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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended April 30, 1996
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-20488
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PMR CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 23-2491707
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.
3990 Old Town Avenue, Suite 206A
San Diego, California 92110
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(Address of principal executive offices)
(619) 295-2227
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X YES NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
herein, and will not be contained to the best of Registrant's knowledge in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ____________________
As of July 17, 1996, 4,739,084 shares of Common Stock, par value $.01
per share, were outstanding and the aggregate market value of the shares of
Common Stock held by non-affiliates was approximately $27,703,703.00 based upon
the closing sale price of the Registrant's Common Stock upon the NASDAQ National
Market System at $11.75 per share of Common Stock. See Footnote (1) below.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended April 30, 1996, filed as Exhibit 13 hereto ("1996 Annual
Report"), are incorporated by reference herein into Items 5, 6, 7, and 8 in Part
II.
Portions of the Proxy Statement for the Registrant's 1996 Annual
Meeting of Stockholders ("1996 Proxy Statement") are incorporated by reference
into Items 10, 11, 12, and 13 in Part III. If the Proxy Statement is not filed
by August 28, 1996, an Amendment to this Form setting forth this information
will be duly filed with the Securities and Exchange Commission.
(1) The information provided shall in no way be construed as an admission
that any person whose holdings are excluded from the figure is not an
affiliate or that any person whole holdings are included is an
affiliate and any such admission is hereby disclaimed. The information
provided is included solely for record keeping purposes of the
Securities and Exchange Commission.
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PART I
ITEM 1. BUSINESS OF THE COMPANY
GENERAL
PMR Corporation (the "Company") is a leader in the development and
management of programs and services for individuals who have been diagnosed with
a Serious Mental Illness ("SMI"). These diseases, which are often chronic and
life long, are primarily schizophrenia and bi-polar disorder (manic depression)
and afflict more than one percent (1%) of the U.S. population. The Company's
programs have been developed to assist providers of health care services in
delivering care and treatment programs which serve as alternatives to more
costly inpatient behavioral healthcare for the SMI population. The Company's
clinical philosophy emphasizes early intervention to identify and reduce the
incidence of crises events and thus contain the high costs associated with
catastrophic events. Through its disease management approach, the Company
believes that its programs may achieve a reduction in health care costs and
result in improved clinical outcomes.
The Company operates three lines of business devoted to behavioral
health care: acute outpatient psychiatric services ("Outpatient Program"), case
management services ("Case Management Program") and chemical dependency services
("Chemical Dependency Program"). The Company's focus is on the growth of its
Outpatient Program and Case Management Program, which are targeted exclusively
to serve the SMI population.
The Company's original program, representing its largest source of
revenues, is its Outpatient Program, which serves as an alternative to inpatient
hospitalization. The Outpatient Program includes two core programs developed for
varying levels of acuity: a partial hospitalization program and a structured
outpatient program. It is designed for consumers who require coordinated,
intensive, and comprehensive treatment services beyond those typically offered
at an outpatient clinical level of care. The objective of the Outpatient Program
is to provide stabilization and rehabilitation at costs which are typically less
than those offered by inpatient providers. Since 1988, the Company has been a
leader in the management of psychiatric partial hospitalization programs serving
persons in the SMI population with 30 programs in 8 states, including
California, Colorado, Texas, Indiana, Arizona, Arkansas, Hawaii and Michigan.
The Company operates these Outpatient Programs under management contracts with
local health care providers ("Providers") such as acute care hospitals and
community mental health centers ("CMHCs").
The Case Management Program is an intensive case management service
which consists of a proprietary intensive case management model which utilizes
detailed protocols for delivering and managing the treatment and care of SMI
patients. This program was established to work with community-based providers of
mental health care (such as case management agencies and CMHC's) to develop,
manage and operate case management and rehabilitation systems designed to serve
the SMI population in either a managed care or the more traditional,
fee-for-service environment. The Company presently operates its Case Management
Programs in Nashville and
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Memphis, Tennessee, and has signed contracts which will result in the opening of
several additional programs in Arkansas.
Through a wholly-owned affiliate, the Company is a provider of Chemical
Dependency Programs which consist of the treatment of chemical dependency and
substance abuse, primarily to patients of managed care organizations in Southern
California. The Company has also recently developed and manages an ambulatory
detoxification program in Arkansas for public sector (Medicaid and other
government funded programs) patients.
The Company's objective is to be a leading developer and provider of a
continuum of programs which deliver cost effective mental health services for
individuals within the SMI population. Since the SMI population receives the
vast majority of its health care funding from state, local and federal agencies,
the Company aims to develop programs which assist these entities in containing
rapidly growing and often uncontrolled health care costs. Through the successful
development and operation of these programs, the Company's mission is to foster
the recovery of individuals from the devastating effects of serious mental
illnesses and chemical dependency, and to ensure the cost-effective treatment
and rehabilitation services which limit hospitalization, afford significant
relief from symptoms, and contribute to better quality health care in the
communities within which the Company operates.
STRATEGY
In order to achieve its objectives, the Company's strategy is to (i)
aggressively pursue new contracts for its Outpatient Programs and increase
profitability of existing programs; (ii) increase the enrollment and market area
of existing Case Management programs; (iii) aggressively seek to develop new
markets for case management; and (iv) identify additional services which the
Company can provide to the SMI population as part of its comprehensive disease
management approach.
THE MARKET AND INDUSTRY BACKGROUND
According to a recently published study using 1990 data, mental illness
consumed $67 billion in annual mental health costs and more than $141 billion in
total costs (including estimates of lost productivity). Schizophrenia, which is
a chronic, biological and life long disorder, consumed approximately $17.3
billion in 1990 or 26% of total mental health care costs for this period. The
Company estimates that current mental health costs for schizophrenia exceed $20
billion annually.
Schizophrenia is the primary diagnosis among the Company's patient
population. Schizophrenia afflicts between 1-3% of the U.S. population. Serious
mental illness also includes bi-polar disorder and major depression. The vast
majority of the costs of treating these population are borne by federal, state
and local government programs.
States, in particular, play a much larger role in the provision of
mental health care than they do in the delivery of general health care services.
For more than 150 years, state mental health authorities have been responsible
for administering funds to insure that the SMI population received adequate
treatment. Typically, the state mental health authorities receive annual
appropriations to operate
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services for individuals that have been designated based on the classification
of their illness. Since the 1960's states have been able to access third party
federal payments through the Medicare and Medicaid program. State systems were
historically dominated by hospitals. However, over recent years outpatient care
has grown rapidly as it became recognized as a lower cost alternative and as
many in-patient providers came under intense scrutiny over questionable
admitting practices. In the late 1970's it became common for states to contract
for services which they did not provide, generally using CMHC's, case management
agencies and other not for profit service agencies.
More recently, a major shift has occurred in the delivery of mental
health services in the United States. State mental health authorities have now
evolved from a provider of funded hospital services to a manager of a broad
range of services financed from several public funding sources. Several states
now contract with private, for profit, managed care companies to assume the
administration and insurance risk of health care benefits for Medicaid
populations. Many states now have several managed care vendors which compete to
enroll Medicaid eligible citizens. Less prevalent, and more recent is the trend
toward states privatizing or creating a "carve out" for mental health benefits.
At least six states, including Massachusetts, Minnesota, Utah, Hawaii, Iowa and
Tennessee have decided to "carve out" behavioral healthcare from their overall
Medicaid managed care programs and have contracted or are expected to contract
directly with behavioral health managed care companies to provide such services.
As of June 1996, nine states had received approval from the Health Care
Financing Administration ("HCFA") of the United States Department of Health and
Human Services for a Section 1115 waiver, which allows those states to implement
mandatory statewide Medicaid managed care programs, while 10 other states have
sought review for similar approval.
However, contracting for the management of the SMI population is at a
very early stage. Individuals with a serious and persistent mental illness have
a need for specialized treatment and rehabilitation services. Coordination and
monitoring of services is crucial to avoid fragmentation which results because
SMI needs often extend across the boundaries of different service sectors and
funding streams. As states look toward implementing Medicaid managed care, the
ability to effectively identify and manage services for a high utilizing and
often transient SMI population becomes crucial to the success of a managed care
entity. The Company believes that its contracts in Tennessee and Arkansas
represent some of the first examples of third party contracts designed
specifically for this population.
In addition to concerns relative to budgetary matters, the Company's
Outpatient Program appeals to health care providers as a more effective means of
delivering the mental health care component. Providers have often cited as
reasons to outsource the mental health component to specialized outpatient
programs, factors such as; delivery of the expertise necessary for the
development, management and administration of a mental health program; access to
skilled psychiatric professionals and support staff needed to operate mental
health care programs; and access to the expertise necessary to develop, design
and manage an accredited mental health program that satisfies all regulatory,
licensing and accreditation requirements.
Prior to the commencement of its case management business, the
Company's principal source of revenue was the Company's Outpatient Program which
relies on Medicare as its source of funding. With the advent of the Case
Management Program, the Company will increasingly rely upon state administered
Medicaid programs for funding. See "Regulatory Matters."
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PROGRAMS AND OPERATIONS
ACUTE OUTPATIENT PSYCHIATRIC PROGRAMS
The Company's Outpatient Program consists principally of psychiatric
partial hospitalization programs developed by the Company which are ambulatory
outpatient programs that provide intensive, coordinated clinical services to
patients with serious mental illnesses. These patients generally require
coordinated, intensive, comprehensive and multi-disciplinary treatment not
typically provided in a traditional outpatient setting. In 1996 the Company
introduced a new service, a structured outpatient clinic, to meet the needs of
patients who complete the partial hospitalization program. This program is
designed to maintain the gains achieved during partial hospitalization and to
prevent relapse.
These programs are operated under management contracts with Providers
consisting of acute care hospitals, psychiatric hospitals or CMHC's and are
established under the governance and administrative authority of the Provider.
They are designed to fit within the Provider's existing operations and are
operated under the Provider's name. Contracts with the Providers generally range
between two and five years.
The Company brings to the healthcare Provider management expertise with
respect to the establishment, development and operation of the Outpatient
Program not usually available on an in-house basis. The Company provides
complete program design and administration from start-up through ongoing
operation. The Company often retains responsibility for staffing, which may
include providing highly trained program administrators responsible for overall
management, a medical director, a community liaison director responsible for
coordination with community agencies and specialized clinical personnel. The
program administrator generally has a degree in psychology or social work and
several years of experience in healthcare administration. The medical director
is a board certified psychiatrist and the other professionals and care givers
have various levels of training and experience usually in nursing, psychology or
social work.
The programs are normally operated in conjunction with proprietary
policy and procedure manuals that have been developed by the Company which are
customized for each Provider and which establish guidelines to insure that
licensing requirements are satisfied. The Company also provides many other
services which are often unavailable to the Provider on an in-house basis, such
as quality assurance systems, initial and on-going staff training, statistical
tracking and financial analysis of program performance and utilization
management reviews.
Patients admitted to these programs undergo a complete assessment
process that includes psychiatric, psychosocial, medical, and, as needed, other
specialized evaluations. An individual treatment plan is developed by the
admitting physician for each patient who is then assigned to specific treatment
groups that best meets his or her needs. A care coordinator is assigned to each
patient upon admission and acts as a case manager, coordinating the various
services provided to the patient. Each program site provides comprehensive
treatment services including specialty services for geriatric patients, dually
diagnosed patients (those having a mental illness along with a substance abuse
problem) and core treatment services for the seriously mentally ill patients.
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All Outpatient Programs provide four to six hours of programming five
or six days a week. Structured outpatient clinics offer three to six hours of
treatment per week for patients less symptomatic and higher functioning than
partial hospitalization. Daily schedules include group psychotherapy, individual
therapy, and psychoeducational group therapy. The treatment program is conducted
by therapists, nurses and mental health specialists who are supervised by the
appropriate department of the Hospital or CMHC and by senior clinical managers
in the programs.
CASE MANAGEMENT PROGRAM
In 1993 the Company acquired and thereafter further refined its Case
Management model, a proprietary service system for managing treatment,
rehabilitation and support of services provided to consumers within the SMI
population. This model was designed to allow a managed care entity in a
capitated financial system to manage the risk associated with the SMI
population. It accomplishes this by making available to CMHC's, state Medicaid
agencies and other payors responsible for publicly financed behavioral services,
a consistent and effective approach to managing the utilization of both acute
and community based services. SMI consumers, who are predominately covered by
Medicaid and/or Medicare due to their disability, pose a large financial risk in
a capitated system due to their heavy utilization of costly services, especially
inpatient care. The Company believes that its case management model positions it
to carve out the management of this high utilizing SMI population from the
managed care entity that has responsibility for managing an entire public
managed care system. The model can also operate in a fee for service
environment.
The Case Management Program utilizes comprehensive protocols that are
based upon a specific model of intensive service coordination developed at the
Boston University Centre for Psychiatric Rehabilitation. The system is designed
around a case manager also known as a personal service coordinator, whose
activities include: connecting with consumers; educating consumers about the
services, policies and procedures of the managed care system; developing
proactive, personal crisis plans; responding to consumers in crisis and linking
them to emergency services; assessing consumers' service needs and developing
personal services plans; and authorizing and reviewing services included in the
plan utilizing service specific protocols.
Case management for the SMI population is fundamentally different from
that required for commercially insured populations. The requirements are ongoing
rather than episodic; the covered services are broader and include housing and
basic support needs; and outcomes measurement is more multi-dimensional and less
dependent on direct interviews with the patient.
The provider network is also different from that accessed by the
typical commercial patient. The "primary care" mental health providers are
CMHC's or case management agencies. These organizations may have little
experience with risk contracts or the information systems required to operate in
a managed care environment.
The mission of the Case Management Program is to facilitate the
provision of the necessary and appropriate individualized assistance to
individuals within the SMI populations and enable them to
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live more healthy, independent, productive and satisfying lives in the
community. This is applicable in a fee for service environment as well as in a
managed care environment.
Effective September and October 1995, the Company installed and
commenced operation of its Case Management Program in conjunction with two case
management agencies in Tennessee. The Case Management Program was further
expanded to an additional market when in March and April 1996 the Company
contracted to implement and manage its Case Management Program for three CMHCs
in Arkansas beginning in the summer of 1996.
CHEMICAL DEPENDENCY PROGRAM
Through a wholly-owned affiliate, the Company operates and manages
programs devoted exclusively to substance abuse and rehabilitation in ambulatory
settings, primarily to patients of managed care organizations in Southern
California. The Company's chemical dependency and substance abuse programs are
operated both as free-standing treatment services or as part of a Management
Services Agreement with health care providers. All programs have received
accreditation by the Joint Commission of American Health Organization ("JCAHO").
The Company also offers chemical dependency programs that have been
specially developed with application to public sector clients. Public sector
clients with chemical dependency problems often are also dually diagnosed with a
mental illness. Bridging the gap between the two systems (i.e. chemical abuse
and mental health) is often difficult due to different funding streams,
treatment philosophies and regulations pertaining to Medicaid and other public
sector payors. Meeting the needs of the public sector dually diagnosed client
requires cross training of staff and development of linkage between traditional
chemical dependency providers and providers of behavioral health services.
The Company works with providers to develop the programs and
technologies including a full range of screening, crisis management, ambulatory
care and utilization management services. Through a Management Services
Agreement, the Company works with providers to develop the following programs on
behalf of public sector clients: sobering and detoxification services, dual
diagnosis treatment and rehabilitation, and screening and assessment triage.
At April 30, 1996 the Company operated four outpatient programs in
southern California under the name of Twin Town Treatment. The Company also
operates one program in Arkansas which provides ambulatory detoxification
services for public sector clients.
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PROGRAM LOCATIONS
ACUTE OUTPATIENT
<TABLE>
<CAPTION>
LOCATION CURRENT PROVIDER COMMENCEMENT
<S> <C> <C>
California
San Diego Hospital May 1988
El Centro Hospital January 1990
Culver City CMHC July 1990
Santee Hospital December 1990
San Francisco Hospital February 1991
Los Angeles CMHC October 1991
Studio City Hospital October 1991
Oakland Hospital January 1992
Santa Ana Hospital February 1992
Escondido Hospital March 1992
Union City Hospital April 1992
Port Hueneme Hospital May 1992
Riverside Hospital August 1992
San Bernardino Hospital November 1992
Signal Hill Hospital February 1993
Bakersfield Hospital April 1993
Sacramento Hospital November 1993
Orange Hospital February 1995
San Jose CMHC January 1996
Arizona
Tucson CMHC April 1991
Phoenix CMHC June 1992
Tempe CMHC January 1995
Arkansas
Little Rock CMHC March 1994
Batesville CMHC October 1994
Texas
Conroe CMHC November 1994
Dallas CMHC January 1996
Colorado
Denver Hospital June 1993
Hawaii
Honolulu Hospital March 1996
Indiana
Indianapolis CMHC July 1992
Michigan
Detroit CMHC June 1996
</TABLE>
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CASE MANAGEMENT
<TABLE>
<CAPTION>
LOCATION AVERAGE POPULATION COMMENCEMENT
<S> <C> <C>
Tennessee
Memphis 1,800 October 1995
Nashville 1,500 September 1995
Arkansas
Little Rock N/A Summer 1996
El Dorado N/A Summer 1996
Russelville N/A Summer 1996
</TABLE>
CONTRACTS
OUTPATIENT PROGRAM
The Outpatient Program is generally administered and operated pursuant
to the terms of written management contracts ("Contracts"). The Contracts
generally govern the term of the program, the method by which the program is to
be operated by the Company, the responsibility of the Provider for licensure,
billing, insurance and the provision of healthcare services and the methods by
which the Company will be compensated. Each Contract also contains certain
exclusivity provisions, as well as establishes that the Company is an
independent contractor that is not acting as an employee of, or joint venture
partner with, the Provider.
