipment, net of accumulated
     depreciation (notes 1, 3 and 4)                                         856,718      1,104,110
Goodwill (note 1)                                                                 --         12,915
Other                                                                         70,376        126,282
Notes receivable (notes 1 and 16)                                            112,500             --
                                                                         -----------     ----------

              Total assets                                               $ 3,007,068      5,835,688
                                                                         ===========     ==========

          Liabilities and Stockholders' Equity
          ------------------------------------

Current Liabilities:
     Current portion of notes payable (note 4)                           $        --        205,700
     Accounts payable                                                         38,708        333,256
     Accrued expenses                                                        125,950        141,605
     Net liabilities of discontinued operation (note 16)                          --        102,546
                                                                         -----------     ----------

              Total current liabilities                                      164,658        783,107
                                                                         -----------     ----------

Notes payable, less current portion (note 4)                                      --        400,000
Deferred income taxes (notes 1 and 6)                                         19,118         34,083
                                                                         -----------     ----------

              Total liabilities                                              183,776      1,217,190
                                                                         -----------     ----------

Commitments and contingencies (note 5)

Stockholders' equity (notes 9, 10, 11, 14 and 17):
     Preferred stock, $.001 par value; 5,000,000 shares
       authorized, none issued or outstanding                                     --             --
     Common stock, $.003 par value; 5,000,000 shares
       authorized, 2,918,751 issued and outstanding                            8,756          8,756
     Additional paid-in capital                                            9,715,071      9,715,071
     Retained earnings (deficit)                                          (6,900,535)    (5,105,329)
                                                                         -----------     ----------

              Total stockholders' equity                                   2,823,292      4,618,498
                                                                         -----------     ----------

              Total liabilities and stockholders' equity                 $ 3,007,068      5,835,688
                                                                         ===========     ==========
</TABLE>

See accompanying notes to financial statements.




                                       F-3

<PAGE>   52


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                      Consolidated Statements of Operations

                       Years Ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
                                                                                1999           1998
                                                                                ----           ----
<S>                                                                          <C>             <C>
Consulting revenues (note 15)                                                $ 6,080,861      7,817,881

Cost of revenues                                                               2,899,955      3,566,164
                                                                             -----------     ----------

     Gross profit                                                              3,180,906      4,251,717

General and administrative expenses                                            5,346,503      7,373,417
                                                                             -----------     ----------

Loss from continuing operations                                               (2,165,597)    (3,121,700)
                                                                             -----------     ----------

Other income (expense):
     Interest income                                                              70,962        316,373
     Interest expense                                                            (15,463)       (19,590)
     Gain (loss) on disposal of assets                                           149,343        (42,973)
                                                                             -----------     ----------

         Total other income (expense)                                            204,842        253,810
                                                                             -----------     ----------

Loss from continuing operations before discontinued operations,
     extraordinary item and provision for income taxes                        (1,960,755)    (2,867,890)

Provision for income tax (expense) benefit (note 6)                                   --        793,684
                                                                             -----------     ----------

Loss before discontinued operations and extraordinary item                    (1,960,755)    (2,074,206)
                                                                             -----------     ----------

Discontinued operations
     Net loss from discontinued operations, net of tax (note 16)                 (55,454)    (3,623,567)
     Net loss on disposal of health plan, net of tax (note 16)                        --       (984,973)
                                                                             -----------     ----------

     Loss from discontinued operations                                           (55,454)    (4,608,540)

Extraordinary item - gain from forgiveness of debt, net of tax                   221,003             --
                                                                             -----------     ----------

         Net loss                                                            $(1,795,206)    (6,682,746)
                                                                             ===========     ==========


Earnings (loss) per common share - basic (notes 1, 8 and 17):
     Income (loss) from continuing operations                                $     (0.67)         (0.77)
     Loss from discontinued operations, net of tax                                 (0.02)         (1.34)
     Loss on disposal of health plan, net of tax                                      --          (0.37)
     Income from extraordinary item, net of tax                                     0.08             --
                                                                             -----------     ----------
         Net income (loss)                                                   $     (0.61)         (2.48)
                                                                             ===========     ==========

