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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-20488
PMR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-2491707
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.
3990 Old Town Avenue, Suite 206A
San Diego, California 92110
(Address of principal executive offices)
(619) 295-2227
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] YES [ ] NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
herein, and will not be contained to the best of Registrant's knowledge in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
As of July 24, 1997, 5,045,778 shares of Common Stock, par value $.01
per share, were outstanding and the aggregate market value of the shares of
Common Stock held by non-affiliates was approximately $51,692,000.00 based upon
the closing sale price of the Registrant's Common Stock upon the NASDAQ National
Market at $21.6875 per share of Common Stock. See Footnote (1) below.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1997 Annual
Meeting of Stockholders ("1997 Proxy Statement") are incorporated by reference
into Items 10, 11, 12, and 13 in Part III. If the Proxy Statement is not filed
by August 28, 1997, an Amendment to this Form setting forth this information
will be duly filed with the Securities and Exchange Commission.
(1) The information provided shall in no way be construed as an admission
that any person whose holdings are excluded from the figure is not an
affiliate or that any person whose holdings are included is an
affiliate and any such admission is hereby disclaimed. The information
provided is included solely for record keeping purposes of the
Securities and Exchange Commission.
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PART I
ITEM 1. BUSINESS
GENERAL
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include without
limitation, those discussed in the description of the Company's business below
and the sections entitled "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" as well as those
discussed in our documents incorporated herein by reference.
PMR Corporation (the "Company") is a leader in the development and
management of programs and services for individuals who have been diagnosed with
a Serious Mental Illness ("SMI"). These diseases, which are often chronic and
life long, are primarily schizophrenia and bi-polar disorder (manic depression)
and according to studies sponsored by the National Institute of Mental Health
(NIMH), afflict approximately 2.8% of the U.S. population. The Company's
programs have been developed to assist providers of health care services in
delivering care and treatment programs which serve as alternatives to more
costly inpatient behavioral healthcare for the SMI population. The Company's
clinical philosophy emphasizes early intervention to identify and reduce the
incidence of crises events and thus contain the high costs associated with
catastrophic events. Through its disease management approach, the Company
believes that its programs may achieve a reduction in health care costs and
result in improved clinical outcomes.
The Company operates three lines of business devoted to behavioral
health care: acute outpatient psychiatric services ("Outpatient Program"), case
management services ("Case Management Program") and chemical dependency services
("Chemical Dependency Program"). In recent years, the Company's principal focus
has been on the growth of its Outpatient Program and Case Management Program,
which are targeted exclusively to serve the SMI population. Looking forward, the
Company intends to blend these products into a single, integrated continuum of
outpatient services and may develop new services in the areas of site
management, clinical information, outcomes analysis and residential services.
The Company's original program, representing its largest source of
revenues, is its Outpatient Program, which serves as an alternative to inpatient
hospitalization. The Outpatient Program includes two core programs developed for
varying levels of acuity: a partial hospitalization program and a structured
outpatient program. It is designed for consumers who require coordinated,
intensive, and comprehensive treatment services beyond those typically offered
at an outpatient clinical level of care. The objective of the Outpatient Program
is to provide stabilization and/or rehabilitation at costs which are typically
less than those offered by inpatient providers. Since 1988, the Company has been
a leader in the management of psychiatric partial hospitalization programs
serving persons in the SMI population with 36programs in 11 states, including
Arizona, Arkansas, California, Colorado, Hawaii, Kentucky, Illinois, Indiana,
Michigan,
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Tennessee and Texas. The Company also has signed contracts to open programs in
Ohio and Washington in the second half of Fiscal 1998. The Company operates
these Outpatient Programs under management contracts with local health care
providers ("Providers") such as acute care hospitals and community mental health
centers ("CMHCs").
The Case Management Program is an intensive case management service
which consists of a proprietary intensive case management model which utilizes
detailed protocols for delivering and managing the treatment and care of SMI
patients. This program was established to work with community-based providers of
mental health care (such as case management agencies and CMHC's) to develop,
manage and operate case management and rehabilitation systems designed to serve
the SMI population in either a managed care or the more traditional,
fee-for-service environment. The Company presently operates its Case Management
Programs in Nashville and Memphis, Tennessee, and in Little Rock, Russellville
and El Dorado, Arkansas.
