SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT TO REPORT
FILED PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
PMR CORPORATION
----------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
AMENDMENT NO. 1
----------------------------------------------------
The Registrant hereby amends its Annual Report on Form 10-K for the fiscal year
ended April 30, 1995 by revising certain information regarding the "Business of
the Company" contained within Item 1 thereof, the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained within Item
7 thereof and certain footnotes to its financial statements contained within
Items 8 and 14(a) thereof.
-----------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS OF THE COMPANY
General
PMR Corporation (the "Company") engages principally in the development
and management of psychiatric partial hospitalization programs, which are
ambulatory treatment programs that include major diagnostic, medical,
psychiatric, psychosocial and prevocational treatment modalities designed for
patients with serious mental disorders who require coordinated, intensive,
comprehensive and multidisciplinary treatment not typically provided in an
outpatient clinic setting. These programs have been designed to be operated by
or in conjunction with hospitals or Community Mental Health Centers (CMHCs). A
CMHC is an entity that provides outpatient services, including specialized
outpatient services for children, the elderly, individuals who are chronically
mentally ill and residents of its mental health service area who have been
discharged from inpatient treatment at a mental health facility; 24-hour-a-day
emergency care services; day treatment or other partial hospitalization services
or psychosocial rehabilitation services; screening for patients being considered
for admission to State mental health facilities to determine the appropriateness
of such admission; and consultation and education services. The CMHC must also
meet applicable licensing or certification requirements for CMHCs in the State
in which it is located.
The Company provides programs in two administrative and operational
formats. In one format, the Company provides administrative and management
services while the hospital or CMHC retains full operational and staffing
responsibility. In the other "all-inclusive" format, the Company provides
medical support personnel and generally assumes a greater operational
responsibility.
The Company's strategic goals continued to evolve throughout the last
fiscal year as management has responded to rapid changes and anticipated
additional changes in the health care field, in general, and in mental health
care, in particular. Increased pressure on health care costs, intense
competition among health care insurers and providers, reduced usage of certain
mental health care services and a consolidation of large health care
organizations, among other factors, have lead management to conclude that it is
no longer feasible to remain solely a developer and manager of psychiatric
partial hospitalization programs.
In addition to the development of new partial hospitalization programs,
the Company continues to expand its focus so that it can position itself to
manage a complete mental health benefit for seriously and persistently mentally
ill ("SPMI") individuals and to compete within the managed care segment of the
industry. The Company, through its subsidiary, Twin Town Outpatient, provides
outpatient chemical dependency treatment services from detoxification to
recovery for the managed care market.
The Company anticipates continuing to add and develop new products and
service systems to better enable itself to compete in the rapidly-changing
mental health care environment.
2
<PAGE>
Description of the Company's Psychiatric Partial
Hospitalization Programs
A partial hospitalization program is an ambulatory outpatient treatment
program (the "Program") that provides intensive, coordinated clinical services
to patients with severe mental illnesses. The Programs are developed in
affiliation with acute care hospitals, licensed as an outpatient service of the
hospital and receive JCAHO (Joint Commission on Accreditation of Health Care
Organizations) accreditation as part of the hospital's review. In 1994, the
Company expanded the scope of its business by contracting with certified CMHCs.
The Company's operations are undertaken pursuant to contractual
arrangements with a hospital ("Hospital") or CMHC. These contractual
arrangements are generally codified in the form of written contracts (the
"Contracts") which establish the respective responsibilities and obligations of
the Company and the Hospital or CMHC. See "Contractual Arrangements".
Program revenues derived by the Company under the Contracts generally
fit within two types of arrangements. First, certain Contracts provide for an
"all inclusive" fee arrangement based upon per-unit rates which require the
Company to assume responsibility for the costs of all patient care and medical
support personnel, facilities costs and certain other direct Program costs.
Second, in non-all-inclusive arrangements, the Company is not responsible for
the costs of patient care and medical support personnel and receives
compensation based on a fixed, monthly fee or in the form of per-unit
arrangements based upon patient census.
To a certain extent, the Company's revenues rely, directly and/or
indiectly, upon the collection experience of the Hospital or CMHCs. Accordingly,
the Company does not enjoy any contractual guarantee of minimum revenues. The
all-inclusive arrangements constitute approximately 85% of the Company's
revenues. Regardless of the type of arrangement with the Hospital or CMHC, all
medical services rendered in the Programs are provided and billed by the
Hospital or CMHC.
Since inception, the Company's business plan focused upon clinical
programs for SPMI patients. Since 1991, however, the Company has continued to
expand the scope of its business through the implementation of specialty
treatment approaches for patients who are dually diagnosed with mental illness
and chemical dependency or a developmental disability and patients who can
benefit from psychiatric rehabilitation along with their treatment for mental
illness. After thorough evaluation of a patient including assessment of
psychiatric, psychosocial, pre-vocational and medical problems and history, the
patient's physician and Program personnel develop a plan for each patient who is
then matched to the array of service that best meets his or her needs. The
Company, through research and evaluation, plans to continue the expansion of its
specialty programs in order to provide the best "fit" for the most patients
possible. The Company also intends to establish additional facilities in the
future.
The Company brings to its Hospitals and CMHCs management expertise with
respect to the establishment, development and operation of psychiatric partial
hospitalization Programs not usually available in-house to devote to this type
of project. The services provided by the Company include:
3
<PAGE>
(1) Complete Program administration from start-up to ongoing
operation. Personnel provided by the Company usually include
an on-site Program Administrator, Medical Director, Community
Liaison Director with supervision from a Regional Vice
President of Operations and in some cases a Clinical
Coordinator. In its all-inclusive Contracts, the Company also
provides all Program operating personnel in addition to
assuming substantially all operating costs and expenses. All
Program personnel receive thorough pre-opening training and
orientation on documentation, clinical and Program policies
and procedures;
(2) Provision of model policies and a procedures manual that is
adapted to meet the individual needs of the Hospital or CMHC;
(3) Provision of a Clinical Specialist who advises on Program and
staff issues;
(4) Statistical tracking and financial analysis of Program
performance;
(5) Provision of basic and specialty clinical programming with
periodic reviews and updates;
(6) Consistent quality assurance and utilization management
reviews;
(7) A complete market development program;
(8) Development of contracts for services with third party payors;
(9) Development of procedures to ensure that the Hospital or
CMHCs comply with licensing requirements; and
(10) Continuing staff education.
The Company believes the level of service it provides in this
specialized field of partial hospitalization, along with the expertise of its
management, gives it a distinctive position among providers of mental health
management services.
Contractual Arrangements
As of April 30, 1995, the Company's Programs were administered and
operated pursuant to the terms of seventeen Contracts with Hospitals or
CMHCs. Generally, the Contracts provide for terms of two to five years with
expiration dates ranging from 1995 to 1999.
In certain instances, a Contract may be terminated without cause (upon
30-120 days' notice and the payment of severance amounts), whereas in other
instances, a Contract may only be terminated with cause or upon the occurrence
of certain material events or defaults, such as a material reduction in patient
census.
4
<PAGE>
Management acknowledges that as the Company's Programs mature, it is
expected that contract terminations may occur periodically as a matter of normal
business development. These may occur as a result of a number of reasons,
including a change in market focus, census shifts, varying program needs, change
in management or ownership of the Hospital or CMHC or shifts in business goals
or relationships. Management recognizes that as a service business, it will
periodically experience an ebb and flow of its contract sources such that
additional Contracts will be secured and existing Contracts may be terminated.