Earnings (loss) per common share - assuming dilution (notes 1, 8 and 17):
     Income (loss) from continuing operations                                $     (0.67)         (0.77)
     Loss from discontinued operations, net of tax                                 (0.02)         (1.34)
     Loss on disposal of health plan, net of tax                                      --          (0.37)
     Income from extraordinary item                                                 0.08             --
                                                                             -----------     ----------
         Net income (loss)                                                   $     (0.61)         (2.48)
                                                                             ===========     ==========

Basic weighted average common stock shares outstanding
 (notes 1, 8 and 17)                                                           2,918,751      2,696,529
                                                                             ===========     ==========

Weighted average diluted common stock shares outstanding
 (notes 1, 8 and 17)                                                           2,918,751      2,696,529
                                                                             ===========     ==========
</TABLE>


See accompanying notes to financial statements.




                                       F-4

<PAGE>   53


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

           Consolidated Statements of Changes in Stockholders' Equity

                       Years Ended June 30, 1999 and 1998



<TABLE>
<CAPTION>
                                                   Common Stock                    Additional         Retained
                                        --------------------------------            Paid-In           Earnings
                                           Shares                Amount             Capital           (Deficit)
                                        -----------------------------------------------------------------------
<S>                                        <C>                 <C>                 <C>               <C>
Balance, June 30, 1997                     2,918,751           $  8,756             9,715,071         1,577,417

     Net loss                                 --                     --                 --           (6,682,746)
                                        -----------------------------------------------------------------------

Balance, June 30, 1998                     2,918,751              8,756             9,715,071        (5,105,329)

     Net loss                                 --                     --                 --           (1,795,206)
                                        -----------------------------------------------------------------------

Balance, June 30, 1999                     2,918,751           $  8,756             9,715,071        (6,900,535)
                                        =======================================================================
</TABLE>









See accompanying notes to financial statements.









                                       F-5

<PAGE>   54


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                       Years Ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
                                                                        1999           1998
                                                                     -----------     ----------
<S>                                                                  <C>             <C>
Cash flows from operating activities:
     Net loss                                                        $(1,795,206)    (6,682,746)
     Loss from discontinued operations                                    55,454      4,608,540
     Extraordinary gain                                                 (221,003)            --
                                                                     -----------     ----------

         Loss from continuing operations                              (1,960,755)    (2,074,206)
                                                                     -----------     ----------

Adjustments to reconcile net income to net cash used in
  operating activities:
     Depreciation and amortization                                       227,650        192,015
     Gain on sale of assets                                             (149,343)        42,973
     Changes in assets and liabilities:
         Accounts receivable                                            (192,927)       747,266
         Federal tax receivable                                        1,234,634     (1,234,634)
         Prepaid expenses and other                                       28,843         34,095
         Note receivable                                                (150,000)            --
         Other                                                            55,906        (97,907)
         Accounts payable                                               (294,548)       138,510
         Accrued expenses                                                (15,655)         9,864
         Income taxes payable                                                 --       (541,473)
         Deferred income taxes                                           (35,771)       (70,711)
                                                                     -----------     ----------

              Net change                                                 708,789       (780,002)
                                                                     -----------     ----------

              Net cash used in operating activities                   (1,251,966)    (2,854,208)
                                                                     -----------     ----------

Cash flows from investing activities:
     Purchase of property and equipment                                  (89,451)      (856,189)
     Payments (advances) for notes receivable - related party             55,265        (45,710)
     Proceeds from sale of assets                                        237,000          5,266
     Investment in discontinued operations                              (102,546)    (2,272,030)
                                                                     -----------     ----------

              Net cash provided by (used in) investing activities        100,268     (3,168,663)
                                                                     -----------     ----------

Cash flows from financing activities:
     Payments on debt                                                   (405,700)        (8,019)
                                                                     -----------     ----------

              Net cash used in financing activities                     (405,700)        (8,019)
                                                                     -----------     ----------

Net decrease in cash and cash equivalents                             (1,557,398)    (6,030,890)

Cash and cash equivalents at beginning of year                         2,431,387      8,462,277
                                                                     -----------     ----------

Cash and cash equivalents at end of year                             $   873,989      2,431,387
                                                                     ===========     ==========
</TABLE>




See accompanying notes to financial statements.





