As filed with the Securities and Exchange Commission on December 12, 1995
Registration No. 33-97202
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-------------------
PMR CORPORATION
(Exact name of registrant as specified in its charter)
---------------------
Delaware 23-2491707
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
3990 Old Town Avenue, Suite 206A
San Diego, California 92110
Telephone (619) 295-2227
--------------------------
(Address, including zip code, and telephone number,
including area code of registrant's principal executive office
and principal place of business)
--------------------------
Allen Tepper
3990 Old Town Avenue, Suite 206A
San Diego, California 92110
--------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
Copies to:
Stephen M. Cohen, Esquire
Clark, Ladner, Fortenbaugh & Young
One Commerce Square
2005 Market Street, 22nd Floor
Philadelphia, PA 19103
(215) 241-1868
<PAGE>
Approximate date of commencement of proposed sale to the public: As
soon as practicable following the date on which this Registration Statement
becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box:
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box: X
------------------------------
The Company hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Company shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION DATED DECEMBER 12, 1995
PRELIMINARY
PROSPECTUS
PMR CORPORATION
1,557,205 Shares of Common Stock
offered by certain Selling Stockholders
This Prospectus relates to 1,557,205 shares of Common Stock which
consists of 266,205 shares of Common Stock previously issued by the Company in
connection with certain private placement transactions, 700,000 shares of Common
Stock issuable, if at all, upon the conversion of an outstanding class of
Series C $2.50 Convertible Preferred Stock (the "Series C Preferred Stock") and
591,400 shares of Common Stock issuable, if at all, upon the exercise of
common stock purchase warrants (the "Warrants") issued by the Company in
conjunction with the Series C Preferred Stock, which shares of Series C
Preferred Stock and Warrants were issued in private placement transactions, and
all of which may be offered by the Selling Stockholders identified in this
Prospectus or in a related supplement. See "SELLING STOCKHOLDERS."
The shares of Common Stock may be offered by the Selling Stockholders
or by donees, pledgees, transferees, or other successors in interest for sale
from time to time by the holders in regular brokerage transactions on NASDAQ,
either directly or through brokers or to dealers, in private sales or negotiated
transactions, or otherwise, at prices related to then prevailing market prices.
The Company will not receive any of the proceeds of the sale of shares of Common
Stock by the Selling Stockholders. All expenses of the registration of such
securities will be borne by the Company. The Selling Stockholders, and not the
Company, will pay or assume all applicable brokerage commissions or other costs
of sale as may be incurred in the sale of such securities.
See "SELLING STOCKHOLDERS."
The Company will assume no responsibility for the sale of the
shares of Common Stock of the Selling Stockholders, nor can there
be any assurances that a liquid trading market will exist for the
sale of the shares of Common Stock to be offered by the Selling
Stockholders. See "RISK FACTORS."
The Company's Common Stock is included on the National Market System of
the National Association of Securities Dealers Automated Quotation System
("NASDAQ") under the symbol "PMRP." The closing price of the Company's Common
Stock as reported by NASDAQ on December 8, 1995 was $5.25.
<PAGE>
No person is authorized to give any information or to make any
representations, other than as contained herein, in connection with the offer
made in this Prospectus, and any information or representation not contained
herein must not be relied upon as having been authorized by the Company or the
Selling Stockholders. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the Common Stock offered
by this Prospectus, nor does it constitute an offer to sell or a solicitation of
any offer to buy any shares of Common Stock offered hereby to any person in any
jurisdiction where it is unlawful to make such an offer or solicitation to such
person. Neither the delivery of this Prospectus nor any sale hereunder shall
under any circumstances create any implication that information contained herein
is correct as of any time subsequent to the date hereof.
------------------------------
PURCHASE OF THESE SECURITIES MAY INVOLVE MATERIAL RISKS. A
DISCUSSION OF THESE RISK FACTORS APPEARS ON PAGES 5 - 9.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATIONS TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================================
Underwriting Proceeds to
Discounts the Selling
Class of Price to and Security
Security Public Commissions Holders
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares of
Common Stock _____ (1) $8,175,326(2)
=============================================================================================================================
</TABLE>
(1) This does not take into account the costs of this Offering, including
among others, printing and professional fees, estimated at $30,000,
which will be borne entirely the Company.
(2) Represents the anticipated sale by the Selling Security
Holders at $5.25 per share, the last reported sales price
reported on The NASDAQ National MarketSM on December 8, 1995.
There can be no assurances, however, that the Selling Security
Holders will be able to sell their shares at this price, or
that a liquid market will exist for the Company's Common
Stock. The Company will receive no proceeds upon the sale of
shares of Common Stock by the Selling Security Holders.
The date of this Prospectus is December __, 1995.
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "1934 Act"), and in accordance therewith
files reports and other information with the Securities and Exchange Commission
(the "Commission"). Reports and other information filed by the Company with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at: Seven
World Trade Center, Suite 1300, New York, New York 10048 and Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material may be obtained upon written request addressed to the Commission
at the Public Reference Section, at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the Common Stock is listed on NASDAQ
and reports and other information concerning the Company may also be inspected
at the offices of The National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, DC 20006.
In addition, the Company will provide without charge to each person to
whom this Prospectus is delivered, upon either the written or oral request of
such person, the Annual Report to Stockholders for the Company's latest fiscal
year and a copy of any or all of the documents incorporated herein by reference
other than exhibits to such documents. See "INCORPORATION OF DOCUMENTS BY
REFERENCE". Such requests should be directed to Allen Tepper, Chief Executive
Officer, PMR Corporation, 3990 Old Town Avenue, Suite 206A, San Diego,
California 92110.
3
<PAGE>
THE COMPANY
PMR Corporation (the "Company") engages principally in the development
and management of psychiatric partial hospitalization programs (the "Programs"),
which are ambulatory treatment programs that include major diagnostic, medical,
psychiatric, psychosocial and prevocational treatment modalities designed for
patients with serious mental disorders who require coordinated, intensive,
comprehensive and multidisciplinary treatment not typically provided in an
outpatient clinic setting. These programs have been designed to be operated by
or in conjunction with Hospitals or Community Mental Health Centers. In
addition, the Company through its subsidiary, Twin Town Outpatient, provides
outpatient chemical dependency treatment services from detoxification to
recovery for the managed care market.
The Company's strategic goals continue to evolve as management has
responded to rapid changes and anticipated additional changes in the health care
field, in general, and in mental health care, in particular. Increased pressure
on health care costs, intense competition among health care insurers and
providers, reduced usage of certain mental health care services and a
consolidation of large health care organizations, among other factors, have lead
management to conclude that it is no longer feasible to remain solely a
developer and manager of psychiatric partial hospitalization programs.