Management is confident, however, that as a general matter, the growth of its
Programs will continue, although there can be no assurances that the rate of
growth experienced in the past will continue for the long term.
For the year ended April 30, 1995, the following Providers were responsible for
ten (10%) percent or more of the Company's consolidated revenues.
Percentage of
Provider Annual Revenue
-------- --------------
Scripps Hospital East County 16%
Coastal Communities Hospital 11%
St. Luke's Hospital 11%.
Each Contract provides that the Company is an independent contractor
and that no employer/employee or joint venture relationship exists between the
Company and the Hospital or CMHC.
An analysis of the revenues that are likely to be realized, or the
expected dates of expiration of the Company's existing contracts, is subject to
a number of variables which makes the process somewhat uncertain.
The Company's existing Contracts are principally on a fee-for-services
basis. Thus, the revenues realizable thereunder are based on a number of
variables, including principally patient census, that are beyond the control of
the Company. In addition, certain of the contracts can be terminated without
cause within varying time frames, notwithstanding stated expiration dates. Thus,
projected expiration dates may be uncertain since Contracts may be terminated
with or without cause prior to the stated expiration dates. The Company has, in
fact, experienced certain terminations in the past. Notwithstanding these
terminations, the Company has historically been able to establish new Provider
relationships and generally maintain a reasonable continuity of patient care.
Based purely upon Contracts in existence as of April 30, 1995, and
assuming that these Contracts remain in effect until their stated expiration
dates, the number and dollar amount of Contracts expiring for the next five
years is as follows:
5
<PAGE>
<TABLE>
<CAPTION>
Dollar amount of
Year # of Contracts Contracts (1)
---- -------------- -------------
<S> <C> <C> <C>
Fiscal 1996 3 $ 2,364,000
Fiscal 1997 8 $15,590,000
Fiscal 1998 3 $ 5,649,000
Fiscal 1999 3 $ 3,875,000
Fiscal 2000 ------- -0-
- ---------------------------------------
</TABLE>
(1) Based solely upon revenues realized during Fiscal 1995. These dollar amounts
shall not be viewed as forecasts of future revenue likely to be realized under
these contracts.
- ---------------------------------------
The Treatment Program
Patients admitted to the 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.
All Programs provide a minimum of four to five hours of programming
five or six days a week. Daily schedules include group therapy, 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. The average length of stay for patients admitted to the Program
is approximately three to four months.
Existing and Anticipated Program Sites
As of April 30, 1995, the Company administered twenty-six Programs in
Hospital or CMHC facilities. The Programs are located in various counties
within California, Arizona, Indiana, Colorado, Arkansas and Texas.
The Company plans to open additional sites with some of its existing
Hospitals or CMHCs based upon economic conditions, the availability of suitable
locations and the Company's ability to recruit, train and retain an adequate
number of qualified management and Program staff, all of which criteria
currently favor continued expansion. The implementation schedule of each new
site or Program varies based on contract negotiations, market development,
recruitment of qualified personnel, facility improvements and regulatory issues.
6
<PAGE>
Although management is confident that its plans for expansion are
attainable within the near term, there can be no assurances that a dramatic
change in the infrastructure of the national health system, an elimination of
third-party reimbursement or a restriction in the third-party reimbursement
guidelines for psychiatric services, would not have an immediate adverse effect
upon such plans for expansion, as well as the Company's present operations.
Development of Additional Businesses
The Company has added three businesses that are intended to diversify
it's historic focus on the development of psychiatric partial hospitalization
programs.
In April 1993, the Company through its newly formed subsidiary,
Collaborative Care, Inc., 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 (the "System") needed to operate the resulting new business.
The Company is in the process of developing a network of agencies that
provide case management services to manage what it believes will be the core
providers for the SPMI population in behavioral healthcare under a managed care
scenario. It has entered into an agreement with Mental Health Cooperative, Inc.
a case management agency in Tennessee, in preparation for the expansion of
Tennessee's managed care Medicaid program, TennCare, to the SPMI population for
behavioral health. The expansion of TennCare to the SPMI population has been
delayed by the State of Tennessee. The start date of the project is not fixed at
this time, but the Company is positioned to take advantage of the expansion of
the TennCare program to the SPMI population once it begins. The Company is
further negotiating with agencies in other states in its development of its
network of case management agencies providing this service.
In November 1993, the Company entered into a general partnership (Twin
Town Outpatient) with Aldine Corporation for the development and operation of
free-standing outpatient chemical dependency programs and the creation of
chemical dependency programs in its existing facilities. The Company has
consolidated its 51% interest in the partnership for financial statement
purposes. Subsequent to year end the Company acquired all of the other partner's
interest by paying $185,000 in cash and 97,087 shares of the Company's common
stock valued at $550,000.
Twin Town Outpatient is a provider of outpatient chemical dependency
services to the managed care markets in Los Angeles and San Francisco where it
operates six facilities. The program, which is the only chemical dependency
program in California to have received Joint Commission Accreditation with
Commendation, is provided exclusively on an outpatient basis from detoxification
to recovery. Twin Town Outpatient is recognized as a low cost provider to
managed care groups, able to complete the total recovery process for the price
that many providers charge for detoxification alone. It is anticipated that Twin
Town Outpatient will expand it operations in the future.
7
<PAGE>
During 1995, the Company discontinued the operation of its home care
division due to various operating factors which pointed to declining margins.
Marketing
The Company's principal marketing efforts, with respect to its partial
hospitalization business, are concentrated in two general areas. First, the
identification of prospective Hospitals or CMHCs who may be suitable providers.
Second, once having established an affiliation, the Company assigns personnel to
a Program site for the purpose of educating the local community about the
availability of the services, its benefits and the type of patient clinically
appropriate for service in the partial hospitalization setting.
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 the
market area, discussions with key individuals in the prospective area and
personal contacts.
The Company's marketing efforts are undertaken by its own marketing
and development personnel whose marketing efforts focus upon the dissemination
of information about the Company's Programs as well as the generic benefits
of partial hospitalization programs.
The Company believes, and its marketing plan emphasizes, that partial
hospitalization programs for psychiatric patients offer a cost effective
alternative to inpatient care for many patients and can serve to shorten
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 partial hospitalization programs attractive
to third party payors, including Medicare.
Marketing efforts for Collaborative Care 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 believes that the
Collaborative Care Model 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 SPMI
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 these benefits of the Collaborative Care Model
are recognized as a distinguishing feature for public-sector managed care
efforts. The Company has developed several alliances with large commercial
sector managed care organizations to provide the administrative services
necessary to jointly pursue opportunities that involve managing a total public
sector population. The Company will also market the benefits of the model to
other managed care organizations as public sector contracts are awarded.
Twin Town Outpatient's business development efforts are focused on the
growth of future centers to serve the managed care industry and capitated
medical groups in markets outside of Southern California. Twin Town Outpatient
anticipates expanding current contractual relationships and obtaining new
8
<PAGE>
provider contracts. Its marketing success is centered on at-risk payors where
ambulatory chemical dependency services are of significant value.
Regulatory Matters
Medicare Guidelines for Reimbursement of Partial Hospitalization
Services
A significant component of the Company's revenues are derived from
payments for its management and administration of the Programs pursuant to the
Contracts with Hospitals or CMHCs. Since a substantial percentage of the
patients admitted to the Programs rely upon Medicare for payment, the Programs
are predominantly dependent upon continued Medicare funding.
Medicare is a federal health care program created in 1965 as part of
the federal Social Security system. It is administered by the U.S. Department of
Health and Human Services which has established the Health Care Financing
Administration ("HCFA") to promulgate rules and regulations governing the
Medicare program.