                                       F-6

<PAGE>   55


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                          Notes to Financial Statements

                                  June 30, 1999

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 two wholly-owned subsidiaries, Birman & Associates, Inc., and
         Hughes & Associates, Inc. Through Birman & Associates, 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. Through Hughes & Associates, the Company
         provides utilization review services to self-insured employer groups
         and insurers. The operations of Hughes & Associates are reported as
         discontinued operations in 1999 (see note 16).

         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. The Company's health plan operations were reported as
         discontinued operations in 1998 (see note 16).

         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. As part of the Company's continued
         restructuring, it sold the assets of Hughes and Associates, a wholly
         owned subsidiary. 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 subsidiaries Birman
         Consulting Group, Inc. (formerly known as "Birman & Associates,
         Inc.,") and Hughes & Associates, Inc. (collectively, the "Company").

         As of June 30, 1998, the health plan operations are reported as
         discontinued operations for all periods presented. The balance sheets
         and the results of operations, cash flows and notes to the 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.



                                      F-7

<PAGE>   56


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                    Notes to Financial Statements, Continued

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)

         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:

<TABLE>
                       <S>                         <C>
                       Computer equipment           3 years
                       Office equipment             5 years
                       Furniture and fixtures       7 years
                       Leasehold improvements      10 years, or life of lease, if shorter
</TABLE>

         Goodwill

         Goodwill consists of the excess of the cost of acquiring the assets of
         Hughes & Associates, Inc. over the fair value of their net assets at
         the date of acquisition, June 14, 1996, and is being amortized on the
         straight-line method over ten (10) years. The carrying value of
         goodwill is periodically reviewed by the Company and impairments, if
         any, are recognized when expected future operating cash flows derived
         from goodwill are less than their carrying value. As a result of such
         review, the Company recognized an impairment loss during the year ended
         June 30, 1999 totaling $12,915 representing the carrying value of
         goodwill recorded for Hughes and Associates, Inc. Such impairment loss
         is included in the net loss from discontinued operations of the
         accompanying statement of operations for the year ended June 30, 1999.





                                     F-8



<PAGE>   57




                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                    Notes to Financial Statements, Continued

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.

         New Accounting Pronouncements

         SFAS No. 129, "Disclosure of Information about Capital Structure" is
         effective for financial statements ending after December 15, 1997. The
         new standard reinstates various securities disclosure requirements
         previously in effect under Accounting Principles Board Opinion No. 15,
         which has been superseded by SFAS No. 128. The adoption of SFAS No. 129
         had no material effect on the Company's financial statements as of and
         for the year ended June 30, 1999.

         SFAS No. 130, "Reporting Comprehensive Income" is effective for
         financial statements with fiscal years beginning after December 15,
         1997. Earlier application is permitted. SFAS No. 130 establishes
         standards for the reporting and display of comprehensive income and its
         components in a full set of general purpose financial statements. The
         Company has not determined the effect on its financial position or
         results of operations, if any, from the adoption of this statement.




                                      F-9

<PAGE>   58


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                    Notes to Financial Statements, Continued

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)

         SFAS No. 131, "Disclosure about Segments of the Enterprise and Related
         Information" is effective for financial statements beginning after
         December 15, 1997. The new standard requires that public business
         enterprises report certain information about operating segments in
         complete sets of financial statements of the enterprise and in
         condensed financial statements of interim periods issued to
         shareholders. It also requires that public business enterprises report
         certain information about their products and services, the geographic
         areas in which they operate and their major customers. The Company does
         not expect adoption of SFAS No. 131 to have a material effect, if any,
         on its results of operations.

         SFAS No. 132, "Employers' Disclosures about Pensions and Other
         Postretirement Benefits" is effective for financial statements
         beginning after December 15, 1997. SFAS No. 132 revises employers'
         disclosures about pension and other postretirement benefit plans. It
         standardizes the disclosure requirements for pensions and other
         postretirement benefits to the extent practicable, requires additional
         information on changes in the benefit obligations and fair values of
         plan assets that will facilitate financial analysis, and eliminates
         certain disclosures. The Company does not expect adoption of SFAS No.
         132 to have a material effect, if any, on its financial position or
         results of operations.