Through wholly-owned subsidiaries, the Company is a provider of Chemical
Dependency Programs which consist of the treatment of chemical dependency and
substance abuse, primarily to patients of managed care organizations in Southern
California. The Company also manages ambulatory detoxification programs in
Arkansas for public sector (Medicaid and other government funded programs)
patients.
In fiscal 1997 the Company also began the development of a site
management and clinical information division. The Company believes that it has a
unique opportunity to collect, analyze and process clinical and pharma-economic
data on the diseases of schizophrenia and bi-polar disorder. This information
may be extremely valuable in outcomes analysis and development of "best
practices" for the treatment of this patient population. The Company plans to
market its network and its information to pharmaceutical companies, clinical
research organizations, CMHC's and other providers. This division also intends
to participate in clinical research trials as the Company has access to several
thousand individuals who may be candidates for new treatments in these areas. On
January 24, 1997 the Company entered into an agreement with the Applied
Informatics division of United HealthCare with respect to developing this
business.
The Company's objective is to be a leading developer and provider of a
continuum of programs which deliver cost effective mental health services for
individuals within the SMI population. Since the SMI population receives the
vast majority of its health care funding from state, local and federal agencies,
the Company aims to develop programs which assist these entities in containing
rapidly growing and often uncontrolled health care costs. Through the successful
development and operation of these programs, the Company's mission is to foster
the recovery of individuals from the devastating effects of serious mental
illnesses and chemical dependency, and to ensure the cost-effective treatment
and rehabilitation services which limit hospitalization, afford significant
relief from symptoms, and contribute to better quality health care in the
communities within which the Company and its subsidiaries operate.
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STRATEGY
In order to achieve its objectives, the Company's strategy is to (i)
actively pursue new contracts for its Outpatient Programs and increase
profitability of existing programs; (ii) increase the enrollment and market area
of existing Case Management Programs and seek to develop new markets for case
management; (iii) combine the outpatient and case management services into an
integrated service and expand it to the Company's existing markets; (iv) develop
the infrastructure for its site management and clinical information business and
identify business opportunities to capitalize on that infrastructure; and (v)
identify additional services which the Company can provide to the SMI population
and the Providers which serve these clients, as part of its comprehensive
disease management approach.
THE MARKET AND INDUSTRY BACKGROUND
According to the National Advisory Mental Health Council, which is part
of the NIMH, in 1995 severe mental illness consumed $27 billion in direct
medical costs and more than $74 billion in total costs (including estimates of
lost productivity). Studies by the Council indicate that approximately 5.6
million Americans over the age of nine suffer from a severe mental illness such
as schizophrenia, manic depression, autism, panic disorder and obsessive
compulsive disorder.
Schizophrenia is the primary diagnosis among the Company's patient
population. Schizophrenia afflicts approximately 1% of the U.S. population. The
vast majority of the costs of treating these populations are borne by federal,
state and local government programs, primarily Medicare and Medicaid.
According to a study by Dorothy Rice and Leonard Miller of the
University of California, as of 19901, the direct medical costs of Schizoprenia
are consumed in the following categories:
Mental health organizations (such as CMHC's) 38%
Nursing homes 31%
Short stay hospitals 15%
Support costs 8%
Other professional services 4%
Physician services 2%
Pharmaceuticals 2%
The Company believes that its services participate in (or provide
alternatives to) 96% of the market for clinical services as defined above.
Moreover, the Company believes that in most cases,
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1 The Company believes that the costs allocation has shifted since 1990 towards
a higher pharmaceutical component due to the introduction and rapid adoption of
several new and more costly anti-psychotic drugs.
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its services offer cost effective alternatives to existing services offered
primarily by locally managed not-for-profit providers.