HCFA has published criteria which partial hospitalization services must
meet in order to qualify for Medicare funding. In transmittal letter No. 1303
(effective January 2, 1987) and in subsequent criteria published in Section
230.50 of the Medicare Coverage Manual, HCFA requires partial hospitalization
services to be (1) incident to a physician's service, (2) reasonable and
necessary for the diagnosis or treatment of the patient's condition, and (3)
provided by a physician with a reasonable expectation of improvement of the
patient from the treatment.
The Company became aware during the fourth quarter of fiscal year 1994
that Medicare fiscal intermediaries had begun a Focused Medical Review of claims
for partial hospitalization services throughout the country which continued
through fiscal year 1995. This process follows HCFA guidelines for Focused
Medical Review and targets claims for services which are at risk of
inappropriate program payment. This process often occurs when HCFA identifies
significant increases in payments for certain types of services as has been the
case with the partial hospitalization benefit, particularly when CMHCs were
authorized to provide partial hospitalization services under Medicare Part B,
effective October 1, 1991. To the extent claims for services have been denied in
Programs managed by the Company, the great majority of the denied claims have
been appealed and the reversal rate has been favorable. The appeal process
continues for a significant number of the denied claims. Generally, to the
extent that a denied claim is not reversed, the Company is not entitled to a fee
with respect to the denied claim. Management believes that the Company's
contract settlement reserve should be adequate to offset the negative impact of
unsuccessful appeals of denied claims.
In addition, one of the intermediaries has issued guidelines
interpreting the regulations in a manner that established more restrictive
admission and treatment criteria. The Focused Medical Review process resulted in
the delay of payments to several Hospital clients. While the process was
disruptive, the Company believes that its Programs meet the Medicare
requirements of the outpatient hospital benefit. The Company experienced an
adverse effect on cash flow as a result of this process, but cash flow has
improved as the effects of the review process diminished.
9
<PAGE>
To deal with issues developed from the Focused Medical Review, in
July, 1995, HCFA issued guidelines in draft form which attempt to clarify
HCFA regulations. Management of the Company believes that the Programs which
it manages comply with these draft guidelines.
Medicare Guidelines for Management or Administrative Support Services
The Company manages partial hospitalization programs for Hospitals or CMHCs who
are Medicare providers. The services which the Company is obligated to render as
specified in its Contracts with various Hospitals and CMHCs are covered Medicare
services. The Company bills its management fee to the providers as a purchased
management and administrative support service. The providers are reimbursed on
an interim basis by Medicare fiscal intermediaries and the providers submit
annual cost reimbursement reports to the intermediaries for audit each year. The
providers seek reimbursement of the Company's management fees from the
intermediaries. The Company has warranted the reimbursability of its fee to some
providers. This may result in a charge upon the Company's working capital in the
event that its management fee is not fully allowed upon audit of a provider's
cost reimbursement report by a fiscal intemediary.
Medicare guidelines indicate that, subject to certain requirements
imposed upon a provider, such contract management services may be used in lieu
of or in support of in-house staff of the provider and are reimbursable by
Medicare, if reasonable. As a general rule, the guidelines indicate that
contract management service 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 and are fully reimbursable to the
providers who pay management fees to the Company.
Within the last fiscal year, the Company's contract management fees
charged to three separate providers were reviewed by two Medicare fiscal
intermediaries, the results of these reviews were inconsistent. The Company
applied to HCFA to resolve the differences by establishing appropriate
guidelines. Although it did confirm the Company's position that management fees
are allowable if reasonable in the marketplace, HCFA has called into question
the eligibility for reimbursement of certain Program-related costs. The Company
asserts that its management fees are fully reimbursable. The Company has added
to its contractual settlement reserve to offset any negative impact that could
occur in the event that a portion of the Company's management fees are
disallowed. Moreover, if there is a disallowance of a portion of the Company's
management fees, the Company may have to alter its contractual arrangements to
avoid similar problems in the future.
Medicare/Medicaid Federal Regulation
Federal statutes regulating Medicare and Medicaid reimbursement provide
criminal and civil sanctions for any person or entity to knowingly and willfully
solicit or receive or offer to pay any remuneration (including any kickback,
bribe or rebate), directly or indirectly, overtly or covertly, in cash or in
kind, in return for referring an individual or purchasing, leasing, ordering,
arranging for or recommending any goods, facilities, services or item for which
payment may be made, in whole or in part, by Medicare or Medicaid funding. The
10
<PAGE>
sanctions for violating these laws can include fines, imprisonment, and
exclusion from participating in federally-funded health care programs for a
period of years or even permanently. Such exclusion would have a material
adverse effect on the Company and could be extremely detrimental to the Company.
Similar State laws exist as well. As a result of a thorough, internal
examination of the Company's operations, management believes that the Company is
in material compliance with applicable regulatory and industry standards.
However, no assurance can be given regarding compliance in any particular
factual situation, as there is no procedure for obtaining advisory opinions from
government officials. Moreover, there can be no assurances that the regulations
applicable to the Company's operations and its arrangements with hospitals or
CMHCs will not change in the future or that future interpretations of existing
laws or new laws will not result in the Company's services under the Contracts
being deemed a violation of federal Medicare/Medicaid laws.
Licensing of Programs
The Company's Programs are operated and licensed as outpatient
departments of its Hospitals of CMHCs, 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. An inability to maintain licenses or permits for any
existing facilities or Programs would adversely affect the Company's ability to
administer the Programs, and would thus have a material adverse effect on the
Company's revenues.
Other Factors That Could Affect Operations and Reimbursement Levels
The following factors, among others, may affect the operations of the
Company and the reimbursement levels of the Hospitals or CMHCs 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 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.
(4) The introduction of a national health insurance program or
nationally mandated managed care plan for Medicare beneficiaries.
(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.
11
<PAGE>
(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 of Medicare reimbursement regulations.
Human Resources
In the aggregate, as of April 30, 1995, the Company employed
approximately 410 employees, of which 235 are full-time employees. Approximately
365 employees staff clinical programs and 40 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. In addition, the Twin Town Outpatient program employs 23
full-time and 21 part-time employees.
Competition
The Company competes with other health care management companies for
the establishment of affiliations with acute care hospitals to operate
psychiatric partial hospitalization 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.
In each of the Company's current and anticipated market areas, the
Company faces competing partial hospitalization programs. The Company
anticipates that competition in the area of partial hospitalization 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.
Currently, management of the Company is aware of several other
non-hospital organizations within the United States that provide similar
services as the Company. These organizations may have greater resources than the
Company. Competition for profit centers will, in fact, cause other non-hospital
organizations or additional hospitals to enter into this field. The Company's
primary existing competitors are hospitals or hospital corporations.
There can be no assurances that the Company will be able to compete successfully
with such companies.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table presents a year-by-year analysis of certain of
the material items that comprise elements of the Company's Results of
Operations for the periods contained within the financial statements made a
part of this Annual Report.