         SFAS No. 133 "Accounting for Derivative Instruments and Hedging
         Activities" is effective for all fiscal quarters beginning after June
         15, 1999. Earlier application is encouraged. The statement establishes
         accounting and reporting standards for derivative instruments and
         hedging activities. It requires that an entity recognize all
         derivatives as either assets or liabilities in the statement of
         financial position and measure those instruments at fair value. The
         Company does not expect adoption of SFAS No. 133 to have a material
         effect, if any, on its financial position or results of operations.

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 $874,000.

         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.       PROPERTY AND EQUIPMENT

         At June 30, 1999 and 1998, property and equipment consist of the
         following:

<TABLE>
<CAPTION>

                                                             1999          1998
                                                             ----          ----
                <S>                                      <C>           <C>
                Computer and office equipment            $  377,866      493,046
                Furniture and fixtures                      429,284      509,283
                Leasehold improvements                      517,256      389,498
                                                         ----------    ---------
                                                          1,324,406    1,391,827

                Less accumulated depreciation              (467,688)    (287,717)
                                                         ----------    ---------
                                                         $  856,718    1,104,110
                                                         ==========    =========
</TABLE>


         For the years ended June 30, 1999 and 1998, depreciation expense was
         $214,735 and $190,400 respectively.




                                      F-10
<PAGE>   59


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                    Notes to Financial Statements, Continued

4.       NOTES PAYABLE

         At June 30, 1999 and 1998, notes payable consist of the following:


<TABLE>
<CAPTION>

                                                                            1999           1998
                                                                            ----           ----

         <S>                                                             <C>            <C>
         Note payable to former shareholders of Canton Management
          Group, Inc. $200,000 due on January 17, 2000 and 2001,
          interest at 2%; unsecured  (see note 13)                       $   --          500,000

         Note payable to former shareholders of Canton Management
          Group, Inc. $100,000 due on January 17, 1999, interest at
          2%; guaranteed by Birman Managed Care, Inc. (see note 13)          --          100,000

         Note payable to Trinity Computer Services, Inc. due
          April 1999, non-interest bearing collateralized by
          computer software                                                  --            5,700
                                                                         ----------    ---------
                                                                             --          605,700
         Less current portion of notes payable                               --         (205,700)
                                                                         ----------    ---------
                                                                         $   --          400,000
                                                                         ==========    =========
</TABLE>


         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 as of the date hereof has not been drawn
         against. The facility has a maturity date of October 31, 1999. 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
         Consulting Group, Inc. and are not Medicare or Medicaid receivable
         accounts.

5.       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 June 30, 1999, a schedule of future
         minimum lease payments due under the non-cancelable operating lease
         agreements is as follows:

<TABLE>
<CAPTION>

                             June 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>




                                      F-11

<PAGE>   60


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                    Notes to Financial Statements, Continued

5.       COMMITMENTS AND CONTINGENCIES, (Continued)

         Rent and lease expense under the foregoing operating lease agreements
         for the year ended June 30, 1999 and 1998 was $210,533 and $140,830,
         respectively.

         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 June 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 former officer and 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 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.



                                      F-12


<PAGE>   61



                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                    Notes to Financial Statements, Continued


6.    INCOME TAXES AND DEFERRED INCOME TAXES

      The provision for income tax expense (benefit) from continuing operations
      is comprised of the following for the years ended June 30, 1999 and 1998.

<TABLE>
<CAPTION>
                               1999          1998
                            ---------      --------
<S>                         <C>            <C>
         Current taxes:
            Federal         $      --      (775,912)
            State                  --        53,040
                            ---------      --------
                                   --      (722,872)
         Deferred taxes            --       (70,812)
                            ---------      --------
                                   --      (793,684)
                            =========      ========

</TABLE>

      The following table details the comprehensive provision (benefit) for
      income taxes for the years ended June 30, 1999 and 1998.

