<PAGE> 1
This filing is made pursant
to rule 424(b)(4) under
the Securities Act of
1933 in connection with
Registration No. 333-36313
2,000,000 SHARES
LOGO
COMMON STOCK
Of the shares of common stock, par value $0.01 per share (the "Common
Stock"), of PMR Corporation ("PMR" or the "Company") offered hereby (the
"Offering"), 1,490,000 shares are being offered by the Company and 510,000
shares are being offered by certain stockholders of the Company (the "Selling
Stockholders"). See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling Stockholders.
The Common Stock is quoted on The Nasdaq Stock Market's National Market (the
"Nasdaq National Market") under the symbol "PMRP." On October 21, 1997, the last
reported sale price of the Common Stock on the Nasdaq National Market was $21.25
per share. See "Price Range of Common Stock."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share..................... $21.25 $1.275 $19.975 $19.975
- ------------------------------------------------------------------------------------------------------
Total(3)...................... $42,500,000 $2,550,000 $29,762,750 $10,187,250
======================================================================================================
</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting expenses of the Offering, payable by the Company, estimated
at $450,000.
(3) The Company and certain stockholders of the Company have granted to the
Underwriters a 30-day option to purchase up to an additional 300,000 shares
of Common Stock on the same terms and conditions as set forth above, solely
to cover over-allotments, if any. If the option is exercised in full, the
total "Price to Public," "Underwriting Discount," "Proceeds to Company" and
"Proceeds to Selling Stockholders" will be $48,875,000, $2,932,500,
$33,757,750 and $12,184,750, respectively. See "Underwriting."
------------------------
The Common Stock is offered by the several Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by them and
subject to approval of certain legal matters by counsel for the Underwriters.
The Underwriters reserve the right to reject orders in whole or in part and to
withdraw, to cancel or to modify the offer without notice. It is expected that
delivery of certificates representing the Common Stock will be made on or about
October 27, 1997.
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS
WESSELS, ARNOLD & HENDERSON
The date of this Prospectus is October 21, 1997.
<PAGE> 2
50 Programs - 12 States - 8,300 Patients Currently Served
[Map of United States showing PMR program sites.]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and accompanying notes
appearing elsewhere in this Prospectus. Prospective investors should also review
carefully the information set forth under "Risk Factors." Unless otherwise
indicated, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. Unless the context otherwise requires, the
terms the "Company" and "PMR" refer collectively to PMR Corporation and its
subsidiaries. All references in this Prospectus to a particular fiscal year of
the Company refer to the Company's fiscal year ended April 30 of that year.
THE COMPANY
PMR is a leading manager of specialized mental health care programs
designed to treat individuals diagnosed with a serious mental illness ("SMI"),
primarily schizophrenia and bi-polar disorder (i.e., manic-depressive illness).
PMR manages the delivery of a broad range of outpatient and community-based
psychiatric services for SMI patients, consisting of 39 intensive outpatient
programs (the "Outpatient Programs"), four case management programs (the "Case
Management Programs") and seven chemical dependency and substance abuse programs
(the "Chemical Dependency Programs"). Through its various programs, PMR employs
or contracts with more than 400 mental health professionals and currently
provides services to approximately 8,300 patients. The Company currently offers
its services in twelve states, comprised of Arizona, Arkansas, California,
Colorado, Hawaii, Illinois, Indiana, Kentucky, Michigan, Ohio, Tennessee and
Texas. PMR believes it is the only private sector company focused on providing
an integrated mental health disease management model to the SMI population.
The four-decade public policy trend of de-institutionalizing the mentally
ill from long-term care hospitals into the community has resulted in a
deterioration in SMI patient care. In response to this trend, a fragmented,
community-based system of care has evolved that does not adequately provide the
patient management or coordination of benefits required by the medically complex
SMI patient population. SMI patients typically enter the health care system
through multiple, uncoordinated points of care where services are provided in
reaction to patient crises rather than proactively to manage patient care.
Multiple physicians, case workers and other care providers handle patients in
different sites across the spectrum of care with little or no coordination. This
disjointed system of care results in low levels of patient monitoring and
medication compliance among the SMI population, which increases the incidence
rate of high-cost catastrophic events. Coordination and monitoring of patient
services is essential to avoid the debilitating effects of fragmented care
delivered by diverse outpatient providers which are reimbursed by disparate,
uncoordinated funding sources. PMR's clinical philosophy focuses on improving
outcomes and lowering costs by utilizing intensive, community-based treatment of
the SMI population in outpatient settings. Through a comprehensive patient
management approach that emphasizes early intervention to identify and reduce
the incidence of crisis events, the Company seeks to achieve significant
reductions in inpatient hospitalization and other SMI related expenses while
improving clinical outcomes and increasing patient compliance and satisfaction.
PMR's Outpatient Programs serve as a comprehensive alternative to inpatient
hospitalization and include partial hospitalization and lower intensity
outpatient services. The Case Management Programs provide an intensive,
individualized primary care service which consists of a proprietary case
management model utilizing clinical protocols for delivering care to SMI
patients. The Company also provides Chemical Dependency Programs to patients
affiliated with managed care organizations and government-funded programs.
Recently, PMR began development of a site management and clinical information
initiative. The Company believes that its access to a large SMI patient base
provides it with a unique opportunity to collect, process and analyze clinical
and pharmacoeconomic data on schizophrenia and bi-polar disorder. In January
1997, PMR entered into a collaborative agreement with United HealthCare
Corporation and its Applied HealthCare Informatics division ("Applied
Informatics") to assist in developing this initiative.
According to the National Institute of Mental Health (the "NIMH") and its
National Advisory Mental Health Council (the "NAMHC"), serious mental illnesses
are neurobiological disorders of the brain and include schizophrenia,
schizoaffective disorder, manic-depressive illness and autism, as well as severe
forms of
3
<PAGE> 4
other disorders such as major depression, panic disorder and
obsessive-compulsive disorder. These diseases are chronic and represent one of
the highest cost segments of the health care system. Industry sources indicate
that approximately 2.8% of the adult population and 3.2% of children ages 9-17
are affected by SMI, for a total SMI population in the United States of
approximately 5.6 million people. In 1995, individuals diagnosed with SMI
consumed $27 billion in direct medical costs relating to the provision of mental
health services and consumed more than $74 billion in total costs, including
estimates of lost productivity. Based on industry data, the Company estimates
that the direct medical expenditures associated with SMI represent in excess of
25% of total direct mental health care costs. However, the potential costs of
direct medical care may exceed these levels due to the approximately 2.2 million
Americans estimated to be suffering from untreated SMI. Substantially all costs
of treating and managing the SMI population are borne by federal, state and
local programs, including Medicare and Medicaid. The SMI population accesses
care primarily through community mental health centers ("CMHCs") and other
community-based health care facilities such as psychiatric and acute care
hospitals and nursing homes. CMHCs typically are not-for-profit organizations
which lack access to capital, sophisticated management information and financial
systems, and comprehensive programs for treating SMI patients.
PMR's objective is to be the leader in the management of cost-effective
programs which provide quality care and foster the successful recovery of
individuals from the devastating effects of SMI. The Company intends to achieve
this objective by (i) obtaining new contracts for its Outpatient and Case
Management Programs, (ii) establishing new programs and ancillary services,
(iii) combining its outpatient, case management and chemical dependency
capabilities into a fully-integrated mental health disease management model and
(iv) pursuing its site management and clinical information initiative. PMR
believes that its proprietary mental health disease management model will
position it to accept risk for SMI benefits and directly manage the costs
associated with providing care to the SMI population.
PMR was incorporated in the State of Delaware in 1988. The operations of
the Company include the operations of the Company's wholly owned subsidiaries,
Psychiatric Management Resources, Inc., Collaborative Care Corporation,
Collaborative Care, Inc., PMR-CD, Inc., Aldine-CD, Inc. and Twin Town
Outpatient. The principal executive offices of the Company are located at 501
Washington Street, 5th Floor, San Diego, California 92103. The Company's
telephone number is (619) 610-4001.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..................... 1,490,000 shares
Common Stock offered by the Selling Stockholders........ 510,000 shares
Common Stock to be outstanding after the Offering(1).... 6,689,535 shares
Use of proceeds......................................... To fund the development of
additional treatment programs and
for general corporate purposes,
including potential acquisitions.
See "Use of Proceeds."
Nasdaq National Market symbol........................... PMRP
</TABLE>
- ---------------
(1) Based on the number of shares outstanding as of September 15, 1997. Includes
an aggregate of 40,000 shares of Common Stock to be issued upon exercise of
outstanding options and warrants by certain Selling Stockholders immediately
prior to consummation of the Offering. Excludes 1,543,290 shares of Common
Stock issuable upon exercise of remaining outstanding options to purchase
Common Stock at a weighted average exercise price of $10.98 per share and
138,000 shares of Common Stock issuable upon exercise of remaining
outstanding warrants to purchase Common Stock at a weighted average exercise
price of $4.82 per share. See "Capitalization" and Note 7 of Notes to
Consolidated Financial Statements.
4
<PAGE> 5
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED APRIL 30, JULY 31,
------------------------------- -------------------
1995 1996 1997 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................. $21,747 $36,316 $56,637 $13,028 $16,177
Operating expenses....................... 20,648 28,472 41,423 9,741 11,626
Marketing, general and administrative.... 2,977 4,019 6,350 1,518 2,115
Provision for bad debts.................. 1,317 1,448 3,084 602 664
Depreciation and amortization............ 403 596 701 180 216
Minority interest in loss of
subsidiary............................. (108) (1) -- -- --
------ ------ ------ ------ ------
Income (loss) from operations............ (3,490) 1,782 5,079 987 1,557
Income (loss) before income taxes........ (3,552) 1,780 5,296 1,018 1,645
Net income (loss)........................ (2,286) 1,050 3,124 600 971
Dividends on preferred stock (1)......... 66 132 17 17 --
Net income (loss) for common stock....... $(2,352) $ 918 $ 3,107 $ 583 $ 971
Earnings (loss) per common share
(fully diluted)(1)..................... $ (0.70) $ 0.21 $ 0.54 $ 0.11 $ 0.16
Weighted average shares outstanding
(fully diluted)........................ 3,337 5,043 5,772 5,291 6,012
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1997
--------------------------
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................................... $21,902 $ 51,380
Total assets........................................................ 34,917 64,395
Long-term debt...................................................... -- --
Stockholders' equity................................................ 17,337 46,815
</TABLE>
- ---------------
(1) Earnings (loss) per common share is affected by the retention of net income
available for Common Stock resulting from the dividends on the Company's
Series C Convertible Preferred Stock (the "Preferred Stock"). In July 1996,
all holders of the Preferred Stock exercised their options to convert all of
such shares of Preferred Stock into 700,000 shares of Common Stock.
(2) As adjusted to reflect (i) the sale of 1,490,000 shares of Common Stock
offered by the Company and (ii) the exercise by certain Selling Stockholders
of outstanding options and warrants to purchase an aggregate of 40,000
shares of Common Stock immediately prior to consummation of the Offering.
5
<PAGE> 6
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby. This
Prospectus contains certain forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of the risk
factors set forth below and other factors described elsewhere in this
Prospectus.
DEPENDENCE UPON MEDICARE REIMBURSEMENT
A significant component of the Company's revenues is derived from payments
made by providers to the Company for managing and administering Outpatient
Programs for providers. Substantially all of the patients admitted to the
Outpatient Programs are eligible for Medicare coverage. The U.S. Department of
Health and Human Services has established the Health Care Financing
Administration ("HCFA") to administer and interpret the rules and regulations
governing the Medicare program and the benefits associated therewith. A
provider's Medicare payments can be adversely affected by actions of HCFA or
fiscal intermediaries in several ways including: (i) denials of coverage on
claims for services furnished to Medicare eligible patients; (ii) disallowances
of costs claimed on the annual cost report on the grounds that such costs are
unreasonable, relate to uncovered services or are otherwise nonallowable; or
(iii) changes in the law or interpretation of the law governing Medicare
coverage and payment.
Each provider is reimbursed for its estimated reasonable costs for covered
services on an interim basis by Medicare fiscal intermediaries and submits
annual cost reports to the fiscal intermediaries for audit and payment
reconciliation. The providers generally seek reimbursement of the Company's
management fees from these fiscal intermediaries as part of their overall
payments from Medicare, and payment of the Company's management fee may be
directly affected by the reimbursement experience of the provider. In certain
instances, providers are not obligated to pay the Company's management fee if
coverage for claims submitted by the provider related to services furnished by
the Company are denied by Medicare's fiscal intermediary. In other instances,
the Company may be obligated to indemnify a provider to the extent the Company's
management fee charged to the provider is disallowed by Medicare's fiscal
intermediary for reimbursement. The occurrence of either of these events with
respect to a significant number of providers or a significant amount of fees
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
During the fourth quarter of fiscal 1994, fiscal intermediaries for
providers began a review (a "Focused Medical Review") of claims for partial
hospitalization services throughout the country, including Outpatient Programs
managed by the Company. A Focused Medical Review consists of an intensive review
by fiscal intermediaries of HCFA, on an industry-wide basis, of certain targeted
claims. Focused Medical Reviews may occur for a number of reasons including,
without limitation, an intermediary's concern about coverage for claims at a
specific site or because HCFA has identified certain services as being at risk
of inappropriate program payment. This generally occurs when HCFA identifies
significant industry-wide increases in payments for certain types of services,
as had been the case with partial hospitalization benefits. The Company's
initial experience with the Focused Medical Review in fiscal 1994 was that there
were numerous denials of providers' claims, and the denials had an adverse
impact on the Company's business, financial condition and results of operations
during fiscal 1995 because providers delayed payment of the Company's management
fee due to of the substantial number of denials.
Although during 1996 the number of denied claims was reduced to a modest
rate, the periodic review of claims by HCFA fiscal intermediaries will likely
continue at one or more programs from time to time and there can be no assurance
that Focused Medical Reviews of claims will not recur at the level previously
experienced by the Company. In addition, during 1997, HCFA has increased its
scrutiny of CMHCs due to a significant increase in Medicare based outpatient
programs operated by these providers. The Company believes that Focused Medical
Reviews are likely to increase at programs managed by the Company in which
6
<PAGE> 7
CMHCs are the providers. Any denied claims resulting from future Focused Medical
Reviews could have a material adverse effect on the Company's business,
financial condition and results of operations.
All of the partial hospitalization programs managed by the Company are
treated as "provider-based" programs by HCFA. This designation is important
since partial hospitalization services are covered only when furnished by a
"provider" (i.e., a hospital or a CMHC). To the extent that partial
hospitalization programs are not located in a site and operated in a manner
which is deemed by HCFA to be "provider-based," there would not be Medicare
coverage for the services furnished at that site under Medicare's partial
hospitalization benefit. In August 1996, HCFA published criteria for determining
when programs may be deemed to be "provider-based" programs. The proper
interpretation and application of these criteria are not entirely clear and
there is a risk that some of the program sites managed by the Company will be
found not to be "provider-based." If such determination is made, HCFA may seek
retroactive recoveries from providers. If HCFA makes a determination that
programs managed by the Company are not "provider-based" and seeks retroactive
recovery of payments from the Company's providers, such recovery could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Contracts" and "-- Government
Regulation."
SUFFICIENCY OF EXISTING RESERVES TO COVER REIMBURSEMENT RISKS
The Company maintains significant reserves to cover the potential impact of
two primary uncertainties: (i) 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 a provider's cost report by fiscal intermediaries;
and (ii) the Company may not receive full payment of the management fees owed to
it by a provider during the periodic review of the provider's 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 previously paid to the Company that
are disallowed pursuant to 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, there can
be no assurance that such reserves will be adequate. The obligation to pay the
amounts estimated within the Company's financial statements (or such greater
amounts as are due), if and when they become due, could have a material adverse
effect upon the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Contracts" and "-- Government Regulation."
CONTINUITY OF MANAGEMENT CONTRACTS
Substantially all of the revenues of the Company are derived from contracts
with providers, behavioral health organizations and case management agencies.
The continued success of the Company is subject to its ability to maintain,
renew, extend or replace existing management contracts and obtain new management
contracts. These contracts generally have defined terms of duration and many
have automatic renewal provisions. The contracts often provide for early
termination either by the provider if specified performance criteria are not
satisfied or by the Company under various other circumstances.
Contract renewals and extensions are likely to be subject to competing
proposals from other contract management companies as well as consideration by
certain providers to terminate their mental health programs or convert their
mental health programs from independently managed programs to programs operated
internally. There can be no assurance that any provider or case management
agency will continue to do business with the Company following expiration of its
management contract or that such management contracts will not be terminated
prior to expiration. In addition, any changes in the Medicare or Medicaid
program which have the effect of limiting or reducing reimbursement levels for
mental health services provided by programs managed by the Company could result
in the early termination of existing management contracts and could adversely
affect the ability of the Company to renew or extend existing management
contracts and to obtain new management contracts. The termination or non-renewal
of a significant number of management contracts could result in a significant
decrease in the Company's net revenues and could have a
7
<PAGE> 8
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Contracts."
POTENTIAL CHANGES IN TENNCARE
The Company holds contracts to provide case management services in
Tennessee with two managed care consortiums, Tennessee Behavioral Health ("TBH")
and Premier Behavioral Health ("Premier"), which operate under the Tennessee
TennCare Partners State Medicaid Managed Care Program ("TennCare"). In July
1996, both consortiums became the payors for mental health care services under
TennCare for the approximately 1.2 million individuals who qualify for coverage
based on Medicaid eligibility or other indigency standards. The Company
previously received information that Premier has notified the State of Tennessee
of its intention to withdraw from TennCare effective June 30, 1997. However, the
Company understands that the State of Tennessee has contested the termination
and Premier has continued in its role as a managed care consortium. Effective
July 1, 1997, TBH amended its contract with TennCare and is attempting to
restructure its agreements with its providers. Significant uncertainty exists as
to the future structure of TennCare and the Company's ability to maintain its
case management revenues subsequent to a restructuring. Case Management Programs
in Tennessee accounted for 23.7% and 23.2% of the Company's revenues for fiscal
1997 and for the three months ended July 31, 1997, respectively. Depending on
the outcome of ongoing discussions among the interested parties in TennCare, the
Company may find it necessary to restructure or terminate one or more of its
contracts with the managed care consortiums or case management agencies. The
potential changes, which the Company cannot predict with any degree of
certainty, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "-- Concentration of
Revenues," "-- Limited Operating History of Case Management Programs,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Operations" and "-- Contracts."