<TABLE>
<CAPTION>
Percentage
Percentage of Revenues Increase (Decrease)
-------------------------------------- ----------------------------
Year ended April 30
1995 1994
1995 1994 1993 vs. 1994 vs. 1993
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues 100% 100% 100% (5%) 37%
Operating expenses 95 75 74 20 40
Gross profit 5 25 26 (80) 29
Marketing, general and administrative 14 12 13 7 32
Other operating expense 7 6 2 (6) 336
Income (loss) from operations (16) 6 11 (354) (29)
Other income - - 1 - (75)
Income (loss) before income taxes (16) 6 12 (354) (29)
Provision for income taxes (benefit) (6) 2 5 (321) (29)
Net income (loss) before dividends (10) 4 7 (377) (29)
</TABLE>
Results of Operations - Fiscal 1995 (compared with fiscal 1994)
The Company incurred a loss of $2,352,000 or $.70 per share for the
fiscal year ended April 30, 1995, compared to a profit of $797,000 or $.24 per
share in the prior fiscal year. Results for fiscal 1995 were adversely affected
by a number of factors, including an 18% decrease in Program census, a 20%
increase in operating expenses, and a year end adjustment of approximately
$2,000,000 to write down management fee revenue to provide for the possible
effects of the Health Care Financing Administration's ("HCFA") interpretation of
the regulations regarding the allowability of management fees for partial
hospitalization programs. HCFA confirmed the Company's position that management
fees are allowable if reasonable in the marketplace; however, Company management
believes that HCFA may still question the allowability of a portion of the
Company's management fees. See Uncertainty of Medicare Regulations.
Management fee revenue. Operating revenue declined $1,039,000 or 5%
from fiscal year 1994. "Same store" census declined approximately 20% while
"same store" net revenue declined almost 26%, reflecting the special year end
provision of approximately $2,000,000 for HCFA's interpretation of the
regulations noted in the preceding paragraph. This decrease in net revenue was
offset by an increase in net revenue from sites not qualifying for the "same
13
<PAGE>
store" comparison, including revenue from five sites opened during 1995. Visits
and revenue for the home health division's nine months of operations were
approximately 5% greater than for the full year of operations in fiscal 1994;
however, the division was unable to attain the census necessary to offset high
fixed costs, resulting in declining margins, and the home health service was
discontinued in January 1995. Twin Town Outpatient chemical dependency treatment
revenues, reported for a full year in fiscal year 1995 as compared to the six
months of operations in fiscal year 1994, increased by approximately $1,000,000
from the prior year.
Operating expenses. Operating expenses increased by approximately
$3,483,000 or 20% from fiscal year 1994. "Same store" operating expenses
remained flat, and the majority of the increase is attributable to operating
expenses at sites not opened for a full year in both 1994 and 1995, including
five sites opened during 1995. Operating expense increases of $753,000 are
associated with reporting the full year of operations of Twin Town Outpatient
compared to six months of operations in fiscal year 1994.
Marketing, general and administrative expenses. Marketing,
general and administrative expenses increased $196,000 or 7% in 1995,
primarily as the result of including the full year of operations for Twin Town
Outpatient compared to six months of operations in fiscal year 1994.
Other expenses (income). In 1995, the Company's provision for bad debts
amounted to $1,317,000, representing 6% of revenue, the same percentage as in
1994. Depreciation and amortization expenses increased by $127,000 or 46% from
the prior year, due largely to the purchases of equipment and furniture in the
prior year. Interest expense net of interest income was $62,000, compared to
interest income net of interest expense in the prior year of $40,000,
representing an increase of $102,000 or 255%. This increase was due to the
Company's use of its line of credit in 1995 to meet its cash flow requirements.
Minority Interest. Minority interest of $108,000 reflects the 49%
allocation of losses on Twin Town Outpatient for the amount not owned by the
Company. Subsequent to year end, the Company purchased this minority interest
for $185,000 and 97,087 shares of the Company's Common Stock.
Dividends. For the year ended April 30, 1995, the Company accrued
dividends on its Series C Convertible Preferred Stock at the rate of 7.5% per
annum for six months. Dividends are due and payable in October, 1995; however,
the Company has the option to pay these dividends in cash or shares of its
Common Stock valued at $2.50 per share.
Results of Operations - Fiscal 1994 (compared with fiscal 1993)
The Company earned $797,000 or $.24 per share in fiscal year 1994
compared to $864,000 or $.30 per share in fiscal year 1993.
Management fee revenue. Net revenues increased by 37% in fiscal 1994
compared to fiscal 1993, as the result of the conversion of several contracts to
the all-inclusive arrangement (26%), the increase in home health visits and
revenue (8%), and the addition of the Twin Town Outpatient substance abuse
revenues (3%). The volume of partial hospitalization program visits was flat as
14
<PAGE>
compared to 1993, largely due to the rebuilding process required as a
consequence of the termination of its contract, without cause, by HarborView
Medical Center in the first quarter of 1994. The facilities covered by the
HarborView contract accounted for approximately 41% of the Company's historic
revenue during fiscal 1993. With four sites under management in San Diego, the
Company was providing service at the end of fiscal 1994 to approximately 50% by
volume of the clients it had served at the beginning of 1994 in San Diego
County. Volume at the Company's other sites increased by 11% while new sites
opened in 1994 added approximately 8% of the volume.
Operating expenses. Operating expenses increased $4,892,000 or 40% in
1994 compared to 1993, a larger percentage increase than the percentage increase
in revenues due to the high costs associated with the home health division,
which represented approximately 39% of the increase, and the addition of the
Twin Town Outpatient operations in November 1993 which represented 8% of the
increase. Were it not for these two operations, operating expenses would have
increased by only 21%.
Marketing, general and administrative. Marketing, general and
administrative expenses in 1994 increased by $668,000 or 32% compared to 1994,
but, as a percentage of revenue, remained constant with 1994 expenses. The cost
increases were due to the addition of administrative costs of the Twin Town
Outpatient operations and the overhead associated with the product and market
development of our managed care model (Collaborative Caresm) for the Seriously
and Persistently Mentally Ill (SPMI) population.
Other expenses (income). In 1994, the Company added significantly to
its provision for bad debts in the amount of $1,342,000, representing 6% of
revenue compared to 2% of revenue in 1994. The increase was considered necessary
due to the worsening financial condition of one of its Hospital contractors in
light of payment delays by the fiscal intermediary. The Hospital subsequently
filed for Chapter 11 Bankruptcy.
Dividends. For the year ended April 30, 1994, the Company issued 5,727
shares of common stock in payment of the 10% dividend due on Series B
Convertible Preferred Stock in June, 1993.
Liquidity and Capital Resources
At April 30, 1995, the Company had $1,382,000 of cash and cash
equivalents, and working capital of $8,790,000. The ratio of current assets to
current liabilities was 3.6 compared to a ratio of 4.1 at April 30, 1994. The
average number of days' revenue in accounts receivable increased to 134 days at
April 30, 1995, from 88 at the end of 1994. This increase in accounts receivable
aging is attributable to several factors: (1) initiation of new programs or
transfers with CMHCs that were inexperienced in submitting claims to Medicare,
which slowed the process of billing and collection; (2) delay in the payment or
denial of claims as the result of the Focused Medical Review; and (3) one
Hospital's deteriorating financial condition, the receivable from which is fully
reserved.
For the year, the Company experienced approximately $5,216,000 in
negative cash flow from operations primarily as the result of factors discussed
in the preceding paragraph. In 1995, the Company's principal sources of working
15
<PAGE>
capital were the proceeds of $1,584,000 from the private placement of preferred
stock, net financings of $1,200,000 of its $2,000,000 line of credit with a
bank, and the use of cash balances retained from prior years. Management plans
to achieve positive cash flow in 1996 by instituting better monitoring systems
of its Providers' billing procedures and has strengthened utilization management
and utilization review procedures in order to reduce the likelihood of denials
from a Focused Medical Review.