In addition to the development of new partial hospitalization programs,
the Company continues to expand its focus so that it can position itself to
manage a complete mental health benefit for seriously and persistently mentally
ill ("SPMI") individuals and to compete within the managed care segment of the
industry.
The Company is developing a network of agencies that provide case
management services to manage what it believes to be the core providers for the
SPMI population in behavioral health care under a managed care scenario. It has
entered into agreements with case management agencies in the State of Tennessee
in preparation for the expansion of the State's managed care Medicaid Programs
to the SPMI population for behavioral health.
The Company anticipates continuing to add and develop new products and
service systems to better enable itself to compete in the rapidly-changing
mental health care environment.
The Company was incorporated in Delaware on January 7, 1988. Its
executive offices are located at 3990 Old Town Avenue, Suite 206A, San Diego,
California 92110, and its telephone number is (619) 295-2227.
4
<PAGE>
RISK FACTORS
An investment in shares of Common Stock being offered by this
Prospectus may involve a material degree of risk. Accordingly, prospective
investors should consider carefully the following risk factors, in addition to
the other information concerning the Company and its business contained
elsewhere in this Prospectus, before purchasing shares of Common Stock offered
hereby.
1. Substantial Losses incurred during Fiscal 1995. The Company's
results of operations for the fiscal year ended April 30, 1995 ("Fiscal 1995")
reflected a loss of $2,352,000 or $.70 per share. This compared to a profit of
$797,000 or $.24 per share for the fiscal year ended April 30, 1994 ("Fiscal
1994") and $864,000 or $.30 per share for the fiscal year ended April 30, 1993
("Fiscal 1993").
Results for Fiscal 1995 were adversely affected by a number of
factors, including a decrease in Program census, increase in operating expenses
as a percentage of gross revenues, and a charge to revenue associated primarily
with an increase in the estimate of reserve for contract settlement of
approximately $2 million.
Revenues during Fiscal 1995 were adversely effected by the
reserve for contract settlement and a decrease in Program census from Fiscal
1994 of approximately 18%. This decrease was as a result of, and in response to,
the more restrictive admission practices and treatment standards established by
fiscal intermediaries for Medicare and associated with the Focused Medical
Review experienced by the Company during Fiscal 1995. (See "RISK FACTOR #2").
Management believes that the change to the reserve for
contract settlement that occurred in Fiscal 1995 is not likely to recur.
Further, the Company has responded to the issues raised during its Focused
Medical Review by modifying admission and treatment criteria. Accordingly,
management is optimistic that Program census has stabilized and will continue to
reflect upward trends.
Although there can be no assurances to this effect, management
believes that the loss incurred during Fiscal 1995 was a result of a confluence
of events which are not likely to recur and should not reflect a trend towards
continuing losses.
2. Possible Uncertainties Associated With Focused Medical
Review of Certain Claims for Medicare Reimbursement. The Company's
revenues are primarily derived from payments for its management and
5
<PAGE>
administration of the Programs pursuant to contracts with Hospitals or CMHCs
(the "Contracts"). Since approximately 98% of the patients admitted to the
Programs rely upon Medicare for payment, the Programs are predominantly
dependent upon continued Medicare funding.
Medicare is a federal health care program created in 1965 as
part of the federal Social Security system. It is administered by the U.S.
Department of Health and Human Services which has established the Health Care
Financing Administration ("HCFA") to promulgate rules and regulations governing
the Medicare program.
HCFA has published criteria which partial hospitalization
services must meet in order to qualify for Medicare funding. In Transmittal
Letter No. 1303 (effective January 2, 1987) and in subsequent criteria published
in Section 230.50 of the Medicare Coverage Manual, HCFA requires partial
hospitalization services to be (1) incident to a physician's service, (2)
reasonable and necessary for the diagnosis or treatment of the patient's
condition, and (3) provided by a physician with a reasonable expectation of
improvement of the patient from the treatment.
The Company became aware during the fourth quarter of Fiscal
1994 that Medicare fiscal intermediaries had begun a Focused Medical Review of
claims for partial hospitalization services which continued through Fiscal 1995.
This process follows HCFA guidelines for Focused Medical Review and targets
claims for services which are at risk of inappropriate Program payment. This
process often occurs when HCFA identifies significant increases in payment for
certain types of services as has been the case with the partial hospitalization
benefit, particularly when CMHCs were authorized to provide partial
hospitalization services under Medicare Part B, effective October 1, 1991. To
the extent claims for services have been denied in Programs managed by the
Company, the great majority of the denied claims have been appealed and the
reversal rate has been favorable. The appeal process continues for a significant
number of the denied claims. Generally, to the extent that a denied claim is not
reversed, the Company is not entitled to a fee with respect to the denied claim.
Management believes that the Company's reserve for contract settlement should be
adequate to offset the negative impact of unsuccessful appeals of denied claims.
3. Possible Disallowance of Certain Management Fees. The
Company has warranted the reimbursement of its management fee
charged to certain hospitals and CHMCs whose partial
hospitalization programs are managed by the Company. This may
result in a charge upon the Company's working capital in the event
that its management fee is not fully allowed upon audit of the
6
<PAGE>
hospital or CMHC's cost reimbursement report by a fiscal
intermediary.
The Company has been advised by HCFA that certain
Program-related costs are not allowable for reimbursement. Although the Company
believes that its management fee is fully reimbursable, there can be no
assurances that upon regulatory or judicial review, the Company's position will
be sustained. If the Company's management fee is not fully allowed, the Company
may be responsible for reimbursement of the amounts disallowed. Even though the
Company's financial statements provide a reserve for any such payments, a
short-term obligation to provide reimbursement could have a material adverse
impact upon the Company's liquidity and capital resources. Management believes,
however, that this is unlikely to occur. Certain factors are, in management's
view, likely to lessen the impact of any such material adverse effect, including
the expectation that, if claims arise, they will arise on a periodic basis over
several years; that any disallowance will merely be offset against the
obligations owed by the hospital or CMHC to the Company; and that, in certain
instances, funds have already been paid into escrow accounts to cover any such
eventuality.