Program revenue derived by the Company under the Contracts generally
fit within three types of arrangements: 1) an all inclusive fee arrangement
based on fee-for-service rates which provide that the Company is responsible for
substantially all program costs, 2) a fee-for-service arrangement whereby
substantially all program costs are the responsibility of the Provider, and 3) a
fixed fee arrangement. In all cases, the Company provides on-site managerial
personnel. The all-inclusive arrangements constitute approximately 72% of the
Company's revenues and 24 of the 30 existing Outpatient Programs. Regardless of
the type of arrangement with the Provider, all medical services rendered in the
programs are provided by the Provider.
A significant number of the Company's Contracts require the Company to
indemnify the Provider for some or all of the management fee paid to the Company
if either Medicare reimbursement for mental health services provided to patients
of the programs is denied or the management fee paid to the Company is
disallowed as a reimbursable cost. See "Regulatory Matters" and "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
The Contracts are generally for a stated term (normally a duration
between two - five years). Generally, Contracts may only be terminated with
cause or upon the occurrence of certain material events including changes in
applicable laws, rules or regulations
Generally, the majority of the Company's Contracts operate through
their stated expiration dates and are often renewed or satisfactorily
re-negotiated. As the Outpatient Programs mature and
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increase in number, it is expected that as a matter of normal business
development, Contract terminations may occur on a periodic basis. Usually even
if a Contract is terminated, the Company has been successful in opening a
replacement program with another Provider covering the same or similar patient
base.
For the year ended April 30, 1996, the Company's Contracts covering
sites operated by Scripps Hospital East County, a San Diego provider, accounted
for approximately 11.0% of the Company's revenues.
CASE MANAGEMENT
Effective September 1, 1995 and October 1, 1995, pursuant to Management
and Affiliation Agreements, the Company commenced the operation of its Case
Management Program with two case management agencies in Nashville, Tennessee and
Memphis, Tennessee. In March and April 1996, the Company also executed
Management and Affiliation Agreements with three CMHCs in Arkansas and those
agreements are expected to become operational in the summer of 1996. The terms
of the Management and Affiliation Agreements range from four to six years and
may only be terminated for cause upon the occurrence of such events such as (i)
a loss of accreditation or other required licensing or regulatory
qualifications: (ii) material breach by either party; and (iii) certain
legislative or administrative changes that may adversely affect the continued
operation of the program.
Pursuant to the terms of the Management and Affiliation Agreements,
through a wholly owned subsidiary, the Company has agreed to manage and operate
on behalf of each case management provider, the delivery of case management and
other covered psychiatric services. Each Management and Affiliation Agreement
can be operated in a fee for service or managed care environment. In Tennessee
it was anticipated that the payor for services under the Management and
Affiliation Agreements would be managed care organizations operating under the
Tennessee TennCare State Medicaid Managed Care Program but implementation of the
TennCare Program for the SMI population was delayed until July 1, 1996 and thus,
the Case Management Program was implemented on a fee for service basis until
conversion to the TennCare Program at which time managed care organizations
become the payor for services.
Through implementation of its Case Management Program, the Company is
responsible to develop and implement detailed operating protocols relative to
training procedures, management information systems, utilization review,
coordination of quality assurance, contract development and other management and
administrative services. The case management provider is responsible to provide
staff personnel and program facilities, and retain final discretionary authority
to approve the related policy manual, staffing issues and overall program
operations.
For the year ended April 30, 1996, case management contracts accounted
for 20.9% of the Company's revenues.
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MARKETING
The Company's principal marketing efforts, with respect to its
Outpatient Program is concentrated in the identification of prospective
Hospitals or CMHC's who may be suitable Providers. Also once having established
an affiliation, the Company assigns personnel to a program site for the purpose
of apprising the local community about the availability of the services, its
benefits and the type of patient clinically appropriate for service in the
Outpatient Program setting. The Company believes that its ability to secure new
contracts with Providers is based on its reputation for quality and the
uniqueness of its services in its market areas.
A significant factor in the Company's expansion into new market areas
is the ability to develop contractual relationships with new Hospitals or CMHCs.
Potential Hospitals or CMHCs are identified through an analysis of market need,
discussions with key individuals in the prospective area and an assessment of
the financial and clinical profile of the Provider.
The Company's marketing efforts are undertaken by its own marketing and
development personnel who focus upon the dissemination of information about the
Company's programs as well as the generic benefits of case management services
and outpatient psychiatric programs.
The Company believes, and its marketing plan emphasizes, that its
Outpatient Program offers a cost effective alternative to inpatient care for
many patients and can serve to shorten or obviate inpatient stays by providing a
transition from the hospital for other patients. Additionally, the Company
believes that these cost saving benefits, coupled with the clinical benefits
provided by the less restrictive atmosphere of an intensive outpatient setting,
make its Outpatient Program attractive to third party payors, including
Medicare.
Marketing efforts for the Company's Case Management Program have
focused on developing opportunities for pilot or demonstration projects
utilizing the system and developing relationships with key local provider groups
to be in a position to respond with a strong, local support base. The Company
will also market the benefits of the Case Management Program to managed care
organizations as public-sector contracts are awarded.
The development of the Company's Chemical Dependency Program focuses on
expanding current contractual relationships and obtaining new provider
contracts. Its marketing success is centered on at-risk payors where ambulatory
chemical dependency services are of significant value.
REGULATORY MATTERS
COMPLIANCE WITH MEDICARE GUIDELINES FOR REIMBURSEMENT OF MANAGEMENT
FEES FOR PARTIAL HOSPITALIZATION PROGRAMS
A significant component of the Company's revenues are derived from
payments made by Providers to the Company relative to the management and
administration by the Company of Outpatient Programs managed for Providers. The
Company bills its management fee to the Provider as a purchased management and
administrative support service. Substantially all of the patients
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admitted to these programs are eligible for Medicare coverage and thus, the
Providers rely upon payment from Medicare. The Providers are reimbursed their
costs on an interim basis by Medicare fiscal intermediaries and the Providers
submit annual cost reimbursement reports to the fiscal intermediaries for audit
and payment reconciliation. The Providers seek reimbursement of the Company's
management fees from these fiscal intermediaries as part of their overall
payments from Medicare. While fees paid to the Company by the Providers are
generally not subject to or based upon reimbursement from Medicare, or from any
fiscal intermediary, under certain of the Company's contracts the Company is
obligated under warranty provisions to refund all or some portion of the
Company's management fees that may be disallowed to the Provider. This may have
an effect upon the Company's liquidity and capital resources. See "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
The Medicare Program is part of a federal health 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 HCFA to
promulgate rules and regulations governing the Medicare program and the benefits
associated therewith.
Medicare guidelines indicate that, subject to certain regulatory
requirements relating to reasonable costs imposed upon a Provider, contract
management services may be used in lieu or in support of in-house staff of the
Provider and are reimbursable by Medicare. As a general rule, Medicare
guidelines indicate that contract management services costs are reasonable if
the costs incurred are comparable with marketplace prices for similar services.
Management of the Company believes that the value of the Company's services is
comparable with marketplace prices for similar services.
HCFA has published criteria which partial hospitalization services must
meet in order to qualify for Medicare funding. In transmittal letter number 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: (i) incident to a physician's service; (ii) reasonable and
necessary for the diagnosis or treatment of the patient's conditions; and (iii)
provided by a physician with a reasonable expectation of improvement of the
patient from the treatment. The Company and its Providers have quality assurance
and utilization review programs to insure that the partial hospitalization
programs managed by the Company are operating in compliance with all Medicare
requirements.
The following factors, among others, may effect the operations of the
Company and the reimbursement levels of its Providers to an extent that cannot
be determined at this time.
1) Changes in Medicare's cost-based reimbursement for psychiatric services
to the prospective payment system used for medical and surgical
services.
2) Increased uncertainty due to the pressures being brought by third party
payors such as Medicare and Medicaid to limit inpatient and outpatient
psychiatric care.
3) Development of new medications and wider use of existing medications
that would alleviate or effectively control symptoms of mental illness.
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4) The introduction of a comprehensive health insurance program or
nationally mandated managed care plan for Medicare beneficiaries and
parallel developments for Medicaid recipients at the state level.
5) A Hospital's or CMHC's closure due to adverse financial conditions or
due to loss of required federal or state licensure, certification or
compliance with Medicare's conditions for participation or Medicaid
standards.
6) A substantiated major liability claim against the Company, its programs
or a Hospital or CMHC. The Company maintains a professional liability
policy.
7) New interpretation or modification of Medicare and Medicaid laws and
reimbursement regulations.
COMPLIANCE WITH MEDICAID REGULATIONS AND POTENTIAL CHANGES
As the Company has been involved with state Medicaid agencies and with
providers whose clients are covered by the combined state and federal Medicaid
Program, compliance with the law and regulations governing such reimbursement
has become a significant consideration. Medicaid is a joint state and federally
funded program established as part of the Social Security Act in the mid-1960s
to provide certain defined health care benefits to poor, indigent or otherwise
eligible general welfare recipients. As states consider methods to control the
cost of health care services generally and behavioral health services
specifically to such recipients, and because such recipients are heavy users of
the type of services which the Company offers, the impact of Medicaid
reimbursement and regulatory compliance with its rules could be material.
Medicaid funding and the methods by which services are supplied to
recipients are changing rapidly. As noted, many states have "carved out"
behavioral health services from the delivery of other health services to
Medicaid recipients and are separately procuring such services on a capitated
basis requiring the contractor and permitting subcontracted providers to assume
risk.
The Company cannot predict the extent or scope of changes which will
occur in terms of the ways in which state Medicaid programs contract for and
deliver services to Medicaid recipients. All Medicaid funding is generally
conditioned upon financial appropriations to state Medicaid agencies by the
state legislatures and there are ever-increasing uncertain political pressures
on such legislatures in terms of controlling and reducing such appropriations.
The overall trend is generally to impose lower reimbursement rates and to
negotiate reduced contract rates with providers, including incentives to assume
risk not only by licensed managed care organizations with whom state Medicaid
agencies contract, but by subcontracted providers, such as the Company. Part of
the Company's strategy for growth depends upon continued and increased
contracting capacity with managed care organizations to provide behavioral
health managed care services to Medicaid recipients.
The United States Congress continues to consider legislation to
substantially alter the overall Medicaid program, to give states greater
flexibility in the design and operation of their individual Medicaid program,
and to stabilize federal spending for such benefits. Various states are also
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<PAGE> 15
considering substantial health care reform measures which could modify the
manner in which all health services are delivered and reimbursed, especially
with respect to Medicaid recipients and with respect to other individuals funded
by public resources. The reduction in other public resources could impact upon
the delivery of services to Medicaid recipients.
COMPLIANCE WITH OTHER STATE REGULATORY CONSIDERATIONS
The Company is also sensitive to the particular nature of the delivery
of behavioral health services and various state requirements with respect to
confidentiality and patient privacy. Indeed, both federal and state laws require
providers of certain behavioral health services to maintain strict
confidentiality as to treatment records and, indeed, the fact of treatment.
There are specific requirements permitting disclosure, but inadvertent or
negligent disclosure triggers substantial criminal and other penalties.
SPECIFIC LICENSING OF PROGRAMS
The Company's Outpatient Programs are operated and licensed as
outpatient departments of Hospitals or CMHC's, thus subjecting such programs to
regulation by federal, state and local agencies. These regulations govern
licensure and conduct of operations at the facilities, review of construction
plans, addition of services and facilities and audit of cost allocations, cost
reporting and capital expenditures. The facilities occupied by the programs must
comply with the requirements of municipal building, health and fire codes. State
licensing of the program facilities is a prerequisite to participation in the
Medicare programs. Additionally, the programs are subject to periodic inspection
and recertification.
COMPLIANCE WITH OTHER MEDICARE/MEDICAID RULES
Federal statutes regulating Medicare and Medicaid reimbursement also
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. Parallel federal prohibitions relate to referrals by physicians of
members of their immediate families to entities in which they have a financial
interest and which receive reimbursement for certain designated health services
from the Medicare or Medicaid programs, Similarly, the submission of claims for
services rendered to beneficiaries of these programs. So called "false claims,"
when such services were either not rendered or were not in compliance with
program requirements also can trigger civil and criminal penalties. The
sanctions for violating these laws can include fines, imprisonment, and
exclusion from participating in these federally-funded health care programs for
a period of years or even permanently. Such exclusion would have a material
adverse effect on the Company. Similar state laws exist as well. 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, CMHC's, or
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<PAGE> 16
case management agencies 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 Contracts being deemed a violation of federal Medicare/Medicaid
laws as to such referral prohibitions.
HUMAN RESOURCES
In the aggregate, as of April 30, 1996, the Company employed
approximately 500 employees, of which 298 are full-time employees. Approximately
435 employees staff clinical programs and 65 oversee and establish new programs
in various regions, develop and monitor the clinical aspects of the programs,
provide marketing and development support, and provide administrative and
clerical support.
COMPETITION
The Company competes with other health care management companies for
the establishment of affiliations with acute care hospitals to operate its
Outpatient Programs. Certain of the Company's competitors have greater financial
and personnel resources, however, notwithstanding such greater resources the
Company believes that it can compete favorably.
In general, the operation of psychiatric programs is characterized by
intense competition. General, community and specialty hospitals, including
national companies and their subsidiaries, provide many different programs and
services. The Company believes that the proprietary nature of its policy and
procedures manuals as well as the level of service it provides and the expertise
of its management and field personnel, provides it with a leading position in
the development and management of Outpatient Programs.
In each of the Company's current and anticipated market areas, the
Company faces competition. The Company anticipates that competition in this area
of will become more intense as pressure to contain the rising costs of health
care continues to intensify, and programs such as those operated by the Company
are perceived to help contain mental health care costs.
The Company believes that the Case Management Program provides the
means to effectively control costs in a managed, public-sector mental health
system by reducing the costs for the population that consumes the largest
portion of the treatment dollars, the SMI population. In addition, the Model
provides state-of-the-art treatment and rehabilitation services which serve to
upgrade the existing provider network in a community. The Company believes the
benefits of the Case Management Model are recognized as a distinguishing feature
for public-sector managed care efforts.
The Company's primary existing competitors in the case management
business are predominantly not for profit CMHC's and case management agencies.
The Company anticipates that mental health managed care companies will
eventually compete for this business. There can be no assurances that the
Company will be able to compete successfully with such companies.
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ITEM 2. PROPERTIES
The Company owns no real property, but currently leases and subleases
approximately 150,000 square feet comprised of (i) a seven-year lease for the
Company's corporate headquarters expiring in 1999 and (ii) twenty-seven (27)
leases for Program sites, ranging from three-to-five years' duration, none of
which extend beyond 1999. The Company has invested approximately $388,000 in
tenant improvements and carries adequate property and liability insurance where
required by lessors and sublessors. The Company believes that its facilities are
adequate for its short term needs.
Leases and subleases, other than the short-term and month-to-month
leases, generally provide for annual rental adjustments which are either indexed
to inflation or have been agreed upon, and further typically provide for
termination on not less than ninety (90) days' written notice. Management is
confident that the Company has sufficient capital to finance any rental
increases contemplated in the leases and subleases.
ITEM 3. LEGAL PROCEEDINGS
There were no matters required to be reported hereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matter was submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year covered by this Report.
ITEM 4A. EXECUTIVE OFFICERS OF THE CORPORATION
The following are the executive officers of the Company as of July 10,
1996 who will serve until the next annual meeting of stockholders or until their
successors are elected or appointed and qualified:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Allen Tepper 48 Chairman of the Board of Directors, President and
Chief Executive Officer
Mark P. Clein 37 Executive Vice President and Chief Financial
Officer
Susan D. Erskine 44 Executive Vice President Development, Secretary
and Director
Fred D. Furman 48 Executive Vice President-Administration and
General Counsel
Daved L. Frerker 48 Chief Operating Officer
Susan Yeagley Sullivan 46 Senior Vice President-Finance and Treasurer
</TABLE>
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<PAGE> 18
ALLEN TEPPER
Mr. Allen Tepper has been Chairman, President and CEO of the Company
since October 31, 1989. Mr. Tepper was a co-founder of Consolidated Medical
Corp. in 1979, which was engaged in out-patient clinic management for acute care
hospitals in the Philadelphia area. The company was sold to the Berwind
Corporation in 1984. Mr. Tepper holds a Masters of Business Administration
degree from Northwestern University and a Bachelors degree from Temple
University.
MARK P. CLEIN
Mr. Mark P. Clein joined the Company in 1996 as Executive Vice
President and Chief Financial Officer. From 1982 to 1995, Mr. Clein had been
employed by several New York based investment banking and venture capital firms,
including Jefferies & Co., where he held the position of managing director of
investment banking (specializing in the health care industry), Sprout Group, an
affiliate of Donaldson, Lufkin and Jenrette, Inc. and Merrill Lynch Venture
Capital, Inc., where he focused on early stage investing in the healthcare
industry. Mr. Clein holds a Masters of Business Administration degree from
Columbia University and a Bachelors degree from the University of North
Carolina.
SUSAN D. ERSKINE
Ms. Susan D. Erskine has been Secretary and a Director of the Company
since October 31, 1989. Ms. Erskine was previously staff development director in
an acute care hospital and a chemical dependency instructor with the Navy
Alcohol & Drug Safety Action Program. She holds a Master's degree in Health
Science and completed post graduate work at Stanford University in Education and
Psychology. She has extensive experience in program development, marketing and
management of psychiatric programs, both inpatient and outpatient.