<TABLE>
<CAPTION>
                                                              1999           1998
                                                            --------     ----------
<S>                                                         <C>            <C>
         Income taxes provision (benefit) allocated to:

                  Continuing operations                     $     --       (793,684)
                  Discontinued operations                         --       (320,223)
                                                            --------     ----------

                           Total income taxes               $     --     (1,113,907)
                                                            ========     ==========
</TABLE>


         The following table reconciles the differences between the statutory
         federal income tax rate and the effective tax rate used for continuing
         operations for the years ended June 30, 1999 and 1998.

<TABLE>
<CAPTION>
                                                               1999                         1998
                                                     ----------------------      -------------------------
                                                       AMOUNT       PERCENT        AMOUNT         PERCENT
                                                     ---------     --------      ---------       ---------
<S>                                                  <C>           <C>           <C>             <C>
         Provision (benefit) for income taxes
            at statutory federal rate                $(666,657)        34.0 %     (975,083)           34.0 %
         Valuation allowance                           716,894        (36.6)%      126,692            (4.4)%
         Non-deductible expenses                        32,115         (1.6)%        9,278            (0.3)%
         State income tax, net of federal income
           tax benefit                                 (82,352)         4.2 %       44,122            (1.5)%
         Other                                              --           --          1,307              --
                                                     ---------     --------      ---------       ---------

         Provision (benefit) for income taxes
           and effective rate                               --           --       (793,684)           27.7 %
                                                     =========     ========      =========       =========

</TABLE>


                                      F-13

<PAGE>   62


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                    Notes to Financial Statements, Continued

6.    INCOME TAXES AND DEFERRED INCOME TAXES, (CONTINUED)

      Temporary differences and carryforwards which give rise to deferred taxes
      from continuing operations are as follows:

<TABLE>
<CAPTION>
                                                          1999          1998
                                                       ---------      --------
<S>                                                    <C>              <C>
         Deferred tax asset - Current:
            Allowance for doubtful accounts            $  47,625        49,348
            Adjustment due to the change from the
              cash method of reporting income for
              income taxes to the accrual method              --       (22,529)
                                                       ---------      --------
                                                       $  47,625        26,819
                                                       =========      ========


         Deferred tax liability - Long-term:
            Depreciation                               $  19,118        65,908
            Adjustment due to the change from the
              cash method of reporting income for
              income to the accrual method
            State net operating loss carryforwards      (257,090)     (146,384)
            ATM credit carryforward                      (31,825)      (31,825)
                                                       ---------      --------
                                                        (269,797)     (112,301)
         Valuation allowance                             288,915       146,384
                                                       ---------      --------
                                                       $  19,118        34,083
                                                       =========      ========

</TABLE>


      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.

7.    STATEMENT OF CASH FLOWS

      For the year ended June 30, 1999, the Company made payments for interest
      in the amount of $15,463. The Company received an income tax refund in the
      amount of $1,234,634.

      For the year ended June 30, 1998, the Company made payments for interest
      and taxes in the amounts of $19,590 and $745,441, respectively.

      For the years ended June 30, 1999 and 1998, there were no non-cash
      activities.



                                      F-14

<PAGE>   63


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                    Notes to Financial Statements, Continued

8.    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>
         JUNE 30, 1999
         -------------
         BASIC EPS - Income (loss) from continuing
           operations available to Common Stockholders     $(1,960,755)     2,918,751

         Effect of Dilutive Securities                              --             --
                                                           -----------      ---------

         DILUTED EPS - Income (loss) from continuing
           operations available to Common Stockholders     $(1,960,755)     2,918,751
                                                           ===========      =========

         JUNE 30, 1998
         -------------
         BASIC EPS - Income (loss) from continuing
           operations available to Common Stockholders     $(2,074,206)     2,696,529

         Effect of Dilutive Securities                              --             --
                                                           -----------      ---------

         DILUTED EPS - Income (loss) from continuing
           operations available to Common Stockholders     $(2,074,206)     2,696,529
                                                           ===========      =========

</TABLE>


      Options and warrants to purchase 219,350 and 345,931 shares of common
      stock were outstanding as of June 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.

9.    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.


                                      F-15

<PAGE>   64


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                    Notes to Financial Statements, Continued


10.   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.