4. No Assurance of Dividends. Pursuant to the General Corporation Law
of the State of Delaware, dividends may only be declared by the Board of
Directors in its sole discretion, thus, dividend declarations may be withheld
for proper corporate purposes. Furthermore, dividends may only be declared to
the extent the Company has "surplus" or net profits. Thus, to the extent the
Company has neither, dividends may not be declared or paid. In addition, to the
extent earnings are retained to finance the continued development of the
Company's business, dividends may not be possible. Therefore, there can be no
assurance that the Company will be able to pay dividends. To date, the Company
has paid no dividends on its Common Stock.
5. No Assurance of Price Stability. The Company's Common
Stock is traded on the National Market System of NASDAQ. There can
be no assurances as to the future trading prices of the Common
Stock. Trading of a Company's securities depends upon a number of
variables most of which are beyond the control of the Company.
6. Substantial Voting Power of Principal Stockholders. The
officers, directors and other affiliates of the Company own over
fifty (50%) percent of its issued and outstanding Common Stock.
Consequently, because of their percentage control and the Company's
lack of cumulative voting, it can be expected that such persons
will have a substantial impact on the determination of the
7
<PAGE>
Company's Board of Directors and policies at least for the foreseeable future.
7. Significant Competition. There are many other companies engaged in
the psychiatric partial hospitalization industry, and some of these companies
are substantially more established and have greater financial and other business
resources than those presently possessed by the Company. Further, other such
companies may enter the Company's area of business in the future. There can be
no assurance that the Company will be able to compete successfully with such
companies.
8. Dependence Upon Key Personnel. The Company's ongoing profitability
may depend to a material extent upon the continued services of certain key
management personnel. The loss of the services of any such individual could
adversely affect the conduct of the Company's business. The Company presently
has no employment agreements with any of its management, including Allen Tepper,
President and Chief Executive Officer, and Susan Erskine, Secretary/Treasurer.
9. Certain Charter and By-Law Provisions. Certain of the Company's
Certificate of Incorporation and By-Law provisions allow the Company to issue
preferred stock with rights senior to those of the Common Stock and impose
various procedural and other requirements which could make it more difficult for
stockholders to effect certain corporate actions. Such provisions could limit
the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock.
10. Risks associated with future financing requirements -- Additional
Dilution possible. The Company may require additional equity or debt financings,
collaborative arrangements with corporate partners or funds from other sources
in order to continue the establishment, development, management and marketing of
psychiatric hospitalization programs. No assurance can be given that these funds
will be available for the Company for these purposes on acceptable terms, if at
all. Such financings may involve additional dilution to the Company's
Stockholders.
11. Terminable Contracts. The Company's Contracts with various hospital
and CMHCs represent its principal source of revenues. Each Contract is
terminable by either party with cause or without cause upon specified notice.
Consequently, through no fault, default or breach by the Company, the hospital
and the CMHCs each have unilateral authority to terminate the given Contract.
Termination of a Contract or Contracts may have an adverse effect upon the
Company, the extent of which shall be determined by the
8
<PAGE>
significance of the Contract(s) to the Company's revenue and
contribution to the Company's net income.
12. Reliance Upon Hospital and CMHCs. The Company derives principally
all of its revenues through the Contracts with the various hospital and CMHCs.
Although the Company undertakes certain due diligence efforts prior to
establishing any such affiliations, there can be no assurances that the hospital
or the CMHCs may not be subject to regulatory sanctions, probation or
limitations upon the scope or conduct of procedures conducted thereby, or are
otherwise subject to adverse financial conditions. To the extent any of the
hospital or CMHCs may be subject to adverse regulatory or financial conditions,
it is possible that any such conditions may cause such hospital or CMHCs to: (1)
close or reduce any of its existing services or programs; (ii) terminate the
contract with the Company; or (iii) become subject to an insolvency or
bankruptcy proceeding, any of which is likely to have an adverse impact on the
Company.
13. Governmental Regulations.
Federal statutes regulating Medicare and Medicaid
reimbursement provide criminal and civil sanctions for any person or entity to
knowingly and willfully solicit or receive or offer to pay any remuneration
(including any kickback, bribe or rebate), directly or indirectly, overtly or
covertly, in cash or in kind, in return for referring an individual or
purchasing, leasing, ordering, arranging for or recommending any goods,
facilities, services or item for which payment may be made, in whole or in part,
by Medicare or Medicaid funding. The sanctions for violating these laws can
include fines, imprisonment, and exclusion from participating in
federally-funded health care programs for a period of years or even permanently.
Such exclusion would have a material adverse effect on the Company and could be
extremely detrimental to the Company. Similar State laws exist as well. As a
result of a thorough, internal examination of the Company's operations,
management believes that the Company is in material compliance with applicable
regulatory and industry standards. However, no assurance can be given regarding
compliance in any particular factual situation, as there is no procedure for
obtaining advisory opinions from government officials. Moreover, there can be no
assurances that the regulations applicable to the Company's operations and its
arrangements with hospitals or CMHCs will not change in the future or that
future interpretations of existing laws or new laws will not result in the
Company's services under the Contracts being deemed a violation of federal
Medicare/Medicaid laws.
9
<PAGE>
USE OF PROCEEDS
The Company will realize no proceeds on the sale of Common Stock by the
Selling Stockholders.
SELLING STOCKHOLDERS
The following table sets forth the name of each Selling Stockholder,
the nature of his position, office, or other material relationship to the
Company for the past three years and the number of shares of Common Stock of
each such Selling Stockholder (1) owned of record as of December 11, 1995; (2)
which are to be offered hereunder; (3) which are to be owned by each such
Selling Stockholder assuming the sale of all shares offered hereunder; and (4)
the percentage of outstanding shares of Common Stock to be owned by each Selling
Stockholder after the sale of the shares to be offered hereunder. There can be
no assurance that any of the Selling Stockholders will offer for sale or sell
any or all of the Common Stock offered by them pursuant to this Prospectus.