FRED D. FURMAN
Mr. Fred D. Furman has been Executive Vice President Administration and
General Counsel since May 1996. Previously, he held the position of Senior Vice
President and General Counsel. Prior to that, Mr. Furman was a partner at a
Philadelphia law firm from 1980 to 1995. Mr. Furman is a member of the National
Health Lawyers Association. He holds a Juris Doctor degree and a Bachelor's
degree from Temple University.
DAVED L. FRERKER
Mr. Daved L. Frerker joined the Company in July, 1995, as Chief
Operating Officer. From 1989 until he joined the Company, Mr. Frerker was the
Chief Executive Officer of Psychiatric Centers in San Diego, a large
multidisciplinary psychiatric medical group. Prior to that position, Mr. Frerker
held operating positions at leading inpatient psychiatric hospital providers
including Community Psychiatric Centers, Inc., and National Medical Enterprises,
Inc. Mr. Frerker holds a Masters of Hospital Administration from Linwood College
and a Bachelor's degree from the University of Missouri.
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<PAGE> 19
SUSAN YEAGLEY SULLIVAN
Ms. Susan Yeagley Sullivan, CPA, has been Senior Vice President and
Treasurer since May of 1996. Previously, she held the position of Chief
Financial Officer of the Company since July, 1991. Ms. Yeagley Sullivan was
previously the Chief Financial Officer of a San Diego home health agency and of
a psychiatric hospital, as well as several real estate development companies in
San Diego and Dallas. Prior to that, Ms. Yeagley-Sullivan was in public
accounting, holding the position of audit manager at Ernst & Young and for
Kenneth Leventhal & Co. She holds a Masters in Business Administration degree
from San Diego State University and a Bachelors degree from San Diego State
University.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Information concerning the market and price history of the Company's
Common Stock, plus dividend information, is incorporated herein by reference to
pages 5 and 6 of the 1996 Annual Report or in an Amendment to this Report to be
filed with the Securities and Exchange Commission.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the Company for each of the past five
fiscal years is incorporated herein by reference to page 5 of the 1996 Annual
Report or in an Amendment to this Report to be filed with the Securities and
Exchange Commission.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following table presents a year-by-year analysis of certain of the material
items that comprise elements of the Company's result of operations for the
periods contained within the financial statements made a part of this Annual
Report.
19
<PAGE> 20
<TABLE>
<CAPTION>
Percentage of Revenues Percentage
Year Ended April 30 Increase/Decrease
1996 1995
1996 1995 1994 vs. 1995 vs. 1994
---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues 100% 100% 100% 67% (5%)
Operating Expenses 78% 95% 75% 38% 20%
Marketing, General and 11% 14% 12% 35% 7%
Administrative
Depreciation and Amortization 2% 2% 1% 48% 46%
Other Operating Expense 4% 6% 5% 14% 9%
-----------------------------------
Income (Loss) before Income Taxes 5% (16%) 6% N/A N/A
Provision for Income Taxes (Benefit) 2% (6%) 3% N/A N/A
Net Income (Loss) 3% (11%) 4% N/A N/A
</TABLE>
In Fiscal 1996, the Company recorded net income of $1.0 million, which
compares to a net loss of ($2.3) million during Fiscal 1995. The increase in
profitability was effected by a significant increase in revenues without a
concomitant increase in operating expenses. The Company's outpatient business
expanded significantly due to a 24.9% increase in patient census and a 15.4%
increase in net revenue per patient as compared to Fiscal 1995. Patient census
growth occurred as the Company accommodated increased demand following the
abatement of the Focused Medical Review conducted by certain HCFA fiscal
intermediaries in Fiscal 1995. Net revenue per patient increased as the Company
focused on providing higher intensity services to a higher acuity patient
population. As most of the costs of an outpatient center are fixed or
semi-fixed, the Company experienced significant unit level operating leverage
with respect to its acute outpatient program, resulting in operating expenses
declining from 95% of revenue in Fiscal 1995 to 78% of revenue in Fiscal 1996.
While the Company anticipates that it may continue to experience additional
efficiencies in its outpatient business, it does not anticipate that
improvements in margins will continue at the rate realized in Fiscal 1996.
Revenues from the Company's Outpatient, Case Management, Chemical
Dependency and Home Health Care Programs were 73.8%, 20.9%, 5.3% and 0% of total
revenues in Fiscal 1996, compared to 86.6%, 0%, 7.2% and 6.2% of total revenues
in Fiscal 1996. The changes in the revenue mix were due primarily to
commencement of case management revenues in Fiscal 1996 and the termination of
home health revenues in Fiscal 1995.
Marketing, General and Administrative expenses declined as a percentage
of revenues in Fiscal 1996 as the Company experienced operating leverage on its
corporate administrative infrastructure. The Company anticipates that in the
short term marketing, general and
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<PAGE> 21
administrative expenses may increase modestly as a percentage of revenues as the
Company invests in infrastructure to support the growth of the case management
business.
RESULTS OF OPERATIONS - FISCAL YEAR ENDED APRIL 30, 1996 COMPARED TO FISCAL YEAR
ENDED APRIL 30, 1995
Revenues. Revenues for Fiscal 1996 were $36.3 million, an increase of
$14.6 million, or 67.0% as compared to Fiscal 1995. Of this increase, $7.6
million, or 52.1%, resulted from the commencement of the Company's Case
Management Program in Tennessee. The remainder of the increase in revenues came
predominantly from the Company's Outpatient Program which recorded revenues of
$26.8 million, an increase of 33.3% from Fiscal 1996. Same store revenue
increased 31.5% as compared to Fiscal 1995. The growth in the Outpatient Program
was due to increases in average patient census and net revenue per patient at
existing sites, and the opening of five programs at new sites during Fiscal
1996. The Company closed two sites during Fiscal 1996. Revenues at the Company's
chemical dependency subsidiary increased 21.5% during Fiscal 1996.
Operating Expenses. Operating expenses for Fiscal 1996 were $28.5
million, an increase of $7.8 million, or 37.9% as compared to Fiscal 1995. Of
this increase, $6.9 million or 88.7%, resulted from the commencement of the
Company's Case Management Program in Tennessee. The remainder of the increase in
operating expenses was associated with increased costs to support the revenue
growth at existing outpatient sites and the net increase of three Outpatient
Programs during Fiscal 1996.
Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses for Fiscal 1996 were $4.0 million, an increase of $1.0
million, or 35.0% as compared to Fiscal 1995 and as compared to an increase in
revenues of 67.0%. The increase was related primarily to the following factors:
the preparation for and commencement of the Company's Case Management service in
Tennessee; the preparation for the commencement of the Case Management Program
in Arkansas; and increased marketing of the Outpatient Program.
Depreciation and Amortization. Depreciation and amortization expenses
for Fiscal 1996 were $596,000, an increase of $193,000, or 47.8% as compared to
Fiscal 1995. The increase was due largely to the amortization of intangible
assets associated with the acquisition of the remaining interest of the Twin
Town Outpatient subsidiary and covenants not to compete in Tennessee.
Provision for Bad Debts and Interest Expense(net). Expenses related to
the provision for bad debts and interest expense for Fiscal 1996 were $1.4
million, an increase of approximately $70,000, or 5.1% as compared to Fiscal
1995. The percentage increase for this category of expense was substantially
less than the percentage increase in revenues and other expenses due to a lower
provision for bad debt on Case Management revenues, substantially higher cash
balances and the repayment of outstanding bank debt in the fourth fiscal
quarter.
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<PAGE> 22
Dividends. Dividends were $132,000, an increase of 100% from Fiscal
1995. In June 1996, subsequent to the end of Fiscal 1996, all shares of Series C
Convertible Preferred Stock were surrendered and converted into 700,000 shares
of common stock. See "Liquidity and Capital Resources."
RESULTS OF OPERATIONS - FISCAL YEAR ENDED APRIL 30, 1995 COMPARED TO FISCAL YEAR
ENDED APRIL 30, 1994
The Company incurred a loss of ($2.3) million or ($.70) per share for
the fiscal year ended April 30, 1995, compared to a profit of $800,000 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 Outpatient Program
census, a 20% increase in operating expenses, and a year end adjustment of
approximately $2.0 million to write down management fee revenue to provide for
the possible disallowance of certain management fees by virtue of the
restrictive interpretation of Medicare reimbursement rules being applied by
certain HCFA fiscal intermediaries, and to reflect the still uncertain effects
of a Focused Medical Review of claims that commenced during the fourth quarter
of Fiscal 1994.
Management fee revenue. Operating revenue declined $1.0 million or 5%
from Fiscal 1994. "Same store" census declined approximately 20% while "same
store" net revenue declined almost 26%, reflecting the special year end
provision of approximately $2.0 million to take into account the restrictive
interpretation of Medicare reimbursement rules by certain HCFA fiscal
intermediaries and the possible denial of claims adversely impacting the
Company's management fees as a result of HCFA's Focused Medical Review. This
decrease in net revenue was offset by an increase in net revenue from five sites
opened during 1995. Visits and revenue for the home health division's nine month
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. Chemical Dependency revenues, reported
for a full year in Fiscal 1995 as compared to the six months of operations in
Fiscal 1994, increased by approximately $1.0 million from the prior year.
Operating expenses. Operating expenses increased by approximately $3.5
million or 20% from Fiscal 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 Fiscal 1994 and Fiscal 1995, including five
sites opened during Fiscal 1995. Operating expense increases of $753,000 are
associated with reporting the full year of operations of the Chemical Dependency
Program compared to six months of operations in Fiscal 1994.
Marketing, general and administrative expenses. Marketing, general and
administrative expenses increased $196,000 or 7% in Fiscal 1995, primarily as
the result of including the full year of operations for the Chemical Dependency
Program compared to six months of operations in Fiscal 1994.
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<PAGE> 23
Depreciation and Amortization. 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.
Provision for Bad Debts and Interest Expense (net). In Fiscal 1995, the
Company's provision for bad debts amounted to $1.3 million representing 6% of
revenue, the same percentage as in Fiscal 1994. 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 Fiscal 1995 to
meet its cash flow requirements.
Minority Interest. Minority interest of $108,000 reflects the 49%
allocation of losses on its wholly owned chemical dependency affiliate known as
Twin Town Outpatient. During July 1995, 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.
LIQUIDITY AND CAPITAL RESOURCES
For Fiscal 1996, net cash provided by operating activities was $4.1
million, which compares to ($5.4) million in Fiscal 1995. Working capital on
hand at April 30, 1996 was $10.9 million, an increase of $2.1 million, or 23.9%,
as compared to April 30, 1995. Cash on hand at April 30, 1996 was $3.9 million,
an increase of $2.5 million, or 184.1% as compared to April 30, 1995.
The increases in operating cash flow, working capital and cash are due
to the substantial improvement in net income during Fiscal 1996, along with
significant improvements in the collection of accounts receivable. Accounts
receivable, as measured by days of revenue outstanding, declined from 134 at
April 30, 1995 to 72 at April 30, 1996. The improvement in the collection of
accounts receivable was due to the implementation of new and more stringent
control systems and the abatement of the Focused Medical Review (and thus a
return to steady payments to the Company's Providers).
In Fiscal 1996, funds from operations were the principal source of
working capital. This reflects an improvement from Fiscal 1995 when the Company
relied upon advances on its line of credit and proceeds from a private financing
transaction to support a negative cash flow from operations of $5.4 million.
During Fiscal 1996, the Company utilized a portion of its funds from operations
to fully repay its credit line, which had a balance of $1.2 million at April 30,
1995. Working capital was also utilized to open five additional Outpatient
Programs and to fund the start up of the Tennessee Case Management Program. The
Company provided $1.1 million in funding for Tennessee in Fiscal 1996. The
Company does not anticipate significant additional funding requirements for case
management in Tennessee, other than that which can be provided from operating
cash flow.
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<PAGE> 24
Working capital is anticipated to be utilized during the year for
operations, to continue expansion of the Company's Outpatient Program and Case
Management Program, and for the implementation and expansion of other Company
programs. During Fiscal 1997, working capital is expected to be realized
principally from operations, as well as from a new $3 million line of credit
from Sanwa Bank which became effective February 1, 1996. Interest is payable
under this line of credit at a rate of either the Bank's reference rate plus one
percent or the Eurodollar rate plus three percent. The Company will also realize
working capital from the exercise of certain outstanding warrants that were
components of a private placement transaction undertaken during Fiscal 1995. In
October 1994, the Company issued investment units consisting of shares of Series
C Convertible Preferred Stock and 525,000 Warrants. The Warrants, in turn, were
comprised of 175,000 Class A Warrants, 175,000 Class B Warrants and 175,000
Class C Warrants which were, respectively, subject to exercise prices of $3.00,
$4.50 and $6.00. During June 1996, following notice of redemption, the holders
of these investment units converted all of the Series C Preferred Stock into
700,000 shares of the Company's common stock and the Company issued an
additional 350,000 shares of common stock upon the exercise of all of the Class
A and Class B Warrants. The exercise of these Warrants provided the Company with
net proceeds in July 1996 of $1.3 million. The Class C Warrants are scheduled to
expire on October 15, 1999 and may be exercised earlier if subject to redemption
by the Company provided the average price of the Company's common stock exceeds
twelve dollars for a period of thirty trading days.
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. These programs generally
experience operating losses through an average of the first four months of
operation, however, the Company has made no commitments for material capital
expenditures for these programs. The Company expects to provide cash for the
start up of the Case Management Program in Arkansas, or other new programs
opened during the year, however, in amounts that are not yet certain due to the
early stage of the program's development.
A charge upon the Company's working capital may also occur during the
year ending April 30, 1997 or thereafter as a result of certain uncertainties
associated with the healthcare reimbursement rules as they apply to the
Company's Outpatient Program. During Fiscal 1996, a majority of the Company's
revenues were derived from the Company's management of its Outpatient Program.
Since substantially all of the patients of the Company's Outpatient Program are
eligible for Medicare, collection of a significant component of the Company's
management fees is dependent upon reimbursement of claims submitted to fiscal
intermediaries by the Hospitals or CMHCs (Providers) on whose behalf these
programs are managed.
The Company maintains reserves to cover the effect of primarily two
uncertainties: 1) that the Company may have an obligation to indemnify certain
Providers for some portions of its management fee which may be subject to
disallowance upon audit of the Providers' cost reports by fiscal intermediaries;
and 2) that the Company may not receive full payment of the management fees owed
to it by the Providers during the periodic review of the Providers' claims by
the fiscal intermediaries.
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<PAGE> 25
The Company has been advised by HCFA that certain program-related costs
are not allowable for reimbursement. The Company may be responsible for
reimbursement of the amounts disallowed pursuant to warranty obligations that
exist with certain Providers. Although the Company believes that its potential
liability to satisfy such requirements has been adequately reserved in its
financial statements, the obligation to pay such amounts when and if they become
due, could have a material adverse impact on the Company's short term liquidity.
Certain factors are, in management's view, likely to lessen the impact of any
such 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 obligations already owed by the Provider to the Company; and that, in
certain instances, funds have already been paid into an escrow account to cover
any such eventuality.
During the fourth quarter of Fiscal Year 1994, fiscal intermediaries
for Hospitals and CMHCs began a Focused Medical Review of claims for partial
hospitalization services throughout the country. A Focused Medical Review
consists of an intensive review by HCFA fiscal intermediaries on an
industry-wide basis of certain targeted claims which HCFA has identified as
being at risk of inappropriate program payment. This often occurs when HCFA
identifies significant industry-wide increases in payments of certain types of
services, as had been the case with the partial hospitalization benefit. The
Company's initial experience with the Focused Medical Review was that there were
numerous denials of Providers' claims and the denials had an adverse impact on
the Company's cash flow during Fiscal 1995 because Providers delayed payment of
the Company's management fee because of the substantial number of denials. On
behalf of the Providers, the Company strenuously disputed these denials,
particularly the interpretations implemented by one singular fiscal
intermediary. The initial review process was particularly complicated by the
absence of comprehensive standards governing the partial hospitalization
benefit.
The Focused Medical Review of claims for partial hospitalization
services conducted by fiscal intermediaries for the Providers continues but its
effect has substantially abated on programs managed by the Company. This has
occurred as a result of a number of factors, such as the issuance of a Medicare
Program Memorandum by HCFA during June 1995 (which defines partial
hospitalization eligibility and the scope of covered services), as well as the
intensification of the Company's utilization review and utilization management
efforts. Specifically, the number of denials reported to the Company in Fiscal
1996 represented approximately 1% of the estimated number of total claims
submitted by Providers to fiscal intermediaries. This reflects a significant
decrease from the 11% denial rate incurred during Fiscal 1995. Although during
Fiscal 1996, the number of denied claims was reduced to an insignificant rate,
the periodic review of claims by HCFA fiscal intermediaries will likely continue
at one or more programs from time to time.
To the extent claims for services have been denied in Outpatient
Programs managed by the Company, the great majority of the denied claims have
been appealed. Approximately 47% of these appeals have reached resolution and
the Company has succeeded in securing a reversal in the substantial majority of
these cases. The appeals process continues for a majority of the denied claims.
Given these results, and given the Company's experience during Fiscal 1996
(during which the rate of denials has declined to an insignificant rate), and in
view of the existing reserves
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<PAGE> 26
established within the Company's financial statements, management does not
believe fiscal intermediaries' review of outstanding claims will likely have a
material adverse effect upon the Company's liquidity and capital resources
during Fiscal 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements of the Company for the fiscal year ended April 30,
1996 and specific supplementary financial information are included within Item
14(a) of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no matters to be reported hereunder.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information with regard to this item is incorporated by reference to
the definitive 1996 Proxy Statement under the caption "Election of Directors,"
or in an Amendment to this Report to be filed with the Securities and Exchange
Commission. See "Item 4A. EXECUTIVE OFFICERS OF THE CORPORATION" with regard to
Executive Officers.