In 1996, the Company's primary sources of funds are expected to be cash
from operations and financings from its available line of credit. The Company
had a line of credit in the principal amount of $2 million dollars which
expired during 1995 and was replaced with a $3 million dollar line which has
a scheduled expiration date of August 30, 1997. The line of credit is
collateralized by essentially all assets of the Company and bears an interest
rate of either the bank's reference rate plus one percent of the Euro dollar
rate plus three percent.
Working capital is anticipated to be utilized during the year to
continue expansion of the Company's partial hospitalization programs, as well as
for the implementation and expansion of other Company programs. The opening of
new partial hospitalization sites typically requires $45,000 to $75,000 for
office equipment, supplies, lease deposits, and the hiring and training of
personnel prior to opening. New programs generally experience operating losses
through an average of the first four months of operation. The Company has made
no commitments for capital expenditures. The Company expects to provide cash for
the start up of a Collaborative Care unit in amounts that are not yet certain
due to the early stage of the program's development.
The Company has warranted the reimbursement of its management fee
charged to certain Hospitals and CHMCs whose partial hospitalization programs
are managed by the Company. This may result in a charge upon the Company's
working capital in the event that its management fee is not fully allowed upon
audit of a Provider's cost reimbursement report by a fiscal intermediary.
The Company has been advised by HCFA that certain Program-related costs
are not allowable for reimbursement. Although the Company believes that its
management fee is fully reimbursable, there can be no assurances that, upon
regulatory or judicial review, the Company's position will be sustained. If the
Company's management fee is not fully allowed, the Company may be responsible
for reimbursement of the amounts disallowed pursuant to warranty obligations
that exist with certain Hospitals and CMHCs. Even though the Company's financial
statements provide a reserve for any such payments, a short-term obligation to
provide reimbursement could have a material adverse impact upon the Company's
liquidity and capital resources. Management believes, however, that this is
unlikely to occur. Certain factors are, in management's view, likely to lessen
the impact of any such material adverse effect, including the expectation that,
if claims arise, they will arise on a periodic basis over several years; that
any disallowance will merely be offset against the obligations owed by the
Provider to the Company; and that, in certain instances, funds have already been
paid into escrow accounts to cover any such eventuality.
The Company, during the course of its ordinary business operations from
time to time, is faced with claims asserted by employees whose employment have
been terminated. Presently, one attorney represents two former employees who
16
<PAGE>
have filed separate wrongful termination lawsuits against the Company. One of
these employees was involuntarily terminated by the Company and the other
voluntarily quit. The employee who was involuntarily terminated also filed a
complaint against the Company in the United States District Court, Northern
District of California, under the federal and state false claims acts alleging
the submission of false claims to Medicare. The complaint was filed on August
24, 1994, and was unsealed in June 1995. The United States declined to
intervene. The Company request special counsel to review the assertions
regarding false claims. As a result of the Company's internal review and an
investigation performed by special counsel, management has concluded that these
lawsuits lack merit and will be defended vigorously. Management believes that
the resolution of these claims will not have a material adverse effect on the
Company's financial position or results of operations, although the Company may
be required to incur legal fees and costs in defending these lawsuits.
Uncertainty of Medicare Regulations
Since a substantial percentage of the patients in the Programs
administered by the Company are Medicare-eligible persons, a significant
component of its revenue is dependent upon Medicare reimbursement rules.
Revisions or modifications to Medicare rules and regulations could have a
material adverse effect on the Company. The Company and its Hospital and CMHC
contracting agencies have quality assurance and utilization review programs to
ensure that the Programs are operated in compliance with all Medicare
requirements. Management and administrative support services related to patient
care have been specifically approved in published Medicare guidelines as a
Medicare-reimbursable expense as long as the costs for such services are
reasonable and records are submitted for the purchased services so that the
Hospital and CMHC contracting agencies can continue to reassess the
effectiveness of such services.
In the present period of legislative uncertainty and deficit Federal
spending, financing the Medicare programs will continue to be a target for
reduced spending and the rules and regulations for Medicare will continue to be
refined and changed. It is impossible to predict what changes will be made and,
therefore, one cannot speculate as to the impact of future changes on the
Company's Contracts or revenues. Management believes it is unlikely that
Medicare will cease funding the treatment of psychiatric illness. Further, in
view of Medicare's continued emphasis on outpatient treatment programs,
management believes changes in Medicare regulations will not disqualify its
Program conceptually, although modification of its Contracts or adjustments in
its Programs may be required.
17
<PAGE>
During the fourth quarter of Fiscal Year 1994, the Company became aware
that Fiscal Intermediaries for the Hospitals and CMHCs had begun a Focused
Medical Review of claims for partial hospitalization services throughout the
country. This process follows HCFA guidelines for Focused Medical Review and
targets claims for services which are at risk of inappropriate program payment.
This process often occurs when HCFA identifies significant increases in payments
for certain types of services, as has been the case with the partial
hospitalization benefit, particularly when CMHCs were authorized to provide
partial hospitalization services under Medicare Part B effective October 1,
1991.
A Focused Medical Review consists of an intensive review of claims by
HCFA Fiscal Intermediaries during a specified time period. It can take six to
eight months, and often longer, from the date services are provided until the
denial is received, thus, the denials received in Fiscal 1995 were predominately
for services rendered prior to Fiscal 1995.
The Company's initial experience with the Focused Medical Review was
that there was numerous denials of Provider's claims and the denials had an
impact on the Company's cash flow 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 Company has received notification that of the approximately 11,000
claims for reimbursement submitted by its Providers during Fiscal 1995,
approximately 1,000 claims were denied as a result of Focused Medical Review.
Substantially all of the material denials (i.e. those involving claims of over
$500) have been appealed by the Providers to a hearing officer appointed by a
Fiscal Intermediary (the "Hearing Officer").
As of the date of this Amended Report, 20% of the denials have been
presented to a Hearing Officer for consideration. The Provider has succeeded in
securing reversals in approximately 50% of these claims. The remaining 50% have
been submitted to further appellate level review by an independent
administrative law judge ("ALJ"). The Provider has succeeded in securing
reversals in all of the first ten (10) matters presented to the ALJ. The balance
of the claims remain pending.
Even though only approximately 20% of the denials have been reviewed by
a Hearing Officer or ALJ, given the results, to date, and based upon its
assessment of the outstanding claims, management is confident that a significant
percentage of the dollar amount of the denials will be decided in favor of the
Company. Given these results, 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 the continued review of outstanding
claims incurred during Focused Medical Review will likely have an adverse effect
upon the Company's liquidity and capital resources.
The impact of Focused Medical Review upon the Company has significantly
abated during Fiscal 1996. 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
18
<PAGE>
(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.
During Fiscal 1996, the number of denied claims have been reduced to an
insignificant rate. As the number of denials decrease, the impact on cash flow
decreases to what management anticipates will constitute a more normal impact on
the Company cash flow typical of the conditions which existed prior to the
Focused Medical Review.
Although the Company expects that an insignificant number of claims for
reimbursement will continue to be denied in the future, management expects these
denials will be at a rate typical for Medicare providers. In any event,
management is of the opinion that adequate provision has been made in the
Company's financial statements in the "Reserve For Contract Settlement" to cover
the financial impact of any such denials.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements of the Company for the fiscal year ended April 30,
1995 and specific supplementary financial information are included within Item
14(a) of this Report.