<TABLE>
<CAPTION>
Amount of
Shares to be
Owned Percentage
After Sales of Common
of Shares Stock to be
Name and Relationship Number of Shares Number of Shares Offered Owned after
to PMR Corporation Owned as of 9/11/95 to be Offered Hereunder Sales
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allen Tepper(1) 1,105,562 3,500 1,102,062 31.7%
Susan D. Erskine(2) 119,922 7,000 112,922 3.2%
Susan Yeagley-Sullivan(3) 16,920 7,000 9,920 *
Daniel Frank(4) 42,500 7,000 35,500 *
Richard Niglio(4) 42,500 7,000 35,500 *
Proactive Investment 849,088 26,500 822,588 23.3%
Managers, L.P.(5)
Proactive Partners, 776,907 551,500 225,407 6.3%
L.P.(6)
Fremont Proactive 72,181 43,750 28,431 *
Partners, L.P.(6)
Lagunitas Partners, 573,907 315,000 258,907 6.9%
L.P.(7)
Robert Ahnert 36,728 35,000 1,728 *
Donald T. Epstein and 35,000 35,000 -0- 0
Sandra Epstein
David Cohen 40,988 35,000 5,988 *
David Schwinger 35,000 35,000 -0- 0
10
<PAGE>
Daniel H. Saidel and Joy 88,364 87,500 864 *
B. Saidel
Monterey Trust "SIVAC" 43,750 43,750 -0- 0
Charles R. Tepper 31,629 10,500 11,334 *
Susan Keenan 15,090 7,000 8,090 *
Jeannine Larsen 15,649 7,000 8,649 *
Gerald McCleery 13,895 7,000 6,895 *
Sandra Harwayne 13,759 7,000 6,759 *
George P. Casey 97,087 97,087 -0- 0
Mental Health 50,000 50,000 -0- 0
Cooperative, Inc.
Case Management, Inc. 50,000 50,000 -0- 0
Co-A-Les Corporation 69,118 69,118 -0-
Ronald Slack 13,000 13,000 -0- 0
</TABLE>
* Less than 1%
(1) Chairman, President and Chief Executive Officer.
(2) Director, Executive Vice-President, Secretary/Treasurer.
(3) Chief Financial Officer.
(4) Director.
(5) Proactive Investment Managers, L.P. is a limited
partnership of which Charles C. McGettigan serves as the
General Partner. Mr. McGettigan is a director or the
Company.
(6) A limited partnership of which Proactive Investment Managers,
L.P. serves as the General Partner.
(7) Lagunitas Partners, L.P. is an affiliate of Proactive
Partners, L.P. and Fremont Proactive Partners, L.P., however,
Mr. McGettigan does not beneficially own or have sole voting
control over the shares held by Lagunitas Partners, L.P.
11
<PAGE>
PLAN OF DISTRIBUTION
Selling Stockholders
The Selling Stockholders may be offering shares of Common Stock for
their own account, and not for the account of the Company. The Company will not
receive any proceeds from the sale of the shares of Common Stock by the Selling
Stockholders.
The Selling Stockholders may be offering for sale up to 1,557,205
shares of common stock. This consists of 266,205 shares of Common Stock
previously issued by the Company in connection with certain private placement
transactions, 700,000 shares of Common Stock issuable upon the conversion of an
outstanding class of Series C $2.50 Convertible Preferred Stock (the "Series C
Preferred Stock") and 591,400 shares of Common Stock issuable, if at all, upon
the exercise of common stock purchase warrants (the "Warrants") issued by the
Company in conjunction with the Series C Preferred Stock, each of which Series C
Preferred Stock and Warrants were issued in private placement transactions, and
all of which may be offered by the Selling Stockholders identified in this
Prospectus or in a related supplement.
Each Selling Stockholder will, prior to any sales, agree (a) not to
effect any offers or sales of the Common Stock in any manner other than as
specified in this Prospectus, (b) to inform the Company of any sale of Common
Stock at least one business day prior to such sale and (c) not to purchase or
induce others to purchase Common Stock in violation of Rule 10b-6 under the
Exchange Act.
The Common Stock may be sold from time to time by the Selling
Stockholders or by pledgees, donees, transferees or other successors in
interest. Such sales may be made on NASDAQ, on the over-the-counter market or
otherwise at prices and at terms then prevailing or at prices related to the
then current market price, or in negotiated private transactions. The Common
Stock may be
12
<PAGE>
sold by one or more of the following: (a) a block trade in which the broker or
dealer so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer for its account pursuant to this Prospectus; and
(c) ordinary brokerage transactions and transactions in which the broker
solicits purchases. In effecting sales, brokers or dealers engaged by the
Selling Stockholders may arrange for other brokers or dealers to participate.
Brokers or dealers will receive commissions or discounts from Selling
Stockholders in amounts to be negotiated immediately prior to the sale. Such
brokers or dealers and any other participating brokers or dealers may be deemed
to be "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Act") in connection with such sales. The Company will not
receive any of the proceeds from the sale of these shares, although it has paid
the expenses of preparing this Prospectus and the related Registration
Statement. The Selling Stockholders have been advised that they are subject to
the applicable provisions of the Securities Exchange Act of 1934, including
without limitation, Rules 10b-5, 10b-6 and 10b-7 thereunder.
LEGAL MATTERS
The validity of the Common Stock being offered hereby, has been passed
upon for the Company by Clark, Ladner, Fortenbaugh & Young, One Commerce Square,
2005 Market Street, 22nd Floor, Philadelphia, Pennsylvania, 19103.
STATEMENT OF INDEMNIFICATION
The Company has adopted the provisions of Section 102(b)(7) of the
Delaware General Corporation Act (the "Delaware Act") which eliminates or limits
the personal liability of a director to the Company or its stockholders for
monetary damages for breach of fiduciary duty under certain circumstances.
Furthermore, under Section 145 of the Delaware Act, the Company may indemnify
each of its directors and officers against his expenses (including reasonable
costs, disbursements and counsel fees) in connection with any proceeding
involving such person by reason of his having been an officer or director to the
extent he acted in good faith and in a manner reasonably believed to be in, or
not opposed to the best interest of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The determination of whether indemnification is proper under the
circumstances, unless made by a court, shall be determined by the Board of
Directors. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed
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<PAGE>
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
EXPERTS
The consolidated financial statements and schedule of the Company
incorporated by reference in the PMR Corporation Annual Report (Form 10-K) for
the year ended April 30, 1995, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements and
schedule are, and audited financial statements to be included in subsequently
filed documents will be, incorporated herein in reliance upon such reports of
Ernst & Young LLP pertaining to such financial statements (to the extent covered
by consents filed with the Securities and Exchange Commission) given upon the
authority of such firm as experts in accounting and auditing.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission are
incorporated herein by reference:
(a) The Company's Registration Statement on Form 10 filed on July 31,
1992, as amended ("Form 10"), which contains descriptions of the Company's
Common Stock and certain rights relating to the Common Stock, including any
amendment or reports filed for the purpose of updating such descriptions;
(b) The Company's Annual Report on Form 10-K for the year
ended April 30, 1995;
(c) The Company's 1995 Annual Report to Stockholders;
(d) The Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held October 18, 1995;
(e) The Company's Quarterly Report on Form 10-Q for the
quarter ended July 31, 1995; and
(f) In addition to the foregoing, all documents subsequently filed by
the Company pursuant to Section 13(a), 13(c), 14 and 15(d) of the Act (prior to
the filing of a post-effective amendment which indicates that all securities
offered hereby have been sold or which deregisters all securities remaining
unsold), shall be deemed to be incorporated by reference herein and to be a part
hereof from the date of the filing of such reports and documents.