CONCENTRATION OF REVENUES
For fiscal 1997, only one provider accounted for more than 10% of the
Company's revenue. In addition, although not attributed to a particular
"customer," the Case Management Programs accounted for 24.2% of the Company's
revenue for fiscal 1997 and for the three months ended July 31, 1997. These
programs were largely operated under contracts with two managed care consortiums
in the State of Tennessee and management agreements with two case management
agencies. A termination or non-renewal of any of these contracts could have a
material adverse effect on the Company's business, financial condition and
results of operations. See " -- Potential Changes in TennCare," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Operations" and "-- Contracts."
LIMITED OPERATING HISTORY OF CASE MANAGEMENT PROGRAMS
The operations of the Company's Case Management Programs are subject to
limited operating history. Thus, the success of these programs will be dependent
upon the Company's ability to manage and expand operations effectively, control
costs and recognize operating efficiencies. By virtue of the lack of operating
history, there can be no assurance that the Company will be able to maintain
these operations at their current level or expand these programs in the future.
See " -- Potential Changes in TennCare," " -- Concentration of Revenues" and
"Business -- Operations."
IMPACT OF HEALTH CARE REFORM AND THE BALANCED BUDGET ACT OF 1997
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Changes in the law,
new interpretations of existing laws, or changes in payment methodology or
amounts may have a dramatic effect on the relative costs associated with doing
business and the amount of reimbursement provided by government or other
third-party payors. In addition to specific health care legislation, both the
Clinton Administration and various federal legislators have considered health
care reform proposals intended to control health care costs and to improve
access to medical services for uninsured individuals. These proposals have
included cutbacks to the Medicare and Medicaid programs and steps to permit
greater flexibility in the administration of the Medicaid program. In addition,
some states in
8
<PAGE> 9
which the Company operates are considering various health care reform proposals.
The Company anticipates that federal and state governments will continue to
review and assess alternative health care delivery systems and payment
methodologies, and that public debate on these issues will likely continue in
the future. Due to uncertainties regarding the ultimate features of reform
initiatives and their enactment, implementation and interpretation, the Company
cannot predict which, if any, of such reform proposals will be adopted, when
they may be adopted or what impact they may have on the Company. Accordingly,
there can be no assurance that future health care legislation or other changes
in the administration or interpretation of governmental health care programs
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
The Medicare benefit has a coinsurance feature, which means that the amount
paid by Medicare is the provider's reasonable cost less "coinsurance" which is
typically the patient's responsibility. The coinsurance amount is currently 20%
of the charges for the services. The coinsurance must be charged to the patient
by the provider unless the patient is indigent. If the patient is indigent or if
the patient does not pay the provider the billed coinsurance amounts after
reasonable collection efforts, the Medicare program has historically paid those
amounts as "allowable Medicare bad debts." The allowability of Medicare bad
debts to providers for whom the Company manages partial hospitalization programs
is significant since most of the patients in programs managed by the Company are
indigent or have very limited resources. The Balanced Budget Act of 1997 reduces
the amount of allowable Medicare bad debts payable to providers as follows: 25%
for provider fiscal years beginning on or after October 1, 1997; 40% for
provider fiscal years beginning on or after October 1, 1998; and 45% for
provider fiscal years beginning on or after October 1, 1999. The reduction in
"allowable Medicare bad debts" could have a material adverse effect on Medicare
reimbursement to the Company's providers and could further result in the
restructuring or loss of provider contracts with the Company. See
"Business -- Government Regulation."
Many of the patients served in the Outpatient Programs are indigent or have
very limited resources. Accordingly, many of those patients have Medicaid
coverage in addition to Medicare coverage. In some of the states where the
Company furnishes services, the state Medicaid plans have paid the Medicare
coinsurance amount. However, under the Balanced Budget Act of 1997, states will
no longer have to pay such amounts if the amount paid by Medicare for the
service equals or exceeds what Medicaid would have paid had it been the primary
insurer. To the extent that states take advantage of this new legislation and
refuse to pay the Medicare coinsurance amounts on behalf of the Outpatient
Program patients to the degree that they had in the past, it will have an
adverse impact on the providers with whom the Company contracts, and thus may
have a material adverse effect on the Company's business, financial condition
and results of operations.
In the Balanced Budget Act of 1997, Congress directed HCFA to implement a
prospective payment system for all outpatient hospital services for the calendar
year beginning January 1, 1999. Under such a system, a pre-determined rate would
be paid to providers regardless of the providers' reasonable cost. While the
actual reimbursement rates and methodology have not been determined and thus
their effect, positive or negative, is unknown, the Company may need to
negotiate modifications to its contracts with providers, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Government Regulation."
GOVERNMENT REGULATION
Mental health care is an area subject to extensive and frequent regulatory
change. Changes in the laws or new interpretations of existing laws can have a
significant effect on the methods of doing business, costs of doing business and
amounts of reimbursement available from governmental and other payors. The
Company is and will continue to be subject to varying degrees of regulation and
licensing by health or social service agencies and other regulatory authorities
in the various states and localities in which it operates or intends to operate,
including applicable Medicare and Medicaid guidelines. The Company's business is
subject to a broad range of federal, state and local requirements including, but
not limited to, fraud and abuse laws, licensing and certification standards, and
regulations governing the scope and quality of care. Violations of these
requirements may result in civil and criminal penalties and exclusions from
participation in federal and state-funded programs. The Company at all times
attempts to comply with all such laws including applicable
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<PAGE> 10
Medicare and Medicaid regulations; however, there can be no assurance that the
expansion or interpretation of existing laws or regulations, or the imposition
of new laws or regulations, will not have a material adverse effect on the
Company's provider relationships or the Company's business, financial condition
and results of operations.
Applicable Medicare guidelines permit the reimbursement of contracted
management services provided that, among other things, the associated fees are
"reasonable." As a general rule, Medicare guidelines indicate that the costs
incurred by a provider for contract management services relating to furnishing
Medicare-covered services are deemed "reasonable" if the costs incurred are
comparable with marketplace prices for similar services. Although management
believes that the Company's charges for its services are comparable with
marketplace prices for similar services, the determination of reasonableness may
be interpreted by HCFA or a fiscal intermediary in a manner inconsistent with
the Company's belief. Notwithstanding the Company's belief, a determination that
the Company's management fees may not be "reasonable" may have a material
adverse effect on the Company's business, financial condition and results of
operations.
HCFA has also published criteria that partial hospitalization services must
meet in order to qualify for Medicare funding. Pursuant to these criteria, 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. Although the
Company and its providers have quality assurance and utilization review programs
to ensure that the partial hospitalization programs managed by the Company are
operating in compliance with all Medicare requirements, there can be no
assurance that in the future certain aspects of the Company's programs will not
be found to have failed to satisfy all applicable criteria for Medicare
eligibility.
Historically, CMHCs, unlike hospitals, were not surveyed by a Medicare
contractor before being permitted to participate in the Medicare program.
However, HCFA is now in the process of surveying all CMHCs to confirm that they
meet all applicable Medicare conditions for furnishing partial hospitalization
programs. Management believes that all the CMHCs that contract with the Company
should be found in compliance with the applicable requirements. However, there
can be no assurance that some CMHCs contracting with the Company will not be
terminated from the Medicare program or that the government will not attempt to
recover payments made to such CMHCs for services, including payments relating to
the Company's services, which had been furnished and paid for by Medicare. See
"Business -- Government Regulation."
MANAGEMENT OF RAPID GROWTH
The Company expects that its outpatient psychiatric management services
business and the number of its Outpatient, Case Management and Chemical
Dependency Programs may increase significantly as it pursues its growth
strategy. If it materializes, this rapid growth will place significant demands
on the Company's management resources. The Company's ability to manage its
growth effectively will require it to continue to expand its operational,
financial and management information systems, and to continue to attract, train,
motivate, manage and retain key employees. If the Company is unable to manage
its growth effectively, its business, financial condition and results of
operations could be adversely affected.
DEPENDENCE ON KEY PERSONNEL
The Company depends, and will continue to depend, upon the services of its
current senior management for the management of the Company's operations and the
implementation of its business strategy. In addition, the Company's success is
also dependent upon its ability to attract and retain additional qualified
management personnel to support the Company's growth. The loss of the services
of any or all such individuals or the Company's inability to attract additional
management personnel in the future may have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
presently has no employment agreements with any of its senior executive
officers.
The Company's success and growth strategy also will depend on its ability
to attract and retain qualified clinical, marketing and other personnel. The
Company competes with general acute care hospitals and other
10
<PAGE> 11
health care providers for the services of psychiatrists, psychologists, social
workers, therapists and other clinical personnel. Demand for such clinical
personnel is high and they are often subject to competing offers. There can be
no assurance that the Company will be able to attract and retain the qualified
personnel necessary to support its business in the future. Any such inability
may have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION
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 health care
programs and services. The Company anticipates that competition will become more
intense as pressure to contain the rising costs of health care continues to
intensify, particularly as programs such as those operated by the Company are
perceived to help contain mental health care costs. Many other companies engaged
in the management of outpatient psychiatric programs compete with the Company
for the establishment of affiliations with acute care hospitals. Furthermore,
while the Company's existing competitors in the case management business are
predominantly not-for-profit CMHCs and case management agencies, the Company
anticipates that other health care management companies will eventually compete
for this business. Many of these present and future competitors are
substantially more established and have greater financial and other resources
than the Company. In addition, the Company's current and potential providers may
choose to operate mental health programs themselves rather than contract with
the Company. There can be no assurance that the Company will be able to compete
effectively with its present or future competitors, and any such inability could
have a material adverse effect on the Company's business, financial condition
and results of operations.
AVAILABILITY AND ADEQUACY OF INSURANCE
The provision of mental health care services entails an inherent risk of
liability. In recent years, participants in the industry have become subject to
an increasing number of lawsuits alleging malpractice or related legal theories,
many of which involve large claims and significant defense costs. The Company
currently maintains annually renewable liability insurance intended to cover
such claims and the Company believes that its insurance is in conformity with
industry standards. There can be no assurance, however, that claims in excess of
the Company's insurance coverage or claims not covered by the Company's
insurance coverage (e.g., claims for punitive damages) will not arise. A
successful claim against the Company not covered by, or in excess of, the
Company's insurance coverage could have a material adverse effect upon the
Company's business, financial condition and results of operations. In addition,
claims asserted against the Company, regardless of their merit or eventual
outcome, could have a material adverse effect upon the Company's reputation and
ability to expand its business, and could require management to devote time to
matters unrelated to the operation of the Company's business. There can be no
assurance that the Company will be able to obtain liability insurance coverage
on commercially reasonable terms in the future or that such insurance will
provide adequate coverage against potential claims.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales by holders of substantial amounts of Common Stock could
adversely affect the prevailing market price of the Common Stock. The number of
shares of Common Stock available for sale in the public market is limited by
restrictions under the Securities Act of 1933, as amended (the "Securities
Act"), and lock-up agreements under which stockholders of the Company holding in
the aggregate 2,260,676 shares of Common Stock upon consummation of the Offering
(plus up to 778,175 shares of Common Stock issuable upon exercise of currently
exercisable stock options and warrants), including each of the Company's
officers, directors, the Selling Stockholders and certain other stockholders,
have agreed, subject to certain limited exceptions, that they will not directly
or indirectly, offer, pledge, sell, offer to sell, contract to sell or grant any
option to purchase or otherwise sell or dispose (or announce any offer, pledge,
offer of sale, contract of sale, grant of any option or other sale or
disposition) of any shares of Common Stock or other capital stock or securities
exchangeable or exercisable for, or convertible into, shares of Common Stock or
other capital stock
11
<PAGE> 12
for a period of 120 days after the date of this Prospectus (the "Lock-Up
Period"), without the prior written consent of Equitable Securities Corporation.
Based on the number of shares of Common Stock outstanding on September 15, 1997,
after completion of the Offering, the Company will have 6,689,535 shares of
Common Stock outstanding. Of these shares, in addition to the 2,000,000 shares
offered hereby plus any additional shares sold upon exercise of the
Underwriters' over-allotment option, 2,426,809 shares of Common Stock held by
existing stockholders (plus up to 888,115 shares of Common Stock issuable upon
exercise of currently exercisable stock options and warrants) will be eligible
for immediate sale without restriction. At the end of the Lock-Up Period,
subject to the volume limitations imposed by Rule 144 ("Rule 144") under the
Securities Act, an additional 2,260,676 shares of Common Stock (plus up to
778,175 shares of Common Stock issuable upon exercise of currently exercisable
stock options and warrants) will be eligible for immediate sale without
restriction. The remaining 2,050 shares of Common Stock held by existing
stockholders (plus up to 15,000 shares of Common Stock issuable upon exercise of
currently exercisable stock options and warrants) will become eligible for sale
at various times pursuant to Rule 144.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock could be subject to significant
fluctuations in response to various factors and events, including, but not
limited to, the liquidity of the market for the Common Stock, variations in the
Company's quarterly results of operations, revisions to existing earnings
estimates by research analysts and new statutes or regulations or changes in the
interpretation of existing statutes or regulations affecting the health care
industry generally or mental health services in particular, some of which are
unrelated to the Company's operating performance. In addition, the stock market
in recent years has generally experienced significant price and volume
fluctuations that often have been unrelated to the operating performance of
particular companies. These market fluctuations also may adversely affect the
market price of the Common Stock. See "Price Range of Common Stock."
CONCENTRATION OF OWNERSHIP; ANTI-TAKEOVER PROVISIONS
Upon completion of the Offering, the officers and directors of the Company
and their affiliates will continue to own over 30% of the Company's issued and
outstanding Common Stock. Although the officers and directors do not have any
arrangements or understandings among themselves with respect to the voting of
the shares of Common Stock beneficially owned by such persons, such persons
acting together could elect a majority of the Company's Board of Directors and
control the Company's policies and day-to-day management. The Company's Board of
Directors has the authority, without action by the stockholders, to issue shares
of preferred stock and to fix the rights and preferences of such shares. The
ability to issue shares of preferred stock, together with certain provisions of
Delaware law and certain provisions of the Company's Restated Certificate of
Incorporation, such as staggered terms for directors, limitations on the
stockholders' ability to call a meeting or remove directors and the requirement
of a two-thirds vote of stockholders for amendment of certain provisions of the
Restated Certificate of Incorporation or approval of certain business
combinations, may delay, deter or prevent a change in control of the Company,
may discourage bids for the Common Stock at a premium over the market price of
the Common Stock and may adversely affect the market price of, and the voting
and other rights of the holders of, the Common Stock. See "Principal and Selling
Stockholders."
12
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,490,000 shares of
Common Stock offered by the Company are estimated to be approximately $29.3
million after deducting estimated underwriting discounts and offering expenses
payable by the Company (or approximately $33.3 million if the Underwriters'
over-allotment option is exercised in full). The Company will not receive any
proceeds from the sale of Common Stock by the Selling Stockholders.
The Company anticipates that the net proceeds will be used to fund the
development of additional treatment programs and for general corporate purposes,
including potential acquisitions of complementary businesses. The Company
explores the possibility of such acquisitions when appropriate in its judgment,
but has not progressed beyond preliminary negotiations and has not reached any
agreements in principle with respect to any material acquisitions. Pending
application of the net proceeds as described, the Company intends to invest the
net proceeds in short-term, interest-bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
"PMRP." The following table sets forth the high and low sales prices for the
Common Stock for the quarters indicated as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
PRICE RANGE
-----------------
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDING APRIL 30, 1998:
Second Quarter (through October 21, 1997).............. $24.50 $19.13
First Quarter.......................................... 23.86 16.75
FISCAL YEAR ENDED APRIL 30, 1997:
Fourth Quarter......................................... 29.75 16.75
Third Quarter.......................................... 31.44 20.25
Second Quarter......................................... 35.25 14.13
First Quarter.......................................... 15.50 8.50
</TABLE>
The last reported sale price of the Common Stock on the Nasdaq National
Market on October 21, 1997 was $21.25 per share. As of October 21, 1997, there
were 88 stockholders of record.
DIVIDEND POLICY
It is the policy of the Company's Board of Directors to retain earnings to
support operations and to finance continued growth of the Company rather than to
pay dividends. The Company has never paid or declared any cash dividends on its
Common Stock and does not anticipate paying any cash dividends in the
foreseeable future. The Company's credit facility contains certain restrictions
and limitations, including the prohibition against payment of dividends on
Common Stock.