PART IV
<TABLE>
<CAPTION>
ITEM 14. Exhibits and Financial Statement Schedules
Page
(a) The following documents are filed as part of this Report: Reference
---------
<S> <C> <C>
1. Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheets as of April 30, 1995 and 1994 F-2
Consolidated Statements of Income for the fiscal years ended
April 30, 1995, 1994 and 1993 F-3
Consolidated Statements of Stockholders' Equity for the
fiscal years ended April 30, 1995, 1994 and 1993 F-4
Consolidated Statements of Cash Flows for the fiscal years
ended April 30, 1995, 1994 and 1993 F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedules -- The following financial
schedules are included herein:
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Page
Reference
---------
<S> <C> <C>
Schedule VIII -- PMR Corporation Valuation
and Qualifying Accounts S-1
</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.
3. The following Exhibits are filed as part of this Report
Description Method of Filing
----------- ----------------
23.1 Consent of Ernst & Young Filed herewith
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Amended Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
PMR CORPORATION
Dated:_________________________
BY:_____________________________
Allen Tepper,
Chief Executive Officer
<PAGE>
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, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended April 30, 1995. 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, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
April 30, 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
June 23, 1995
San Diego, California
F-1
<PAGE>
PMR Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
April 30
1995 1994
-----------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,382,376 $ 4,040,362
Accounts receivable, net of allowance for uncollectible amounts of
$1,423,000 in 1995 and $400,000 in 1994 8,465,568 5,941,346
Prepaid expenses and other current assets 289,996 206,647
Refundable income taxes 817,165 -
Deferred income tax benefits 1,217,000 -
-----------------------------
Total current assets 12,172,105 10,188,355
Furniture and office equipment, net of accumulated depreciation of
$579,656 in 1995 and $282,416 in 1994 790,243 922,567
Long-term receivables 937,705 1,636,697
Other assets 910,701 923,630
-----------------------------
Total assets $14,810,754 $13,671,249
=============================
Liabilities and stockholders' equity
Current liabilities:
Note payable to bank $ 1,200,000 $ -
Accounts payable and accrued expenses 1,048,597 893,766
Accrued compensation and employee benefits 861,029 874,805
Income taxes payable - 356,000
Current portion of long-term debt 206,550 205,985
Dividends payable 65,537 -
Deferred income taxes - 153,000
-----------------------------
Total current liabilities 3,381,713 2,483,556
Long-term debt, less current portion 125,697 320,004
Deferred rent expense 209,862 126,032
Deferred income taxes 458,000 12,000
Contract settlement reserve 3,523,223 2,871,462
Minority interest 50,666 158,867
Commitments
Stockholders' equity:
Convertible Preferred Stock, $.01 par value, authorized shares -- 1,000,000;
Series C -- issued and outstanding shares -- 700,000 in 1994; liquidation
preference $1,750,000
7,000 -
Common Stock, $.01 par value, authorized shares -- 10,000,000; issued and
outstanding shares -- 3,338,656 in 1995 and 3,307,653
in 1994 33,385 33,075
Additional paid-in capital 7,050,262 5,280,687
Notes receivable from stockholders (62,626) -
Retained earnings 33,572 2,385,566
-----------------------------
7,061,593 7,699,328
-----------------------------
$14,810,754 $13,671,249
=============================
</TABLE>
See accompanying notes.
F-2
<PAGE>
PMR Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended April 30
1995 1994 1993
------------------------------------------------
<S> <C> <C> <C>
Management fee revenue $21,746,663 $22,785,605 $16,615,406
Expenses:
Operating expenses 20,647,965 17,164,823 12,273,306
Marketing, general and administrative 2,976,600 2,780,829 2,111,977
Provision for bad debts 1,317,483 1,341,652 272,353
Depreciation and amortization 403,294 276,297 98,911
Interest -- net 61,979 (39,901) (99,666)
Minority interest in loss of subsidiary (108,201) (135,133) -
------------------------------------------------
25,299,120 21,388,567 14,656,881
------------------------------------------------
Income (loss) before income taxes (3,552,457) 1,397,038 1,958,525
Income tax expense (benefit) (1,266,000) 572,000 802,000
------------------------------------------------
Net income (loss) (2,286,457) 825,038 1,156,525
Less dividends on:
Series A Convertible Preferred Stock - - 84,849
Series B Convertible Preferred Stock - 28,428 207,500
Series C Convertible Preferred Stock 65,537 - -
------------------------------------------------
Net income (loss) for common stock $ (2,351,994) $ 796,610 $ 864,176
================================================
Earnings (loss) per common share $ (.70) $ .24 $ .30
================================================
Shares used in computing earnings per share
3,337,484 3,312,108 2,839,381
================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
PMR Corporation
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Sieries A Series B Series C
Convertible Preferred Stock Convertible Preferred Stock Convertible Preferred Stock
------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1992 160,111 $ 1,601 395,238 $ 3,952 - $ -
Exercise of Redeemable B Warrants
to purchase common stock - - - - - -
Conversion of Series A convertible
preferred stock to common stock (160,111) (1,601) - - - -
Dividend paid in cash and stock to
Series A preferred shareholders - - - - - -
Issuance of common stock under stock
option plan - - - - - -
Issuance of common stock for
proprietary information - - - - - -
Dividend declared on Series B
preferred stock - - - - - -
Net income - - - - - -
------------------------------------------------------------------------------------------
Balance at April 30, 1993 - - 395,238 3,952 - -
Conversion of Series B convertible
preferred stock to common stock - - (395,238) (3,952) - -
Issuance of common stock under
stock option plan - - - - - -
Dividend paid in common stock to
Series B preferred shareholders - - - - - -
Net income - - - - - -
------------------------------------------------------------------------------------------
Balance at April 30, 1994 - - - - - -
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 - - - - - -
Issuance of common stock under
stock option plan - - - - -
Accrued interest on stockholder notes - - - - - -
Dividend payable on Series C
preferred stock - - - - - -
Net loss - - - - - -
------------------------------------------------------------------------------------------
Balance at April 30, 1995 - $ - - $ - 700,000 $7,000
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Notes
Common Stock Receivable Total
------------------------- from Paid-in Retained Stockholders
Shares Amount Stockholders Capital Earnings Equity
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1992 2,405,103 $ 24,050 $ - $ 3,503,873 $ 724,780 $ 4,258,256
Exercise of Redeemable B Warrants
to purchase common stock 222,500 2,225 - 887,771 - 889,996
Conversion of Series A convertible
preferred stock to common stock 160,111 1,601 - - - -
Dividend paid in cash and stock to
Series A preferred shareholders 9,504 95 - 64,055 (84,849) (20,699)
Issuance of common stock under stock
option plan 122 1 - 288 - 289
Issuance of common stock for
proprietary information 69,118 691 - 586,812 - 587,503
Dividend declared on Series B
preferred stock - - - - (207,500) (207,500)
Net income - - - - 1,156,525 1,156,525
-----------------------------------------------------------------------------------------
Balance at April 30, 1993 2,866,458 28,663 - 5,042,799 1,588,956 6,664,370
Conversion of Series B convertible
preferred stock to common stock 395,238 3,952 - - - -
Issuance of common stock under
stock option plan 450 5 - 2,415 - 2,420
Dividend paid in common stock to
Series B preferred shareholders 45,507 455 - 235,473 (28,428) 207,500
Net income - - - - 825,038 825,038
-----------------------------------------------------------------------------------------
Balance at April 30, 1994 3,307,653 33,075 - 5,280,687 2,385,566 7,699,328
Issuance of Series C convertible
preferred stock, net of issuance
costs of $105,628 - - (60,000) 1,637,372 - 1,584,372
Exercise of Redeemable A Warrants
to purchase common stock 29,003 290 - 115,723 - 116,013
Issuance of common stock under
stock option plan 2,000 20 - 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 3,338,656 $ 33,385 $(62,626) $ 7,050,262 $ 33,572 $7,061,593
==========================================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