14
<PAGE>
ADDITIONAL INFORMATION
As of December 11, 1995, the Company had an aggregate of 10,000,000
shares of Common Stock authorized of which 3,443,742 shares of Common Stock were
issued and outstanding. Further information concerning the Common Stock of the
Company may be found in the documents incorporated by reference above.
No dealer, salesperson or other person has been authorized in connection with
this offering to give any information or to make any representations other than
those contained in this Prospectus. This Prospectus does not constitute an offer
or a solicitation in any jurisdiction to any person to whom it is unlawful to
make such an offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create an implication
that there has been no change in the circumstances of the Company or the facts
herein set forth since the date hereof.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Available Information.............................................................................................3
The Company.......................................................................................................4
Risk Factors......................................................................................................5
Use of Proceeds..................................................................................................10
Selling Stockholders.............................................................................................10
Plan of Distribution.............................................................................................13
Legal Matters....................................................................................................14
Statement of Indemnification.....................................................................................15
Experts..........................................................................................................15
Incorporation of Documents by
Reference......................................................................................................15
Additional Information...........................................................................................17
</TABLE>
1,557,205 Shares of Common Stock
Offered by certain Selling Stockholders
PMR CORPORATION
------------------------------------
PROSPECTUS
------------------------------------
December 12, 1995
<PAGE>
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
Item 14. Other Expenses of Issuance and Distribution.
The expenses in connection with the offering of shares pursuant to that portion
of the Registration Statement on Form S-3 are listed below. The Company will pay
each of these expenses.
<TABLE>
<S> <C>
Filing Fee -- Securities and Exchange
Commission............................................................$ 3,186.00
Accountants' Fee and Expenses*........................................$ 5,000.00
II-1
<PAGE>
Fees and Expenses of the Company's
Counsel*..............................................................$15,000.00
Printing and Engraving Expenses*......................................$ 2,500.00
Miscellaneous Expenses*...............................................$ 1,000.00
Total...............................................................$26,686.00
</TABLE>
* Estimated
Item 15. Indemnification of Directors and Officers.
The Company has adopted the provisions of Section 102(b)(7) of the
Delaware General Corporation Act (the "Delaware Act") which eliminate or limit
the personal liability of a director to the Company or its stockholders for
monetary damages for breach of fiduciary duty under certain circumstances.
Furthermore, under Section 145 of the Delaware Act, the Company may indemnify
each of its directors and officers against his expenses (including reasonable
costs, disbursements and counsel fees) in connection with any proceeding
involving such person by reason of his having been an officer or director to the
extent he acted in good faith and in a manner reasonably believed to be in, or
not opposed to the best interest of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The determination of whether indemnification is proper under the
circumstances, unless made by a court, shall be determined by the Board of
Directors.
Item 16. Exhibits.
3.1 Certificate of Incorporation of the Company (Incorporated by Reference
to the Company's Registration Statement on Form S-18, Commission File
No. 33-20095-A filed under the Securities Act of 1933, as amended,
effective November 3, 1988 (the "Form S-18")).
3.2 By-Laws of the Company (Incorporated by reference to the Company's
Registration Statement on Form S-18).
3.3 Certificate of Amendment of Certificate of Incorporation of The
Company, filed November 17, 1989 (Incorporated by reference to the
Company's Registration Statement on Form S-1, Commission File No.
33-41871, filed under the Securities Act of 1933, effective November
18, 1991 (the "Form S-1")).
3.4 Certificate of Amendment of Certificate of Incorporation of Company,
filed May 8, 1991 (Incorporated by reference to the Company's
Registration Statement on Form S-1).
II-2
<PAGE>
3.5 Certificate of Amendment of Certificate of Incorporation of Company,
filed July 9, 1991 (Incorporated by reference to the Company's
Registration Statement on Form S-1).
4.1 Common Stock Specimen Certificate (Incorporated by reference to the
Company's Registration Statement on Form S-18).
4.2 Form of Warrant Agreement with exercise price of $4.00 per share
(Incorporated by reference to the Company's Registration Statement on
Form S-3, Commission File No. 33- 77848, filed under the Securities Act
of 1933, effective June 8, 1994 (the "Form S-3")).
4.3 Form of Warrant Agreement with exercise price of $6.00 per share
(Incorporated by reference to the Company's Registration Statement on
Form S-3).
4.4 Form of Warrant Agreement with exercise price of $8.40 per share
(Incorporated by reference to the Company's Registration Statement on
Form S-3).
4.5 Form of Warrant Agreement with exercise price of $3.00 per share.
(Incorporated by reference to the Company's Registration Statement
on Form S-3, Commission File No. 33-97202 filed with the Commission on
September 21, 1995 (the "1995 Form S-3").
4.6 Form of Warrant Agreement with exercise price of $4.50 per share.
(Incorporated by reference to the Company's Registration Statement
on 1995 Form S-3).
4.7 Form of Warrant Agreement with exercise price of $6.00 per share.
(Incorporated by reference to the Company's Registration Statement
on 1995 Form S-3).
4.8 Form of Warrant Agreement with exercise price of $2.50 per share.
(Incorporated by reference to the Company's Registration Statement
on 1995 Form S-3).
5 Opinion of Counsel. (Incorporated by reference to the Company's
Registration Statement on 1995 Form S-3).
23.1 Consent of Independent Auditors.
23.2 Consent of Clark, Ladner, Fortenbaugh & Young (Included in their
opinion filed under Exhibit 5).
(Incorporated by reference to the Company's Registration Statement
on 1995 Form S-3).
24 Power of Attorney (Included in the Registration Statement on the
Signature Page).
Item 17. Undertakings.
The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act
of 1933, as amended (the "1933 Act");
II-3
<PAGE>
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement; provided, however, that the undertakings set
forth in paragraphs (1)(i) and (1)(ii) above do not apply if the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Company
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act
of 1934, as amended (the "1934 Act") that are incorporated by reference
in this Registration Statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) That, for the purposes of determining any liability under the 1933
Act, each filing of the Company's annual report pursuant to Section 13(a) or
Section 15(d) of the 1934 Act that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to the initial bona fide offering thereof.