ITEM 11. EXECUTIVE COMPENSATION
Information with regard to this item is incorporated herein by
reference to the definitive 1996 Proxy Statement under the caption "ADDITIONAL
INFORMATION - Management Compensation," or in an Amendment to this Report to be
filed with the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with regard to this item is incorporated herein by
reference to the definitive 1996 Proxy Statement under the caption "PRINCIPAL
STOCKHOLDERS," or in an Amendment to this Report to be filed with the Securities
and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with regard to this item is incorporated herein by
reference to the definitive 1996 Proxy Statement under the caption "ADDITIONAL
INFORMATION - Certain Transactions," or in an Amendment to this Report to be
filed with the Securities and Exchange Commission.
26
<PAGE> 27
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
<S> <C>
(a) The following documents are filed as part of this Report:
1. Financial Statements 30
Report of Independent Auditors 30
Consolidated Balance Sheets as of April 30, 1996 and 1995 31
Consolidated Statements of Operations for the fiscal years 32
ended April 30, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the 33
fiscal years ended April 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the fiscal 34
years ended April 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements 35
2. Financial Statement Schedules - The following financial schedule is included herein:
<CAPTION>
Page Reference
--------------
<S> <C>
Schedule VIII - PMR Corporation Valuation
and Qualifying Accounts 46
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are included in the financial statements or
the notes thereto and therefore have been omitted.
27
<PAGE> 28
3. The following Exhibits are filed as part of this Report:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Exhibit
No. Description Method of Filing
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Certificate of Incorporation 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, 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 Incorporated by reference to the Company's
Incorporation of the Company, filed November Registration Statement on Form S-1, Commission
17, 1989 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 by reference to the Company's
Incorporation of the Company, filed May 8, 1991 Registration Statement on Form S-1.
- -----------------------------------------------------------------------------------------------------------------
3.5 Certificate of Amendment of Certificate of Incorporated by reference to the Company's
Incorporation of the Company, filed July 9, Registration Statement on Form S-1.
1991
- -----------------------------------------------------------------------------------------------------------------
4.1 Common Stock Specimen Certificate Incorporated by reference to the Company's
Registration Statement on Form S-18.
- -----------------------------------------------------------------------------------------------------------------
13 Annual Report to Stockholders Filed herewith.
- -----------------------------------------------------------------------------------------------------------------
21 Subsidiaries of the Corporation Filed herewith.
- -----------------------------------------------------------------------------------------------------------------
23.1 Consent of Ernst & Young Filed herewith.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
All other exhibits for which provision is made in the applicable
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the last quarter of the
fiscal year ended April 30, 1996.
28
<PAGE> 29
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PMR CORPORATION
Dated: July 19, 1996
BY:/s/ Allen Tepper
--------------------------
Allen Tepper
Chief Executive Officer
BY:/s/ Mark P. Clein
--------------------------
Mark P. Clein
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10-K has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
/s/ Allen Tepper Chief Executive Officer July 19, 1996
- --------------------------- President and Director
Allen Tepper
/s/ Susan D. Erskine Secretary, Treasurer and July 19, 1996
- --------------------------- Director
Susan D. Erskine
/s/ Daniel L. Frank Director July 15, 1996
- ---------------------------
Daniel L. Frank
/s/ Charles McGettigan Director July 15, 1996
- ---------------------------
Charles C. McGettigan
/s/ Richard A. Niglio Director July 16, 1996
- ---------------------------
Richard A. Niglio
/s/ Eugene D. Hill Director July 16, 1996
- ---------------------------
Eugene D. Hill
29
<PAGE> 30
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PMR Corporation
We have audited the accompanying consolidated balance sheets of PMR Corporation
as of April 30, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended April 30, 1996. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PMR
Corporation at April 30, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
April 30, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
June 14, 1996,
except for the second paragraph of Note 6, as to which the date is
July 3, 1996
San Diego, California
30
<PAGE> 31
PMR CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30
1996 1995
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,917,922 $ 1,382,376
Accounts receivable, net of allowance for uncollectible amounts of
$1,759,000 in 1996 and $1,423,000 in 1995 9,289,895 8,465,568
Prepaid expenses and other current assets 321,506 289,996
Refundable income taxes -- 817,165
Deferred income tax benefits 2,701,000 1,217,000
--------------------------------
Total current assets 16,230,323 12,172,105
Furniture and office equipment, net of accumulated depreciation of
$869,261 in 1996 and $579,656 in 1995 649,312 790,243
Long-term receivables 2,444,055 937,705
Other assets 1,858,102 910,701
--------------------------------
Total assets $ 21,181,792 $ 14,810,754
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ -- $ 1,200,000
Accounts payable and accrued expenses 1,522,721 1,048,597
Accrued compensation and employee benefits 2,276,809 861,029
Advances from case management agencies 1,012,847 --
Income taxes payable 308,489 --
Dividends payable 71,739 65,537
Other current liabilities 127,213 206,550
--------------------------------
Total current liabilities 5,319,818 3,381,713
Deferred rent expense 149,531 209,862
Deferred income taxes 1,101,000 458,000
Contract settlement reserve 5,499,020 3,523,223
Minority interest -- 50,666
Other liabilities -- 125,697
Commitments
Stockholders' equity:
Convertible Preferred Stock, $.01 par value, authorized shares -
1,000,000; Series C - issued and outstanding shares - 700,000 in
1996 and 1995; liquidation preference $1,750,000 7,000 7,000
Common Stock, $.01 par value, authorized shares - 10,000,000;
issued and outstanding shares - 3,577,917 in 1996 and 3,338,656
in 1995 35,778 33,385
Additional paid-in capital 8,259,243 7,050,262
Notes receivable from stockholders (141,547) (62,626)
Retained earnings 951,949 33,572
--------------------------------
9,112,423 7,061,593
--------------------------------
$ 21,181,792 $ 14,810,754
================================
</TABLE>
See accompanying notes.
31
<PAGE> 32
PMR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1996 1995 1994
----------------------------------------------
<S> <C> <C> <C>
Management fee revenue $ 36,315,921 $ 21,746,663 $ 22,785,605
Expenses:
Operating expenses 28,471,644 20,647,965 17,164,823
Marketing, general and administrative 4,018,685 2,976,600 2,780,829
Provision for bad debts 1,447,983 1,317,483 1,341,652
Depreciation and amortization 595,896 403,294 276,297
Interest - net 2,174 61,979 (39,901)
Minority interest in loss of subsidiary (524) (108,201) (135,133)
----------------------------------------------
34,535,858 25,299,120 21,388,567
----------------------------------------------
Income (loss) before income taxes 1,780,063 (3,552,457) 1,397,038
Income tax expense (benefit) 730,000 (1,266,000) 572,000
----------------------------------------------
Net income (loss) 1,050,063 (2,286,457) 825,038
Less dividends on:
Series B Convertible Preferred Stock -- -- 28,428
Series C Convertible Preferred Stock 131,686 65,537 --
----------------------------------------------
Net income (loss) for common stock $ 918,377 $ (2,351,994) $ 796,610
==============================================
Earnings (loss) per common share
Primary $ .23 $ (.70) $ .24
==============================================
Fully diluted $ .21 $ (.70) $ .24
==============================================
Shares used in computing earnings (loss)
per share
Primary 4,540,280 3,337,484 3,312,108
==============================================
Fully diluted 5,042,879 3,337,484 3,312,108
==============================================
</TABLE>
See accompanying notes.
32
<PAGE> 33
PMR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES B SERIES C
CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED NOTES
STOCK STOCK COMMON STOCK RECEIVABLE
-------------------------------------------------------------- PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1993 395,238 $ 3,952 - $ - 2,866,458 $28,663 $5,042,799 $ -
Conversion of Series B convertible
preferred stock to common stock (395,238) (3,952) - - 395,238 3,952 - -
Issuance of common stock under
stock option plan - - - - 450 5 2,415 -
Dividend paid in common stock to
Series B preferred stockholders - - - - 45,507 455 235,473 -
Net income - - - - - - - -
-------------------------------------------------------------------------------------
Balance at April 30, 1994 - - - - 3,307,653 33,075 5,280,687 -
Issuance of Series C convertible
preferred stock, net of issuance
costs of $105,628 - - 700,000 7,000 - - 1,637,372 (60,000)
Exercise of Redeemable A Warrants
to purchase common stock - - - - 29,003 290 115,723 -
Issuance of common stock under
stock option plan - - - - 2,000 20 16,480 -
Accrued interest on stockholder
notes - - - - - - - (2,626)
Dividend payable on Series C
preferred stock - - - - - - - -
Net loss - - - - - - - -
-------------------------------------------------------------------------------------
Balance at April 30, 1995 - - 700,000 7,000 3,338,656 33,385 7,050,262 (62,626)
Issuance of common stock under
stock option plans - - - - 17,174 172 61,202 1,184
Issuance of common stock for
non-compete agreements and
acquisition of minority interest - - - - 197,087 1,971 1,029,279 -
Issuance of common stock for a
note receiveable - - - - 25,000 250 118,500 (118,750)
Accrued interest on stockholder
notes - - - - - - - (4,507)
Dividend payable on Series C
preferred stock - - - - - - - -
Proceeds from payment of
stockholder notes - - - - - - - 43,152
Net income - - - - - - - -
-------------------------------------------------------------------------------------
Balance at April 30, 1996 - $ - 700,000 $7,000 3,577,917 $35,778 $8,259,243 $(141,547)
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
TOTAL
RETAINED STOCKHOLDERS'
EARNINGS EQUITY
--------------------------
<S> <C> <C>
Balance at April 30, 1993 $ 1,588,956 $ 6,664,370
Conversion of Series B convertible
preferred stock to common stock - -
Issuance of common stock under
stock option plan - 2,420
Dividend paid in common stock to
Series B preferred stockholders (28,428) 207,500
Net income 825,038 825,038
--------------------------
Balance at April 30, 1994 2,385,566 7,699,328
Issuance of Series C convertible
preferred stock, net of issuance
costs of $105,628 - 1,584,372
Exercise of Redeemable A Warrants
to purchase common stock - 116,013
Issuance of common stock under
stock option plan - 16,500
Accrued interest on stockholder
notes - (2,626)
Dividend payable on Series C
preferred stock (65,537) (65,537)
Net loss (2,286,457) (2,286,457)
--------------------------
Balance at April 30, 1995 33,572 7,061,593
Issuance of common stock under
stock option plans - 62,558
Issuance of common stock for
non-compete agreements and
acquisition of minority interest - 1,031,250
Issuance of common stock for a
note receiveable - -
Accrued interest on stockholder
notes - (4,507)
Dividend payable on Series C
preferred stock (131,686) (131,686)
Proceeds from payment of
stockholder notes - 43,152
Net income 1,050,063 1,050,063
--------------------------
Balance at April 30, 1996 $ 951,949 $ 9,112,423
==========================
</TABLE>
See accompanying notes.
<PAGE> 34
PMR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,050,063 $(2,286,457) $ 825,038
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 595,896 403,294 276,297
Provision for losses on accounts receivable 1,447,983 1,317,483 1,341,652
Accrued interest income on notes receivable from
stockholders (4,507) (2,626) --
Deferred income taxes (841,000) (924,000) (1,105,000)
Minority interest in loss of joint venture (524) (108,201) (135,133)
Changes in operating assets and liabilities:
Accounts receivable (3,778,660) (3,142,713) (2,765,356)
Refundable income tax 817,165 (817,165) 240,000
Prepaid expenses and other assets (88,487) (176,474) (117,879)
Accounts payable and accrued expenses 474,124 154,831 426,961
Accrued compensation and employee benefits 1,415,780 (13,776) (273,700)
Advances from case management agencies 1,012,847 -- --
Other liabilities (205,034) (193,742) (93,707)
Contract settlement reserve 1,975,797 651,761 1,691,137
Income taxes payable 308,489 (356,000) 326,000
Deferred rent expense (60,331) 83,830 6,925
-------------------------------------------------------
Net cash provided by (used in) operating activities 4,119,601 (5,409,955) 643,235
INVESTING ACTIVITIES
Purchases of furniture and office equipment (179,281) (164,916) (616,938)
Acquisition of Twin Town minority interest (185,000) -- --
-------------------------------------------------------
Net cash used in investing activities (364,281) (164,916) (616,938)
FINANCING ACTIVITIES
Proceeds from sale of preferred stock -- 1,584,372 --
Proceeds from sale of common stock and notes receivable from
stockholders 105,710 132,513 2,420
Proceeds from note payable to bank 800,000 2,800,000 --
Payments on note payable to bank (2,000,000) (1,600,000) --
Proceeds from long-term debt -- -- 417,008
Cash dividend paid (125,484) -- --
-------------------------------------------------------
Net cash (used in) provided by financing activities (1,219,774) 2,916,885 419,428
-------------------------------------------------------
Net increase (decrease) in cash 2,535,546 (2,657,986) 445,725
Cash at beginning of year 1,382,376 4,040,362 3,594,637
-------------------------------------------------------
Cash at end of year $ 3,917,922 $ 1,382,376 $ 4,040,362
SUPPLEMENTAL INFORMATION: =======================================================
Taxes paid $ 380,735 $ 830,000 $ 1,073,000
=======================================================
Interest paid $ 129,108 $ 107,831 $ 20,447
=======================================================
</TABLE>
See accompanying notes.
34
<PAGE> 35
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BUSINESS AND PRINCIPLES OF CONSOLIDATION
PMR Corporation (the "Company") operates in the healthcare industry segment.
The Company develops, manages and markets acute outpatient psychiatric programs,
psychiatric case management programs and substance abuse treatment programs. The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, Psychiatric Management Resources, Inc., Collaborative
Care Corporation, PMR-CD, Inc., Aldine - CD, Inc. and Twin Town Outpatient.
Prior to July 1995, Twin Town Outpatient was a 51% owned subsidiary.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with maturities,
when acquired, of three months or less. The Company evaluates the financial
strength of institutions in which it invests and believes the related credit
risks are limited to an acceptable level.
CONCENTRATION OF CREDIT RISK
The Company grants credit to contracting providers in various states without
collateral. Losses resulting from bad debts have traditionally not exceeded
management's estimates. The Company has receivables, aggregating $3,671,000 at
April 30, 1996, from two providers, each of which comprise more than 10% of
total receivables. The Company monitors the credit worthiness of these customers
and believes the balances outstanding at April 30, 1996 are fully collectible.
Substantially all of the Company's cash and cash equivalents is deposited in two
banks. The Company monitors the financial status of these banks and does not
believe the deposits are subject to a significant degree of risk.
USE OF 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 related disclosures at
the date of the financial statements and the amounts of revenues and expenses
reported during the period. Actual results could differ from those estimates.
The Company's significant accounting estimates are the allowance for
uncollectible accounts and the contract settlement reserve.
35
<PAGE> 36
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE AND OFFICE EQUIPMENT
Furniture and office equipment are stated at cost and are depreciated over their
estimated useful lives using the straight-line method. Depreciation expense for
each of the three years ended April 30, 1996 was $320,212, $297,240 and
$179,106, respectively.
OTHER ASSETS
Other assets are comprised of the following at April 30:
<TABLE>
<CAPTION>
1996 1995
---------------------------------
<S> <C> <C>
Proprietary information and covenants not to compete $1,118,753 $ 637,503
Goodwill 978,858 294,000
Other 282,176 225,199
---------------------------------
2,379,787 1,156,702
Less accumulated amortization 521,685 246,001
---------------------------------
$1,858,102 $ 910,701
=================================
</TABLE>
Other assets are being amortized using the straight-line method over their
estimated useful lives. The estimated useful life of proprietary information and
covenants not to compete is five to nine years and goodwill is 15 years.
EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of common and
common equivalent shares outstanding during the year. Common stock equivalents
consist of employee and director stock options, warrants and Convertible
Preferred Stock. Earnings per share is affected by the reduction of net income
available for common stock by the amount of dividends on Series B and C
Convertible Preferred Stock. The Series B shares were converted to common in
June 1993. The Series C shares were outstanding at April 30, 1996 but were
converted to common stock subsequent to year end (see Note 6). Assuming the
conversion of the Series B preferred stock had taken place on May 1, 1993,
primary earnings per common share would have been $.25 for fiscal 1994. Assuming
the conversion of the Series C preferred stock had taken place on May 1, 1995
primary earnings per share would have been unchanged in fiscal 1996.
36
<PAGE> 37
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION AND CONTRACT SETTLEMENT RESERVE
The Company's acute outpatient psychiatric program customers are primarily acute
care hospitals or community mental health centers ("Providers"). Typical
contractual agreements with providers require the Company to provide, at its own
expense, specific management personnel for each program site. Revenue under
these programs is primarily derived from services provided under three types of
agreements: 1) an all inclusive fee arrangement based on fee-for-service rates
which provide that the Company is responsible for substantially all program
costs, 2) a fee-for-service arrangement whereby substantially all of the program
costs are the responsibility of the Provider, and 3) a fixed fee arrangement. In
all cases, the Company provides on-site managerial personnel. Patients served by
the acute outpatient psychiatric programs typically are covered by the Medicare
program.
The Company also provides management services to psychiatric case management
programs. The Company has been retained to manage the outpatient psychiatric
portion of a managed health care program funded by the State of Tennessee
("TennCare"). Under the terms of the agreement, the Company is responsible for
planning, coordinating and managing psychiatric case management to residents of
Tennessee who are eligible to participate in the TennCare program using the
proprietary treatment programs developed by the Company. The Company has signed
six-year contracts with two case management agencies which will provide the
clinical network necessary to help the Company meet its obligations under the
TennCare program. The TennCare program will become effective in July 1996.
During fiscal 1996, the Company managed the two case management agencies and was
reimbursed by the State of Tennessee on a fee-for-service basis. Revenue under
this program was approximately $7,600,000 for the year ended April 30, 1996.