      A summary of the status of the Company's two fixed stock option plans for
      fiscal 1999 and changes during the year are presented below:

<TABLE>
<CAPTION>
                                                   Weighted
                                                    Average
                                        Number      Exercise
                                      of Shares      Price
                                      --------     ---------
<S>                                    <C>          <C>
         Balance at June 30, 1998      345,931      $ 8.91
           Options granted              21,386        7.99
           Options forfeited          (147,967)      11.23
                                      --------

         Balance at June 30, 1999      219,350      $ 7.19
                                      ========

</TABLE>

      Information relating to options at June 30, 1999 summarized by exercise
      price is as follows:

<TABLE>
<CAPTION>
             Range of                      Weighted Average      Vested      Weighted Average
             Exercise         Options         Remaining          Options         Exercise
              Prices        Outstanding    Contractual 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>




                                      F-16

<PAGE>   65


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                    Notes to Financial Statements, Continued

10.   STOCK OPTION PLANS, (CONTINUED)

      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 year ended June 30, 1999. As of
      June 30, 1999, none of these options have been exercised and 203,794 were
      exercisable.

      The Company accounts for its stock-based compensation arrangements under
      the provisions of Accounting Principles Board Opinion No. 25, "Accounting
      for Stock Issued to Employees" ("APB No. 25"). In 1996, SFAS No. 123,
      "Accounting for Stock-Based Compensation," was issued whereby companies
      may elect to account for stock-based compensation using a fair value based
      method or continue measuring compensation expense using the intrinsic
      value method prescribed in APB No. 25. SFAS No. 123 requires that
      companies electing to continue to use the intrinsic value method make
      pro-forma disclosure of net income and net income per share as if the fair
      value based method of accounting had been applied.

      If compensation cost for stock-based compensation had been determined
      based on the fair value of the options at the grant dates consistent with
      the method of SFAS No. 123, the Company's net income (loss) and earnings
      (loss) per share for the year ended June 30, 1999, would have been reduced
      to the pro-forma amounts presented below:

         Net income (loss):
            As reported                                       $   1,795,206
            Pro-forma                                             2,480,016

         Net income (loss) per Common Share - Basic:
            As reported                                       $       (0.61)
            Pro-forma                                                 (0.85)

         Net income (loss) per share - assuming dilution:
            As reported                                       $       (0.61)
            Pro-forma                                                 (0.85)

      The fair value of each option grant is estimated as of the date of grant
      utilizing the Black-Scholes option- pricing model with the following
      weighted average assumptions applied to options granted:

         Expected dividend yield                                        0.0%
         Expected volatility                                          103.0%
         Risk-free interest rate                                        5.2%
         Expected life of options (years)                               8

      The weighted average fair value at date of grant for options granted
      during 1999 approximated $7.25.





                                      F-17
<PAGE>   66


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                    Notes to Financial Statements, Continued



11.   STOCK WARRANTS

      As of June 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.

12.   EMPLOYEE BENEFIT PLAN

      Effective January 1, 1994, the Company implemented a profit sharing plan
      covering virtually all employees meeting certain eligibility requirements.
      The plan is designed as a 401(k) profit sharing plan. Employees are
      permitted to make voluntary contributions to the plan, for which the
      Company is required to make a matching contribution up to certain
      limitations. For the years ended June 30, 1999 and 1998, the Company made
      contributions in the amount of $17,533 and $32,245, respectively, to the
      plan.

13.   ACQUISITION

      On January 15, 1997, the Company acquired substantially all of the issued
      and outstanding shares of capital stock of Canton Management Group, Inc.,
      a Mississippi corporation ("Canton"), for $1,500,000, of which $700,000
      was paid in cash and $800,000 was paid by issuance of promissory notes in
      four equal annual installments of $200,000 each, plus interest at the rate
      of 2% per annum on the unpaid principal balance. The acquisition was
      accounted for as a stock purchase and resulted in goodwill in the amount
      of $1,220,756. Goodwill represents the excess of the cost of acquiring
      companies over the fair value of the net assets acquired at the date of
      acquisition. Canton was an inactive holder of a certificate of authority
      to operate an HMO in Mississippi. Canton was renamed Care3, Inc. As a
      result of the issuance of shares of Care3, Inc. to certain founders of
      Canton, Care3, Inc. became a 69% owned subsidiary of the Company.