(5) The undersigned registrant hereby undertakes to deliver or cause to
be delivered with the Prospectus, to each person to whom the prospectus is sent
or given, the latest annual report to stockholders that is incorporated by
reference in the Prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the 1934 Act; and, where interim
financial information required to be presented by Article 3 of Regulation S-X is
not set forth in the Prospectus, to deliver, or cause to be delivered to each
person to whom the Prospectus is sent or given, the latest quarterly report that
is specifically incorporated by reference in the prospectus to provide such
interim financial information.
(6) Insofar as indemnification for liabilities arising under the 1933
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will,
II-4
<PAGE>
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form S-3 and authorized this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned, on
_____________________, 1995.
PMR CORPORATION
By:/s/Allen Tepper
Allen Tepper
Chairman of the Board,
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement was signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Allen Tepper Chairman of the Board, _________, 1995
- -----------------------------
Allen Tepper President and
Chief Executive Officer
(*) Vice President/
Susan D. Erskine Secretary/Treasurer _________, 1995
Director
(*) Director _________, 1995
Eugene Hill
(*) Director _________, 1995
Charles McGettigan
(*) Director _________, 1995
Richard Niglio
(*) Director _________, 1995
Daniel Frank
(*) Chief Financial Officer _________, 1995
- ----------------------------- (Principal Financial
Susan Yeagley Sullivan Officer)
</TABLE>
(*)/s/Allen T. Tepper
Allen T. Tepper, Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
Page
<S> <C> <C> <C>
3.1 Certificate of Incorporation of the Company Incorporated
(Incorporated by Reference to Company's by Reference
Registration Statement on Form S-18,
Commission File No. 33-20095-A filed under
the Securities Act of 1933, as amended,
effective November 3, 1988 (the "Form S-
18")).
3.2 By-Laws of the Company (Incorporated by Incorporated
reference to the Company's Registration by Reference
Statement on Form S-18).
3.3 Certificate of Amendment of Certificate of Incorporated
Incorporation of The Company, filed November by Reference
17, 1989 (Incorporated by reference to the
Company's Registration Statement on Form S-1,
Commission File No. 33-41871, filed under the
Securities Act of 1933, effective November 18,
1991 (the "Form S-1")).
3.4 Certificate of Amendment of Certificate of Incorporated
Incorporation of Company, filed May 8, 1991 by Reference
(Incorporated by reference to the Company's
Registration Statement on Form
S-1).
3.5 Certificate of Amendment of Certificate of Incorporated
Incorporation of Company, filed July 9, 1991 by Reference
(Incorporated by reference to the Company's
Registration Statement on Form
S-1).
4.1 Common Stock Specimen Certificate Incorporated
(Incorporated by reference to the by Reference
Company's Registration Statement on Form
S-18).
II-7
<PAGE>
4.2 Form of Warrant Agreement with exercise price Incorporated by
of $4.00 per share (Incorporated by reference Reference
to the Company's Registration Statement on
Form S-3, Commission File No. 33-77848, filed
under the Securities Act of 1933, effective
June 8, 1994 (the "Form S-3")).
4.3 Form of Warrant Agreement with exercise Incorporated
price of $6.00 per share (Incorporated by by Reference
reference to the Company's Registration
Statement on Form S-3).
4.4 Form of Warrant Agreement with exercise Incorporated
price of $8.40 per share (Incorporated by by Reference
reference to the Company's Registration
Statement on Form S-3).
4.5 Form of Warrant Agreement with exercise Incorporated
price of $3.00 per share. (Incorporated by Reference
by reference to the Company's Registration
Statement on Form S-3, Commission File
No. 33-97202 filed with the Commission on
September 21, 1995 (the "1995 Form S-3").
4.6 Form of Warrant Agreement with exercise Incorporated
price of $4.50 per share. (Incorporated by by Reference
reference to the Company's Registration
Statement on 1995 Form S-3).
4.7 Form of Warrant Agreement with exercise Incorporated
price of $6.00 per share. (Incorporated by by Reference
reference to the Company's Registration
Statement on 1995 Form S-3).
4.8 Form of Warrant Agreement with exercise Incorporated
price of $2.50 per share. (Incorporated by by Reference
reference to the Company's Registration
Statement on 1995 Form S-3).
5 Opinion of Counsel. (Incorporated by Incorporated
reference to the Company's Registration by Reference
Statement on 1995 Form S-3).
23.1 Consent of Independent Auditors. Filed herewith
II-8
<PAGE>
23.2 Consent of Clark, Ladner, Fortenbaugh & Young Incorporated
(Included in their opinion filed under Exhibit by Reference
5). (Incorporated by reference to the
Company's Registration Statement on 1995 Form
S-3).
24 Power of Attorney (Included in the
Registration Statement on the Signature
Page). (Incorporated by reference to the
Company's Registration Statement
on 1995 Form S-3).
</TABLE>
II-9
<PAGE>
SCHEDULE "A"
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following table presents a year-by-year analysis of certain of the
material items that comprise elements of the Company's Results of Operations for
the periods contained within the financial statements made a part of this Annual
Report.
<TABLE>
<CAPTION>
Percentage
Percentage of Increase
Revenues (Decrease)
Year ended April 30
1995 1994
1995 1994 1993 vs. vs.
1994 1993
<S> <C> <C> <C> <C> <C>
Revenues 100% 100% 100% (5%) 37%
Operating expenses 95 75 74 20 40
Gross profit 5 25 26 (80) 29
Marketing, general and 14 12 13 7 32
administrative
Other operating expense 7 6 2 (6) 336
Income (loss) from (16) 6 11 (354) (29)
operations
Other income -- -- 1 -- (75)
Income (loss) before (16) 6 12 (354) (29)
income taxes
Provision for income (6) 2 5 (321) (29)
taxes (benefit)
Net income (loss) before (10) 4 7 (377) (29)
dividends
</TABLE>
Results of Operations -- Fiscal 1995 (compared with fiscal 1994)
The Company incurred a loss of $2,352,000 or $.70 per share for the
fiscal year ended April 30, 1995, compared to a profit of $797,000 or $.24 per
share in the prior fiscal year. Results for fiscal 1995 were adversely affected
by a number of factors, including an 18% decrease in Program census, a 20%
increase in operating expenses, and a year end adjustment of approximately
$2,000,000 to
<PAGE>
write down management fee revenue to provide for the possible effects of the
Health Care Financing Administration's ("HCFA") interpretation of the
regulations regarding the allowability of management fees for partial
hospitalization programs. HCFA confirmed the Company's position that management
fees are allowable if reasonable in the marketplace; however, Company management
believes that HCFA may still question the allowability of a portion of the
Company's management fees. See Uncertainty of Medicare Regulations.