13
<PAGE> 14
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of July 31, 1997 and as adjusted to give effect to (i) the sale of the 1,490,000
shares of Common Stock offered by the Company and (ii) the exercise by certain
Selling Stockholders of outstanding options and warrants to purchase an
aggregate of 40,000 shares of Common Stock immediately prior to consummation of
the Offering. This table should be read in conjunction with the more detailed
information and consolidated financial statements and accompanying notes
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JULY 31, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current portion of long-term debt......... $ -- $ --
======= =======
Long-term debt and capital lease obligations......................... -- --
Stockholders' equity:
Preferred Stock, $0.01 par value: 1,000,000 shares authorized; no
shares issued and outstanding................................... -- --
Common Stock, $0.01 par value: 10,000,000 shares authorized;
5,055,500 shares issued and outstanding; 6,585,500 shares issued
and outstanding as adjusted..................................... $ 51 $ 66
Additional paid-in capital......................................... 12,257 41,720
Retained earnings.................................................. 5,029 5,029
------- -------
Total stockholders' equity...................................... 17,337 46,815
------- -------
Total capitalization............................................ $17,337 $46,815
======= =======
</TABLE>
14
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected consolidated financial data for the
Company for the periods and at the dates indicated. The selected financial data
as of and for the fiscal years ended April 30, 1993, 1994, 1995, 1996 and 1997
are derived from the Company's financial statements which have been audited by
Ernst & Young LLP, independent auditors. The selected financial data for the
three months ended July 31, 1996 and 1997 are derived from the Company's
unaudited interim consolidated financial statements and, in the opinion of the
Company, all normal and recurring adjustments necessary to present fairly the
Company's financial position and results of operations at the end of and for
such periods have been reflected. Results of operations for the three months
ended July 31, 1997 are not necessarily indicative of the results to be expected
for the entire fiscal year ending April 30, 1998. The following data should be
read in conjunction with the more detailed information and consolidated
financial statements and accompanying notes, as well as "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and other
financial information, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED APRIL 30, JULY 31,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................... $16,615 $22,786 $21,747 $36,316 $56,637 $13,028 $16,177
Expenses:
Operating expenses............ 12,273 17,165 20,648 28,472 41,423 9,741 11,626
Marketing, general and
administrative............. 2,112 2,781 2,977 4,019 6,350 1,518 2,115
Provision for bad debts....... 272 1,342 1,317 1,448 3,084 602 664
Depreciation and
amortization............... 99 276 403 596 701 180 216
Interest (income), expense.... (100) (40) 62 2 (217) (31) (89)
Minority interest in loss of
subsidiary................. -- (135) (108) (1) -- -- --
------- ------- ------- ------- ------- ------- -------
Total expenses................ 14,656 21,389 25,299 34,536 51,341 12,010 14,531
------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes......................... 1,959 1,397 (3,552) 1,780 5,296 1,018 1,645
Income tax expense (benefit).... 802 572 (1,266) 730 2,172 418 675
------- ------- ------- ------- ------- ------- -------
Net income (loss)............... 1,157 825 (2,286) 1,050 3,124 600 971
------- ------- ------- ------- ------- ------- -------
Dividends declared on preferred
stock(1)...................... 292 28 66 132 17 17 --
------- ------- ------- ------- ------- ------- -------
Net income (loss) for common
stock......................... $ 864 $ 797 $(2,352) $ 918 $ 3,107 $ 583 $ 971
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per common share
(fully diluted)............... $ 0.30 $ 0.24 $ (0.70) $ 0.21 $ 0.54 $ 0.11 $ 0.16
======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding (fully diluted)... 2,839 3,312 3,337 5,043 5,772 5,291 6,012
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
----------------------------------------------- JULY 31,
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................... $ 7,842 $ 7,705 $ 8,790 $10,911 $20,641 $ 21,902
Total assets............................. 11,289 13,671 14,811 21,182 33,085 34,917
Long-term debt........................... 203 526 -- -- -- --
Stockholders' equity..................... 6,664 7,699 7,062 9,112 16,248 17,337
</TABLE>
- ---------------
(1) Earnings (loss) per common share is affected by the reduction of net income
available for Common Stock resulting from the dividends on the Preferred
Stock. In July 1996, all holders of the Preferred Stock exercised their
options to convert all of such shares of Preferred Stock into 700,000 shares
of Common Stock.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the more
detailed information and consolidated financial statements and accompanying
notes, as well as the other financial information appearing elsewhere in this
Prospectus. Except for historical information, the following discussion contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Risk Factors," as well as those discussed elsewhere in this
Prospectus.
OVERVIEW
PMR is a leading manager of specialized mental health care programs
designed to treat individuals diagnosed with SMI, primarily schizophrenia and
bi-polar disorder (i.e., manic-depressive illness). PMR manages the delivery of
a broad range of outpatient and community-based psychiatric services for SMI
patients, consisting of 39 Outpatient Programs, four Case Management Programs
and seven Chemical Dependency Programs. Through its various programs, PMR
employs or contracts with more than 400 mental health professionals and
currently provides services to approximately 8,300 patients. The Company
currently offers its services in twelve states, comprised of Arizona, Arkansas,
California, Colorado, Hawaii, Illinois, Indiana, Kentucky, Michigan, Ohio,
Tennessee and Texas. PMR believes it is the only private sector company focused
on providing an integrated mental health disease management model to the SMI
population.
PMR's Outpatient Programs serve as a comprehensive alternative to inpatient
hospitalization and include partial hospitalization and lower intensity
outpatient services. The Case Management Programs provide an intensive,
individualized primary care service which consists of a proprietary case
management model utilizing clinical protocols for delivering care to SMI
patients. The Company also provides Chemical Dependency Programs to patients
affiliated with managed care organizations and government-funded programs.
SOURCES OF REVENUE
Outpatient Programs. PMR's Outpatient Programs are the Company's primary
source of revenue. Revenue under these programs is derived primarily from
services provided under three types of agreements: (i) an all-inclusive fee
arrangement based on fee-for-service rates which provides that the Company is
responsible for substantially all program costs; (ii) a fee-for-service
arrangement under which substantially all program costs are the responsibility
of the provider; and (iii) a fixed fee arrangement. The all-inclusive
arrangements are in effect at 36 of the 39 existing Outpatient Programs and
constituted 69.8% of the Company's revenue for the three months ended July 31,
1997. Typical contractual agreements with these providers, primarily acute care
hospitals or CMHCs, require the Company to provide, at its own expense, specific
management personnel for each program site. Patients served by the Outpatient
Programs typically are covered by Medicare.
Revenue under the Outpatient Programs is recognized at estimated net
realizable amounts when services are rendered based upon contractual
arrangements with providers. Under certain of the Company's contracts, the
Company is obligated to indemnify the provider for all or some portion of the
Company's management fees that may not be deemed reimbursable to the provider by
Medicare's fiscal intermediaries. As of July 31, 1997, the Company had recorded
$9.7 million in contract settlement reserves to provide for possible amounts
ultimately owed to its provider customers resulting from disallowance of costs
by Medicare and Medicare cost report settlement adjustments. Such reserves are
classified as non-current liabilities because ultimate determination of
substantially all of the potential contract disallowances is not anticipated to
occur during fiscal 1998. See "Risk Factors -- Dependence Upon Medicare
Reimbursement" and "-- Sufficiency of Existing Reserves to Cover Reimbursement
Risks."
Case Management Programs. For its Case Management Programs in Tennessee,
the Company receives a monthly case rate payment from the managed care
consortiums responsible for managing the TennCare program and is responsible for
planning, coordinating and managing psychiatric case management services for its
consumers who are eligible to participate in the TennCare program. The Company
also is responsible for
16
<PAGE> 17
providing a portion of the related outpatient clinical care under certain of the
agreements. Revenue under the TennCare program is recognized in the period in
which the related service is to be provided. These revenues represent
substantially all of the Company's case management revenues. See "Risk
Factors -- Potential Changes in TennCare," "-- Concentration of Revenues" and
"-- Limited Operating History of Case Management Programs."
Chemical Dependency Programs. In Southern California, the Company contracts
primarily with managed care companies and commercial insurers to provide its
outpatient chemical dependency services. The contracts are structured as
fee-for-service or case rate reimbursement and revenue is recognized in the
period in which the related service is delivered. In Arkansas, the Company
manages detoxification and dual diagnosis programs for individuals eligible for
public sector reimbursement. The Company generates revenue based on a
combination of state-funded grants and Medicaid fee-for-service reimbursement.
Revenue is recognized in the period in which the related service is delivered.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of revenue represented by the respective financial items:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED APRIL 30, JULY 31,
------------------------- -----------------
1995 1996 1997 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses..................... 95.0 78.4 73.1 74.8 71.9
Marketing, general and
administrative....................... 13.7 11.1 11.2 11.7 13.1
Provision for bad debts................ 6.1 4.0 5.5 4.6 4.1
Depreciation and amortization.......... 1.9 1.6 1.2 1.4 1.3
Interest (income), expense............. 0.3 0.0 (0.4) (0.2) (0.6)
------ ------ ------ ------ ------
- - - - -
Total expenses......................... 116.3 95.1 90.7 92.2 89.8
------ ------ ------ ------ ------
- - - - -
Income (loss) before income taxes...... (16.3)% 4.9% 9.4% 7.8% 10.2%
======= ======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED JULY 31, 1997 COMPARED TO THREE MONTHS ENDED JULY 31, 1996
Revenue. Revenue increased from $13.0 million for the three months ended
July 31, 1996 to $16.2 million for the three months ended July 31, 1997, an
increase of $3.1 million, or 24.2%. The Outpatient Programs recorded revenue of
$11.5 million, an increase of 24.0% as compared to the three months ended July
31, 1996. This increase was the result of same-site increases in revenue of 7.0%
and the gross addition of eight new programs as compared to the three months
ended July 31, 1996. The increase in same-site revenue was due to increases in
revenue per patient day attributable to the Outpatient Programs' emphasis on a
higher-acuity patient population. The remainder of the increase in revenue came
predominantly from the Case Management Programs in Tennessee and Arkansas, which
recorded revenue of $3.9 million, an increase of 25.3%, as compared to the three
months ended July 31, 1996. This increase was attributable to enrollment growth
in existing programs and the launch of an additional Case Management Program in
Arkansas, which was subsequently closed in September 1997. Revenue from the
Chemical Dependency Programs was $786,000, an increase of 30.6% as compared to
the three months ended July 31, 1996. This increase was attributable to a strong
census increase in the first Arkansas Chemical Dependency Program.
Operating expenses. Operating expenses consist of costs incurred at the
program sites and costs associated with the field management responsible for
administering the programs. Operating expenses increased from $9.7 million for
the three months ended July 31, 1996 to $11.6 million for the three months ended
July 31, 1997, an increase of $1.9 million, or 19.4%. As a percentage of
revenue, operating expenses declined from 74.8% for the three months ended July
31, 1996 to 71.9% for the three months ended July 31,
17
<PAGE> 18
1997. Operating expenses increased less rapidly than revenue due to the
substantial component of fixed and semi-fixed costs in the Outpatient and Case
Management Programs.
Marketing, general and administrative. Marketing, general and
administrative expenses consist of corporate overhead expense and regional
administrative, development and clinical expenses which are not direct program
expenses. Marketing, general and administrative expenses increased from $1.5
million for the three months ended July 31, 1996 to $2.1 million for the three
months ended July 31, 1997, an increase of $596,000, or 39.3%. This increase was
due to investment in regional offices to support existing and anticipated
programs, as well as enhancements to corporate infrastructure including
utilization review and information technology.
Provision for bad debts. Provision for bad debt expense increased from
$602,000 for the three months ended July 31, 1996 to $664,000 for the three
months ended July 31, 1997, an increase of $62,000, or 10.3%. This increase was
due primarily to an increase in revenue which was partially offset by a modest
decrease in the percentage used to accrue for the provision for bad debts. The
Company has modestly reduced this percentage based on its collection experience
over the past year. However, the Company expects this percentage to fluctuate
based on the aggressiveness of fiscal intermediaries in reviewing claims related
to the Outpatient Programs and the number of programs that the Company operates
which serve a significant indigent population.
Depreciation and amortization. Depreciation and amortization expense
increased from $180,000 for the three months ended July 31, 1996 to $216,000 for
the three months ended July 31, 1997, an increase of $35,000, or 19.6%. The
increase was due largely to expenditures for capital equipment and leasehold
improvements, as well as start-up costs associated with the gross addition of
eight new Outpatient Programs and one new Chemical Dependency Program.
Interest (income), expense. Interest income increased from $31,000 for the
three months ended July 31, 1996 to $89,000 for the three months ended July 31,
1997, an increase of $58,000, or 184.7%. This increase resulted primarily from
higher cash and cash equivalent balances.
Income (loss) before income taxes. Income before income taxes increased
from $1.0 million for the three months ended July 31, 1996 to $1.6 million for
the three months ended July 31, 1997, an increase of $627,000, or 61.6%. Income
before income taxes as a percentage of revenue increased from 7.8% to 10.2% over
this period of time.
YEAR ENDED APRIL 30, 1997 COMPARED TO YEAR ENDED APRIL 30, 1996
Revenue. Revenue increased from $36.3 million for the year ended April 30,
1996 to $56.6 million for the year ended April 30, 1997, an increase of $20.3
million, or 56.0%. The Outpatient Programs recorded revenue of $40.0 million, an
increase of 49.3% as compared to fiscal 1996. This increase was the result of
same-site increases in revenue of 40.0% compared to fiscal 1996 and the gross
addition of eight new programs in fiscal 1997. The remainder of the increase in
revenue came predominantly from the growth in Case Management Programs in
Tennessee and the introduction of Case Management Programs in Arkansas, which
recorded revenue of $13.7 million, an increase of 80.3% as compared to fiscal
1996. Revenue from the Chemical Dependency Programs was $2.9 million, an
increase of 54.4% as compared to fiscal 1996. This increase was attributable to
a full year of operation of the Little Rock public sector program in Arkansas
and to growth in the managed care business in California.
Operating expenses. Operating expenses increased from $28.5 million for the
year ended April 30, 1996 to $41.4 million for the year ended April 30, 1997, an
increase of $13.0 million, or 45.5%. Of this increase, $5.4 million, or 42.0%,
resulted from the effect of a full year of operations of the Case Management
Programs in Tennessee and the launch of the Case Management Programs in
Arkansas. The remainder of the increase in operating expenses was associated
primarily with increased costs to support the revenue growth at existing
Outpatient Programs and the net addition of six Outpatient Programs during
fiscal 1997.
Marketing, general and administrative. Marketing, general and
administrative expenses increased from $4.0 million for the year ended April 30,
1996 to $6.4 million for the year ended April 30, 1997, an increase of
18
<PAGE> 19
$2.3 million, or 58.0%. The increase was related to the following factors: (i)
the reorganization of the Company into three regions; (ii) the significant
investment in the Mid-America region to prepare for anticipated growth
associated with the agreement with Columbia/HCA Healthcare Corporation
("Columbia"); (iii) the start-up of the site management and clinical information
initiative; and (iv) increases in personnel associated with information systems,
development and utilization review.
Provision for bad debts. Provision for bad debt expense increased from $1.4
million for the year ended April 30, 1996 to $3.1 million for the year ended
April 30, 1997, an increase of $1.6 million, or 113.0%. This increase was due to
an increase in the percentage for bad debt from 4.0% in fiscal 1996 to 5.4% in
fiscal 1997, which resulted in part from higher rates of indigent clients in the
Case Management Programs, limited collection experience in the Case Management
Programs and in the Chemical Dependency Programs in Arkansas, and a more
conservative percentage for denials by third-party payors.
Depreciation and amortization. Depreciation and amortization expense
increased from $596,000 for the year ended April 30, 1996 to $701,000 for the
year ended April 30, 1997, an increase of $105,000, or 17.6%. The increase was
due to additional capital expenditures associated with the start-up of eight new
Outpatient Programs and increased capital expenditures for information systems.
Interest (income), expense. Interest expense decreased from $2,000 for the
year ended April 30, 1996 to interest income of $217,000 for the year ended
April 30, 1997, an increase of $219,000. The improvement was due to higher cash
and cash equivalent balances and the absence of bank debt in fiscal 1997.
Income (loss) before income taxes. Income before income taxes increased
from $1.8 million for the year ended April 30, 1996 to $5.3 million for the year
ended April 30, 1997, an increase of $3.5 million, or 197.5%. Income before
income taxes as a percentage of revenue increased from 4.9% to 9.4% over this
period of time.
YEAR ENDED APRIL 30, 1996 COMPARED TO YEAR ENDED APRIL 30, 1995
Revenue. Revenue increased from $21.7 million for the year ended April 30,
1995 to $36.3 million for the year ended April 30, 1996, an increase of $14.6
million, or 67.0%. The Outpatient Programs recorded revenue of $26.8 million, an
increase of 33.3% as compared to fiscal 1995. This increase was due to increases
in average patient census and net revenue per patient at existing program sites,
and the gross addition of five new Outpatient Programs during fiscal 1996. The
remainder of the increase in revenue came predominantly from the commencement of
the Case Management Programs in Tennessee, which recorded revenue of $7.6
million. Revenue from the Chemical Dependency Programs was $1.9 million, an
increase of 21.5% as compared to fiscal 1995.
Operating expenses. Operating expenses increased from $20.6 million for the
year ended April 30, 1995 to $28.5 million for the year ended April 30, 1996, an
increase of $7.8 million, or 37.9%. Of this increase, $6.9 million resulted from
the commencement of the Case Management Programs in Tennessee. The remainder of
the increase in operating expenses was associated with increased costs to
support the revenue growth at existing Outpatient Programs and the net addition
of three Outpatient Programs during fiscal 1996.
Marketing, general and administrative. Marketing, general and
administrative expenses increased from $3.0 million for the year ended April 30,
1995 to $4.0 million for the year ended April 30, 1996, an increase of $1.0
million, or 35.0%. The increase was related primarily to the following factors:
(i) the preparation for and commencement of the Case Management Programs in
Tennessee; (ii) the preparation for the commencement of the Case Management
Programs in Arkansas; and (iii) increased marketing of the Outpatient Programs.
Provision for bad debts. Provision for bad debt expense increased from $1.3
million for the year ended April 30, 1995 to $1.4 million for the year ended
April 30, 1996, an increase of $131,000, or 9.9%. This increase was
substantially less than the percentage increase in revenue and other expenses
due to a lower provision for bad debts on revenue from the Case Management
Programs.
Depreciation and amortization. Depreciation and amortization expense
increased from $403,000 for the year ended April 30, 1995 to $596,000 for the
year ended April 30, 1996, an increase of $193,000, or 47.8%.
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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.
Interest (income), expense. Interest expense decreased from $62,000 for the
year ended April 30, 1995 to $2,000 for the year ended April 30, 1996, a
decrease of $60,000, or 96.5%. This decrease resulted primarily from
substantially higher cash and cash equivalent balances in fiscal 1996 and the
repayment of outstanding bank debt in the fourth quarter of fiscal 1996.