According to the NIMH, serious mental illness is defined as
neuro-biological disorders of the brain and are characterized by measurable
disturbances in brain function and structure. The specific biological causes of
these diseases remains unknown. With the exception of autism, effective
medications exist which generate medical responses in 60-90% of individuals with
a serious mental illness. Unfortunately, approximately 40% of the SMI
population, or 2.2 million people, do not receive these effective treatments, or
often treatment of any kind. For schizophrenia, several studies have shown even
higher percentages of non-treatment.
The effect of de-institutionalization on the SMI population, and its
link to widespread homelessness among the SMI, has been described in E. Fuller
Torrey's 1997 work on the mental illness crisis, Out of the Shadows. Torrey
points out that the population of SMI patients in public psychiatric hospitals
declined from 558,239 in 1955 to 71,619 in 1994. The true impact of this
phenomenon is actually larger since the U.S. population grew 58% over this
period (and the incidence of serious mental illness has not changed). Torrey
estimates that 60-75% of the de-institutionalized patients were diagnosed with
schizophrenia or bi-polar disorder, which is the population of the Company's
focus. Based on numerous studies of homelessness over the past fifteen years,
Torrey estimates that approximately 35% of the homeless population has a severe
mental illness.
Although health care for SMI is funded by numerous public sources,
states play a much larger role for mental health care than they do in the
delivery of general health care services. For more than 150 years, state mental
health authorities have been responsible for administering funds to ensure that
the SMI population received adequate treatment. Typically, the state mental
health authorities receive annual appropriations to operate services for
individuals that have been designated based on the classification of their
illness. Since the 1960s, states have been able to access third party federal
payments through the Medicare and Medicaid program. State systems were
historically dominated by hospitals. However, over recent years outpatient care
has grown rapidly as it became recognized as a lower cost alternative and as
many in-patient providers came under intense scrutiny over questionable
admitting practices. In the late 1970s it became common for states to contract
for services which they did not provide, generally using CMHC's, case management
agencies and other not for profit service agencies.
More recently, a major shift has occurred in the delivery of mental
health services in the United States. State mental health authorities have now
evolved from a provider of funded hospital services to a manager of a broad
range of services financed from several public funding sources. Several states
now contract with private, for profit, managed care companies to assume the
administration and insurance risk of health care benefits for Medicaid
populations. At least nine states, including Colorado, Hawaii, Iowa,
Massachusetts, Minnesota, Montana, Ohio, Utah, and Tennessee have implemented
"carve out" behavioral healthcare contracts 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.
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However, contracting for the management of the SMI population is at an
early stage. Individuals with a serious and persistent mental illness have a
need for specialized treatment and rehabilitation services. Coordination and
monitoring of services is crucial to avoid fragmentation which results because
SMI needs often extend across the boundaries of different service sectors and
funding streams. As states look toward implementing Medicaid managed care, the
ability to effectively identify and manage services for a high utilizing and
often transient SMI population becomes crucial to the success of a managed care
entity. The Company believes that its contracts in Tennessee and Arkansas
represent some of the early examples of third party contracts designed
specifically for this population.
Prior to the commencement of its case management business, the
Company's principal source of revenue was the Company's Outpatient Program which
relies on Medicare as its primary source of funding. With respect to the Case
Management Program, the Company will largely rely upon state administered
Medicaid programs for funding.
See "Regulatory Matters."
PROGRAMS AND OPERATIONS
ACUTE OUTPATIENT PSYCHIATRIC PROGRAMS
The Company's Outpatient Program consists principally of psychiatric
partial hospitalization programs developed by the Company which are ambulatory
outpatient programs that provide intensive, coordinated clinical services to
patients with a SMI. These patients generally require coordinated, intensive,
comprehensive and multi-disciplinary treatment not typically provided in a
traditional outpatient setting. In 1996 the Company introduced a new service, a
structured outpatient clinic, to meet the needs of patients who complete the
partial hospitalization program. This program is designed to maintain the gains
achieved during partial hospitalization and to prevent relapse. In 1997 the
Company intends to expand its structured outpatient program to include clients
that are at a lower level of clinical risk but still require maintenance to
reduce the likelihood of decompensation. This expansion, which includes three
levels of care, is designed to introduce techniques and protocols utilized by
the Company's Case Management Program.