      On July 31, 1998, the Company's Board of Directors approved a plan to
      discontinue the health plan operations of the Company (see note 16).




                                      F-18

<PAGE>   67


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                    Notes to Financial Statements, Continued

14.   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.

      In connection with the IPO, Dr. Birman, the Company's principal
      stockholder, agreed to place 1,000,000 shares of common stock in escrow.
      These shares will not be assignable or transferable (but may be voted)
      until such time as they are released from escrow. The release from escrow
      is based upon the Company meeting certain annual earnings levels over the
      next three years. At June 30, 1999, the remaining shares were forfeited
      and contributed to the Company's capital.

      In the event the Company attains any of the earnings thresholds providing
      for the release of the escrow shares to Dr. Birman, the Company will
      recognize compensation expense at such time based on the fair market value
      of the shares. In addition, Dr. Birman tendered 174,800 shares of his
      common stock, valued at $4.60 per share, as payment in full of his note to
      the Company in the amount of $775,000 plus accrued interest, at the time
      of closing the IPO.

15.   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 23% of the Company's revenue for fiscal
      1999 was from hospital-clients owned by a large Ohio based hospital
      system.

16.   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, the 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 had also elected to provide no additional capital to
      Care3. As a consequence, Care3 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 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. Care3 is currently under the
      control of the Commissioner and is winding down operations. The Company
      believes that Care3's reserves were adequate to pay all claims of its
      members and is aware of no grounds on which a claim against the Company
      regarding Care3 could be based. There can be no assurance of this until
      all claims and costs of rehabilitation are presented.




                                      F-19

<PAGE>   68


                   BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

                    Notes to Financial Statements, Continued


16.   DISCONTINUED OPERATIONS - CONTINUED

      All assets (liabilities) of the health plan operations are as follows:

<TABLE>
<CAPTION>
                                                                         JUNE 30, 1998
                                                                         -------------
<S>                                                                       <C>
         Current assets                                                   $ 1,540,898
         Property and equipment, net                                           54,482
         Income taxes receivable                                              320,223
         Restricted cash deposit                                              500,000
         Other assets                                                         127,698
         Current liabilities                                               (1,434,379)
         Estimated losses through disposal date and costs to
           dispose of health plan                                          (1,211,468)
                                                                          -----------
                  Net assets (liabilities) of discontinued operations     $  (102,546)
                                                                          ===========
</TABLE>


      As of June 30, 1999, there were no net assets of the health plan
      operations.

      SALE OF UTILIZATION REVIEW SERVICES

      On March 16, 1999 (measurement date), the Company voted to sell
      substantially all of the assets and operations of Hughes & Associates,
      Inc., the Company's utilization review service, to HAA Acquisition
      Corporation (Purchaser). The sale was closed on April 30, 1999 (disposal
      date), and resulted in a gain on disposal of approximately $74,343. The
      net loss of the disposed segment from the measurement date to the disposal
      date was estimated at $37,000 and was reimbursed by the Purchaser. The
      loss from discontinued operations from Hughes & Associates is net of taxes
      of $0. Revenues from Hughes & Associates during the year ended June 30,
      1999 were $831,666. As substantially all assets and liabilities were sold,
      the Company has not accrued any loss reserves and is aware of no grounds
      on which claims against the Company can be based. In accordance with APB
      30, certain prior year numbers have been restated to disclose the prior
      year results of Hughes & Associates' operations as a separate component of
      income before extraordinary items.

      In exchange for the assets and operations of Hughes & Associates, the
      Company received $387,000, of which $237,000 was in cash and $150,000 is
      outstanding under a note receivable. Beginning July 1, 1999, the Company
      will receive monthly payments of $3,627, which includes interest of 7.5%.
      The note matures in June 2003 and is secured by assets of HAA Acquisition
      Corporation. Following is a breakdown of the current and long-term
      portions of the note receivable as of June 30, 1999:

<TABLE>
<S>                                                                       <C>
         Current portion                                                  $ 37,500
         Long-term portion                                                 112,500
                                                                          --------

         Note receivable                                                  $150,000
                                                                          ========

</TABLE>

17.   SUBSEQUENT EVENT

      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).




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