Income (loss) before income taxes. Income before income taxes increased
from a loss of $3.6 million for the year ended April 30, 1995 to income of $1.8
million for the year ended April 30, 1996, an increase of $5.3 million. Income
before income taxes as a percentage of revenue increased to 4.9% over this
period of time.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended July 31, 1997, net cash used in operating
activities was $854,000. Working capital was $21.9 million, an increase of $1.3
million, or 6.1%, as compared to April 30, 1997. Cash and cash equivalents at
July 31, 1997 were $8.6 million, a decrease of $1.4 million, or 14.2% as
compared to April 30, 1997.
The negative cash flow from operating activities during the three months
ended July 31, 1997 was primarily due to increases in accounts receivable. This
increase in accounts receivable was a result of significant revenue increases
combined with an increase in days sales outstanding from 67 in fiscal 1997 to 79
for the three months ended July 31, 1997. The increase in days sales outstanding
was due to delays in payments associated with six of the Outpatient Programs
which are presently subject to a review of claims. The other significant use of
cash was the purchase of furniture and office equipment associated with recently
opened program sites and investment in information technology.
Working capital is anticipated to be utilized during fiscal 1998 for
operations, to continue expansion of the Outpatient and Case Management
Programs, for the development of the site management and clinical information
initiative, and for the implementation and expansion of the Company's other
programs. During fiscal 1998, working capital is expected to be realized
principally from operations, as well as from a $10.0 million line of credit from
Sanwa Bank which became effective November 1, 1996. Interest is payable under
this line of credit at a rate of either the bank's reference rate plus one-half
percent or the eurodollar rate plus two and one-half percent.
The opening of a new Outpatient Program site typically requires $45,000 to
$150,000 for office equipment, supplies, lease deposits, leasehold improvements,
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. The Company expects to provide cash for the start up of the
site management and clinical information initiative in amounts that are not yet
certain due to the early stage development of this initiative. The Company also
is in the process of refining the specifications for the purchase and
development of a new care management information system which will include a
data collection and repository system for the Company's clinical information.
From time to time, the Company recognizes charges to operations as a result
of particular uncertainties associated with the health care reimbursement rules
as they apply to the Outpatient Programs. During fiscal 1997, a majority of the
Company's revenue was derived from the management of the Outpatient Programs.
Since substantially all of the patients of the Outpatient Programs 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 on whose behalf these programs are
managed. Under the Company's contracts with its providers, the Company may be
responsible to indemnify providers for the portion of the Company's management
fee disallowed for reimbursement 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, if and when they
become due, could have a material adverse effect on the Company's short term
liquidity.
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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 and that any disallowance will merely be
offset against obligations already owed by the provider to the Company. See
"Risk Factors -- Dependence Upon Medicare Reimbursement."
The Company maintains significant reserves to cover the potential impact of
two primary uncertainties: (i) 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 a provider's cost report by fiscal intermediaries;
and (ii) the Company may not receive full payment of the management fees owed to
it by a provider during the periodic review of the provider's 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 previously paid to the Company that
are disallowed pursuant to 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, there can
be no assurance that such reserves will be adequate. The obligation to pay the
amounts estimated within the Company's financial statements (or such greater
amounts as are due), if and when they become due, could have a material adverse
effect upon the Company's business, financial condition and results of
operations. See "Risk Factors -- Sufficiency of Existing Reserves to Cover
Reimbursement Risks," "Business -- Contracts" and "-- Government Regulation."
IMPACT OF INFLATION
A substantial portion of the Company's revenue is subject to reimbursement
rates that are regulated by the federal and state governments and that do not
automatically adjust for inflation. As a result, increased operating costs due
to inflation, such as labor and supply costs, without a corresponding increase
in reimbursement rates, may adversely affect the Company's earnings in the
future.
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BUSINESS
PMR is a leading manager of specialized mental health care programs
designed to treat individuals diagnosed with SMI, primarily schizophrenia and
bi-polar disorder (i.e., manic-depressive illness). PMR manages the delivery of
a broad range of outpatient and community-based psychiatric services for SMI
patients, consisting of 39 Outpatient Programs, four Case Management Programs
and seven Chemical Dependency Programs. Through its various programs, PMR
employs or contracts with more than 400 mental health professionals and
currently provides services to approximately 8,300 patients. The Company
currently offers its services in twelve states, comprised of Arizona, Arkansas,
California, Colorado, Hawaii, Illinois, Indiana, Kentucky, Michigan, Ohio,
Tennessee and Texas. PMR believes it is the only private sector company focused
on providing an integrated mental health disease management model to the SMI
population.
PMR's Outpatient Programs serve as a comprehensive alternative to inpatient
hospitalization and include partial hospitalization and lower intensity
outpatient services. The Case Management Programs provide an intensive,
individualized primary care service which consists of a proprietary case
management model utilizing clinical protocols for delivering care to SMI
patients. The Company also provides Chemical Dependency Programs to patients
affiliated with managed care organizations and government-funded programs.
Recently, PMR began development of a site management and clinical information
initiative. The Company believes that its access to a large SMI patient base
provides it with a unique opportunity to collect, process and analyze clinical
and pharmacoeconomic data on schizophrenia and bi-polar disorder. In January
1997, PMR entered into a collaborative agreement with United HealthCare
Corporation and its Applied Informatics division to assist in developing this
initiative.
INDUSTRY OVERVIEW
According to the NIMH and the NAMHC, serious mental illnesses are
neurobiological disorders of the brain and include schizophrenia,
schizoaffective disorder, manic-depressive illness and autism, as well as severe
forms of other disorders such as major depression, panic disorder and
obsessive-compulsive disorder. These diseases are chronic and represent one of
the highest cost segments of the health care system. Industry sources indicate
that approximately 2.8% of the adult population and 3.2% of children ages 9-17
are affected by SMI, for a total SMI population in the United States of
approximately 5.6 million people. In 1995, individuals diagnosed with SMI
consumed $27 billion in direct medical costs relating to the provision of mental
health services and consumed more than $74 billion in total costs, including
estimates of lost productivity. Based on industry data, the Company estimates
that the direct medical expenditures associated with SMI represent in excess of
25% of total direct mental health care costs. However, the potential costs of
direct medical care may exceed these levels due to the approximately 2.2 million
Americans estimated to be suffering from untreated SMI. The cost and quality of
care for the SMI population has been adversely affected by several continuing
public policy trends including: (i) the de-institutionalization of SMI patients
from long-term care hospitals into the community; (ii) the fragmented provision
of care through under-funded, community-based organizations; and (iii)
disparate, uncoordinated funding sources.
DE-INSTITUTIONALIZATION OF THE SMI POPULATION
Since 1955, the SMI population in the United States has experienced
extensive de-institutionalization resulting in the public psychiatric hospital
census declining from approximately 560,000 individuals to approximately 72,000
individuals in 1994. The effect of de-institutionalization is exacerbated by the
fact that the general population grew 58% over this same period, while the SMI
incidence rate remained stable. Industry sources estimate that there are
approximately 763,000 individuals in the United States currently diagnosed with
SMI who otherwise would have received inpatient treatment prior to
de-institutionalization, of which 60%-75% are patients with schizophrenia or
bi-polar disorder. The result of this trend has been increased rates of
transinstitutionalism and homelessness among SMI patients. Transinstitutionalism
is a term utilized to describe the mechanism by which de-institutionalized
individuals receive care in one or more alternate settings such as nursing
homes, general hospitals, jails and prisons. Industry estimates indicate that
23% of nursing home residents have a mental disorder and that more than 98,000
general hospital beds are occupied by SMI patients. Furthermore, approximately
10% of all prison and jail inmates are SMI diagnosed
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and 35% of the approximately 350,000 homeless individuals in the United States
are currently suffering from SMI disorders.
De-institutionalization has exacerbated an ineffective and disorganized
system of care for a medically complex patient population with highly
specialized needs. Coordination and monitoring of services is crucial to avoid
fragmentation of care for SMI patients. SMI patients typically enter the health
care system through multiple, uncoordinated access points including emergency
rooms, CMHCs, substance abuse centers, community case managers and crisis
management hotlines. Services provided are generally disparate, often
duplicative and structured to function reactively to patient crises rather than
proactively to manage patient care. Multiple physicians, case workers and other
care providers handle patients in different sites across the spectrum of care
with little or no coordination. Under the current system, patient monitoring and
medication compliance is generally low for SMI patients, leading to an increased
incidence rate of high-cost catastrophic events.
EVOLUTION OF GOVERNMENT ROLE
The majority of the costs of treating and managing the SMI population are
borne by federal, state and local government programs, including Medicare and
Medicaid. States play a much larger role in the provision of mental health care
services than they do in the delivery of general health care services,
particularly for the SMI population. Many states operate and manage psychiatric
hospitals and CMHCs, the latter of which are often the primary care setting for
SMI patients. CMHCs typically are not-for-profit, government affiliated or
independently operated organizations which lack access to capital, sophisticated
management information and financial systems, and comprehensive programs for
treating SMI patients. CMHCs traditionally have not been included in managed
care networks and thus may be unfamiliar with the needs and demands of managed
care. This provider segment also is extremely fragmented, with each community
having one or more agencies and boards of directors. As costs for public sector
mental health care have continued to escalate, states have begun to turn to the
private sector to assume the administrative and financial risk of providing
mental health care to state Medicaid populations. At least nine states,
including Colorado, Hawaii, Iowa, Massachusetts, Minnesota, Montana, Ohio,
Tennessee and Utah, have established some of the first contracts to "carve-out"
behavioral health care directly within 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. The expensive
and difficult-to-manage SMI population creates significant challenges for
managed care companies unfamiliar with the requirements of these disorders.
SCHIZOPHRENIA
The primary diagnosis of the SMI population treated by PMR is
schizophrenia, an incurable biological disorder which affects approximately 1%
of the general population. Approximately 70% of the patients treated at the
Company's programs are diagnosed with schizophrenia. The remainder are afflicted
with bi-polar disorder, major depression, schizoaffective disorder or other
personality disorders. Industry sources indicate that up to 50% of patients
suffering from schizophrenia receive no treatment for symptoms. In addition, due
to the stigma and social constraints that accompany schizophrenia, 25% of
schizophrenics attempt to end their lives through suicide. In general, each year
a significant percentage of individuals with schizophrenia are admitted for an
inpatient hospitalization and virtually all of the diagnosed population is
prescribed a chronic medication regimen. These individuals often suffer from a
substance abuse or chemical dependency diagnosis. Based on industry data, the
Company estimates that schizophrenia consumes approximately $20 billion in
annual mental health care expenditures. The direct medical costs of
schizophrenia are consumed primarily in CMHCs, nursing homes and acute care
hospitals.
ADVANCES IN PHARMACEUTICAL TREATMENTS
Since the introduction of Clozaril in the United States in 1989, several
pharmaceutical products have been developed for SMI patients that have resulted
in significant improvements in treatment. Although the specific biological
causes of SMI remain unknown, the efficacy of many treatment regimens has been
found to be comparable to that in other branches of medicine. For example, with
the exception of autism, medications
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exist which generate medical responses in 60%-90% of patients with SMI. For
schizophrenia and schizoaffective disorder, research has shown that standard
anti-psychotic medication will reduce psychotic symptoms in 60% of patients and
in 70%-85% of those experiencing symptoms for the first time. These newer
medications, with proper compliance, offer significant potential for recovery to
individuals afflicted with SMI.
STRATEGY
PMR's objective is to be the leader in the management of cost-effective
programs which provide quality care and foster the successful recovery of
individuals from the devastating effects of SMI. Following are the key
components of the Company's strategy:
- OBTAIN NEW CONTRACTS FOR OUTPATIENT AND CASE MANAGEMENT PROGRAMS. PMR
plans to expand into new geographic markets and increase penetration in
its existing markets by leveraging its reputation as a leading manager of
outpatient psychiatric programs for the SMI population. The Company seeks
to identify new markets and potential strategic alliances for these
programs. In addition, the Company invests in program enhancements which
offer additional benefits to providers and patients while increasing
program profitability to the Company.
- ESTABLISH NEW PROGRAMS AND ANCILLARY SERVICES. PMR maintains an ongoing
effort to identify and establish new programs and services which can
positively influence the outcomes and reduce the costs of mental health
care for the SMI population. Such services include the Company's
structured outpatient clinic, which is a lower intensity "step-down"
outpatient service designed to meet the needs of patients who have
completed the partial hospitalization program or are at other levels of
recovery. In addition, the Company has established an ambulatory
detoxification program in Arkansas. By adding additional programs and
ancillary services, PMR is able to extend the breadth and depth of its
treatment capabilities and more effectively provide needed care to SMI
patients.
- COMBINE EXISTING PROGRAMS INTO A FULLY-INTEGRATED DISEASE MANAGEMENT
MODEL. PMR believes its proprietary mental health disease management
model will position the Company to accept the clinical and financial
risks associated with providing care on a capitated basis to the SMI
population. The Company intends to integrate its Case Management and
Chemical Dependency Programs into markets where outpatient psychiatric
services are already being provided by the Company in order to offer a
more comprehensive mental health care program. By combining existing
Outpatient Programs with its case management capabilities, PMR believes
it can offer an integrated SMI care program to payors which will result
in improved clinical outcomes on a cost-effective basis.
- PURSUE SITE MANAGEMENT AND CLINICAL INFORMATION INITIATIVE. PMR is
pursuing a site management and clinical information initiative. The
Company intends to develop a proprietary database that will facilitate
its ability to participate in clinical trials, to collect information
related to clinical practice, and to define appropriate clinical
protocols for treating SMI patients. PMR believes that its access to more
than 20,000 individuals diagnosed with SMI provides it with a unique
opportunity to pursue such business opportunities and expand its
potential base of customers.
OPERATIONS
The Company currently operates three specialized mental health care
programs comprised of its Outpatient, Case Management and Chemical Dependency
Programs. These programs are designed to ensure that high quality,
cost-effective treatment and rehabilitation services are provided which decrease
hospitalization and assist patients in overcoming the disabling effects of SMI.
In addition, the Company has recently begun to pursue a site management and
clinical information initiative focused on collecting, processing and analyzing
clinical and pharmacoeconomic data related to schizophrenia and bi-polar
disorder.
OUTPATIENT PROGRAMS
PMR's Outpatient Programs are operated under management contracts with
acute care hospitals, psychiatric hospitals and CMHCs, and consist principally
of intensive outpatient programs which serve as
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alternatives to inpatient care. These programs target patients in crisis or
those recovering from crisis and thus provide more intensive clinical services
than those generally available in a traditional outpatient setting. The Company
currently manages 39 programs in Arizona, Arkansas, California, Colorado,
Hawaii, Illinois, Indiana, Kentucky, Michigan, Ohio, Tennessee and Texas. The
Company's contracts are with 27 separate providers including Scripps Health,
Sutter Health System, St. Luke's Hospital of San Francisco and the University of
California, Irvine. In addition, the Company entered into an agreement in July
1996 with Columbia which provides access to a ten-state region which presently
includes approximately 70 hospitals. Typically, the Company's contracts are two
to five years in length. While contract expirations occur from time to time in
the ordinary course of business, the Company vigorously attempts to extend and
renew existing contracts and to maintain its market share through the addition
of new contracts.
The Outpatient Programs consist principally of psychiatric partial
hospitalization programs which are ambulatory in nature and provide intensive,
coordinated clinical services to patients diagnosed with SMI. In 1996, the
Company introduced its structured outpatient clinic which is a lower intensity
"step-down" outpatient service designed to continue the care, maintain the gains
achieved and prevent the relapse of patients who have completed the partial
hospitalization program. To further expand the Company's potential client
population, in August 1997, the Company broadened its structured outpatient
program by introducing techniques and protocols utilized in the Case Management
Programs in an effort to include clients that are at a lower level of clinical
risk.
Patients admitted to the Outpatient Programs undergo a complete assessment
and treatment planning process that includes psychiatric, psycho-social, medical
and other specialized evaluations. Each SMI individual is assigned a care
coordinator responsible for managing the comprehensive treatment available to
the patient, which includes specialty services for geriatric and dually
diagnosed patients. All Outpatient Programs provide programming five or six days
a week. Treatments include daily group psychotherapy and individual therapy
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. In its Outpatient Programs where the Company retains
designated staffing responsibilities, the Company often provides program
administrators, medical directors, nurses, community liaisons and other clinical
personnel. In these cases, the program administrator generally has a degree in
psychology or social work and several years of experience in health care
administration. Typically, the medical director is a board-eligible or certified
psychiatrist and the other professionals have various levels of training in
nursing, psychology or social work.
Through its Outpatient Programs, the Company brings management expertise to
the health care provider with respect to the establishment, development and
operation of an outpatient program for SMI patients that is not usually
available on an in-house basis. Services provided under Outpatient Program
management contracts include complete program design and administration from
start-up through ongoing program operation. These programs are intended to
enhance the delivery of outpatient mental health services by introducing
proprietary clinical protocols and procedures, conducting quality assurance and
utilization reviews, ensuring compliance with government regulations and
licensure requirements, supplying highly trained certified personnel, providing
market research support and expanding the range of services provided. In
addition, the programs also enhance the management of financial and
administrative services by providing coding and billing support to the providers
and performing budget, financial and statistical analyses designed to monitor
facility performance. The Company believes these comprehensive features enhance
the efficiency and quality of care provided by its Outpatient Programs.
CASE MANAGEMENT PROGRAMS
PMR's Case Management Programs were created in 1993 to treat the SMI
population in a managed care environment. The case management model was
developed in part from proprietary clinical protocols and assessment tools which
were purchased in 1993 from leading researchers in the field of psychiatric
rehabilitation. Specifically, the Company's programs provide SMI individuals
with personalized, one-on-one services designed to stabilize their daily lives
and provide early intervention in crisis situations, thereby limiting the
catastrophic events which lead to inpatient hospitalizations. The Case
Management Programs utilize comprehensive protocols based upon a specific model
of intensive service coordination in conjunction with a
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case manager whose responsibilities include consumer education, the development
of crisis plans, responding to crisis events, linking patients to emergency
services, assessing patient needs, reviewing patient treatment plans, and
authorizing and reviewing services. Case management services vary by market and
need of the population and may include 24-hour case management, crisis
intervention, respite services, housing assistance, medication management and
routine health screening. PMR believes that its Case Management Programs
represent the core clinical tool for managing the SMI population in either a
capitated or fee-for-service environment and enable its patients to live more
healthy, independent, productive and satisfying lives in the community.