Management fee revenue. Operating revenue declined $1,039,000 or 5%
from fiscal year 1994 . "Same store" census declined approximately 20% while
"same store" net revenue declined almost 26%, reflecting the special year end
provision of approximately $2,000,000 for HCFA's interpretation of the
regulations noted in the preceding paragraph. This decrease in net revenue was
offset by an increase in net revenue from sites not qualifying for the "same
store" comparison, including revenue from five sites opened during 1995. Visits
and revenue for the home health division's nine months of operations were
approximately 5% greater than for the full year of operations in fiscal 1994;
however, the division was unable to attain the census necessary to offset high
fixed costs, resulting in declining margins, and the home health service was
discontinued in January 1995. Twin Town Outpatient chemical dependency treatment
revenues, reported for a full year in fiscal year 1995 as compared to the six
months of operations in fiscal year 1994, increased by approximately $1,000,000
from the prior year.
Operating expenses. Operating expenses increased by approximately
$3,483,000 or 20% from fiscal year 1994 . "Same store" operating expenses
remained flat, and the majority of the increase is attributable to operating
expenses at sites not opened for a full year in both 1994 and 1995, including
five sites opened during 1995. Operating expense increases of $753,000 are
associated with reporting the full year of operations of Twin Town Outpatient
compared to six months of operations in fiscal year 1994.
<PAGE>
Marketing, general and administrative expenses. Marketing, general and
administrative expenses increased $196,000 or 7% in 1995, primarily as the
result of including the full year of operations for Twin Town Outpatient
compared to six months of operations in fiscal year 1994.
Other expenses (income). In 1995, the Company's provision for bad debts
amounted to $1,317,000, representing 6% of revenue, the same percentage as in
1994. Depreciation and amortization expenses increased by $127,000 or 46% from
the prior year, due largely to the purchases of equipment and furniture in the
prior year. Interest expense net of interest income was $62,000, compared to
interest income net of interest expense in the prior year of $40,000,
representing an increase of $102,000 or 255%. This increase was due to the
Company's use of its line of credit in 1995 to meet its cash flow requirements.
Minority Interest. Minority interest of $108,000 reflects the 49%
allocation of losses on Twin Town Outpatient for the amount not owned by the
Company. Subsequent to year end, the Company purchased this minority interest
for $185,000 and 97,087 shares of the Company's Common Stock.
Dividends. For the year ended April 30, 1995, the Company accrued
dividends on its Series C Convertible Preferred Stock at the rate of 7.5% per
annum for six months. Dividends are due and payable in October, 1995; however,
the Company has the option to pay these dividends in cash or shares of its
Common Stock valued at $2.50 per share.
Results of Operations -- Fiscal 1994 (compared with fiscal 1993)
The Company earned $797,000 or $.24 per share in fiscal year 1994
compared to $864,000 or $.30 per share in fiscal year 1993.
Management fee revenue. Net revenues increased by 37% in fiscal 1994
compared to fiscal 1993, as the result of the conversion of several contracts to
the all-inclusive arrangement (26%), the increase in home health visits and
revenue (8%), and the addition of the Twin Town Outpatient substance abuse
revenues (3%). The volume of partial hospitalization program visits was flat as
compared to 1993, largely due to the rebuilding process required as a
consequence of the termination of its contract, without cause, by HarborView
Medical Center in the first quarter of 1994. The facilities covered by the
HarborView contract accounted for approximately 41% of the Company's historic
revenue during fiscal 1993. With four sites under management in San Diego, the
Company was providing service at the end of fiscal 1994 to approximately 50% by
volume of the clients it had served at the beginning of 1994 in San Diego
County. Volume at the Company's other
<PAGE>
sites increased by 11% while new sites opened in 1994 added approximately 8% of
the volume.
Operating expenses. Operating expenses increased $4,892,000 or 40% in
1994 compared to 1993, a larger percentage increase than the percentage increase
in revenues due to the high costs associated with the home health division,
which represented approximately 39% of the increase, and the addition of the
Twin Town Outpatient operations in November 1993 which represented 8% of the
increase. Were it not for these two operations, operating expenses would have
increased by only 21%.
Marketing, general and administrative. Marketing, general and
administrative expenses in 1994 increased by $668,000 or 32% compared to 1994,
but, as a percentage of revenue, remained constant with 1994 expenses. The cost
increases were due to the addition of administrative costs of the Twin Town
Outpatient operations and the overhead associated with the product and market
development of our managed care model (Collaborative Care sm) for the Seriously
and Persistently Mentally Ill (SPMI) population.
Other expenses (income). In 1994, the Company added significantly to
its provision for bad debts in the amount of $1,342,000, representing 6% of
revenue compared to 2% of revenue in 1994. The increase was considered necessary
due to the worsening financial condition of one of its Hospital contractors in
light of payment delays by the fiscal intermediary. The Hospital subsequently
filed for Chapter 11 Bankruptcy.
Dividends. For the year ended April 30, 1994, the Company issued 5,727
shares of common stock in payment of the 10% dividend due on Series B
Convertible Preferred Stock in June, 1993.
Liquidity and Capital Resources
At April 30, 1995, the Company had $1,382,000 of cash and cash
equivalents, and working capital of $8,790,000. The ratio of current assets to
current liabilities was 3.6 compared to a ratio of 4.1 at April 30, 1994. The
average number of days' revenue in accounts receivable increased to 134 days at
April 30, 1995, from 88 at the end of 1994. This increase in accounts receivable
aging is attributable to several factors: (1) initiation of new programs or
transfers with CMHCs
<PAGE>
that were inexperienced in submitting claims to Medicare, which slowed the
process of billing and collection; (2) delay in the payment or denial of claims
as the result of the Focused Medical Review; and (3) one Hospital's
deteriorating financial condition, the receivable from which is fully reserved.
For the year, the Company experienced approximately $5,216,000 in
negative cash flow from operations primarily as the result of factors discussed
in the preceding paragraph. In 1995, the Company's principal sources of working
capital were the proceeds of $1,584,000 from the private placement of preferred
stock, net financings of $1,200,000 of its $2,000,000 line of credit with a
bank, and the use of cash balances retained from prior years. Management plans
to achieve positive cash flow in 1996 by instituting better monitoring systems
of its Providers' billing procedures and has strengthened utilization management
and utilization review procedures in order to reduce the likelihood of denials
from a Focused Medical Review.