PMR Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended April 30
1995 1994 1993
------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $(2,286,457) $ 825,038 $ 1,156,525
Adjustments to reconcile net (loss) income to net cash (used
in) provided by operating activities:
Depreciation and amortization 403,294 276,297 98,911
Provision for losses on accounts receivable 1,317,483 1,341,652 272,353
Accrued interest income on notes receivable from
stockholders (2,626) - -
Deferred income taxes (924,000) (1,105,000) 772,000
Minority interest in loss of joint venture (108,201) (135,133)
Changes in operating assets and liabilities:
Accounts receivable (3,142,713) (2,765,356) (4,068,479)
Refundable income tax (817,165) 240,000 (240,000)
Prepaid expenses and other assets (176,474) (117,879) 32,548
Accounts payable and accrued expenses 154,831 426,961 285,656
Accrued compensation and employee benefits (13,776) (273,700) 638,739
Contract settlement reserve 651,761 1,691,137 1,180,325
Income taxes payable (356,000) 326,000 25,900
Deferred rent expense 83,830 6,925 105,185
------------------------------------------------
Net cash (used in) provided by operating activities (5,216,213) 736,942 259,663
INVESTING ACTIVITIES
Purchases of furniture and office equipment (164,916) (616,938) (378,176)
Purchase of proprietary information - - (50,000)
------------------------------------------------
Net cash used in investing activities (164,916) (616,938) (428,176)
FINANCING ACTIVITIES
Proceeds from sale of preferred stock 1,584,372 - -
Proceeds from sale of common stock 132,513 2,420 890,285
Proceeds from note payable to bank 2,800,000 - -
Payments on note payable to bank (1,600,000) - (69,000)
Proceeds from long-term debt - 417,008 202,688
Payments on long-term debt (193,742) (93,707) (4,279)
Cash dividend paid - - (20,699)
------------------------------------------------
Net cash provided by financing activities 2,723,143 325,721 998,995
------------------------------------------------
Net (decrease) increase in cash (2,657,986) 445,725 830,482
Cash at beginning of year 4,040,362 3,594,637 2,764,155
------------------------------------------------
Cash at end of year $ 1,382,376 $ 4,040,362 $ 3,594,637
================================================
SUPPLEMENTAL INFORMATION
Taxes paid $ 830,000 $ 1,073,000 $ 244,100
================================================
Interest paid $ 107,831 $ 20,447 $ 4,634
================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
PMR Corporation
Notes to Consolidated Financial Statements
April 30, 1995
1. Organization and Significant Accounting Policies
Organization, Business and Principles of Consolidation
PMR Corporation develops, manages, and markets psychiatric partial
hospitalization programs and conducts its operations in the health care industry
segment. The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Psychiatric Management Resources,
Inc., PMR-CD, Inc. and Collaborative Care, Inc. Also included are the accounts
of its 51% owned subsidiary, Twin Town Outpatient, a California general
partnership. The partnership was formed during fiscal 1994 to develop and
operate chemical dependency treatment programs. All intercompany accounts and
transactions have been eliminated in consolidation.
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.
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 ending April 30, 1995 was $297,240, $179,106 and
$86,695, respectively.
Other Assets
Other assets are comprised as follows:
<TABLE>
<CAPTION>
1995 1994
--------------------------
<S> <C> <C>
Proprietary information and covenant not to compete $ 637,503 $ 637,503
Goodwill 294,000 294,000
Other 225,199 132,074
--------------------------
1,156,702 1,063,577
Less accumulated amortization 246,001 139,947
--------------------------
$ 910,701 $ 923,630
==========================
</TABLE>
F-6
<PAGE>
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
Other assets are being amortized using the straight-line method over their
estimated useful lives. The estimated useful life of the proprietary information
and related covenant not to compete is approximately 9 years and goodwill is 15
years.
Earnings Per Share
Earnings per share is based on 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 certain Convertible
Preferred Stock. Earnings per share on a fully diluted basis are unchanged from
primary per share amounts. Earnings per share is affected by the reduction of
net income available for common stock by the amount of dividends on Series A, B
and C Convertible Preferred Stock. The Series A and Series B shares were
converted to common in June 1992 and June 1993, respectively, and all of the
Series C shares remain outstanding at April 30, 1995. Assuming the conversion of
these preferred stock classes had taken place on April 1, 1993 and April 1,
1994, primary earnings per common share would have been $.36 and $.25 for fiscal
1993 and 1994, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes.
Revenue Recognition and Contract Settlement Reserve
The Company's customers are primarily acute care providers or community mental
health centers ("providers") with which it has contracted to manage psychiatric
partial hospitalization programs. Typical contractual agreements with providers
provide that the Company will provide at its own expense specific management
personnel for each program site. The Company's revenue is primarily derived from
three types of agreements: 1) an all inclusive fee arrangement based on per diem
rates which provide that the Company is responsible for all patient care
personnel, all facilities costs, and certain other direct program costs, 2) a
per diem arrangement based on patient census whereby the patient care operating
costs are the responsibility of the provider, and 3) an agreed upon percentage
of the excess of the net revenue earned at each site over the direct costs of
operations, which costs are the responsibility of the provider. Patients served
by the partial hospitalization programs typically are covered by the Medicare
program. The Company also provides its management services to substance abuse
and until January 31, 1995, home health customers. Revenue from substance abuse
and home health contracts for the years ended April 30, 1995 and 1994 was
$2,902,321 and $1,925,000, respectively.
F-7
<PAGE>
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
Revenue is recognized when services are provided. Revenues are subject to
potential denials of payment by Medicare to the various providers and to each
provider's settlement of its Medicare cost report for the program being managed
by the Company. The Company estimates the effect of such potential denials and
settlements and records revenue for services provided at the estimated net
realizable value in the period the related services are provided. The Company
has recorded contract settlement reserves to provide for possible amounts
ultimately owed to its provider customers caused by denials of payment 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 1996.
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.
Reclassification
Certain classifications of accounts in the prior year have been reclassified to
reflect current year classifications.
2. Purchased Proprietary Information
In April 1993, the Company, through its newly formed subsidiary, Collaborative
Care, Inc., 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 shares of common stock valued at $8.50 per share. The seller is
entitled to receive up to 225,000 additional shares of the
F-8
<PAGE>
PMR Corporation
Notes to Consolidated Financial Statements (continued)
2. Purchased Proprietary Information (continued)
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, 1995. 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.
3. Long-Term Receivables
Long term receivables at April 30, 1995 consist primarily of amounts due from
contracting providers for which the Company has established specific payment
terms for accounts receivable amounts which were past due. These receivables are
due in monthly installments at varying amounts for periods ranging from two to
five years.
4. Credit Agreement and Debt
Lines of Credit
The Company has a credit agreement with a bank that permits borrowings up to
$2,000,000 for working capital needs that expires on September 5, 1995. Interest
on borrowings is payable monthly at the bank's prime rate plus 1% (10% at April
30, 1995). The agreement contains certain affirmative covenants. As of April 30,
1995, the Company was not in compliance with certain of these covenants,
however, the lender has waived such compliance for the remainder of the loan
agreement. Borrowings outstanding under the Agreement were $1,200,000 at April
30, 1995 and are collateralized by substantially all of the Company's assets.
There were no borrowings outstanding at April 30, 1994.