PMR provides its case management services through long-term exclusive
management agreements with leading independent case management agencies and
CMHCs. Pursuant to those agreements, the Company contributes its proprietary
protocols and management expertise and, when necessary, negotiates case
management rates and contracts on behalf of the providers. The Company also
provides training, management information systems support, and accounting and
financial services. Presently, the Company manages programs at two case
management agencies in Tennessee and two CMHCs in Arkansas.
In September 1995, PMR began providing case management services in
Tennessee through exclusive management agreements with two leading case
management agencies based in Memphis and Nashville. In July 1996, the State of
Tennessee implemented the behavioral health program of TennCare, its Medicaid
managed care initiative, which resulted in a complete transition to behavioral
managed health care for the Medicaid population, including approximately 45,000
SMI patients. Consequently, PMR became the leading provider of case management
services to two managed care consortiums, Premier which consists of Columbia and
Green Spring Health Services, Inc. (a subsidiary of Magellan Health Services,
Inc.), and TBH which consists of Merit Behavioral Care Corporation and Tennessee
Behavioral Health. See "Risk Factors -- Potential Changes in TennCare,"
"-- Concentration of Revenues," "-- Limited Operating History of Case Management
Programs" and "Business -- Contracts."
In July 1996, the Company's Arkansas program became operational with the
launch of case management services at CMHCs in Little Rock and Russelville. A
third site, at a CMHC in El Dorado, Arkansas, opened in September 1996 but was
subsequently closed in September 1997. The two remaining CMHCs serve a potential
market of approximately 3,500 SMI patients.
PMR has developed a new clinical program which provides psychiatric
rehabilitation and community support services to SMI individuals. This program
is designed to be integrated with the Company's existing Case Management
Program. The new clinical program provides a continuum of rehabilitative
services including day treatment, skills development, skills maintenance, and
individual and small group rehabilitation services designed to help individuals
with SMI achieve recovery goals.
CHEMICAL DEPENDENCY PROGRAMS
Public sector patients with mental illness often are dually diagnosed with
a chemical dependency problem and bridging the gap between the two illnesses is
often difficult due to different funding streams, treatment philosophies and
regulations pertaining to Medicaid and other public sector payors. Through its
Chemical Dependency Programs, PMR works with both public and private payors to
develop programs and technologies which include a full range of screening,
triage, crisis management, ambulatory care and utilization review services for
individuals suffering from chemical addictions. The Company also works with
providers to develop detoxification services, and dual diagnosis treatment and
rehabilitation. The Company believes that its programs and treatment protocols
enable it to meet effectively the specific needs of this patient population.
In January 1996, the Company opened its first outpatient detoxification
program for adults in affiliation with Little Rock Community Mental Health
Center in order to manage the detoxification of state-funded and Medicaid
beneficiaries on an outpatient basis. Since its opening, the Company believes
that its outpatient program at this center has stabilized substantially all of
the individuals who were previously directed to a state inpatient detoxification
facility. The Company opened its second ambulatory detoxification program in
Arkansas in September 1996. Given that the cost of stabilizing chemically
dependent individuals on an
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ambulatory basis is significantly lower relative to inpatient treatment, PMR
believes that states and other agencies will be interested in developing similar
arrangements.
The Company also operates and manages programs devoted exclusively to
substance abuse and rehabilitation in ambulatory settings, primarily for
patients of managed care organizations in Southern California. These programs
are operated as free-standing treatment services or as part of a management
services agreement with providers. Currently, the Company operates four
outpatient facilities that provide intensive chemical dependency services under
five distinct programs. All of these programs have received accreditation with
commendations by the Joint Commission of American Health Organizations. In
addition, the Company is a primary provider of outpatient chemical dependency
rehabilitation services to MedPartners Inc. in the Los Angeles basin.
SITE MANAGEMENT AND CLINICAL INFORMATION INITIATIVE
PMR recently began pursuit of a site management and clinical information
initiative. This initiative which is still in a start-up phase of development,
will seek to establish the infrastructure to participate in clinical trials and
collect clinical information related to pharmaceutical and non-pharmaceutical
clinical practice in treating SMI individuals. In January 1997, the Company
signed a collaborative agreement with United HealthCare Corporation and its
Applied Informatics division to develop this initiative. Pursuant to this
agreement, Applied Informatics will provide information systems and database
compilation services to PMR in order to facilitate the development of a
proprietary database that captures clinical information relating to the care of
SMI patients.
The genetic and neurobiological bases of SMI will continue to be the focus
of intensive research attention. Presently, numerous pharmaceutical companies
and drug development companies have compounds in various stages of development
which are targeted for the treatment of these disorders. The development of
these compounds requires extensive pre-clinical and clinical testing phases,
many aspects of which are outsourced to global contract research organizations
("CROs"). Delays in recruiting and enrolling qualified patients, along with
patient compliance issues, are significant concerns for the CROs which manage
the trials. As a result, site management organizations ("SMOs") are emerging as
a new industry sector which provides commercialized clinical trial services
under contract with CROs or directly with a pharmaceutical sponsor.
The Company believes that its expanding service base is an excellent
platform for the development of research and clinical information capabilities
due to its direct access to a large number of individuals with SMI. Presently,
the Company believes that it has access, through programs it manages and through
its providers, to more than 20,000 individuals diagnosed with SMI. The Company
is currently in the process of developing its capabilities to participate in
clinical trials, to collect information related to clinical practice and to
define appropriate clinical protocols for treating SMI patients.
CONTRACTS
OUTPATIENT PROGRAMS
Each Outpatient Program is generally administered and operated pursuant to
the terms of written management contracts with providers. These 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 health care services, and the methods by
which the Company will be compensated. The contracts are generally for a stated
term between two and 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.
Revenues derived by the Company under these contracts generally fit within
three types of arrangements: (i) an all-inclusive fee arrangement based on
fee-for-service rates which provides that the Company is responsible for
substantially all program costs; (ii) a fee-for-service arrangement whereby
substantially all program costs are the responsibility of the provider; and
(iii) a fixed fee arrangement. The all-inclusive arrangements are in effect at
36 of the 39 existing Outpatient Programs and constituted approximately 69.8%
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<PAGE> 28
of the Company's revenues for the three months ended July 31, 1997. Typical
contractual agreements with these providers, primarily acute care hospitals or
CMHCs, require the Company to provide, at its own expense, specific management
personnel for each program site. 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 third-party reimbursement for mental health services provided to
patients of the programs is denied or if the management fee paid to the Company
is not reimbursable by Medicare. See "Risk Factors -- Dependence Upon Medicare
Reimbursement," "-- Sufficiency of Existing Reserves to Cover Reimbursement
Risks," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business -- Government Regulation."
As the Outpatient Programs mature and increase in number, the Company
anticipates that as a matter of normal business development, contract
terminations may occur on a periodic basis. In the past, if a contract was
terminated, the Company has been successful in opening a replacement program
with another provider in the program's geographic area, although no assurance
can be given that the Company will successfully replace such terminated
contracts or programs in the future.
In August 1996, the Company signed an enabling agreement (the "Columbia
Agreement") with Columbia. The Columbia Agreement relates specifically to the
Company's Outpatient Program and Columbia's ten state Mid-America Group which is
comprised of Alabama, Illinois, Indiana, Iowa, Kentucky, Minnesota, Mississippi,
Tennessee, Wisconsin and West Virginia. The Columbia Agreement grants both
Columbia and the Company mutual rights of first refusal with respect to
developing Outpatient Programs in the Mid-America Group markets where Columbia
owns or manages a hospital. As of August 1997, the Company managed five programs
for Columbia hospitals in Illinois, Kentucky and Tennessee and had signed
contracts for two additional programs.
The Company's contracts covering sites operated by hospitals operating
under Scripps Health, a San Diego provider, accounted for approximately 12.6%
and 14.4% of the Company's revenues for fiscal 1997 and for the three months
ended July 31, 1997, respectively. No other provider accounted for more than 10%
of the Company's revenues for fiscal 1997.
CASE MANAGEMENT PROGRAMS
Each Case Management Program is generally administered pursuant to a
management and affiliation agreement with a contracting provider and operates
through a wholly owned subsidiary of the Company. The Company is responsible for
developing and implementing detailed operating protocols relating to training
procedures, management information systems, utilization review, coordination of
quality assurance, contract development and other management and administrative
services, and, under certain contracts, the provision of mental health services.
Pursuant to the terms of the management and affiliation agreements, the Company
manages and operates, on behalf of each case management provider, the delivery
of case management and other covered psychiatric services. The case management
provider is responsible for staff personnel and program facilities, and retains
final discretionary authority to approve the related policy manual, staffing
issues and overall program operations.
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 as (i) a loss of accreditation or other required licensing or regulatory
qualifications, (ii) material breach by either party, (iii) certain legislative
or administrative changes that may adversely affect the continued operation of
the program and (iv) failure to achieve certain performance targets after
designated notice and cure periods. In the Fall of 1995, the Company commenced
the operation of its Case Management Programs with two case management agencies
in Nashville, Tennessee and Memphis, Tennessee. In March and April of 1996, the
Company also executed management and affiliation agreements with three CMHCs in
Arkansas, which became operational in 1996. In September 1997, the Company
closed one of its Case Management Programs in Arkansas. See "Risk
Factors -- Concentration of Revenues" and "-- Limited Operating History of Case
Management Programs."
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Commencing in July 1996, two managed care consortiums became the payors for
mental health care services under TennCare. These consortiums, known as TBH and
Premier, were fully at-risk for the approximately 1.2 million individuals who
qualified for coverage based on Medicaid eligibility or other indigency
standards. The Company holds contracts for Case Management Programs with both of
the managed care consortiums. The Company previously received information that
Premier has notified the State of Tennessee of its intention to withdraw from
TennCare effective June 30, 1997. However, the Company understands that the
State of Tennessee has contested the termination and Premier has continued in
its role as a managed care consortium. Effective July 1, 1997, TBH amended its
contract with TennCare and is attempting to restructure its agreements with its
providers. Significant uncertainty exists as to the future structure of TennCare
and the Company's ability to maintain its case management revenues subsequent to
a restructuring. Depending on the outcome of ongoing discussions among the
interested parties in TennCare, the Company may find it necessary to restructure
or terminate one or more of its contracts with the managed care consortiums or
case management agencies. The potential changes, which the Company cannot
predict with any degree of certainty, could have a material adverse effect on
the Company's business, financial condition and results of operations. See "Risk
Factors -- Potential Changes in TennCare."
CHEMICAL DEPENDENCY PROGRAMS
Each Chemical Dependency Program is generally administered and operated
pursuant to the terms of a chemical dependency management agreement with
providers and payors. The Company is responsible for furnishing all management,
administrative and business services required to develop and operate Medicaid-
funded intensive outpatient rehabilitative services and commercial chemical
dependency rehabilitation services primarily reimbursed by managed care
organizations. The Company also is responsible for creating and implementing
appropriate policies and procedures, admissions guidelines and other protocols
for each Chemical Dependency Program. The provider is responsible for staff
personnel, program facilities and for providing detoxification services.
The terms of the Company's commercial chemical dependency management
agreements, which represent a significant portion of the Company's Chemical
Dependency Program revenues, range from one to three years and may only be
terminated for cause upon the occurrence of such events as (i) a loss of
accreditation or other required licensing or regulatory qualifications, (ii) the
failure of either party to maintain required liability insurance coverage, (iii)
certain legislative changes that may affect the legal validity of the agreement,
(iv) the insolvency of either party, (v) a material misrepresentation of any
warranty set forth in the agreement or (vi) any material breach of the agreement
that is not cured as provided in the agreement.
CORPORATE COMPLIANCE
PMR's corporate compliance program is designed to ensure that its services
are operated in conformity with all applicable federal, state and local
regulations including those governing qualification for reimbursement under the
Medicare and Medicaid programs. Historically, the Company has recognized the
complexity of the regulations governing health care in general and the Company's
services in particular, and has taken a proactive approach to ensure the
appropriate level of corporate resources dedicated to monitoring the Company's
compliance with these issues. The Company's internal compliance program was
formalized in fiscal 1996 and includes annual training sessions for all
employees regarding fraud and abuse issues, periodic utilization and quality
assurance reviews of each of the Company's programs, and a 24-hour hotline which
is available to all employees. The Company employs a compliance officer who is
responsible for the Company's corporate compliance program and reports directly
to the Company's President. In addition, the Company recently formed a committee
comprised of outside board members responsible for reviewing the structure of
and initiatives within the Company's corporate compliance program.
MARKETING AND DEVELOPMENT
PMR's principal marketing efforts with respect to its Outpatient and Case
Management Programs are concentrated in the identification of prospective
hospitals, CMHCs and case management agencies which may be suitable providers.
Providers that may contract for the Company's services are identified through an
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<PAGE> 30
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 also markets the benefits of its Outpatient and Case Management
Programs to managed care organizations and their provider networks as public
sector contracts are awarded. The development of the Chemical Dependency
Programs focuses on expanding current contractual relationships, obtaining new
provider contracts and marketing primarily to at-risk payors where ambulatory
chemical dependency services are of significant value.
The Company's marketing efforts with providers are undertaken by its own
marketing and development personnel who focus upon the dissemination of
information about the benefits of the Company's programs. 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.
COMPETITION
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 health care
programs and services. The Company anticipates that competition will become more
intense as pressure to contain the rising costs of health care continues to
intensify, particularly as programs such as those operated by the Company are
perceived to help contain mental health care costs. Many other companies engaged
in the management of outpatient psychiatric programs compete with the Company
for the establishment of affiliations with acute care hospitals. Furthermore,
while the Company's existing competitors in the case management business are
predominantly not-for-profit CMHCs and case management agencies, the Company
anticipates that other health care management companies will eventually compete
for this business. Many of these present and future competitors are
substantially more established and have greater financial and other resources
than the Company. In addition, the Company's current and potential providers may
choose to operate mental health programs themselves rather than contract with
the Company. There can be no assurance that the Company will be able to compete
effectively with its present or future competitors, and any such inability could
have a material adverse effect on the Company's business, financial condition
and results of operations.
GOVERNMENT REGULATION
Compliance with Medicare Guidelines for Reimbursement and Coverage 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 for the management and administration by the Company of Outpatient
Programs. The Company bills its management fee to the provider as a purchased
management and administrative support service. Substantially all of the patients
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 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. Under certain of the Company's contracts the Company is obligated to
indemnify the provider for all or some portion of the Company's management fees
that may be disallowed to the provider. In the event a significant amount of
such fees are disallowed for providers, there could be a material adverse effect
upon the Company's business, financial condition and results of operations. In
addition, to the extent that providers who contract with the Company for
management services suffer material losses in Medicare payments, there is a
greater risk of non-payment by the providers and a risk that the providers will
terminate or not renew their contracts with the Company. Thus, even though the
Company does not submit claims to Medicare, it may be adversely affected by
reductions in Medicare payments or other Medicare policies. See "Risk
Factors -- Dependence Upon Medicare Reimbursement," "-- Sufficiency of Existing
Reserves to Cover Reimbursement Risks" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The Medicare Program was 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
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<PAGE> 31
administer and interpret 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. Applicable Medicare guidelines permit
the reimbursement of contracted management services provided that, among other
things, the associated fees are "reasonable." As a general rule, Medicare
guidelines indicate that the costs incurred by a provider for contract
management services relating to furnishing Medicare-covered services are deemed
"reasonable" if the costs are comparable with marketplace prices for similar
services. Although management believes that the Company's charges for its
services are comparable with marketplace prices for similar services, the
determination of reasonableness may be interpreted by HCFA or a fiscal
intermediary in a manner inconsistent with the Company's belief. Notwithstanding
the Company's belief, a determination that the Company's management fees may not
be reasonable could have a material adverse effect on the Company's business,
financial condition and results of operations.
HCFA has published criteria that 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. As a condition of the service being "reasonable and
necessary," the patient must otherwise need inpatient psychiatric hospital care,
or be at risk of relapsing and requiring inpatient care if the partial
hospitalization services are not furnished. The Medicare criteria for coverage,
specifically what is "reasonable and necessary" in particular cases, is a
subjective determination on which health care professionals may disagree.
Medicare's application of its "reasonable and necessary" standard is not always
consistent and that standard may be interpreted in the future in a manner which
is more restrictive than prevailing current interpretations. Although the
Company and its providers have quality assurance and utilization review programs
to monitor partial hospitalization programs managed by the Company in order to
ensure that such programs operate in compliance with the Company's understanding
of all Medicare coverage requirements, there can be no assurance that in the
future certain aspects of the Company's programs will not be found to have
failed to satisfy all applicable criteria for Medicare eligibility.
All of the partial hospitalization programs managed by the Company are
treated as "provider-based" programs by HCFA. This designation is important
since partial hospitalization services are covered only when furnished by a
"provider" (i.e., a hospital or a CMHC). To the extent that partial
hospitalization programs are not located in a site and operated in a manner
which is deemed by HCFA to be "provider-based," there would not be Medicare
coverage for the services furnished at that site under Medicare's partial
hospitalization benefit. In August 1996, HCFA published criteria for determining
when programs may be deemed to be "provider-based" programs. The proper
interpretation and application of these criteria are not entirely clear and
there is a risk that some of the program sites managed by the Company will be
found not to be "provider-based." If such determination is made, HCFA may seek
retroactive recoveries from providers. If HCFA makes a determination that
programs managed by the Company are not "provider-based" and seeks retroactive
recovery of payments from the Company's providers, such recovery could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Contracts."
Historically, CMHCs, unlike hospitals, were not surveyed by a Medicare
contractor before being permitted to participate in the Medicare program.