There were no revenues under this program in prior years.
The Company also provides management services to substance abuse agencies and
until January 31, 1995, home health customers. Revenue from substance abuse
agencies and home health contracts for the years ended April 30, 1996, 1995 and
1994 was $1,898,000, $2,902,000 and $1,925,000, respectively.
Revenue is recognized when services are provided. Revenue under acute outpatient
psychiatric program is subject to potential denials of payment due to
disallowance of certain costs by Medicare to the various Providers and is
subject to the Provider's settlement of its Medicare cost report for the program
being managed by the Company. The Company estimates the effect of such potential
disallowances and settlements, based upon its contractual arrangements with
Providers, and records revenue for services provided at the estimated net
realizable value in the period the related services are
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provided. The Company has recorded contract settlement reserves to provide for
possible amounts ultimately owed to its Provider customers caused by denials of
payment for disallowance of costs by Medicare and Medicare cost report
settlement adjustments. Such reserve is classified
37
<PAGE> 38
as a non-current liability as ultimate resolution of substantially all of these
issues is not expected to occur during fiscal 1997.
INSURANCE
The Company carries "occurrence basis" insurance to cover general liability,
property damage and workers' compensation risks. Medical professional liability
risk is covered by a "claims made" insurance policy that provides for guaranteed
tail coverage. The Company self-insures for all employee and dependent health
care costs to a maximum of $40,000 annually per participating employee or
dependent. Excess employee health care claims are covered by stop loss
insurance. The estimated costs of settling employee health care claims and
claims and incidents not reported to the Company's professional liability
insurance carrier are accrued currently.
NEW ACCOUNTING STANDARD - STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock-Based Compensation," which is effective for the
Company's 1997 financial statements. Statement No. 123 allows companies to
either account for stock-based compensation under the new provisions of
Statement No. 123 or under the provisions of APBO 25, but requires pro-forma
disclosure in the footnotes to the financial statements as if the measurement
provisions of Statement No. 123 had been adopted. The Company intends to
continue accounting for its stock-based compensation in accordance with the
provisions of APBO 25. Accordingly, the provisions of Statement No. 123 will not
impact the financial position or the results of operations of the Company.
NEW ACCOUNTING STANDARD - LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which is effective for the Company's fiscal 1997
financial statements. The new Statement requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
estimated to be generated by those assets are less than the assets' carrying
amount. Statement 121 also addresses the accounting for long-lived assets that
are expected to be disposed of. Any impairment losses identified will be
measured by comparing the fair value of the asset to its carrying amount. The
Company does not believe, based on current circumstances, the effect of the
adoption of Statement No. 121 will have a material impact on its financial
position or results of operations.
RECLASSIFICATION
Certain classifications of accounts in the prior year have been reclassified to
reflect current year classifications.
38
<PAGE> 39
2. ACQUISITION OF MINORITY INTEREST AND OTHER AFFILIATIONS
In July 1995, the Company acquired the 49% minority interest in Twin Town
Outpatient for $185,000 in cash and $550,000 in common stock (97,087 shares) for
total consideration of $735,000. The total purchase price was allocated to
goodwill net of minority interest of $50,142.
In October 1995, the Company entered into exclusive affiliation agreements with
two case management agencies in Tennessee (see Note 1). As part of these
agreements the Company obtained six year non-compete agreements with the two
agencies in exchange for 50,000 shares each of the Company's common stock for an
aggregate value of $481,250. The amounts will be amortized over the term of the
agreements. The agreements also provide for the Company to grant warrants to the
two agencies for the purchase of up to an aggregate 550,000 shares of common
stock over a six year period if certain performance criteria are met. No
warrants were granted during fiscal 1996.
3. PURCHASED PROPRIETARY INFORMATION
In April 1993, the Company purchased certain proprietary information relating to
a complete framework and service design for assisting patients with serious and
persistent mental illness to advance through the recovery process within a
managed care and cost containment environment. The complete framework and
service design includes the protocols, techniques, programs and service
development plans needed to operate the resulting new business, for which the
Company paid $50,000 cash and issued 69,118.
3. PURCHASED PROPRIETARY INFORMATION (CONTINUED)
shares of common stock valued at $8.50 per share. The seller is entitled to
receive up to 225,000 additional shares of the Company's common stock during the
four year period through April 1997, based on pre-tax income of the business
resulting from the purchased proprietary information, which will be accounted
for as additional purchase price when, and if, issued. The earnings goals
necessary in order to entitle the sellers to additional shares of the Company's
common stock have not been met through April 30, 1996. The purchase price
includes an agreement of the principals of Co-A-Les Corp., the seller, not to
compete for a period of up to five years after any possible contingent purchase
price shares are earned.
4. LONG-TERM RECEIVABLES
Long-term receivables at April 30, 1996 consist primarily of amounts due from
contracting Providers for which the Company has established specific payment
terms for receivable amounts which were past due or for which payment, due to
contract terms, is expected to exceed one year. Management expects to receive
payment on the long-term receivables as contract terms are met, none of which
are expected to exceed two years.
5. LINE OF CREDIT
39
<PAGE> 40
The Company has a credit agreement with a bank that permits borrowings up to
$3,000,000 for working capital needs that expires on August 30, 1997 and is
collateralized by substantially all of the Company's assets. Interest on
borrowings is payable monthly at either the Bank's reference rate plus 1% or at
the Bank's Eurodollar rate plus 3%. There were no borrowings outstanding at
April 30, 1996.
6. STOCKHOLDERS' EQUITY AND SUBSEQUENT EVENT
In April 1992, the Company sold 395,238 shares of Series B Convertible Preferred
Stock at $5.25 per share for net proceeds of $1,966,249. The holders of the
Series B Preferred Stock were entitled to receive non-cumulative dividends at a
rate of 10% per annum. Effective for shareholders of record at April 30, 1993,
the Company declared a 10% dividend on the Series B Preferred Stock which was
paid by distributing 39,780 shares of common stock in June, 1993. In May 1993,
the Company called for redemption all outstanding shares of Series B Convertible
Preferred Stock. Holders of all the Series B shares exercised their options to
convert such shares to common and accordingly, in June.
6. STOCKHOLDERS' EQUITY AND SUBSEQUENT EVENT (CONTINUED)
1993, the Company issued 395,238 shares of Common Stock. An additional 5,727
shares of Common Stock were issued in payment of the 10% dividend due on the
Series B shares up to the June conversion date.
In October 1994, the Company sold investment units consisting of 700,000 shares
of Series C Convertible Preferred Stock and warrants to purchase 525,000 shares
of Common Stock at a per unit price of $2.50 for net proceeds of $1,584,372. The
warrants consist of three classes and have exercise prices ranging from $3.00 to
$6.00 per share. The holders of the Series C Preferred Stock are entitled to
receive non-cumulative dividends at a rate of 7.5% per annum. The Series C
Preferred Stock converts into an equal number of shares of Common Stock at the
option of the holder. In June 1996, the Company called for redemption all
outstanding shares of Series C Convertible Preferred Stock. Holders of all the
Series C shares exercised their options to convert such shares to Common Stock
and accordingly, in July 1996, the Company issued 700,000 shares of Common
Stock. In conjunction with the conversion, the Series C shareholders also
exercised warrants to purchase 350,000 shares of the Company's Common Stock for
net proceeds of $1,312,500.
7. STOCK OPTIONS AND WARRANTS
During 1990, the Company adopted an incentive stock option plan that, as
amended, provides for the granting of options to purchase up to 2,000,000 shares
of common stock to eligible employees. Under the 1990 plan, options may be
granted for terms of up to ten years and are generally exercisable in cumulative
annual increments of 20 percent each year, commencing one year after the date of
grant. Option prices must equal or exceed the fair market value of the shares on
the date of grant.
40
<PAGE> 41
In August 1992, the Company adopted a non-qualified stock option plan for its
outside directors. The 1992 plan provides for the Company to grant each outside
director options to purchase 15,000 shares annually of the Company's common
stock through 1997, at the fair market value at the date of grant. Options for a
maximum of 525,000 shares may be granted under this plan. The options vest 30%
immediately and in ratable annual increments over the three year period
following the date of grant.
41
<PAGE> 42
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
Warrants to purchase shares of the Company's common stock were issued in each of
the three years in the period ended April 30, 1996 to brokers, consultants
and/or Preferred Stock shareholders in connection with financing and consulting
transactions. A summary of all such warrant and employee and director option
transactions is as follows:
<TABLE>
<CAPTION>
Shares Price per Share
------------------------------------------
<S> <C> <C> <C>
Outstanding April 30, 1993 276,715 $2.00 to $8.80
Granted 159,614 6.50 to 7.15
Exercised (450) 5.38
Forfeited (22,069) 2.37 to 8.00
------------------------------------------
Outstanding April 30, 1994 413,810 2.00 to 8.80
Granted 762,120 2.50 to 7.38
Exercised (29,266) 4.00
Forfeited (38,184) 2.37 to 8.00
------------------------------------------
Outstanding April 30, 1995 1,108,480 2.00 to 8.80
Granted 1,010,279 3.50 to 9.75
Exercised (12,911) 2.61 to 4.26
Forfeited (13,973) 3.75 to 3.88
------------------------------------------
Outstanding April 30, 1996 2,091,875 $2.00 to $9.75
==========================================
</TABLE>
At April 30, 1996 options and warrants to purchase 1,635,250 shares of common
stock were exercisable and 1,257,049 shares and 285,000 shares were available
for future grant under the employee incentive stock option plan and the 1992
directors' plan, respectively.
42
<PAGE> 43
8. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1996 1995 1994
---------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $1,220,000 $ (284,000) $1,330,000
Deferred (685,000) (698,000) (890,000)
---------------------------------------------------------
535,000 (982,000) 440,000
State:
Current 351,000 (58,000) 347,000
Deferred (156,000) (226,000) (215,000)
---------------------------------------------------------
195,000 (284,000) 132,000
---------------------------------------------------------
$ 730,000 $(1,266,000) $ 572,000
=========================================================
</TABLE>
43
<PAGE> 44
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the tax effects of the use through fiscal 1993 of
the cash method of accounting for income tax purposes and temporary differences
between the carrying amounts of assets and liabilities used for financial
reporting and income tax purposes. Commencing in 1994, the Company was required
to discontinue use of the cash method of accounting for income tax purposes, the
effects of which are being recognized through April 30, 1997. The significant
components of the Company's deferred tax assets and liabilities result at April
30, 1996 and 1995 primarily from the following:
<TABLE>
<CAPTION>
1996 1995
---------------------------------
<S> <C> <C>
Deferred tax assets:
Contract settlement reserve $2,405,000 $1,446,000
Accrued compensation and employee benefits 501,000 127,000
Allowance for bad debts 497,000 537,000
State income taxes 87,000 -
Depreciation and amortization 77,000 -
Other 129,000 163,000
---------------------------------
Total deferred tax assets 3,696,000 2,273,000
Deferred tax liabilities:
Non-accrual experience method 227,000 218,000
Accrual to cash method of accounting 577,000 1,155,000
Contractual retainers 1,292,000 141,000
---------------------------------
Total deferred tax liabilities 2,096,000 1,514,000
---------------------------------
Net deferred tax assets $1,600,000 $ 759,000
=================================
</TABLE>
A reconciliation between the federal income tax rate and the effective income
tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 34% 34% 34%
State income taxes, net of federal tax benefit 7 6 6
Other - 1
(4)
-----------------------------------------------
Effective income tax rate 41% 36% 41%
===============================================
</TABLE>
44
<PAGE> 45
9. CUSTOMERS
Approximately 56% of the Company's revenues are derived from contracts with
providers in the State of California. The remainder of the Company's revenue is
derived from contracts with providers in Arizona, Arkansas, Colorado, Hawaii,
Indiana, Tennessee and Texas. The following table summarizes the percent of
revenue earned from any individual or agency which was responsible for ten
percent or more of the Company's consolidated revenues. There is more than one
program site for some providers.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
Provider 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
A 21% - -
B 11 16% -
C - - 26%
D - 11 16
E - 11 -
F - - 14
</TABLE>
10. EMPLOYEE BENEFITS
The Company maintains a tax deferred retirement plan under Section 401(k) of the
Internal Revenue Code for the benefit of all employees meeting minimum
eligibility requirements. Under the plan, each employee may defer up to 15% of
pre-tax earnings, subject to certain limitations. The Company will match 50% of
an employee's deferral to a maximum of 3% of the employee's gross salary. The
Company's matching contributions vest over a five year period. For the year
ended April 30, 1996, 1995 and 1994, the Company contributed $138,000, $134,000
and $73,000, respectively, to match employee deferrals.
11. COMMITMENTS
The Company leases its administrative facilities and certain program site
facilities under both cancelable and non-cancelable leasing arrangements.
Certain non-cancelable lease agreements call for annual rental increases based
on the consumer price index or as otherwise provided in the lease. The Company
also leases certain equipment under operating lease agreements. Future minimum
lease payments for all leases with initial terms of one year or more at April
30, 1996 are as follows: 1997 - $1,937,000; 1998 - $1,114,000; 1999 - $715,000;
2000 - $117,000 and none thereafter.
Rent expense totaled $1,950,000, $1,811,000 and $1,307,000 for the year ended
April 30, 1996, 1995 and 1994, respectively.
45
<PAGE> 46
Schedule II
PMR Corporation
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. .D COL. E
- ----------------------------------------------------------------------------------------------------------------------------------
Additions
--------------------------------------
Balance at Charged to Costs Charged to Other Balance at
Description Beginning of and Expenses Accounts - Deductions - End of
Period Describe Describe Period
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended April 30, 1996
Allowance for doubtful accounts $1,423,054 $1,447,983 $ - $1,111,855 (1) $1,759,182
Contract settlement reserve $3,523,223 $2,390,196 $ - $ 414,399 (2) $5,499,020
Year ended April 30, 1995
Allowance for doubtful accounts $ 400,000 $1,317,483 $ - $ 294,429 (1) $1,423,054
Contract settlement reserve $2,871,462 $3,899,000 $ - $3,247,239 (2) $3,523,223
Year ended April 30, 1994
Allowance for doubtful accounts $ 183,353 $1,341,652 $ - $1,125,005 (1) $ 400,000
Contract settlement reserve $1,180,325 $1,741,352 $ - $ 50,215 (2) $2,871,462
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
(2) Write off of hospital receivables based on denials or estimated
adjustments by Medicare
46
<PAGE> 47
PMR CORPORATION
ANNUAL REPORT ON FORM 10-K - YEAR ENDED APRIL 30, 1996
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------
13 Annual Report to Stockholders Filed herewith.
- -----------------------------------------------------------------------------
21 Subsidiaries of the Corporation Filed herewith.
- -----------------------------------------------------------------------------
23.1 Consent of Ernst & Young Filed herewith.
- -----------------------------------------------------------------------------
</TABLE>
47
<PAGE> 1
EXHIBIT 13
ANNUAL REPORT
TO
STOCKHOLDERS
48
<PAGE> 2
PMR CORPORATION
1996 ANNUAL REPORT
[PSYCHIATRIC MANAGEMENT RESOURCES LOGO]
49
<PAGE> 3
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Letter to Stockholders 2
Description of Business 4
Selected Financial Data 5
Stock Prices 5
Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Report of Independent Auditors 14
Financial Statements 15
</TABLE>
1
<PAGE> 4
LETTER TO STOCKHOLDERS
By any yardstick, fiscal year 1996 was a wonderful year of growth and recovery
for the shareholders and employees of PMR Corporation.
PMR aided in the recovery of over 10,000 individuals with a Serious Mental
Illness (SMI). The diseases of schizophrenia and bipolar disorder (manic
depression) afflict one to three percent of our population and cost the nation
in excess of $20 billion. It may result in the devastation of the lives of those
afflicted, as well as the family members who are forced to watch those they care
for cycle through protracted bouts of acute illness.
PMR recorded record revenue of $36.3 million versus $21.7 million in fiscal year
1995, an increase of 67%. Annualizing the revenues of the fourth quarter, PMR
begins fiscal year 1997 with a "run rate" in excess of $45 million. Earnings
improved to $1.0 million or $.21 per share in Fiscal 1996 versus a loss of $2.4
million or ($.70) per share in Fiscal 1995. In addition to favorable yearly
comparisons we were able to increase revenue and earnings each quarter
throughout the year, even through our seasonally difficult third quarter. Our
balance sheet also demonstrated dramatic improvement, as cash on hand increased
184% to $3.9 million, while the Company retired all of its outstanding bank
debt.
Our internal progress was reflected in the increase of our market value. Our
stock price increased over 110%, rewarding the patience of our loyal long term
stockholders.
Several key events and accomplishments drove the success of the past year and
auger well for fiscal 1997 and beyond:
- The Health Care Finance Administration further defined the outpatient
psychiatric benefit adding a degree of certainty as to how claims for
service would be adjudicated. Consequently, the company was able to add 5
programs during the year and grow "same center" revenues and census by 40%
and 25%, respectively.
- We launched our case management venture in Tennessee and enrolled 3,500
clients. In less than a year, this business has grown to represent more
than 20% of the Company's revenues, and we anticipate continued growth in
the future. This venture is a partnership between PMR and the two premier
case management agencies in Tennessee. A second case management effort was
initiated in Arkansas in collaboration with leading community mental health
centers and should generate revenue during the first half of fiscal year
1997.
2
<PAGE> 5
- We developed another new service for public sector patients, known as
ambulatory detoxification, which we are testing in Arkansas. Early results
are encouraging for this unique substance abuse program.
- We implemented new systems and controls in our accounts receivable
department which resulted in a reduction in days sales outstanding from 134
in April 1995 to 72 at year end.