In 1996, the Company's primary sources of funds are expected to be cash
from operations and financings from its available line of credit in the
principal amount of $2,000,000 which expires September 5, 1995. The line of
credit is collateralized by essentially all assets of the Company and bears an
interest rate of prime plus one percent. Management is currently negotiating an
extension of the line of credit. Although there can be no assurances, management
believes that it will be able to renew its line of credit on terms no less
favorable to the Company than those currently in effect.
Working capital is anticipated to be utilized during the year to
continue expansion of the Company's partial hospitalization programs, as well as
for the implementation and expansion of other Company programs. The opening of
new partial hospitalization sites typically requires $45,000 to $75,000 for
office equipment, supplies, lease deposits, and the hiring and training of
personnel prior to opening. New programs generally experience operating losses
through an average of the first four months of operation. The Company has made
no commitments for capital expenditures. The Company expects to provide cash for
the start up of a Collaborative Care unit in amounts that are not yet certain
due to the early stage of the program's development.
The Company has warranted the reimbursement of its management fee charged
to certain Hospitals and CHMCs whose partial hospitalization programs are
managed by the Company. This may result in a charge upon the Company's working
capital in the event that its management fee is
<PAGE>
not fully allowed upon audit of a Provider's cost reimbursement report by a
fiscal intermediary.
The Company has recently received advice from HCFA that calls into
question the eligibility for reimbursement of certain Program-related costs.
Although the Company believes that its management fee is fully reimbursable,
there can be no assurances that, upon regulatory or judicial review, the
Company's position will be sustained. If the Company's management fee is not
fully allowed, the Company may be responsible for reimbursement of the amounts
disallowed. Even though the Company's financial statements provide a reserve for
any such payments, a short-term obligation to provide reimbursement could have a
material adverse impact upon the Company's liquidity and capital resources.
Management believes, however, that this is unlikely to occur. Certain factors
are, in management's view, likely to lessen the impact of any such material
adverse effect, including the expectation that, if claims arise, they will arise
on a periodic basis over several years; that any disallowance will merely be
offset against the obligations owed by the Provider to the Company; and that, in
certain instances, funds have already been paid into escrow accounts to cover
any such eventuality.
The Company, during the course of its ordinary business operations from
time to time, is faced with claims asserted by employees whose employment have
been terminated. Presently, one attorney represents two former employees who
have filed separate wrongful termination lawsuits against the Company. One of
these employees was involuntarily terminated by the Company and the other
voluntarily quit. The employee who was involuntarily terminated also filed a
complaint against the Company in the United States District Court, Northern
District of California, under the federal and state false claims acts alleging
the submission of false claims to Medicare. The complaint was filed on August
24, 1994, and was recently unsealed. The United States declined to intervene.
The Company requested outside counsel to review the assertions regarding false
claims. As a result of the Company's internal review and an investigation
performed by outside counsel, management has concluded that these lawsuits lack
merit and will be defended vigorously. Management believes that the resolution
of these claims will not have a material adverse effect on the Company's
financial position or results of operations, although the Company will be
required to incur legal fees and costs in defending these lawsuits.
Uncertainty of Medicare Regulations
Since approximately 98% of the patients in the Programs administered by
the Company are Medicare-eligible persons, much of its revenue is dependent upon
Medicare reimbursement rules. Revisions or modifications to Medicare rules and
regulations could have a material
<PAGE>
adverse effect on the Company. The Company and its Hospital and CMHC contracting
agencies have quality assurance and utilization review programs to ensure that
the Programs are operated in compliance with all Medicare requirements.
Management and administrative support services related to patient care have been
specifically approved in published Medicare guidelines as a
Medicare-reimbursable expense as long as the costs for such services are
reasonable and records are submitted for the purchased services so that the
Hospital and CMHC contracting agencies can continue to reassess the
effectiveness of such services.
In the present period of legislative uncertainty and deficit Federal
spending, financing the Medicare programs will continue to be a target for
reduced spending and the rules and regulations for Medicare will continue to be
refined and changed. It is impossible to predict what changes will be made and,
therefore, one cannot speculate as to the impact of future changes on the
Company's Contracts or revenues. Management believes it is unlikely that
Medicare will cease funding the treatment of psychiatric illness. Further, in
view of Medicare's continued emphasis on outpatient treatment programs,
management believes changes in Medicare regulations will not disqualify its
Program conceptually, although modification of its Contracts or adjustments in
its Programs may be required.
During the fourth quarter of fiscal year 1994, the Company became aware
that fiscal intermediaries for the Hospitals and CMHCs had begun a Focused
Medical Review of claims for partial hospitalization services throughout the
country. This process follows HCFA guidelines for Focused Medical Review and
targets claims for services which are at risk of inappropriate program payment.
This process often occurs when HCFA identifies significant increases in payments
for certain types of services, as has been the case with the partial
hospitalization benefit, particularly when CMHCs were authorized to provide
partial hospitalization services under Medicare Part B, effective October 1,
1991. To the extent claims for services have been denied in Programs managed by
the Company, the great majority of the denied claims have been appealed and the
reversal rate has been favorable. The appeals process continues for a
significant number of the denied claims. Generally, to the extent that a denied
claim is not reversed, the Company is not entitled to a management fee with
respect to the denied claim. Management believes that the Company's contract
settlement reserve should be adequate to offset the negative impact of
unsuccessful appeals of denied claims.
Within the last fiscal year, the Company's Contract management fees charged
to three separate Providers were reviewed by two fiscal intermediaries. The
results of these reviews were inconsistent. The Company applied to HCFA to
resolve the differences by establishing appropriate guidelines. Although it did
confirm the Company's position
<PAGE>
that management fees are allowable if reasonable in the marketplace, HCFA has
called into question the eligibility of reimbursement of certain Program-related
costs. The Company asserts that its management fees are fully reimbursable. The
Company has added to its contract settlement reserve to offset any negative
impact that could occur in the event that a portion of the Company's management
fees are disallowed. Moreover, if there is a disallowance of a portion of the
Company's management fees, the Company may have to alter its contractual
arrangements to avoid similar problems in the future.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement (Form S-3 No. 33-97202) and
related Prospectus of PMR Corporation for the registration of 1,720,605 shares
of its common stock and to the incorporation by reference therein of our reports
dated June 23, 1995, with respect to the consolidated financial statements of
PMR Corporation incorporated by reference in its Annual Report (Form 10-K) for
the year ended April 30, 1995 and the related financial statement schedule
included therein, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
__/s/___Ernst & Young LLP___
San Diego, California
December 5, 1995