However, HCFA is now in the process of surveying all CMHCs to confirm that they
meet all applicable Medicare conditions for furnishing partial hospitalization
programs. Management believes that all the CMHCs that contract with the Company
should be found in compliance with the applicable requirements. However, there
can be no assurance that some CMHCs contracting with the Company will not be
terminated from the Medicare program or that the government will not attempt to
recover payments made to such CMHCs for services, including payments relating to
the Company's services, which had been furnished and paid for by Medicare.
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Changes in Medicare's Cost-Based Reimbursement. In the Balanced Budget Act
of 1997, Congress directed HCFA to implement a prospective payment system for
all outpatient hospital services for the calendar year beginning January 1,
1999. Under such a system, a pre-determined rate would be paid to providers
regardless of the provider's reasonable cost. While the actual reimbursement
rates and methodology have not been determined and thus their effect, positive
or negative, is unknown, the Company may need to negotiate modifications to its
contracts with providers, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Medicare benefit has a coinsurance feature, which means that the amount
paid by Medicare is the provider's reasonable cost less "coinsurance" which
typically is the patient's responsibility. The coinsurance amount is currently
20% of the charges for the services. The coinsurance must be charged to the
patient by the provider unless the patient is indigent. If the patient is
indigent or if the patient does not pay the provider the billed coinsurance
amounts after reasonable collection efforts, the Medicare program has
historically paid those amounts as "allowable Medicare bad debts." The
allowability of Medicare bad debts to providers for whom the Company manages
partial hospitalization programs is significant since most of the patients in
programs managed by the Company are indigent or have very limited resources. The
Balanced Budget Act of 1997 reduces the amount of allowable Medicare bad debts
payable to providers as follows: 25% for provider fiscal years beginning on or
after October 1, 1997; 40% for provider fiscal years beginning on or after
October 1, 1998; and 45% for provider fiscal years beginning on or after October
1, 1999. The reduction in "allowable Medicare bad debts" could have a material
adverse effect on Medicare reimbursement to the Company's providers and could
further result in the restructuring or loss of provider contracts with the
Company.
Compliance with Medicaid Regulations and Potential Changes. Since the
Company is involved with state Medicaid agencies and with providers whose
clients are covered by Medicaid, the Company must comply with the laws and
regulations governing such reimbursement. 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. Although there is federal
financial participation in state Medicaid programs, states have broad discretion
in determining the methods for paying providers, the amounts of payment, and
limiting the number of eligible providers. Thus, flexibility was increased by
the Balanced Budget Act of 1997, which repeals a prior law that required states
to pay enough to cover the costs of a provider that was efficiently and
effectively operated. As states consider methods to control the cost of health
care services generally and behavioral health services specifically to Medicaid
recipients, and because such recipients are, as a group, 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 to the Company's
business, financial condition and results of operations.
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 may occur
in 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 obtaining continued and increased contracts with managed
care organizations to provide behavioral health managed care services to
Medicaid recipients. Consequently, any significant reduction in funding for
Medicaid programs could have a material adverse effect on the Company's
business, financial condition and results of operations.
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Periodically, the United States Congress considers 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
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 have an
impact upon the delivery of services to Medicaid recipients.
Many of the patients served in the Outpatient Programs managed by the
Company are indigent or have very limited resources. Accordingly, many of those
patients have Medicaid coverage in addition to Medicare coverage. In some of the
states where the Company furnishes services, the state Medicaid plans have paid
the Medicare coinsurance amount. However, under the Balanced Budget Act of 1997,
states will no longer have to pay such amounts if the amount paid by Medicare
for the service equals or exceeds what Medicaid would have paid had it been the
primary insurer. To the extent that states take advantage of this new
legislation and refuse to pay the Medicare coinsurance amounts on behalf of the
Outpatient Program patients to the extent that they had in the past, it will
have an adverse impact on the providers with whom the Company contracts, and
thus, may have a material adverse effect on the Company's business, financial
condition and results of operations.
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 can trigger
substantial criminal and other penalties.
Specific Licensing of Programs. The Company's Outpatient Programs are
operated as outpatient departments of hospitals or 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. Additionally, the provider's premises and programs may be subject to
periodic inspection and recertification to maintain required licenses and to
continue participation as a Medicaid provider.
Aggressive Investigation and Enforcement of Health Care Fraud Laws. The
Office of the Inspector General within the U.S. Department of Health and Human
Services, as well as other Federal, state, and private organizations, are
aggressively enforcing their interpretation of Medicare and Medicaid laws and
policies, and other applicable standards. Often in such enforcement efforts, the
government has relied on the Federal False Claims Act. Under that law, if the
government prevails in a case, it is entitled to treble damages plus not less
than $5,000 nor more than $10,000 per claim, plus reasonable attorney fees and
costs. In addition, a person found to have submitted false claims can be
excluded from governmental health care programs including Medicare and Medicaid.
If a provider contracting with the Company were excluded from governmental
health programs, no services furnished by that provider would be covered by any
governmental health program. Some of the providers contracting with the Company
are reported to be under active investigation for health care fraud; however,
the Company is not aware that any alleged fraud relates to programs with which
the Company is involved. If the Company were excluded from governmental health
programs, providers contracting with the Company could not be reimbursed for
amounts paid to the Company.
To prevail in a False Claims Act case, the government need show only that
incorrect claims were submitted with "reckless disregard" or in "deliberate
ignorance" of the applicable Medicare law. The government does not have to prove
that the claims were submitted with the intent to defraud a governmental or
private health care payor. The qui tam provisions of the Federal False Claims
Act permit individuals also to bring suits under the Federal False Claims Act.
The incentive for an individual to do so is that he or she will usually be
entitled to approximately 15%-30% of any ultimate recovery. Under the Federal
False Claims Act, the Office of the Inspector General, in conjunction with the
Department of Justice, have successfully made demands on thousands of providers
to settle alleged improper billing disputes at double damages or more.
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Although the Company does not bill governmental programs directly, it could
possibly be liable under the False Claims Act to the extent that it is found to
have "caused" false claims to have been presented.
There are many other civil and criminal statutes at the federal and state
levels that may penalize conduct related to submitting false claims for health
care services or for offering or receiving anything of value in exchange for the
referring of patients. The penalties under many of those statutes are severe,
and the government often need not prove intent to defraud in order to prevail.
Management believes that the Company is in material compliance with applicable
regulatory and industry standards. However, in light of the complexity of the
policies governing governmental health care programs together with changing and
uncertain interpretations of those policies, it is impossible to be absolutely
assured that the government (or a qui tam relator in the name of the government)
will not assert that some conduct by the Company has given rise to a potentially
large liability.
In the past, there have been occasions when Medicare fiscal intermediaries
have denied coverage for all or substantially all of the claims submitted by the
providers where the Company had a management contract. Such denials have
occurred even though a physician has certified that the Outpatient Program
services were medically necessary. Notwithstanding the Company's ongoing efforts
to assure that the Outpatient Program services furnished by it under contract
are consistent with its understanding of the Medicare coverage criteria, it is
possible that there will be future occasions when a substantial number of
services furnished at a site managed by the Company will be deemed to be
noncovered. The Health Insurance Portability and Accountability Act of 1996
grants the U.S. Department of Health and Human Services broad authority to
impose civil monetary penalties on providers for certain activities. Among those
activities are the repeated submission of claims for services which are not
medically necessary. If there were again to be occasions when a Medicare fiscal
intermediary denied a large number of claims for a site managed by the Company,
it is possible that the government would seek sanctions from the provider and
possibly from the Company. While the Company believes that it would be
inappropriate for the government to seek such sanctions for services for which
the coverage criteria are interpreted differently at different times and which
have been ordered by a physician, it is not clear at this time how the
government will apply this new authority.
EMPLOYEES
As of September 15, 1997, PMR employed approximately 900 employees, of
which 480 are full-time employees. Approximately 810 employees staff clinical
programs and approximately 90 are in corporate management including finance,
accounting, development, utilization review, training and education, information
systems, human resources and legal areas. None of the Company's employees are
subject to a collective bargaining agreement and the Company believes that its
employee relations are good.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
PROPERTIES
The Company owns no real property, but currently leases and subleases
approximately 205,000 square feet comprised of (i) a lease for the Company's
corporate headquarters expiring in April 3, 2002, (ii) two leases for regional
administration offices expiring in July 2001 and September 2001, respectively,
and (iii) 30 leases for program sites, averaging three years duration, none of
which extends beyond 2002. The Company carries property and liability insurance
where required by lessors and sub-lessors. The Company believes that its
facilities are adequate for its short-term needs.
Leases and sub-leases, 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 typically provide for termination on not
less than 90 days written notice.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth certain information concerning each of the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- ---- ----------------------------------------
<S> <C> <C>
Allen Tepper......................... 50 Chairman of the Board of Directors and
Chief Executive Officer
Fred D. Furman....................... 49 President
Mark P. Clein........................ 38 Executive Vice President and Chief
Financial Officer
Susan D. Erskine..................... 45 Executive Vice President-Development,
Secretary and Director
Charles E. Galetto................... 47 Senior Vice President-Finance and
Treasurer
Daniel L. Frank (1).................. 41 Director
Eugene D. Hill, III (2).............. 45 Director
Charles C. McGettigan(1)............. 52 Director
Richard A. Niglio (2)................ 55 Director
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Allen Tepper co-founded the Company in 1988, has served as Chairman and
Chief Executive Officer of the Company since October 1989 and previously served
as President from October 1989 to April 1997. Mr. Tepper co-founded Consolidated
Medical Corp., which was engaged in out-patient clinic management for acute care
hospitals in the Philadelphia area. The company was subsequently sold to the
Berwind Corporation in 1984 and Mr. Tepper remained with the company until
December 1986 as Senior Vice President. Mr. Tepper holds a Masters of Business
Administration degree from Northwestern University and a Bachelors degree from
Temple University.
Fred D. Furman has served as President of the Company since April 1997.
Previously, he held the position of Executive Vice President -- Administration
and General Counsel from March 1995 to April 1997. Prior to joining the Company,
Mr. Furman was a partner at Kleinbard, Bell and Brecker, a Philadelphia law firm
from 1980 to March 1995. Mr. Furman is a member of the National Health Lawyers
Association. He holds a Juris Doctor degree and a Bachelors degree from Temple
University.
Mark P. Clein has served as Executive Vice President and Chief Financial
Officer of the Company since May 1996. Prior to joining the Company, Mr. Clein
was a Managing Director of Health Care Investment Banking for Jefferies & Co.,
an investment banking firm, from August 1995 to May 1996, a Managing Director of
Rodman & Renshaw, Inc., an investment banking firm, from March 1995 to August
1995, a Managing Director of Mabon Securities Corp., an investment banking firm,
from March 1993 to March 1995, a Vice President with Sprout Group, an affiliate
of Donaldson, Lufkin and Jenrette, Inc., from May 1991 to March 1993, and a Vice
President and partner with Merrill Lynch Venture Capital, Inc. from 1982 to
February 1990 and from August 1990 to February 1991. 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 co-founded the Company in 1988 and has served as Executive
Vice President, Secretary and a director of the Company since October 1989. Ms.
Erskine previously served in several operational and marketing management
positions with acute care hospitals and health care management organizations.
Ms. Erskine holds a Masters in Health Science degree and completed post-graduate
work at Stanford University in Education and Psychology, and she holds a
Bachelors degree from the University of Miami.
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Charles E. Galetto has served as Senior Vice President-Finance and
Treasurer of the Company since August 1997. Prior to joining the Company, Mr.
Galetto was Vice President-Corporate Controller of Medtrans, a medical
transportation company, from June 1996 to July 1997 and Vice President, Chief
Financial Officer, Treasurer and Secretary of Data/Ware Development, Inc., a
computer hardware and software developer, from 1989 to May 1996. Mr. Galetto
holds a Bachelors degree from Wayne State University.
Daniel L. Frank has served as a director of the Company since 1992. Mr.
Frank has been with Coram Healthcare since 1996, where he serves as President -
Lithotripsy. From 1993 to 1996, Mr. Frank was Chief Executive Officer of Western
Medical Center-Anaheim and Santa Ana, a provider of acute and long-term health
care. From 1991 to 1993, he was the President of Summit Ambulatory Network.
Eugene D. Hill, III has served as a director of the Company since 1995. Mr.
Hill has been employed with Accel Partners, a venture capital firm, since 1994
and has been a General Partner of the firm since 1995, focusing on health care
services investments. Prior to that time, he was President of United Behavioral
Health at United HealthCare Corporation from 1992 to 1994. From 1988 to 1992, he
served as President and CEO of U.S. Behavioral Health, a managed behavioral
health care company. Previously Mr. Hill was the President and Chairman of
Sierra Health and Life Insurance Company. Mr. Hill serves on the Boards of
Directors of Paidos Healthcare, Navix Radiology Systems, Abaton.com, Delos
WomensHealth, Presidium and Cornerstone Physicians.
Charles C. McGettigan has served as a director of the Company since 1992.
Mr. McGettigan was a co-founder in November 1988 and remains a Managing Director
of McGettigan, Wick & Co., Inc., an investment banking firm. He is a co-general
partner of a limited partnership which, through its holdings, is a principal
stockholder of the Company. See "Principal and Selling Stockholders." Mr.
McGettigan has previously had investment banking experience with firms such as
Blyth Eastman Dillon & Co., Dillon, Read & Co. Inc., Woodman, Kirkpatrick &
Gilbreath and Hambrecht & Quist. Mr. McGettigan serves on the Boards of
Directors of digital dictation, inc., I-Flow Corp., Modtech, Inc., Onsite
Energy, Phoenix Network, Sonex Research, Tanknology -- NDE, Vie de France and
Wray-Tech Instruments.
Richard A. Niglio has served as a director of the Company since 1992. Mr.
Niglio has been Chief Executive Officer and Director of Children's Discovery
Centers of America, Inc., since 1987. From 1982 until March 1987, he was
President, Chief Executive Officer and a director of Victoria Station
Incorporated, a restaurant chain based in Larkspur, California. Prior to that
time, he held various executive positions with several major publicly held
companies such as Kentucky Fried Chicken and International Multi-Foods.
36
<PAGE> 37
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 15, 1997 and as adjusted
to reflect the sale of the Common Stock offered hereby: (i) by each person known
to the Company to be the beneficial owner of more than 5% of the outstanding
Common Stock; (ii) by each Selling Stockholder; (iii) by each executive officer
and director of the Company; and (iv) all executive officers and directors of
the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING NUMBER OF AFTER OFFERING
--------------------- SHARES BEING ---------------------
NAME NUMBER PERCENT(1) OFFERED(2) NUMBER PERCENT(1)
--------------------------------- -------- ---------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C>
Entities affiliated with
Proactive Investment Managers,
L.P.(3)........................ 1,728,714 32.8% 350,000 1,377,458 20.2%
Charles C. McGettigan(3)......... 964,407 18.3 210,700 743,976 10.9
J. Patterson McBaine(3).......... 1,597,814 30.7 350,000 1,238,083 18.4
Jon D. Gruber(3)................. 1,622,014 31.1 350,000 1,262,283 18.7
Myron A. Wick, III(3)............ 895,407 17.2 210,700 674,976 10.0
Allen Tepper(4).................. 1,113,281 21.1 100,000 1,013,281 14.9
Susan D. Erskine(5).............. 161,919 3.1 20,000 141,919 2.1
Daniel L. Frank(6)............... 76,000 1.5 -- 76,000 1.1
Eugene D. Hill, III(7)........... 24,000 * -- 24,000 *
Richard A. Niglio(8)............. 76,000 1.5 -- 76,000 1.1
Mark P. Clein(9)................. 243,000 4.5 20,000 223,000 3.2
Fred D. Furman(10)............... 125,937 2.4 20,000 105,937 1.6
Charles E. Galetto............... 0 -- -- 0 --
All executive officers and
directors as a group (9
persons)(11)................... 2,784,544 46.6 370,700 2,404,113 32.2
</TABLE>
- ---------------
* Less than one percent.
(1) Applicable percentages of ownership prior to the Offering are based on
5,159,535 shares of Common Stock outstanding on September 15, 1997,
adjusted as required by rules promulgated by the Securities and Exchange
Commission (the "SEC"). Applicable percentages of ownership after the
Offering are based on 6,689,535 shares of Common Stock outstanding. This
table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G (if any) filed with the
SEC. Unless otherwise indicated in the footnotes to this table and subject
to community property laws where applicable, the Company believes that each
of the stockholders named in this table has sole voting and investment
power with respect to the shares indicated as beneficially owned. Any
security that any person named above has the right to acquire within 60
days is deemed to be outstanding for purposes of calculating the percentage
ownership of such person, but is not deemed to be outstanding for purposes
of calculating the ownership percentage of any other person.
(2) An additional 100,000 shares of Common Stock may be sold by certain Selling
Stockholders and others listed in the above table if the Underwriters'
over-allotment option is exercised in full as follows: Proactive Partners,
L.P., 39,200 shares; Fremont Proactive Partners, L.P., 2,940 shares;
Lagunitas Partners, L.P., 27,860 shares; Daniel L. Frank, 10,000 shares;
Eugene D. Hill, III, 10,000 shares; and Richard A. Niglio, 10,000 shares.
Shares of Common Stock offered by Messrs. Clein and Furman and, if the
Underwriters' over-allotment option is exercised in full, by Mr. Hill, will
have been acquired by such person pursuant to the exercise of outstanding
options or warrants to purchase shares of Common Stock held by each of
them.
(3) Charles C. McGettigan, a director of the Company since 1992, Myron A. Wick,
III, J. Patterson McBaine and Jon D. Gruber are general partners of
Proactive Investment Managers, L.P. Proactive Investment Managers, L.P. is
the General Partner of Proactive Partners, L.P. and Fremont Proactive
Partners, L.P. Shares beneficially owned include (i) 39,056 shares held by
Proactive Investment Managers, L.P. (which include 26,500 shares issuable
pursuant to a warrant exercisable within 60 days
37
<PAGE> 38
of September 15, 1997), (ii) 796,670 shares held by Proactive Partners,
L.P. (which include 26,500 shares issuable pursuant to a warrant
exercisable within 60 days of September 15, 1997), (iii) 59,681 shares held
by Fremont Proactive Partners, L.P., (iv) 69,000 shares held by Mr.