Our strategy for the future centers on a disease management approach to treating
the Seriously Mentally Ill. We presently offer an expanding array of outpatient
services and managed care programs for patients afflicted by schizophrenia and
bipolar disorder. We believe this population, which requires on-going care and
supervision, can achieve the best outcomes at the lowest cost through integrated
management and a clinical program focused on early intervention. For the public
sector payors, who provide virtually all of the financial support for this
population, PMR represents an experienced and proven provider which can offer a
"carve-out" for this traditionally high cost and unmanaged population.
Finally, I want to personally thank two groups. First, the principals of Gruber
and McBaine Capital Management and Proactive Partners, L.P. These investors have
provided long term capital and valuable counsel throughout each stage of our
development. For me, they define the true meaning of long term investors.
Second, my appreciation and admiration are extended to the employees of PMR
CORPORATION. These are wonderful, committed professionals who have consistently
demonstrated their talent, fortitude and dedication to our mission. I am very
proud to work with you.
Thank you,
Allen Tepper,
Chief Executive Officer
Chairman of the Board
3
<PAGE> 6
DESCRIPTION OF BUSINESS
PMR Corporation (the "Company") is a leader in the development and
management of programs and services for individuals who have been diagnosed with
a Serious Mental Illness ("SMI"). These diseases, which are often chronic and
life long, are primarily schizophrenia and bi-polar disorder (manic depression)
and afflict more than one percent (1%) of the U.S. population. The Company's
programs have been developed to assist providers of health care services in
delivering care and treatment programs which serve as alternatives to more
costly inpatient behavioral healthcare for the SMI population. The Company's
clinical philosophy emphasizes early intervention to identify and reduce the
incidence of crises events and thus contain the high costs associated with
catastrophic events. Through its disease management approach, the Company
believes that its programs may achieve a reduction in health care costs and
result in improved clinical outcomes.
The Company operates three lines of business devoted to behavioral
health care: acute outpatient psychiatric services, case management services and
chemical dependency services. The Company's focus is on the growth of its acute
outpatient program and case management businesses, which are targeted
exclusively to serve the SMI population.
The Company's objective is to be a leading developer and provider of a
continuum of programs which deliver cost effective mental health services for
individuals within the SMI population. Since the SMI population receives the
vast majority of its health care funding from state, local and federal agencies,
the Company aims to develop programs which assist these entities in containing
rapidly growing and often uncontrolled health care costs. Through the successful
development and operation of these programs, the Company's mission is to foster
the recovery of individuals from the devastating effects of serious mental
illnesses and chemical dependency, and to ensure the cost-effective treatment
and rehabilitation services which limit hospitalization, afford significant
relief from symptoms, and contribute to better quality health care in the
communities within which the Company operates.
In order to achieve its objectives, the Company's strategy is to (i)
aggressively pursue new contracts for acute outpatient programs and increase
profitability of existing programs; (ii) increase the enrollment and market area
of existing case management programs; (iii) aggressively seek to develop new
markets for case management; and (iv) identify additional services which the
Company can provide to the SMI population as part of its comprehensive disease
management approach.
4
<PAGE> 7
FIVE YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except per share amounts) FOR THE YEAR ENDED APRIL 30
1996 1995 1994 1993 1992
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT INFORMATION
Revenues $ 36,316 $ 21,747 $ 22,786 $ 16,615 $ 6,594
Net Income (loss) 918 (2,352) 825 1,157 619
Net Income (loss) per share
Primary .23 (.70) .24 .30 .23
Fully Diluted .21 (.70) .24 .30 .23
Weighted Shares Outstanding
Primary 4,540 3,337 3,312 2,839 2,726
Fully Diluted 5,043 3,337 3,313 2,858 2,733
BALANCE SHEET INFORMATION
Working Capital $ 10,911 $ 8,790 $ 7,705 $ 7,843 $ 4,054
Total Assets 21,182 14,811 13,671 11,289 5,538
Long Term Debt 0 126 320 135 2
Total Liabilities 12,069 7,749 5,972 4,625 1,280
Stockholders' Equity 9,112 7,062 7,699 6,664 4,258
</TABLE>
<TABLE>
<CAPTION>
QUARTERS FOR THE YEAR ENDED APRIL 1995 QUARTERS FOR THE YEAR ENDED APRIL 1996
1st 2nd 3rd 4th 1st 2nd 3rd 4th
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 6,119 6,035 5,107 4,486 6,006 8,215 10,154 11,940
Net Income (loss) (240) (151) (674) (1,278) 5 167 222 524
Net Income (loss) per share
Primary (.07) (.05) (.20) (.39) .00 .04 .06 .11
Fully Diluted (.07) (.05) (.20) (.38) .00 .04 .06 .10
</TABLE>
The Company's Common Stock trades on the National Market System of
NASDAQ under the symbol "PMRP." The following table sets forth the reported high
and low prices per share of the Common Stock for each quarterly period during
Fiscal 1995 and 1996.
<TABLE>
<CAPTION>
STOCK PRICES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $8.25 7.38 9.00 7.00 6.00 5.63 5.63 10.19
Low $5.75 2.50 5.63 3.44 3.00 3.50 4.25 4.50
</TABLE>
5
<PAGE> 8
HOLDERS
As of July 19, 1996, the number of record holders of the Company's
Common Stock was 93. A significant number of shares are held by financial
institutions in "street name." Management has reason to believe, based upon
inquiry from brokerage sources, that the Company has more than 650 beneficial
owners of its Common Stock.
DIVIDENDS
During October, 1994, the Company sold 700,000 shares of Series C $2.50
Convertible Preferred Stock (the "Series C Stock") for net proceeds of
$1,584,000. The holders of the Series C Stock are entitled to receive
non-cumulative dividends at the rate of 7.5% per annum. In Fiscal 1996, cash
dividends of $125,484 were declared and paid. Subsequent to year end, the Series
C stock was converted to common and retired.
6
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following table presents a year-by-year analysis of certain of the material
items that comprise elements of the Company's result of operations for the
periods contained within the financial statements made a part of this Annual
Report.
<TABLE>
<CAPTION>
Percentage of Revenues Percentage
Year Ended April 30 Increase/Decrease
1996 1995
1996 1995 1994 vs. 1995 vs. 1994
----- ----- ----- --------- --------
<S> <C> <C> <C> <C> <C>
Revenues 100% 100% 100% 67% (5%)
Operating Expenses 78% 95% 75% 38% 20%
Marketing, General and 11% 14% 12% 35% 7%
Administrative
Depreciation and Amortization 2% 2% 1% 48% 46%
Other Operating Expense 4% 6% 5% 14% 9%
----------------------------------------------
Income (Loss) before Income Taxes 5% (16%) 6% N/A N/A
Provision for Income Taxes (Benefit) 2% (6%) 3% N/A N/A
Net Income (Loss) 3% (11%) 4% N/A N/A
</TABLE>
In Fiscal 1996, the Company recorded net income of $1.0 million, which
compares to a net loss of ($2.3) million during Fiscal 1995. The increase in
profitability was effected by a significant increase in revenues without a
concomitant increase in operating expenses. The Company's outpatient business
expanded significantly due to a 24.9% increase in patient census and a 15.4%
increase in net revenue per patient as compared to Fiscal 1995. Patient census
growth occurred as the Company accommodated increased demand following the
abatement of the Focused Medical Review conducted by certain HCFA fiscal
intermediaries in Fiscal 1995. Net revenue per patient increased as the Company
focused on providing higher intensity services to a higher acuity patient
population. As most of the costs of an outpatient center are fixed or
semi-fixed, the Company experienced significant unit level operating leverage
with respect to its acute outpatient program, resulting in operating expenses
declining from 95% of revenue in Fiscal 1995 to 78% of revenue in Fiscal 1996.
While the Company anticipates that it may continue to experience additional
efficiencies in its outpatient business, it does not anticipate that
improvements in margins will continue at the rate realized in Fiscal 1996.
7
<PAGE> 10
Revenues from the Company's Outpatient, Case Management, Chemical
Dependency and Home Health Care Programs were 73.8%, 20.9%, 5.3% and 0% of total
revenues in Fiscal 1996, compared to 86.6%, 0%, 7.2% and 6.2% of total revenues
in Fiscal 1996. The changes in the revenue mix were due primarily to
commencement of case management revenues in Fiscal 1996 and the termination of
home health revenues in Fiscal 1995.
Marketing, General and Administrative expenses declined as a percentage
of revenues in Fiscal 1996 as the Company experienced operating leverage on its
corporate administrative infrastructure. The Company anticipates that in the
short term marketing, general and administrative expenses may increase modestly
as a percentage of revenues as the Company invests in infrastructure to support
the growth of the case management business.
RESULTS OF OPERATIONS - FISCAL YEAR ENDED APRIL 30, 1996 COMPARED TO FISCAL YEAR
ENDED APRIL 30, 1995
Revenues. Revenues for Fiscal 1996 were $36.3 million, an increase of
$14.6 million, or 67.0% as compared to Fiscal 1995. Of this increase, $7.6
million, or 52.1%, resulted from the commencement of the Company's Case
Management Program in Tennessee. The remainder of the increase in revenues came
predominantly from the Company's Outpatient Program which recorded revenues of
$26.8 million, an increase of 33.3% from Fiscal 1996. Same store revenue
increased 31.5% as compared to Fiscal 1995. The growth in the Outpatient Program
was due to increases in average patient census and net revenue per patient at
existing sites, and the opening of five programs at new sites during Fiscal
1996. The Company closed two sites during Fiscal 1996. Revenues at the Company's
chemical dependency subsidiary increased 21.5% during Fiscal 1996.
Operating Expenses. Operating expenses for Fiscal 1996 were $28.5
million, an increase of $7.8 million, or 37.9% as compared to Fiscal 1995. Of
this increase, $6.9 million or 88.7%, resulted from the commencement of the
Company's Case Management Program in Tennessee. The remainder of the increase in
operating expenses was associated with increased costs to support the revenue
growth at existing outpatient sites and the net increase of three Outpatient
Programs during Fiscal 1996.
Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses for Fiscal 1996 were $4.0 million, an increase of $1.0
million, or 35.0% as compared to Fiscal 1995 and as compared to an increase in
revenues of 67.0%. The increase was related primarily to the following factors:
the preparation for and commencement of the Company's Case Management service in
Tennessee; the preparation for the commencement of the Case Management Program
in Arkansas; and increased marketing of the Outpatient Program.
Depreciation and Amortization. Depreciation and amortization expenses
for Fiscal 1996 were $596,000, an increase of $193,000, or 47.8% as compared to
Fiscal 1995. The increase was due largely to the amortization of intangible
assets associated with the acquisition of the remaining interest of the Twin
Town Outpatient subsidiary and covenants not to compete in Tennessee.
8
<PAGE> 11
Provision for Bad Debts and Interest Expense(net). Expenses related to
the provision for bad debts and interest expense for Fiscal 1996 were $1.4
million, an increase of approximately $70,000, or 5.1% as compared to Fiscal
1995. The percentage increase for this category of expense was substantially
less than the percentage increase in revenues and other expenses due to a lower
provision for bad debt on Case Management revenues, substantially higher cash
balances and the repayment of outstanding bank debt in the fourth fiscal
quarter.
Dividends. Dividends were $132,000, an increase of 100% from Fiscal
1995. In June 1996, subsequent to the end of Fiscal 1996, all shares of Series C
Convertible Preferred Stock were surrendered and converted into 700,000 shares
of common stock. See "Liquidity and Capital Resources."
RESULTS OF OPERATIONS - FISCAL YEAR ENDED APRIL 30, 1995 COMPARED TO FISCAL YEAR
ENDED APRIL 30, 1994
The Company incurred a loss of $2.3 million or ($.70) per share for the
fiscal year ended April 30, 1995, compared to a profit of $800,000 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 Outpatient Program census, a
20% increase in operating expenses, and a year end adjustment of approximately
$2.0 million to write down management fee revenue to provide for the possible
disallowance of certain management fees by virtue of the restrictive
interpretation of Medicare reimbursement rules being applied by certain HCFA
fiscal intermediaries, and to reflect the still uncertain effects of a Focused
Medical Review of claims that commenced during the fourth quarter of Fiscal
1994.
Management fee revenue. Operating revenue declined $1.0 million or 5%
from Fiscal 1994. "Same store" census declined approximately 20% while "same
store" net revenue declined almost 26%, reflecting the special year end
provision of approximately $2.0 million to take into account the restrictive
interpretation of Medicare reimbursement rules by certain HCFA fiscal
intermediaries and the possible denial of claims adversely impacting the
Company's management fees as a result of HCFA's Focused Medical Review. This
decrease in net revenue was offset by an increase in net revenue from five sites
opened during 1995. Visits and revenue for the home health division's nine month
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. Chemical Dependency revenues, reported
for a full year in Fiscal 1995 as compared to the six months of operations in
Fiscal 1994, increased by approximately $1.0 million from the prior year.
Operating expenses. Operating expenses increased by approximately $3.5
million or 20% from Fiscal 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
9
<PAGE> 12
with reporting the full year of operations of the Chemical Dependency Program
compared to six months of operations in Fiscal 1994.
Marketing, general and administrative expenses. Marketing, general and
administrative expenses increased $196,000 or 7% in Fiscal 1995, primarily as
the result of including the full year of operations for the Chemical Dependency
Program compared to six months of operations in Fiscal 1994.
Depreciation and Amortization. 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.
Provision for Bad Debts and Interest Expense (net). In Fiscal 1995, the
Company's provision for bad debts amounted to $1.3 million representing 6% of
revenue, the same percentage as in Fiscal 1994. 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 Fiscal 1995 to
meet its cash flow requirements.
Minority Interest. Minority interest of $108,000 reflects the 49%
allocation of losses on its wholly owned chemical dependency affiliate known as
Twin Town Outpatient. During July 1995, 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.
LIQUIDITY AND CAPITAL RESOURCES
For Fiscal 1996, net cash provided by operating activities was $4.1
million, which compares to ($5.4) million in Fiscal 1995. Working capital on
hand at April 30, 1996 was $10.9 million, an increase of $2.1 million, or 23.9%,
as compared to April 30, 1995. Cash on hand at April 30, 1996 was $3.9 million,
an increase of $2.5 million, or 184.1% as compared to April 30, 1995.
The increases in operating cash flow, working capital and cash are due
to the substantial improvement in net income during Fiscal 1996, along with
significant improvements in the collection of accounts receivables. Accounts
receivable, as measured by days of revenue outstanding, declined from 134 at
April 30, 1995 to 72 at April 30, 1996. The improvement in the collection of
accounts receivable was due to the implementation of new and more stringent
control systems and the abatement of the Focused Medical Review (and thus a
return to steady payments to the Company's Providers).
In Fiscal 1996, funds from operations were the principal source of
working capital. This reflects an increase from Fiscal 1995 when the Company
relied upon advances on its line of credit
10
<PAGE> 13
and proceeds from a private financing transaction to support a negative cash
flow from operations of $5.4 million. During Fiscal 1996, the Company utilized a
portion of its funds from operations to fully repay its credit line, which had a
balance of $1.2 million at April 30, 1995. Working capital was also utilized to
open five additional Outpatient Programs and to fund the start up of the
Tennessee Case Management Program. The Company provided $1.1 million in funding
for Tennessee in Fiscal 1996. The Company does not anticipate significant
additional funding requirements for case management in Tennessee, other than
that which can be provided from operating cash flow.
Working capital is anticipated to be utilized during the year for
operations, to continue expansion of the Company's Outpatient Program and Case
Management Program, and for the implementation and expansion of other Company
programs. During Fiscal 1997, working capital is expected to be realized
principally from operations, as well as from a new $3 million line of credit
from Sanwa Bank which became effective February 1, 1996. Interest is payable
under this line of credit at a rate of either the Bank's reference rate plus one
percent or the Eurodollar rate plus three percent. The Company will also realize
working capital from the exercise of certain outstanding warrants that were
components of a private placement transaction undertaken during Fiscal 1995. In
October 1994, the Company issued investment units consisting of shares of Series
C Convertible Preferred Stock and 525,000 Warrants. The Warrants, in turn, were
comprised of 175,000 Class A Warrants, 175,000 Class B Warrants and 175,000
Class C Warrants which were, respectively, subject to exercise prices of $3.00,
$4.50 and $6.00. During June 1996, following notice of redemption, the holders
of these investment units converted all of the Series C Preferred Stock into
700,000 shares of the Company's common stock and the Company issued an
additional 350,000 shares of common stock upon the exercise of all of the Class
A and Class B Warrants. The exercise of these Warrants provided the Company with
net proceeds in July 1996 of $1.3 million. The Class C Warrants are scheduled to
expire on October 15, 1999 and may be exercised earlier if subject to redemption
by the Company provided the average price of the Company's common stock exceeds
twelve dollars for a period of thirty trading days.
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. These programs generally
experience operating losses through an average of the first four months of
operation, however, the Company has made no commitments for material capital
expenditures for these programs. The Company expects to provide cash for the
start up of the Case Management Program in Arkansas, or other new programs
opened during the year, however, in amounts that are not yet certain due to the
early stage of the program's development.
A charge upon the Company's working capital may also occur during the
year ending April 30, 1997 or thereafter as a result of certain uncertainties
associated with the healthcare reimbursement rules as they apply to the
Company's Outpatient Program. During Fiscal 1996, a majority of the Company's
revenues were derived from the Company's management of its Outpatient Program.
Since substantially all of the patients of the Company's Outpatient Program are
eligible for Medicare, collection of a significant component of the Company's
management fees is dependent upon reimbursement of claims submitted to fiscal
intermediaries by the Hospitals or CMHCs (Providers) on whose behalf these
programs are managed.