F-9
<PAGE>
PMR Corporation
Notes to Consolidated Financial Statements (continued)
4. Credit Agreement and Debt (continued)
Long-Term Debt
Long-term debt consists of the following at April 30:
<TABLE>
<CAPTION>
1995 1994
---------------------------
<S> <C> <C>
Note payable to a bank, with principal payments of $5,630 plus interest at 7%
due monthly through April 5, 1996; collateralized by furniture and office
equipment $ 67,564 $135,125
Note payable to a bank, with principal payments of $5,529 plus interest at 7%
due monthly through November 5, 1996; collateralized by furniture and office
equipment 99,344 162,087
Note payable to a bank, with interest at 7.5% and payments of $7,157 due monthly
through May 5, 1997; collateralized by furniture and office equipment 165,339 228,777
---------------------------
332,247 525,989
Less current portion 206,550 205,985
---------------------------
$125,697 $320,004
===========================
</TABLE>
5. Stockholders' Equity
During the year ended April 30, 1993, all Redeemable B Warrants were exchanged
for shares of common stock.
In April 1992, the Company elected to redeem all of its outstanding Series A
Convertible Preferred Stock shares at $4.50 per share, plus accrued but unpaid
dividends. Pursuant to the underlying agreement, holders of all the Series A
shares exercised their options to convert such shares to common and accordingly,
in June 1992, the Company issued 160,111 shares of common stock. Concurrently,
the Company declared a dividend on such Series A shares that was paid in cash of
$20,699 and 9,504 common shares.
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,
F-10
<PAGE>
PMR Corporation
Notes to Consolidated Financial Statements (continued)
5. Stockholders' Equity (continued)
the Company called for redemption of 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 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 700,000 shares of Series C Convertible
Preferred Stock at $2.50 per share for net proceeds of $1,584,372. Of the
700,000 shares sold, 24,000 shares were sold pursuant to notes receivable for
$60,000. The holders of the Series C Preferred Stock are entitled to receive
non-cumulative dividends at a rate of 7.5% per annum.
6. 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 500,000 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 over
the three year period following the date of grant.
Warrants to purchase shares of the Company's common stock were issued in each of
the three years in the period ended April 30, 1995 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:
F-11
<PAGE>
PMR Corporation
Notes to Consolidated Financial Statements (continued)
6. Stock Options and Warrants (continued)
Shares Price per Share
------------------------------------
Outstanding April 30, 1992 115,690 $2.00 to $8.40
Granted 166,987 7.00 to 8.80
Exercised (122) 2.37
Forfeited (5,840) 2.37 to 8.00
------------------------------------
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 $8.00
====================================
At April 30, 1995 options and warrants to purchase 833,398 shares of common
stock were exercisable and 556,781 shares were available for future grant.
7. Income Taxes
Income tax expense consists of the following:
Year Ended April 30
1995 1994 1993
----------------------------------------------
Federal:
Current $ (284,000) $1,330,000 $ -
Deferred (698,000) (890,000) 673,000
----------------------------------------------
(982,000) 440,000 673,000
State:
Current (58,000) 347,000 30,000
Deferred (226,000) (215,000) 99,000
----------------------------------------------
(284,000) 132,000 129,000
----------------------------------------------
$(1,266,000) $ 572,000 $802,000
==============================================
F-12
<PAGE>
PMR Corporation
Notes to Consolidated Financial Statements (continued)
7. 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 over a four year period commencing in
fiscal 1994. The significant components of the Company's deferred tax assets and
liabilities result at April 30, 1995 and 1994 primarily from the following:
<TABLE>
<CAPTION>
Year Ended April 30
1995 1994
-----------------------------
<S> <C> <C>
Deferred tax assets:
Contract settlement reserve $1,446,000 $1,055,000
Accrued compensation and employee benefits 127,000 153,000
Allowance for bad debts 537,000 161,000
State income taxes - 106,000
Other 163,000 79,000
-----------------------------
Total deferred tax assets 2,273,000 1,554,000
Deferred tax liabilities:
Non-accrual experience method 218,000 -
Accrual to cash method of accounting 1,155,000 1,719,000
Other 141,000 -
-----------------------------
Total deferred tax liabilities 1,514,000 1,719,000
-----------------------------
Net deferred tax assets (liabilities) $ 759,000 $ (165,000)
=============================
</TABLE>
A reconciliation between the federal income tax rate and the effective income
tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended April 30
1995 1994 1993
-----------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 34% 34% 34%
State income taxes, net of federal tax benefit 6 6 6
Other (4) 1 1
-----------------------------------------
Effective income tax rate 36% 41% 41%
=========================================
</TABLE>
F-13
<PAGE>
PMR Corporation
Notes to Consolidated Financial Statements (continued)
8. Customers
Approximately 75% 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, Texas and
Indiana. The following table summarizes the percent of revenue earned from any
individual provider which was responsible for ten percent or more of the
Company's consolidated revenues. There is more than one program site for some
providers.
Year ended April 30
Provider 1995 1994 1993
- --------------------------------------------------------------------------
A 16% - -
B - 26% 25%
C 11 16 -
D 11 - -
E - 14 -
F - - 41
Provider "F" above is Harbor View Hospital, which unilaterally terminated its
contract with the Company on May 19, 1993. At April 30, 1995, two individual
providers represent 10% or more of the Company's gross accounts receivable.
Those are provider "B" - 16% and provider "D" - 13%.
9. Employee Benefits
During fiscal 1994, the Company instituted 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 years ended April 30, 1995 and 1994, the Company contributed $134,000
and $73,000, respectively, to match employee deferrals.
10. 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, 1995 are as follows: 1996 -- $1,937,000; 1997 -- $1,772,000; 1998 --
$1,055,000; 1999 -- $682,000; 2000 -- $105,000 and none thereafter.
F-14
<PAGE>
PMR Corporation
Notes to Consolidated Financial Statements (continued)
10. Commitments (continued)
Rent expense totaled $1,811,000, $1,307,000 and $910,000 in 1995, 1994, and
1993, respectively.
F-15
<PAGE>
Schedule VIII
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 Deductions -- Balance at
Description Beginning of and Expenses Accounts -- Describe End of
Period Describe Period
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended April 30, 1995:
Allowance for doubtful accounts $ 400,000 $ 1,317,483 $ - $ 419,657 (1) $ 1,297,826
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
Year ended April 30, 1993:
Allowance for doubtful accounts $ - $ 272,353 $ - $ 89,000 (1) $ 183,353
Contract settlement reserve $ - $ 1,688,174 $ - $ 507,849 (2) $ 1,180,325
</TABLE>
(1) Uncollectible accounts written off, net of recoveries,
(2) Write off of hospital receivables based on denials or estimated adjustments
by Medicare
S-1
<PAGE>
EXHIBIT INDEX
Description Method of Filing
----------- ----------------
23.1 Consent of Ernst & Young Filed herewith
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the used of our report dated June 23, 1995 in this Amendment No. 1
on Form 10-K/A of PMR Corporation to its 1995 Annual Report (Form 10-K).
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 excess 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
and the Registration Statement (Form S-3 No. 33-77848) pertaining to the
registration of 554,272 shares of common stock of our report dated June 23,
1995, with respect to the consolidated financial statements included herein, and
our report included in the preceding paragraph with respect to the financial
statement schedule included in this Amendment No. 1 on Form 10-K/A of PMR
Corporation to its 1995 Annual Report (Form 10-K).
ERNST & YOUNG LLP
San Diego, California
May 2, 1996