McGettigan (which include 64,500 shares issuable pursuant to options
exercisable within 60 days of September 15, 1997), (v) 664,707 shares held
by entities controlled by Messrs. Gruber and McBaine (which include (A)
590,407 shares held by Lagunitas Partners L.P., a limited partnership of
which Messrs. Gruber and McBaine and an investment advisor controlled by
Messrs. Gruber and McBaine are controlling general partners, (B) 21,000
shares held by a limited partnership of which Messrs. Gruber and McBaine
are the sole general partners and (C) 53,300 shares held in various
accounts by an investment advisor controlled by Messrs. Gruber and
McBaine), (vi) 37,700 shares held by Mr. McBaine and (vii) 61,900 shares
held by Mr. Gruber. Proactive Investment Managers, L.P. and Messrs.
McGettigan, Wick, McBaine and Gruber, as general partners of Proactive
Investment Managers, L.P., share voting and investment power of the shares
and may be deemed to be beneficial owners of the shares held by Proactive
Partners, L.P. and Fremont Proactive Partners, L.P. Messrs. McGettigan,
Wick, McBaine and Gruber disclaim beneficial ownership of any shares held
by Proactive Investment Managers, L.P., Proactive Partners, L.P., Fremont
Proactive Partners, L.P. or other entities they control as described above,
except to the extent of their respective interests in such shares arising
from their pecuniary interest in such partnerships. Proactive Partners,
L.P., Fremont Proactive Partners, L.P. and Lagunitas Partners L.P. are
offering 196,000, 14,700 and 139,300 shares, respectively, in the Offering.
Amounts and percentages beneficially owned after the Offering give effect
to a distribution of an aggregate of 12,556 shares of Common Stock by
Proactive Investment Managers, L.P. to its partners, which included a
distribution of 2,825 shares of Common Stock to each of Messrs. McGettigan,
Wick, Gruber and McBaine.
(4) Includes 9,076 shares held by Mr. Tepper, 905,033 shares held by Mr.
Tepper, as Trustees FBO Tepper Family Trust (the "Family Trust"), 85,000
shares held by Mr. Tepper and Ms. Tepper as Trustees FBO The Tepper 1996
Charitable Remainder Trust UA DTD dated 11/19/96 (the "Charitable Remainder
Trust"), and 114,172 shares issuable pursuant to options exercisable within
60 days of September 15, 1997. Of the shares being sold, 30,000 shares will
be sold by the Family Trust and 70,000 shares will be sold by the
Charitable Remainder Trust.
(5) Includes 87,566 shares issuable pursuant to options exercisable within 60
days of September 15, 1997 and 7,000 shares held by Ms. Erskine's spouse,
William N. Erskine, who has sole voting and dispositive power over such
shares.
(6) Includes 64,500 shares issuable pursuant to options exercisable within 60
days of September 15, 1997.
(7) Includes 24,000 shares issuable pursuant to options exercisable within 60
days of September 15, 1997.
(8) Includes 64,500 shares issuable pursuant to options exercisable within 60
days of September 15, 1997.
(9) Includes 220,000 shares issuable pursuant to options exercisable within 60
days of September 15, 1997.
(10) Includes 90,000 shares issuable pursuant to an outstanding warrant and
35,937 shares issuable pursuant to options exercisable within 60 days of
September 15, 1997.
(11) Includes 818,175 shares of Common Stock issuable pursuant to exercise of
outstanding options and warrants within 60 days of September 15, 1997, as
described in the notes above, as applicable.
38
<PAGE> 39
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Equitable
Securities Corporation, Lehman Brothers Inc. and Wessels, Arnold & Henderson,
L.L.C. are acting as representatives (the "Representatives"), have severally
agreed, subject to the terms and conditions of the Underwriting Agreement, to
purchase from the Company and the Selling Stockholders the number of shares of
Common Stock set forth opposite their respective names below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
---------------------------------------------------------------- ---------
<S> <C>
Equitable Securities Corporation................................ 666,668
Lehman Brothers Inc............................................. 666,666
Wessels, Arnold & Henderson, L.L.C.............................. 666,666
---------
Total................................................. 2,000,000
=========
</TABLE>
The Company and the Selling Stockholders are obligated to sell 1,490,000
and 510,000 shares, respectively, and the Underwriters are obligated to purchase
all of the 2,000,000 shares offered hereby, if any are purchased. The Common
Stock is offered subject to receipt and acceptance by the Underwriters and to
certain other conditions, including the right to reject orders in whole or in
part.
The Underwriters, through the Representatives, have advised the Company and
the Selling Stockholders that the Underwriters propose to offer the shares of
Common Stock to the public initially at the public offering price set forth on
the cover page of this Prospectus and to selected dealers at such public
offering price less a concession not to exceed $0.76 per share. The selected
dealers may reallow a concession to certain other dealers not to exceed $0.10
per share. After the initial offering to the public, the public offering price,
the concession to selected dealers and the reallowance to other dealers may be
changed by the Representatives.
The Company and certain stockholders of the Company have granted the
Underwriters, an option, exercisable for 30 days from the date of this
Prospectus, to purchase at the public offering price less the underwriting
discount as set forth on the cover page of this Prospectus, up to 200,000 and
100,000 additional shares of Common Stock, respectively. If the Underwriters
exercise their option to purchase any of the additional shares of Common Stock,
each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by each of them as shown in the
above table bears to the Underwriters' initial commitment. The Underwriters may
exercise such option solely to cover over-allotments, if any, in connection with
the sale of the Common Stock offered hereby. The Underwriters, should they
exercise their over-allotment option, will exercise such option on a pro rata
basis.
In order to facilitate the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock during and after the Offering. Specifically, the Underwriters may
over-allot or otherwise create a short position in the Common Stock for their
own account by selling more shares of Common Stock than have been sold to them
by the Company and the Selling Stockholders. The Underwriters may elect to cover
any such short position by purchasing shares of Common Stock in the open market
or by exercising the over-allotment option granted to the Underwriters. In
addition, the Underwriters may stabilize or maintain the price of the Common
Stock by bidding for or purchasing shares of Common Stock in the open market and
may impose penalty bids, under which selling concessions allowed to syndicate
members or other broker-dealers participating in the Offering are reclaimed if
shares of Common Stock previously distributed in the Offering are repurchased in
connection with stabilization transactions or otherwise. The effect of these
transactions may be to stabilize or maintain the market price of the Common
Stock at a level above that which might otherwise prevail in the open market.
The imposition of a penalty bid may also affect the price of the Common Stock to
the extent that it discourages resales thereof. No representation is made as to
the magnitude or effect of any such stabilization or other transactions. Such
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
39
<PAGE> 40
In connection with the Offering, certain Underwriters (and selling group
members) may also engage in passive market making transactions in the Common
Stock on the Nasdaq National Market. Passive market making consists of
displaying bids on the Nasdaq National Market limited by the prices of
independent market makers and effecting purchases limited by such prices and in
response to order flow. Rule 103 of Regulation M promulgated by the SEC limits
the amount of net purchases that each passive market maker may make and the
displayed size of each bid. Passive market making may stabilize the market price
of the Common Stock at a level above that which might otherwise prevail in the
open market and, if commenced, may be discontinued at any time.
In connection with the Offering, the Company and stockholders of the
Company holding in the aggregate 2,260,676 shares of Common Stock upon
consummation of the Offering, including each of the Company's officers and
directors, the Selling Stockholders and certain other stockholders, have agreed,
subject to certain limited exceptions, that they will not directly or
indirectly, offer, pledge, sell, offer to sell, contract to sell or grant any
option to purchase or otherwise sell or dispose (or announce any offer, pledge,
offer of sale, contract of sale, grant of any option or other sale or
disposition), of any shares of Common Stock or other capital stock or securities
exchangeable or exercisable for, or convertible into, shares of Common Stock or
other capital stock for a period of 120 days after the date of this Prospectus
without the prior written consent of Equitable Securities Corporation.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments which the Underwriters may be required to make in respect thereof.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, San Diego, California. Certain legal
matters will be passed upon for the Underwriters by Stroock & Stroock & Lavan
LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company at April 30, 1997 and
1996 and for each of the three years in the period ended April 30, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the SEC a registration statement on Form S-2 (as
amended, the "Registration Statement") under the Securities Act with respect to
the Common Stock offered by this Prospectus. This Prospectus, which constitutes
a part of the Registration Statement, does not contain all the information set
forth in the Registration Statement. For further information with respect to the
Company and the Common Stock, reference is made to the Registration Statement
and to the exhibits and schedules filed therewith. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the SEC. A copy of the
Registration Statement, including exhibits and schedules thereto, filed by the
Company with the SEC, as well as reports and other information filed by the
Company with the SEC may be inspected without charge (and copies of the material
contained therein may be obtained from the SEC upon payment of
40
<PAGE> 41
applicable copying charges) at the public reference facilities maintained by the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following
regional offices: Midwest Regional Office, 500 West Madison, Suite 1400,
Chicago, Illinois 60661 and the Northeast Regional Office, 7 World Trade Center,
Suite 1300, New York, New York 10048. In addition, registration statements and
certain other filings made with the SEC through its Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system are publicly available through the SEC's
site on the World Wide Web, located at http://www.sec.gov. The Registration
Statement, including exhibits thereto and amendments thereof, has been filed
with the SEC via the EDGAR system. In addition, such reports, proxy statements
and other information concerning the Company can be inspected at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended April
30, 1997, the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders filed pursuant to Rule 14a-6 of the Exchange Act, the Company's
Quarterly Report on Form 10-Q for the three months ended July 31, 1997 and the
Company's Registration Statement on Form 10 filed on July 31, 1992, as amended,
which contains descriptions of the Company's Common Stock and certain rights
relating to the Common Stock, including any amendment or reports filed for the
purpose of updating such descriptions, each as filed by the Company with the
SEC, are hereby incorporated by reference in this Prospectus except as
superseded or modified herein. Any statement contained in any document
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as modified or superseded, to constitute
a part of this Prospectus. The Company will provide without charge to each
person, including any beneficial owner, to whom this Prospectus is delivered,
upon written or oral request of such person, a copy of any and all of the
documents that have been incorporated by reference herein (other than exhibits
to such documents which are not specifically incorporated by reference into such
documents). Such requests should be directed to Mark P. Clein, the Chief
Financial Officer, at the Company's principal executive offices at 501
Washington Street, 5th Floor, San Diego, California 92103, telephone number
(619) 610-4001.
41
<PAGE> 42
PMR CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Annual Financial Statements:
Report of Independent Auditors....................................................... F-2
Consolidated Balance Sheets as of April 30, 1996 and 1997............................ F-3
Consolidated Statements of Operations for the years ended April 30, 1995, 1996 and
1997.............................................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended April 30, 1995,
1996 and 1997..................................................................... F-5
Consolidated Statements of Cash Flows for the years ended April 30, 1995, 1996 and
1997.............................................................................. F-6
Notes to Consolidated Financial Statements........................................... F-7
Consolidated Interim Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet as of July 31, 1997 (Unaudited)................. F-15
Condensed Consolidated Statements of Operations for the three months ended July 31,
1996 and 1997 (Unaudited)......................................................... F-16
Condensed Consolidated Statements of Cash Flows for the three months ended July 31,
1996 and 1997 (Unaudited)......................................................... F-17
Notes to Condensed Consolidated Financial Statements (Unaudited)..................... F-18
</TABLE>
F-1
<PAGE> 43
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 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended April 30, 1997. 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 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
April 30, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Diego, California
June 13, 1997
F-2
<PAGE> 44
PMR CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 3,917,922 $10,048,203
Accounts receivable, net of allowance for uncollectible
amounts of $1,759,000 in 1996 and $5,081,177 in 1997....... 9,289,895 11,268,962
Prepaid expenses and other current assets..................... 321,506 572,136
Deferred income tax benefits.................................. 2,701,000 6,069,000
----------- -----------
Total current assets............................................ 16,230,323 27,958,301
Furniture and office equipment, net of accumulated depreciation
of $869,261 in 1996 and $1,175,980 in 1997.................... 649,312 1,263,743
Long-term receivables........................................... 2,444,055 2,360,872
Other assets.................................................... 1,858,102 1,501,622
----------- -----------
Total assets.................................................... $21,181,792 $33,084,538
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses......................... $ 1,522,721 $ 1,735,658
Accrued compensation and employee benefits.................... 2,276,809 2,951,867
Advances from case management agencies........................ 1,012,847 926,712
Income taxes payable.......................................... 308,489 1,703,000
Dividends payable............................................. 71,739 --
Other current liabilities..................................... 127,213 --
----------- -----------
Total current liabilities....................................... 5,319,818 7,317,237
Deferred rent expense........................................... 149,531 92,822
Deferred income taxes........................................... 1,101,000 635,000
Contract settlement reserve..................................... 5,499,020 8,791,928
Commitments
Stockholders' equity:
Convertible Preferred Stock, $.01 par value, authorized
shares -- 1,000,000; Series C -- issued and outstanding
shares -- 700,000 in 1996; liquidation preference
$1,750,000................................................. 7,000 --
Common Stock, $.01 par value, authorized shares -- 10,000,000;
issued and outstanding shares -- 3,577,917 in 1996 and
5,033,507 in 1997.......................................... 35,778 50,334
Additional paid-in capital.................................... 8,259,243 12,138,569
Notes receivable from stockholders............................ (141,547) --
Retained earnings............................................. 951,949 4,058,648
----------- -----------
Total stockholders' equity...................................... 9,112,423 16,247,551
----------- -----------
Total liabilities and stockholders' equity...................... $21,181,792 $33,084,538
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 45
PMR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue............................................. $21,746,663 $36,315,921 $56,636,902
Expenses:
Operating expenses................................ 20,647,965 28,471,644 41,423,157
Marketing, general and administrative............. 2,976,600 4,018,685 6,350,101
Provision for bad debts........................... 1,317,483 1,447,983 3,084,166
Depreciation and amortization..................... 403,294 595,896 700,734
Interest (income), expense........................ 61,979 2,174 (217,297)
Minority interest in loss of subsidiary........... (108,201) (524) --
----------- ----------- -----------
25,299,120 34,535,858 51,340,861
----------- ----------- -----------
Income (loss) before income taxes................... (3,552,457) 1,780,063 5,296,041
Income tax expense (benefit)........................ (1,266,000) 730,000 2,172,000
----------- ----------- -----------
Net income (loss)................................... (2,286,457) 1,050,063 3,124,041
Less dividends on:
Series C Convertible Preferred Stock.............. 65,537 131,686 17,342
----------- ----------- -----------
Net income (loss) for common stock.................. $(2,351,994) $ 918,377 $ 3,106,699
=========== =========== ===========
Earnings (loss) per common share
Primary........................................... $ (0.70) $ 0.23 $ 0.54
=========== =========== ===========
Fully diluted..................................... $ (0.70) $ 0.21 $ 0.54
=========== =========== ===========
Shares used in computing earnings (loss) per share
Primary........................................... 3,337,484 4,540,280 5,772,210
=========== =========== ===========
Fully diluted..................................... 3,337,484 5,042,879 5,772,210
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 46
PMR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES C
CONVERTIBLE
PREFERRED STOCK COMMON STOCK NOTES RECEIVABLE TOTAL
----------------- ------------------- PAID-IN FROM RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS EARNINGS EQUITY
-------- ------ --------- ------- ----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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............. 700,000 7,000 -- -- 1,637,372 (60,000) -- 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 Apri1 30,
1995................... 700,000 7,000 3,338,656 33,385 7,050,262 (62,626) 33,572 7,061,593
Issuance of common
stock under stock
option plans......... -- -- 17,174 172 61,202 1,184 -- 62,558
Issuance of common
stock for non-compete
agreements and
acquisition of
minority interest.... -- -- 197,087 1,971 1,029,279 -- -- 1,031,250
Issuance of common
stock for a note
receivable........... -- -- 25,000 250 118,500 (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 Apri1 30,
1996................... 700,000 7,000 3,577,917 35,778 8,259,243 (141,547) 951,949 9,112,423
Issuance of common
stock under stock
option plans
including realization
of income tax benefit
of $369,000.......... -- -- 96,016 960 729,189 -- -- 730,149
Dividend payable on
Series C preferred
stock................ -- -- -- -- -- -- (17,342) (17,342)
Proceeds from payment
of stockholder
notes................ -- -- -- -- -- 141,547 -- 141,547
Exercise of warrants to
purchase common
stock................ -- -- 657,524 6,575 3,104,801 -- -- 3,111,376
Issuance of common
stock for consulting
services............. -- -- 2,050 21 45,336 -- -- 45,357
Conversion of Series C
convertible preferred
stock................ (700,000) (7,000) 700,000 7,000 -- -- -- --
Net income............. -- -- -- -- -- -- 3,124,041 3,124,041
--------- ------- --------- ------- ----------- -------- ----------- -----------
Balance at April 30,
1997................... -- $ -- 5,033,507 $50,334 $12,138,569 $ -- $ 4,058,648 $ 16,247,551
========= ======= ========= ======= =========== ======== =========== ===========
</TABLE>
F-5
<PAGE> 47
PMR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................................... $(2,286,457) $ 1,050,063 $ 3,124,041
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 403,294 595,896 700,734
Issuance of stock for consulting services............. -- -- 45,357
Provision for losses on accounts receivable........... 1,317,483 1,447,983 3,084,166
Accrued interest income on notes receivable from
stockholders....................................... (2,626) (4,507) --
Deferred income taxes................................. (924,000) (841,000) (3,834,000)
Minority interest in loss of joint venture............ (108,201) (524) --
Changes in operating assets and liabilities:
Accounts and notes receivable...................... (3,142,713) (3,778,660) (4,980,050)
Refundable income tax.............................. (817,165) 817,165 --
Prepaid expenses and other assets.................. (176,474) (88,487) (250,630)
Accounts payable and accrued expenses.............. 154,831 474,124 212,937
Accrued compensation and employee benefits......... (13,776) 1,415,780 675,058
Advances from case management agencies............. -- 1,012,847 (86,135)
Other liabilities.................................. (193,742) (205,034) (127,213)
Contract settlement reserve........................ 651,761 1,975,797 3,292,908
Income taxes payable............................... (356,000) 308,489 1,394,511
Deferred rent expense.............................. 83,830 (60,331) (56,709)
----------- ----------- -----------
Net cash provided by (used in) operating activities..... (5,409,955) 4,119,601 3,194,975
INVESTING ACTIVITIES
Purchases of furniture and office equipment............. (164,916) (179,281) (958,685)
Acquisition of Twin Town minority interest.............. -- (185,000) --
----------- ----------- -----------
Net cash used in investing activities................... (164,916) (364,281) (958,685)
FINANCING ACTIVITIES
Proceeds from sale of preferred stock................... 1,584,372 -- --
Proceeds from sale of common stock and notes receivable
from stockholders..................................... 132,513 105,710 3,983,072
Proceeds from note payable to bank...................... 2,800,000 800,000 --
Payments on note payable to bank........................ (1,600,000) (2,000,000) --
Cash dividend paid...................................... -- (125,484) (89,081)
----------- ----------- -----------
Net cash provided by (used in) financing activities..... 2,916,885 (1,219,774) 3,893,991
----------- ----------- -----------
Net increase (decrease) in cash......................... (2,657,986) 2,535,546 6,130,281
Cash at beginning of year............................... 4,040,362 1,382,376 3,917,922
----------- ----------- -----------
Cash at end of year..................................... $ 1,382,376 $ 3,917,922 $10,048,203
=========== =========== ===========
SUPPLEMENTAL INFORMATION:
Taxes paid.............................................. $ 830,000 $ 380,735 $ 4,611,489
=========== =========== ===========
Interest paid........................................... $ 107,831 $ 129,108 $ 17,612
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 48
PMR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization, Business and Principles of Consolidation
PMR Corporation (the "Company") develops, manages and markets acute
outpatient psychiatric programs, psychiatric case management programs and
substance abuse treatment programs. The Company operates in the healthcare
industry segment. The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Psychiatric Management Resources,
Inc., Collaborative Care Corporation, Collaborative Care, Inc., 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.