11
<PAGE> 14
The Company maintains reserves to cover the effect of primarily two
uncertainties: 1) that the Company may have an obligation to indemnify certain
Providers for some portions of its management fee which may be subject to
disallowance upon audit of the Providers' cost reports by fiscal intermediaries;
and 2) that the Company may not receive full payment of the management fees owed
to it by the Providers during the periodic review of the Providers' claims by
the fiscal intermediaries.
The Company has been advised by HCFA that certain program-related costs
are not allowable for reimbursement. The Company may be responsible for
reimbursement of the amounts disallowed pursuant to warranty obligations that
exist with certain Providers. Although the Company believes that its potential
liability to satisfy such requirements has been adequately reserved in its
financial statements, the obligation to pay such amounts when and if they become
due, could have a material adverse impact on the Company's short term liquidity.
Certain factors are, in management's view, likely to lessen the impact of any
such 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 obligations already owed by the Provider to the Company; and that, in
certain instances, funds have already been paid into an escrow account to cover
any such eventuality.
During the fourth quarter of Fiscal Year 1994, fiscal intermediaries
for Hospitals and CMHCs began a Focused Medical Review of claims for partial
hospitalization services throughout the country. A Focused Medical Review
consists of an intensive review by HCFA fiscal intermediaries on an
industry-wide basis of certain targeted claims which HCFA has identified as
being at risk of inappropriate program payment. This often occurs when HCFA
identifies significant industry-wide increases in payments of certain types of
services, as had been the case with the partial hospitalization benefit. The
Company's initial experience with the Focused Medical Review was that there were
numerous denials of Providers' claims and the denials had an adverse impact on
the Company's cash flow during Fiscal 1995 because Providers delayed payment of
the Company's management fee because of the substantial number of denials. On
behalf of the Providers, the Company strenuously disputed these denials,
particularly the interpretations implemented by one singular fiscal
intermediary. The initial review process was particularly complicated by the
absence of comprehensive standards governing the partial hospitalization
benefit.
The Focused Medical Review of claims for partial hospitalization
services conducted by fiscal intermediaries for the Providers continues but its
effect has substantially abated on programs managed by the Company. This has
occurred as a result of a number of factors, such as the issuance of a Medicare
Program Memorandum by HCFA during June 1995 (which defines partial
hospitalization eligibility and the scope of covered services), as well as the
intensification of the Company's utilization review and utilization management
efforts. Specifically, the number of denials reported to the Company in Fiscal
1996 represented approximately 1% of the estimated number of total claims
submitted by Providers to fiscal intermediaries. Although during Fiscal 1996,
the number of denied claims was reduced to an insignificant rate, the periodic
review of
12
<PAGE> 15
claims by HCFA fiscal intermediaries will likely continue at one or more
programs from time to time.
To the extent claims for services have been denied in Outpatient
Programs managed by the Company, the great majority of the denied claims have
been appealed. Approximately 47% of these appeals have reached resolution and
the Company has succeeded in securing a reversal in the substantial majority of
these cases. The appeals process continues for a majority of the denied claims.
Given these results, and given the Company's experience during Fiscal 1996
(during which the rate of denials has declined to an insignificant rate), and in
view of the existing reserves established within the Company's financial
statements, management does not believe fiscal intermediaries' review of
outstanding claims will likely have a material adverse effect upon the Company's
liquidity and capital resources during Fiscal 1997.
13
<PAGE> 16
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PMR Corporation
We have audited the accompanying consolidated balance sheets of PMR Corporation
as of April 30, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended April 30, 1996. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PMR
Corporation at April 30, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
April 30, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
June 14, 1996,
except for the second paragraph of Note 6, as to which the date is
July 3, 1996
San Diego, California
14
<PAGE> 17
PMR CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30
1996 1995
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,917,922 $ 1,382,376
Accounts receivable, net of allowance for uncollectible amounts of
$1,759,000 in 1996 and $1,423,000 in 1995 9,289,895 8,465,568
Prepaid expenses and other current assets 321,506 289,996
Refundable income taxes -- 817,165
Deferred income tax benefits 2,701,000 1,217,000
--------------------------------
Total current assets 16,230,323 12,172,105
Furniture and office equipment, net of accumulated depreciation of
$869,261 in 1996 and $579,656 in 1995 649,312 790,243
Long-term receivables 2,444,055 937,705
Other assets 1,858,102 910,701
--------------------------------
Total assets $ 21,181,792 $ 14,810,754
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ -- $ 1,200,000
Accounts payable and accrued expenses 1,522,721 1,048,597
Accrued compensation and employee benefits 2,276,809 861,029
Advances from case management agencies 1,012,847 --
Income taxes payable 308,489 --
Dividends payable 71,739 65,537
Other current liabilities 127,213 206,550
--------------------------------
Total current liabilities 5,319,818 3,381,713
Deferred rent expense 149,531 209,862
Deferred income taxes 1,101,000 458,000
Contract settlement reserve 5,499,020 3,523,223
Minority interest -- 50,666
Other liabilities -- 125,697
Commitments
Stockholders' equity:
Convertible Preferred Stock, $.01 par value, authorized shares -
1,000,000; Series C - issued and outstanding shares - 700,000
in 1996 and 1995; liquidation preference $1,750,000
7,000 7,000
Common Stock, $.01 par value, authorized shares - 10,000,000;
issued and outstanding shares - 3,577,917 in 1996 and 3,338,656
in 1995 35,778 33,385
Additional paid-in capital 8,259,243 7,050,262
Notes receivable from stockholders (141,547) (62,626)
Retained earnings 951,949 33,572
--------------------------------
9,112,423 7,061,593
--------------------------------
$ 21,181,792 $ 14,810,754
================================
</TABLE>
See accompanying notes.
15
<PAGE> 18
PMR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C>
Management fee revenue $ 36,315,921 $ 21,746,663 $ 22,785,605
Expenses:
Operating expenses 28,471,644 20,647,965 17,164,823
Marketing, general and administrative 4,018,685 2,976,600 2,780,829
Provision for bad debts 1,447,983 1,317,483 1,341,652
Depreciation and amortization 595,896 403,294 276,297
Interest - net 2,174 61,979 (39,901)
Minority interest in loss of subsidiary (524) (108,201) (135,133)
----------------------------------------------------
34,535,858 25,299,120 21,388,567
----------------------------------------------------
Income (loss) before income taxes 1,780,063 (3,552,457) 1,397,038
Income tax expense (benefit) 730,000 (1,266,000) 572,000
----------------------------------------------------
Net income (loss) 1,050,063 (2,286,457) 825,038
Less dividends on:
Series B Convertible Preferred Stock -- -- 28,428
Series C Convertible Preferred Stock 131,686 65,537 --
----------------------------------------------------
Net income (loss) for common stock $ 918,377 $ (2,351,994) $ 796,610
====================================================
Earnings (loss) per common share
Primary $ .23 $ (.70) $ .24
====================================================
Fully diluted $ .21 $ (.70) $ .24
====================================================
Shares used in computing earnings (loss)
per share
Primary 4,540,280 3,337,484 3,312,108
====================================================
Fully diluted 5,042,879 3,337,484 3,312,108
====================================================
</TABLE>
See accompanying notes.
16
<PAGE> 19
PMR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES B SERIES C
CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED
STOCK STOCK COMMON STOCK
----------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1993 395,238 $ 3,952 -- $ -- 2,866,458 $ 28,663
Conversion of Series B convertible
preferred stock to common stock (395,238) (3,952) -- -- 395,238 3,952
Issuance of common stock under
stock option plan -- -- -- -- 450 5
Dividend paid in common stock to
Series B preferred stockholders -- -- -- -- 45,507 455
Net income -- -- -- -- -- --
----------------------------------------------------------------------------------------
Balance at April 30, 1994 -- -- -- -- 3,307,653 33,075
Issuance of Series C convertible
preferred stock, net of issuance
costs of $105,628 -- -- 700,000 7,000 -- --
Exercise of Redeemable A Warrants
to purchase common stock -- -- -- -- 29,003 290
Issuance of common stock under
stock option plan -- -- -- -- 2,000 20
Accrued interest on stockholder
notes -- -- -- -- -- --
Dividend payable on Series C
preferred stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------------------------------------------------------------------------------------
Balance at April 30, 1995 -- -- 700,000 7,000 3,338,656 33,385
Issuance of common stock under
stock option plans -- -- -- -- 17,174 172
Issuance of common stock for
non-compete agreements and
acquisition of minority interest -- -- -- -- 197,087 1,971
Issuance of common stock for a
note receiveable -- -- -- -- 25,000 250
Accrued interest on stockholder
notes -- -- -- -- -- --
Dividend payable on Series C
preferred stock -- -- -- -- -- --
Proceeds from payment of
stockholder notes -- -- -- -- -- --
Net income -- -- -- -- -- --
----------------------------------------------------------------------------------------
Balance at April 30, 1996 -- $ -- 700,000 $ 7,000 3,577,917 $ 35,778
========================================================================================
<CAPTION>
NOTES
RECEIVABLE TOTAL
PAID-IN FROM RETAINED STOCKHOLDERS'
CAPITAL STOCKHOLDERS EARNINGS EQUITY
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at April 30, 1993 $ 5,042,799 $ -- $ 1,588,956 $ 6,664,370
Conversion of Series B convertible
preferred stock to common stock -- -- -- --
Issuance of common stock under
stock option plan 2,415 -- -- 2,420
Dividend paid in common stock to
Series B preferred stockholders 235,473 -- (28,428) 207,500
Net income -- -- 825,038 825,038
--------------------------------------------------------------------------
Balance at April 30, 1994 5,280,687 -- 2,385,566 7,699,328
Issuance of Series C convertible
preferred stock, net of issuance
costs of $105,628 1,637,372 (60,000) -- 1,584,372
Exercise of Redeemable A Warrants
to purchase common stock 115,723 -- -- 116,013
Issuance of common stock under
stock option plan 16,480 -- -- 16,500
Accrued interest on stockholder
notes -- (2,626) -- (2,626)
Dividend payable on Series C
preferred stock -- -- (65,537) (65,537)
Net loss -- -- (2,286,457) (2,286,457)
--------------------------------------------------------------------------
Balance at April 30, 1995 7,050,262 (62,626) 33,572 7,061,593
Issuance of common stock under
stock option plans 61,202 1,184 -- 62,558
Issuance of common stock for
non-compete agreements and
acquisition of minority interest 1,029,279 -- -- 1,031,250
Issuance of common stock for a
note receiveable 118,500 (118,750) -- --
Accrued interest on stockholder
notes -- (4,507) -- (4,507)
Dividend payable on Series C
preferred stock -- -- (131,686) (131,686)
Proceeds from payment of
stockholder notes -- 43,152 -- 43,152
Net income -- -- 1,050,063 1,050,063
--------------------------------------------------------------------------
Balance at April 30, 1996 $ 8,259,243 $ (141,547) $ 951,949 $ 9,112,423
==========================================================================
</TABLE>
See accompanying notes.
<PAGE> 20
PMR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,050,063 $(2,286,457) $ 825,038
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 595,896 403,294 276,297
Provision for losses on accounts receivable 1,447,983 1,317,483 1,341,652
Accrued interest income on notes receivable from
stockholders (4,507) (2,626) --
Deferred income taxes (841,000) (924,000) (1,105,000)
Minority interest in loss of joint venture (524) (108,201) (135,133)
Changes in operating assets and liabilities:
Accounts receivable (3,778,660) (3,142,713) (2,765,356)
Refundable income tax 817,165 (817,165) 240,000
Prepaid expenses and other assets (88,487) (176,474) (117,879)
Accounts payable and accrued expenses 474,124 154,831 426,961
Accrued compensation and employee benefits 1,415,780 (13,776) (273,700)
Advances from case management agencies 1,012,847 -- --
Other liabilities (205,034) (193,742) (93,707)
Contract settlement reserve 1,975,797 651,761 1,691,137
Income taxes payable 308,489 (356,000) 326,000
Deferred rent expense (60,331) 83,830 6,925
-------------------------------------------------
Net cash provided by (used in) operating activities 4,119,601 (5,409,955) 643,235
INVESTING ACTIVITIES
Purchases of furniture and office equipment (179,281) (164,916) (616,938)
Acquisition of Twin Town minority interest (185,000) -- --
-------------------------------------------------
Net cash used in investing activities (364,281) (164,916) (616,938)
FINANCING ACTIVITIES
Proceeds from sale of preferred stock -- 1,584,372 --
Proceeds from sale of common stock and notes receivable from
stockholders 105,710 132,513 2,420
Proceeds from note payable to bank 800,000 2,800,000 --
Payments on note payable to bank (2,000,000) (1,600,000) --
Proceeds from long-term debt -- -- 417,008
Cash dividend paid (125,484) -- --
-------------------------------------------------
Net cash (used in) provided by financing activities (1,219,774) 2,916,885 419,428
-------------------------------------------------
Net increase (decrease) in cash 2,535,546 (2,657,986) 445,725
Cash at beginning of year 1,382,376 4,040,362 3,594,637
-------------------------------------------------
Cash at end of year $ 3,917,922 $ 1,382,376 $ 4,040,362
=================================================
SUPPLEMENTAL INFORMATION:
Taxes paid $ 380,735 $ 830,000 $ 1,073,000
=================================================
Interest paid $ 129,108 $ 107,831 $ 20,447
=================================================
</TABLE>
See accompanying notes.
18
<PAGE> 21
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BUSINESS AND PRINCIPLES OF CONSOLIDATION
PMR Corporation (the "Company") operates in the healthcare industry segment.
The Company develops, manages and markets acute outpatient psychiatric programs,
psychiatric case management programs and substance abuse treatment programs. The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, Psychiatric Management Resources, Inc., Collaborative
Care Corporation, PMR-CD, Inc., Aldine - CD, Inc. and Twin Town Outpatient.
Prior to July 1995, Twin Town Outpatient was a 51% owned subsidiary.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with maturities,
when acquired, of three months or less. The Company evaluates the financial
strength of institutions in which it invests and believes the related credit
risks are limited to an acceptable level.
CONCENTRATION OF CREDIT RISK
The Company grants credit to contracting providers in various states without
collateral. Losses resulting from bad debts have traditionally not exceeded
management's estimates. The Company has receivables, aggregating $3,671,000 at
April 30, 1996, from two providers, each of which comprise more than 10% of
total receivables. The Company monitors the credit worthiness of these customers
and believes the balances outstanding at April 30, 1996 are fully collectible.
Substantially all of the Company's cash and cash equivalents is deposited in two
banks. The Company monitors the financial status of these banks and does not
believe the deposits are subject to a significant degree of risk.
USE OF 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 related disclosures at
the date of the financial statements and the amounts of revenues and expenses
reported during the period. Actual results could differ from those estimates.
The Company's significant accounting estimates are the allowance for
uncollectible accounts and the contract settlement reserve.
19
<PAGE> 22
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE AND OFFICE EQUIPMENT
Furniture and office equipment are stated at cost and are depreciated over their
estimated useful lives using the straight-line method. Depreciation expense for
each of the three years ended April 30, 1996 was $320,212, $297,240 and
$179,106, respectively.
OTHER ASSETS
Other assets are comprised of the following at April 30:
<TABLE>
<CAPTION>
1996 1995
---------------------------
<S> <C> <C>
Proprietary information and covenants not to compete $1,118,753 $ 637,503
Goodwill 978,858 294,000
Other 282,176 225,199
---------------------------
2,379,787 1,156,702
Less accumulated amortization 521,685 246,001
---------------------------
$1,858,102 $ 910,701
===========================
</TABLE>
Other assets are being amortized using the straight-line method over their
estimated useful lives. The estimated useful life of proprietary information and
covenants not to compete is five to nine years and goodwill is 15 years.
EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of common and
common equivalent shares outstanding during the year. Common stock equivalents
consist of employee and director stock options, warrants and Convertible
Preferred Stock. Earnings per share is affected by the reduction of net income
available for common stock by the amount of dividends on Series B and C
Convertible Preferred Stock. The Series B shares were converted to common in
June 1993. The Series C shares were outstanding at April 30, 1996 but were
converted to common stock subsequent to year end (see Note 6). Assuming the
conversion of the Series B preferred stock had taken place on May 1, 1993,
primary earnings per common share would have been $.25 for fiscal 1994. Assuming
the conversion of the Series C preferred stock had taken place on May 1, 1995
primary earnings per share would have been unchanged in fiscal 1996.
20
<PAGE> 23
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION AND CONTRACT SETTLEMENT RESERVE
The Company's acute outpatient psychiatric program customers are primarily acute
care hospitals or community mental health centers ("Providers"). Typical
contractual agreements with providers require the Company to provide, at its own
expense, specific management personnel for each program site. Revenue under
these programs is primarily derived from services provided under three types of
agreements: 1) an all inclusive fee arrangement based on fee-for-service rates
which provide that the Company is responsible for substantially all program
costs, 2) a fee-for-service arrangement whereby substantially all of the program
costs are the responsibility of the Provider, and 3) a fixed fee arrangement. In
all cases, the Company provides on-site managerial personnel. Patients served by
the acute outpatient psychiatric programs typically are covered by the Medicare
program.
The Company also provides management services to psychiatric case management
programs. The Company has been retained to manage the outpatient psychiatric
portion of a managed health care program funded by the State of Tennessee
("TennCare"). Under the terms of the agreement, the Company is responsible for
planning, coordinating and managing psychiatric case management to residents of
Tennessee who are eligible to participate in the TennCare program using the
proprietary treatment programs developed by the Company. The Company has signed
six-year contracts with two case management agencies which will provide the
clinical network necessary to help the Company meet its obligations under the
TennCare program. The TennCare program will become effective in July 1996.
During fiscal 1996, the Company managed the two case management agencies and was
reimbursed by the State of Tennessee on a fee-for-service basis. Revenue under
this program was approximately $7,600,000 for the year ended April 30, 1996.
There were no revenues under this program in prior years.
The Company also provides management services to substance abuse agencies and
until January 31, 1995, home health customers. Revenue from substance abuse
agencies and home health contracts for the years ended April 30, 1996, 1995 and
1994 was $1,898,000, $2,902,000 and $1,925,000, respectively.
Revenue is recognized when services are provided. Revenue under acute outpatient
psychiatric program is subject to potential denials of payment due to
disallowance of certain costs by Medicare to the various Providers and is
subject to the Provider's settlement of its Medicare cost report for the program
being managed by the Company. The Company estimates the effect of such potential
disallowances and settlements, based upon its contractual arrangements with
Providers, and records revenue for services provided at the estimated net
realizable value in the period the related services are
21
<PAGE> 24
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provided. The Company has recorded contract settlement reserves to provide for
possible amounts ultimately owed to its Provider customers caused by denials of
payment for disallowance of costs by Medicare and Medicare cost report
settlement adjustments. Such reserve is classified as a non-current liability as
ultimate resolution of substantially all of these issues is not expected to
occur during fiscal 1997.
INSURANCE
The Company carries "occurrence basis" insurance to cover general liability,
property damage and workers' compensation risks. Medical professional liability
risk is covered by a "claims made" insurance policy that provides for guaranteed
tail coverage. The Company self-insures for all employee and dependent health
care costs to a maximum of $40,000 annually per participating employee or
dependent. Excess employee health care claims are covered by stop loss
insurance. The estimated costs of settling employee health care claims and
claims and incidents not reported to the Company's professional liability
insurance carrier are accrued currently.
NEW ACCOUNTING STANDARD - STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock-Based Compensation," which is effective for the
Company's 1997 financial statements. Statement No. 123 allows companies to
either account for stock-based compensation under the new provisions of
Statement No. 123 or under the provisions of APBO 25, but requires pro-forma
disclosure in the footnotes to the financial statements as if the measurement
provisions of Statement No. 123 had been adopted. The Company intends to
continue accounting for its stock-based compensation in accordance with the
provisions of APBO 25. Accordingly, the provisions of Statement No. 123 will not
impact the financial position or the results of operations of the Company.
NEW ACCOUNTING STANDARD - LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which is effective for the Company's fiscal 1997
financial statements. The new Statement requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
estimated to be generated by those assets are less than the assets' carrying
amount. Statement 121 also addresses the accounting for long-lived assets that
are expected to be disposed of. Any impairment losses identified will be
measured by comparing the fair value of the asset to its carrying
22
<PAGE> 25
PMR Corporation
Notes to Consolidated Financial Statements (continued)
amount. The Company does not believe, based on current circumstances, the effect
of the adoption of Statement No. 121 will have a material impact on its
financial position or results of operations.
RECLASSIFICATION
Certain classifications of accounts in the prior year have been reclassified to
reflect current year classifications.
2. ACQUISITION OF MINORITY INTEREST AND OTHER AFFILIATIONS
In July 1995, the Company acquired the 49% minority interest in Twin Town
Outpatient for $185,000 in cash and $550,000 in common stock (97,087 shares) for
total consideration of $735,000. The total purchase price was allocated to
goodwill net of minority interest of $50,142.
In October 1995, the Company entered into exclusive affiliation agreements with
two case management agencies in Tennessee (see Note 1). As part of these
agreements the Company obtained six year non-compete agreements with the two
agencies in exchange for 50,000 shares each of the Company's common stock for an
aggregate value of $481,250. The amounts will be amortized over the term of the
agreements. The agreements also provide for the Company to grant warrants to the
two agencies for the purchase of up to an aggregate 550,000 shares of common
stock over a six year period if certain performance criteria are met. No
warrants were granted during fiscal 1996.
3. PURCHASED PROPRIETARY INFORMATION
In April 1993, the Company purchased certain proprietary information relating to
a complete framework and service design for assisting patients with serious and
persistent mental illness to advance through the recovery process within a
managed care and cost containment environment. The complete framework and
service design includes the protocols, techniques, programs and service
development plans needed to operate the resulting new business, for which the
Company paid $50,000 cash and issued 69,118.
23
<PAGE> 26
PMR Corporation
Notes to Consolidated Financial Statements (continued)
3. PURCHASED PROPRIETARY INFORMATION (CONTINUED)
shares of common stock valued at $8.50 per share. The seller is entitled to
receive up to 225,000 additional shares of the Company's common stock during the
four year period through April 1997, based on pre-tax income of the business
resulting from the purchased proprietary information, which will be accounted
for as additional purchase price when, and if, issued. The earnings goals
necessary in order to entitle the sellers to additional shares of the Company's
common stock have not been met through April 30, 1996. The purchase price
includes an agreement of the principals of Co-A-Les Corp., the seller, not to
compete for a period of up to five years after any possible contingent purchase
price shares are earned.
4. LONG-TERM RECEIVABLES
Long-term receivables at April 30, 1996 consist primarily of amounts due from
contracting Providers for which the Company has established specific payment
terms for receivable amounts which were past due or for which payment, due to
contract terms, is expected to exceed one year. Management expects to receive
payment on the long-term receivables as contract terms are met, none of which
are expected to exceed two years.
5. LINE OF CREDIT
The Company has a credit agreement with a bank that permits borrowings up to
$3,000,000 for working capital needs that expires on August 30, 1997 and is
collateralized by substantially all of the Company's assets. Interest on
borrowings is payable monthly at either the Bank's reference rate plus 1% or at
the Bank's Eurodollar rate plus 3%. There were no borrowings outstanding at
April 30, 1996.
6. STOCKHOLDERS' EQUITY AND SUBSEQUENT EVENT
In April 1992, the Company sold 395,238 shares of Series B Convertible Preferred
Stock at $5.25 per share for net proceeds of $1,966,249. The holders of the
Series B Preferred Stock were entitled to receive non-cumulative dividends at a
rate of 10% per annum. Effective for shareholders of record at April 30, 1993,
the Company declared a 10% dividend on the Series B Preferred Stock which was
paid by distributing 39,780 shares of common stock in June, 1993. In May 1993,
the Company called for redemption all outstanding shares of Series B Convertible
Preferred Stock. Holders of all the Series B shares exercised their options to
convert such shares to common and accordingly, in June
24
<PAGE> 27
PMR Corporation
Notes to Consolidated Financial Statements (continued)
6. STOCKHOLDERS' EQUITY AND SUBSEQUENT EVENT (CONTINUED)
1993, the Company issued 395,238 shares of Common Stock. An additional 5,727
shares of Common Stock were issued in payment of the 10% dividend due on the
Series B shares up to the June conversion date.
In October 1994, the Company sold investment units consisting of 700,000 shares
of Series C Convertible Preferred Stock and warrants to purchase 525,000 shares
of Common Stock at a per unit price of $2.50 for net proceeds of $1,584,372. The
warrants consist of three classes and have exercise prices ranging from $3.00 to
$6.00 per share. The holders of the Series C Preferred Stock are entitled to
receive non-cumulative dividends at a rate of 7.5% per annum. The Series C
Preferred Stock converts into an equal number of shares of Common Stock at the
option of the holder. In June 1996, the Company called for redemption all
outstanding shares of Series C Convertible Preferred Stock. Holders of all the
Series C shares exercised their options to convert such shares to Common Stock
and accordingly, in July 1996, the Company issued 700,000 shares of Common
Stock. In conjunction with the conversion, the Series C shareholders also
exercised warrants to purchase 350,000 shares of the Company's Common Stock for
net proceeds of $1,312,500.
7. STOCK OPTIONS AND WARRANTS
During 1990, the Company adopted an incentive stock option plan that, as
amended, provides for the granting of options to purchase up to 2,000,000 shares
of common stock to eligible employees. Under the 1990 plan, options may be
granted for terms of up to ten years and are generally exercisable in cumulative
annual increments of 20 percent each year, commencing one year after the date of
grant. Option prices must equal or exceed the fair market value of the shares on
the date of grant.
In August 1992, the Company adopted a non-qualified stock option plan for its
outside directors. The 1992 plan provides for the Company to grant each outside
director options to purchase 15,000 shares annually of the Company's common
stock through 1997, at the fair market value at the date of grant. Options for a
maximum of 525,000 shares may be granted under this plan. The options vest 30%
immediately and in ratable annual increments over the three year period
following the date of grant.
25
<PAGE> 28
PMR Corporation
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
Warrants to purchase shares of the Company's common stock were issued in each of
the three years in the period ended April 30, 1996 to brokers, consultants
and/or Preferred Stock shareholders in connection with financing and consulting
transactions. A summary of all such warrant and employee and director option
transactions is as follows:
<TABLE>
<CAPTION>
Shares Price per Share
-------------------------------
<S> <C> <C>
Outstanding April 30, 1993 276,715 $2.00 to $8.80
Granted 159,614 6.50 to 7.15
Exercised (450) 5.38
Forfeited (22,069) 2.37 to 8.00
-------------------------------
Outstanding April 30, 1994 413,810 2.00 to 8.80
Granted 762,120 2.50 to 7.38
Exercised (29,266) 4.00
Forfeited (38,184) 2.37 to 8.00
-------------------------------
Outstanding April 30, 1995 1,108,480 2.00 TO 8.80
Granted 1,010,279 3.50 TO 9.75
Exercised (12,911) 2.61 TO 4.26
Forfeited (13,973) 3.75 TO 3.88
-------------------------------
Outstanding April 30, 1996 2,091,875 $2.00 TO $9.75
===============================
</TABLE>
At April 30, 1996 options and warrants to purchase 1,635,250 shares of common
stock were exercisable and 1,257,049 shares and 285,000 shares were available
for future grant under the employee incentive stock option plan and the 1992
directors' plan, respectively.
8. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 1,220,000 $ (284,000) $ 1,330,000
Deferred (685,000) (698,000) (890,000)
-------------------------------------------------
535,000 (982,000) 440,000
State:
Current 351,000 (58,000) 347,000
Deferred (156,000) (226,000) (215,000)
-------------------------------------------------
195,000 (284,000) 132,000
-------------------------------------------------
$ 730,000 $(1,266,000) $ 572,000
=================================================
</TABLE>
26
<PAGE> 29
PMR Corporation
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the tax effects of the use through fiscal 1993 of
the cash method of accounting for income tax purposes and temporary differences
between the carrying amounts of assets and liabilities used for financial
reporting and income tax purposes. Commencing in 1994, the Company was required
to discontinue use of the cash method of accounting for income tax purposes, the
effects of which are being recognized through April 30, 1997. The significant
components of the Company's deferred tax assets and liabilities result at April
30, 1996 and 1995 primarily from the following:
<TABLE>
<CAPTION>
1996 1995
---------------------------
<S> <C> <C>
Deferred tax assets:
Contract settlement reserve $2,405,000 $1,446,000
Accrued compensation and employee benefits 501,000 127,000
Allowance for bad debts 497,000 537,000
State income taxes 87,000 --
Depreciation and amortization 77,000 --
Other 129,000 163,000
---------------------------
Total deferred tax assets 3,696,000 2,273,000
Deferred tax liabilities:
Non-accrual experience method 227,000 218,000
Accrual to cash method of accounting 577,000 1,155,000
Contractual retainers 1,292,000 141,000
---------------------------
Total deferred tax liabilities 2,096,000 1,514,000
---------------------------
Net deferred tax assets $1,600,000 $ 759,000
===========================
</TABLE>
A reconciliation between the federal income tax rate and the effective income
tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1996 1995 1994
--------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 34% 34% 34%
State income taxes, net of federal tax benefit 7 6 6
Other -- (4) 1
-------------------------
Effective income tax rate 41% 36% 41%
=========================
</TABLE>
27
<PAGE> 30
PMR Corporation
Notes to Consolidated Financial Statements (continued)
9. CUSTOMERS
Approximately 56% of the Company's revenues are derived from contracts with
providers in the State of California. The remainder of the Company's revenue is
derived from contracts with providers in Arizona, Arkansas, Colorado, Hawaii,
Indiana, Tennessee and Texas. The following table summarizes the percent of
revenue earned from any individual or agency which was responsible for ten
percent or more of the Company's consolidated revenues. There is more than one
program site for some providers.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
Provider 1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C>
A 21% - -
B 11 16% -
C - - 26%
D - 11 16
E - 11 -
F - - 14
</TABLE>
10. EMPLOYEE BENEFITS
The Company maintains a tax deferred retirement plan under Section 401(k) of the
Internal Revenue Code for the benefit of all employees meeting minimum
eligibility requirements. Under the plan, each employee may defer up to 15% of
pre-tax earnings, subject to certain limitations. The Company will match 50% of
an employee's deferral to a maximum of 3% of the employee's gross salary. The
Company's matching contributions vest over a five year period. For the year
ended April 30, 1996, 1995 and 1994, the Company contributed $138,000, $134,000
and $73,000, respectively, to match employee deferrals.
11. COMMITMENTS
The Company leases its administrative facilities and certain program site
facilities under both cancelable and non-cancelable leasing arrangements.
Certain non-cancelable lease agreements call for annual rental increases based
on the consumer price index or as otherwise provided in the lease. The Company
also leases certain equipment under operating lease agreements. Future minimum
lease payments for all leases with initial terms of one year or more at April
30, 1996 are as follows: 1997 - $1,937,000; 1998 - $1,114,000; 1999 - $715,000;
2000 - $117,000 and none thereafter.
Rent expense totaled $1,950,000, $1,811,000 and $1,307,000 for the year ended
April 30, 1996, 1995 and 1994, respectively.
28
<PAGE> 31
CORPORATE INFORMATION
================================================================================
<TABLE>
<S> <C>
Directors & Officers Corporate Headquarters
Allen Tepper PMR Corporation
President and Chief Executive Officer 3990 Old Town Avenue
Chairman of the Board Suite 206A
San Diego, CA 92110
Susan D. Erskine 619/295-2227
Executive Vice President
Secretary Independent Auditors
Ernst & Young
Eugene D. Hill 501 W. Broadway
Accell Partners Suite 1100
Director San Diego, CA 92101
Charles C. McGettigan Special Securities Counsel
General Partner Buchanon Ingersoll
Proactive Partners, L.P. Two Logan Square, 12th Floor
Director 18th and Arch Streets
Philadelphia, PA 19103
Richard A. Niglio
President and CEO Transfer Agent
Children's Discovery Centers of America, Inc. Stocktrans, Inc.
Director 7 East Lancaster Avenue
Ardmore, PA 19003
Daniel L. Frank
Director Form 10-K
Copies of the Company's Form 10-K for the
Mark P. Clein year ended April 30, 1996 will be supplied to
Executive Vice President and Chief Financial stockholders upon request. Requests should be
Officer made in writing and addressed to:
Daved L. Frerker Heather Moore
Chief Operating Officer PMR Corporation
3990 Old Town Avenue
Fred D. Furman Suite 206A
Executive Vice President Administration and San Diego, CA 92110
General Counsel
Susan Yeagley Sullivan
Senior Vice President - Finance and Treasurer
</TABLE>
29
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
OF THE
CORPORATION
30
<PAGE> 2
EXHIBIT 21
The following is a list of the significant subsidiaries of PMR Corporation:
<TABLE>
<CAPTION>
Name Jurisdiction of Organization
---- ----------------------------
<S> <C>
Psychiatric Management Resources, Inc. California
Collaborative Care Corporation California
PMR - CD, Inc. California
Aldine - CD, Inc. California
Twin Town Outpatient California
Tennessee Mental Health Cooperative Tennessee
</TABLE>
31
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG
32
<PAGE> 2
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of PMR Corporation of our report dated June 14, 1996, except for the second
paragraph of Note 6, as to which the date is July 3, 1996, included in the 1996
Annual Report to Shareholders of PMR Corporation.
Our audit also included the financial statement schedule of PMR Corporation
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8/S-3 No. 33-72664) pertaining to the Employees' Incentive Stock Option
Plan of 1990 and the Outside Directors' Non-Qualified Stock Option Plan of 1992,
the Registration Statement (Form S-3 No. 33-77848) pertaining to the
registration of 554,272 shares of common stock and the Registration Statement
(Form S-3 No. 33-97202) pertaining to the registration of 1,388,087 shares of
common stock of our report dated June 14, 1996, except for the second paragraph
of Note 6, as to which the date is July 3, 1996, with respect to the
consolidated financial statements incorporated herein by reference, and our
report included in the preceding paragraph with respect to the financial
statement schedule included in this Annual Report (Form 10-K) of PMR
Corporation.
ERNST & YOUNG LLP
July 19, 1996
San Diego, California
33
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> APR-30-1996
<CASH> 3917922
<SECURITIES> 0
<RECEIVABLES> 11049077
<ALLOWANCES> 1759182
<INVENTORY> 0
<CURRENT-ASSETS> 16230323
<PP&E> 649312
<DEPRECIATION> 869261
<TOTAL-ASSETS> 21181792
<CURRENT-LIABILITIES> 5319818
<BONDS> 0
0
7000
<COMMON> 35778
<OTHER-SE> 8259243
<TOTAL-LIABILITY-AND-EQUITY> 21181792
<SALES> 0
<TOTAL-REVENUES> 36315921
<CGS> 0
<TOTAL-COSTS> 28471644
<OTHER-EXPENSES> 595896
<LOSS-PROVISION> 1447983
<INTEREST-EXPENSE> 2174
<INCOME-PRETAX> 1780063
<INCOME-TAX> 730000
<INCOME-CONTINUING> 918377
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 918377
<EPS-PRIMARY> .23
<EPS-DILUTED> .21
</TABLE>