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
$6,593,000 at April 30, 1997, from four 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, 1997 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.
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, 1997 was $297,240, $320,212
and $344,254, respectively.
F-7
<PAGE> 49
PMR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Assets
Other assets are comprised of the following at April 30:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Proprietary information and covenants not to
compete............................................. $1,118,753 $1,118,753
---------- ----------
Goodwill.............................................. 978,858 978,858
Other................................................. 282,176 282,176
---------- ----------
2,379,787 2,379,787
Less accumulated amortization......................... 521,685 878,165
---------- ----------
$1,858,102 $1,501,622
========== ==========
</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 C
Convertible Preferred Stock. The Series C Convertible Preferred Stock shares
were outstanding at April 30, 1996 but were converted to common stock during
fiscal 1997 (see Note 6). Assuming the conversion of the Series C Convertible
Preferred Stock had taken place on May 1, 1995, primary earnings per share would
have been unchanged in fiscal 1996.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings per Share". SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997 and replaces APB Opinion 15,
"Earnings per Share" ("EPS"). SFAS No. 128 requires dual presentation of basic
and diluted earnings per share by entities with complex capital structures.
Basic EPS includes no dilution and is computed by dividing net income (loss) by
the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of this entity. The Company plans to adopt SFAS No. 128 beginning with
its financial statements for the third fiscal quarter ended January 31, 1998.
The impact of SFAS No. 128 on the calculation of either basic or diluted net
income (loss) per share for the years ended April 30, 1995, 1996 and 1997 is not
expected to be material.
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 has been retained to manage and provide the outpatient
psychiatric portion of a managed health care program funded by the State of
Tennessee ("TennCare"). Under the terms of agreements, the
F-8
<PAGE> 50
PMR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company receives a monthly case rate payment from the managed care consortium
responsible for managing the TennCare program, and 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 is also responsible for
providing the related clinical care under the agreements. The Company has signed
six-year contracts with two case management agencies to provide the clinical
network necessary for the Company to meet its obligations under the TennCare
program. Revenue under this program was approximately $7,600,000 and $13,429,000
for the years ended April 30, 1996 and 1997, respectively. There were no such
revenues in fiscal 1995.
The Company also operates chemical dependency rehabilitation programs.
Revenue from these programs for the years ended April 30, 1995, 1996 and 1997
was $1,673,000, $1,898,000 and $2,902,000, respectively.
Revenue under the Acute Outpatient Psychiatric Programs is recognized when
services are rendered based upon contractual arrangements with Providers at the
estimated net realizable amounts. Under certain of the Company's contracts the
Company is obligated under warranty provisions to indemnify the Provider for all
or some portions of the Company's management fees that may be disallowed as
reimbursable to the Provider by Medicare's fiscal intermediaries. The Company
has recorded contract settlement reserves to provide for possible amounts
ultimately owed to its Provider customers resulting from disallowance of costs
by Medicare and Medicare cost report settlement adjustments. Such reserves is
classified as a non-current liability as ultimate resolution of substantially
all of these issues is not expected to occur during fiscal 1998.
Revenue under the TennCare managed care program is recognized in the period
in which the related service is to be provided.
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.
New Accounting Standards
On May 1, 1996, the Company adopted the Financial Accounting Standards
Board Statement No. 123, "Accounting for Stock-Based Compensation," 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 APB Opinion
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 has elected to continue accounting for its stock-based
compensation in accordance with the provisions of APB Opinion 25. Accordingly,
the provisions of Statement No. 123 will not impact the financial position or
the results of operations of the Company.
The Company also adopted Financial Accounting Standards Board Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," on May 1, 1996. 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 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 adoption of Statement No. 121 did
not have any material impact on the financial position or results of operations
of the Company.
F-9
<PAGE> 51
PMR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 issued 50,000 shares each of the Company's common stock
for an aggregate value of $481,250. 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 at fair value over a six year period if certain
performance criteria are met. During fiscal 1997, warrants for the purchase of
30,000 shares of the Company's Common Stock at the fair market value at the date
of grant were earned by the case management agencies.
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 shares of common stock valued at
$8.50 per share. The seller was 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 would have been 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 were not
met. The purchase price included 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 were earned.
4. LONG-TERM RECEIVABLES
Long-term receivables at April 30, 1997 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 the lesser of 50% of the aggregate amount of eligible accounts receivable of
the Company or $10,000,000 for working capital needs that expires on December
31, 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 0.5% or at the Bank's Eurodollar rate plus 2.5%. There were no borrowings
outstanding at April 30, 1997.
F-10
<PAGE> 52
PMR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY
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 525,000 shares of the Company's Common Stock for net proceeds of
$2,362,500.
7. STOCK OPTIONS AND WARRANTS
During 1997 the board of directors of the Company amended the Employees'
Incentive Stock Option Plan of 1990 and renamed it the 1997 Equity Incentive
Plan (the "1997 Plan"). The 1997 Plan provides for the granting of options to
purchase up to 2,000,000 shares of common stock to eligible employees and
consultants to the Company. 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. The 1997 Plan also provides
for the full vesting of all outstanding options under certain change of control
events. Option prices must equal or exceed the fair market value of the shares
on the date of grant.
The Company has a non qualified stock option plan for its outside directors
(the "1992 Plan"). The 1992 Plan provides for the Company to grant each outside
director options to purchase 15,000 shares annually, 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. In 1997, the board of
directors amended the 1992 Plan to provide for full vesting of all outstanding
options under certain change of control events.
Warrants to purchase shares of the Company's common stock were issued in
each of the three years in the period ended April 30, 1997 to brokers in
connection with financing transactions (See Note 6). As of April 30, 1997,
broker warrants to purchase 53,000 shares of the Company's common stock at $2.50
per share were outstanding. These warrants expire on October 31, 1999.
Adjusted pro forma information regarding net income or loss and net income
or loss per share is required by SFAS 123, and has been determined as if the
Company had accounted for its employee stock options and stock purchase plan
under the fair value method of SFAS 123. The fair value for these options was
estimated at the date of grant using the "Black-Scholes" method for option
pricing with the following weighted average assumptions for both 1996 and 1997:
risk-free interest rates of 6.5%; dividend yield of 0%; volatility factors of
the expected market price of the Company's common stock of 88%; and a
weighted-average expected life of the option of 6 years.
For purposes of pro forma disclosures, the estimated fair value of the
options granted is amortized to expense over the options' vesting period. The
Company's pro forma information for the years ended April 30, 1996 and 1997,
follows:
<TABLE>
<CAPTION>
1996 1997
----- ------
<S> <C> <C>
Pro forma net income (in thousands)......................... $ 98 $1,968
Pro forma income per share.................................. $0.02 $ 0.34
Pro forma income per share, fully diluted................... $0.02 $ 0.34
</TABLE>
F-11
<PAGE> 53
PMR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma effect on net income for the years ended April 30, 1996 and
1997 is not likely to be representative of the effects on reported income or
loss in future years because these amounts reflect only two years or one year of
vesting, respectively.
A summary of the Company's stock option activity and related information
for the years ended April 30, is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE
SHARES PRICE
--------- ----------------
<S> <C> <C>
Outstanding April 30, 1994....................... 411,739 $ 4.99
Granted........................................ 355,620 3.55
Exercised...................................... (31,003) 4.00
Forfeited...................................... (29,232) 4.50
--------- ------
Outstanding April 30, 1995....................... 707,124 4.41
Granted........................................ 897,526 7.57
Exercised...................................... (17,174) 3.40
Forfeited...................................... (32,423) 4.11
--------- ------
Outstanding April 30, 1996....................... 1,555,053 6.63
Granted........................................ 486,837 20.50
Exercised...................................... (228,540) 5.17
Forfeited...................................... (27,744) 8.44
--------- ------
Outstanding April 30, 1997....................... 1,785,606 $14.72
========= ======
</TABLE>
At April 30, 1997 options to purchase 974,913 shares of common stock were
exercisable and 1,069,772 shares and 270,000 shares were available for future
grant under the 1997 Plan and the 1992 Plan, respectively.
The weighted-average fair value of options granted was $4.48 and $15.21 in
fiscal years 1996 and 1997, respectively.
A summary of options outstanding and exercisable as of April 30, 1997
follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE EXERCISE CONTRACTUAL OPTIONS EXERCISE
OUTSTANDING RANGE PRICE LIFE EXERCISABLE PRICE
- -------------------------- ------------------ --------- ----------- -------------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
964....................... $2.37 - $6.50 $ 4.21 7.23 771 $ 4.18
732....................... $7.00 - $19.875 $ 16.81 9.43 204 $15.244
86........................ $20.875 - $28.50 $ 23.71 9.68 -- $ --
</TABLE>
F-12
<PAGE> 54
PMR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------------------
1995 1996 1997
----------- ---------- ----------
<S> <C> <C> <C>
Federal:
Current................................ $ (284,000) $1,220,000 $4,868,000
Deferred............................... (698,000) (685,000) (3,009,000)
---------- ---------- -----------
(982,000) 535,000 1,859,000
State:
Current................................ (58,000) 351,000 1,138,000
Deferred............................... (226,000) (156,000) (825,000)
---------- ---------- -----------
(284,000) 195,000 313,000
---------- ---------- -----------
$(1,266,000) $ 730,000 $2,172,000
========== ========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Contract settlement reserve....................... $2,405,000 $3,609,000
Accrued compensation and employee benefits........ 501,000 531,000
Allowance for bad debts........................... 497,000 1,979,000
State income taxes................................ 87,000 280,000
Depreciation and amortization..................... 77,000 163,000
Other............................................. 129,000 159,000
---------- ----------
Total deferred tax assets........................... 3,696,000 6,721,000
Deferred tax liabilities:
Non-accrual experience method..................... 227,000 326,000
Accrual to cash method of accounting.............. 577,000 --
Contractual retainers............................. 1,292,000 961,000
---------- ----------
Total deferred tax liabilities...................... 2,096,000 1,287,000
---------- ----------
Net deferred tax assets............................. $1,600,000 $5,434,000
========== ==========
</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 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate....................................... 34% 34% 35%
State income taxes, net of federal tax benefit.......................... 6 7 6
Other................................................................... (4) -- --
-- -- --
Effective income tax rate............................................... 36% 41% 41%
== == ==
</TABLE>
F-13
<PAGE> 55
PMR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. CUSTOMERS
Approximately 47% 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, Michigan, 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 1995 1996 1997
---------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
A............................................................. --% 21% 23%
B............................................................. 16 11 13
C............................................................. 11 -- --
D............................................................. 11 -- --
</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, 1995, 1996 and 1997, the Company contributed $134,000, $138,000
and $186,000, 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, 1997 are as follows: 1998 -- $2,272,000; 1999 -- $1,836,000;
2000 -- $1,232,000; 2001 -- $1,011,000; 2002 -- $666,000 and $102,000
thereafter.
Rent expense totaled $1,811,000, $1,950,000 and $2,690,800 for the year
ended April 30, 1995, 1996 and 1997, respectively.
F-14
<PAGE> 56
PMR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JULY 31,
1997
-----------
<S> <C>
Current assets:
Cash and cash equivalents..................................................... $ 8,619,595
Notes and accounts receivable, net of allowance for uncollectible amounts of
$5,709,854................................................................. 13,887,987
Prepaid expenses and other current assets..................................... 501,580
Deferred income tax benefits.................................................. 6,069,000
-----------
Total current assets............................................................ 29,078,162
Furniture and office equipment, net of accumulated depreciation of $1,306,203... 1,827,024
Long-term receivables........................................................... 2,595,435
Other assets.................................................................... 1,416,298
-----------
Total assets.................................................................... $34,916,919
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities................................ $ 1,197,458
Accrued compensation and employee benefits.................................... 3,044,205
Advances from case management agencies........................................ 643,677
Income taxes payable.......................................................... 2,291,067
-----------
Total current liabilities....................................................... 7,176,407
Deferred rent expense........................................................... 108,949
Deferred income taxes........................................................... 635,000
Contract settlement reserve..................................................... 9,659,603
Stockholders' equity:
Common Stock, $.01 par value, authorized shares -- 10,000,000; issued and
outstanding shares -- 5,033,507............................................ 50,555
Additional paid-in capital.................................................... 12,257,032
Retained earnings............................................................. 5,029,373
-----------
Total stockholders' equity...................................................... 17,336,960
-----------
Total liabilities and stockholders' equity...................................... $34,916,919
===========
</TABLE>
See notes to consolidated condensed financial statements.
F-15
<PAGE> 57
PMR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Revenue........................................................... $13,028,083 $16,176,780
Expenses:
Operating expenses.............................................. 9,741,050 11,626,432
Marketing, general and administrative........................... 1,518,193 2,114,651
Provision for bad debts......................................... 601,511 663,530
Depreciation and amortization................................... 180,242 215,615
Interest (income), expense...................................... (31,168) (88,748)
----------- -----------
12,009,828 14,531,480
----------- -----------
Income before income taxes........................................ 1,018,255 1,645,300
Income tax expense................................................ 418,000 674,574
----------- -----------
Net income........................................................ 600,255 970,726
Less dividends on:
Series C Convertible Preferred Stock............................ 17,342 --
----------- -----------
Net income for common stock....................................... $ 582,913 $ 970,726
=========== ===========
Earnings per common share
Primary......................................................... $ 0.12 $ 0.16
=========== ===========
Fully diluted................................................... $ 0.11 $ 0.16
=========== ===========
Shares used in computing earnings per share
Primary......................................................... 5,102,789 6,011,977
=========== ===========
Fully diluted................................................... 5,291,050 6,011,977
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
F-16
<PAGE> 58
PMR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 600,255 $ 970,726
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization................................... 180,242 215,615
Provision for losses on accounts receivable..................... 601,511 663,530
Deferred income taxes........................................... 418,000 --
Changes in operating assets and liabilities:
Receivables.................................................. (2,877,698) (3,517,119)
Prepaid expenses and other current assets.................... (53,751) 70,556
Advances from case management agencies....................... -- (283,035)
Accounts payable and accrued compensation.................... 210,423 (445,862)
Contracts settlement reserve................................. 1,116,038 867,675
Deferred rent expense........................................ (352,029) 16,127
Income taxes payable......................................... -- 588,067
----------- -----------
Net cash used in operating activities............................. (157,009) (853,720)
INVESTING ACTIVITIES
Purchases of furniture and equipment............................ (101,804) (693,571)
Net cash used in investing activities............................. (101,804) (693,571)
FINANCING ACTIVITIES
Decrease in notes receivable from stockholders.................. 265,844 --
Payments on note payable to bank................................ (31,242) --
Proceeds from exercise of options and warrants.................. 1,729,375 118,684
Cash dividend paid.............................................. (86,577) --
----------- -----------
Net cash provided by financing activities......................... 1,877,400 118,684
----------- -----------
Net increase (decrease) in cash and cash equivalents.............. $ 1,618,587 $(1,428,608)
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-17
<PAGE> 59
PMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for audited financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the financial position of the Company have
been included. Operating results for the three months ended July 31, 1997 are
not necessarily indicative of the results to be expected for the year ending
April 30, 1998. For further information, refer to the financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended April 30, 1997.
NOTE B -- RECLASSIFICATION
Certain first quarter 1997 amounts have been reclassified to conform to the
first quarter 1998 presentation.
F-18
<PAGE> 60
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES
OF COMMON STOCK OFFERED HEREBY NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 13
Price Range of Common Stock........... 13
Dividend Policy....................... 13
Capitalization........................ 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 22
Management............................ 35
Principal and Selling Stockholders.... 37
Underwriting.......................... 39
Legal Matters......................... 40
Experts............................... 40
Available Information................. 40
Incorporation of Certain Documents by
Reference........................... 41
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
2,000,000 SHARES
LOGO
COMMON STOCK
-----------------
PROSPECTUS
-----------------
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS
WESSELS, ARNOLD & HENDERSON
OCTOBER 21, 1997
======================================================