The Outpatient Programs are operated under management contracts with
Providers consisting of acute care hospitals, psychiatric hospitals and CMHC's,
and are established under the governance and administrative authority of the
Provider. They are designed to fit within a Provider's existing operations and
are operated under the Provider's name. Duration of contracts with Providers
generally range between two and five years.
The Company brings to the health care Provider management expertise
with respect to the establishment, development and operation of the Outpatient
Program that is not usually available on an in-house basis. The Company provides
complete program design and administration from start-up through ongoing
operation. The Company often retains responsibility for staffing, which may
include providing highly trained program administrators responsible for overall
management, a medical director, a community liaison director responsible for
coordination with community agencies and specialized clinical personnel. The
program administrator generally has a degree in
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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 and care givers have various levels of
training and experience, usually in nursing, psychology or social work.
The programs are normally operated in conjunction with proprietary
policy and procedure manuals that have been developed by the Company which are
customized for each Provider and which establish guidelines to ensure that
licensing requirements are satisfied. The Company also provides many other
services which are often unavailable to the Provider on an in-house basis, such
as quality assurance systems, initial and on-going staff training, statistical
tracking and financial analysis of program performance and utilization
management reviews.
Patients admitted to these programs undergo a complete assessment
process that includes psychiatric, psycho-social, medical, and, as needed, other
specialized evaluations. An individual treatment plan is developed by the
admitting physician for each patient who is then assigned to specific treatment
groups that best meets his or her needs. A care coordinator is assigned to each
patient upon admission, coordinating the various services provided to the
patient. Each program site provides comprehensive treatment services which may
include specialty services for geriatric patients, dually diagnosed patients
(those having a mental illness along with a substance abuse problem) and core
treatment services for the seriously mentally ill patients.
All Outpatient Programs provide programming five or six days a week.
Structured outpatient services offer treatment for patients who are less
symptomatic and higher functioning than patients needing partial
hospitalization. Daily schedules include group psychotherapy and individual
therapy. The treatment program is conducted by therapists, nurses and mental
health specialists who are supervised by the appropriate department of the
Hospital or CMHC and by senior clinical managers in the programs.
The Company believes that its Outpatient Program appeals to health care
providers as a more effective means of delivering the mental health care
component. Providers have often cited as reasons to outsource the mental health
component to specialized outpatient programs, factors such as; delivery of the
expertise necessary for the development, management and administration of a
mental health program; access to skilled psychiatric professionals and support
staff needed to operate mental health care programs; and access to the expertise
necessary to develop, design and manage an accredited mental health program that
satisfies all regulatory, licensing and accreditation requirements.
As of June 1997 the Company operates 36 outpatient programs in 11
states and has approximately 1,500 patients receiving care under programs it
manages.
CASE MANAGEMENT PROGRAM
In 1993 the Company acquired and thereafter further refined its Case
Management model, a proprietary service system for managing treatment,
rehabilitation and support of services provided to consumers within the SMI
population. This model was designed to allow a managed care entity
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in a capitated financial system to manage the risk associated with the SMI
population. It accomplishes this by making available to CMHC's, state Medicaid
agencies and other payors responsible for publicly financed behavioral services,
a consistent and effective approach to managing the utilization of both acute
and community based services. SMI consumers, who are predominately covered by
Medicaid and/or Medicare due to their disability, pose a large financial risk in
a capitated system due to their heavy utilization of costly services, especially
inpatient care. The Company believes that its case management model positions it
to carve out the management of this high utilizing SMI population from the
managed care entity that has responsibility for managing an entire public
managed care system. The model can also operate in a fee-for-service
environment.
The Case Management Program utilizes comprehensive protocols that are
based upon a specific model of intensive service coordination developed at the
Boston University Center for Psychiatric Rehabilitation. The system is designed
around a case manager, also known as a personal service coordinator, whose
activities include: connecting with consumers; educating consumers about the
services, policies and procedures of the managed care system; developing
proactive, personal crisis plans; responding to consumers in crisis and linking
them to emergency services; assessing consumers' service needs and developing
personal services plans; and authorizing and reviewing services included in the
plan utilizing service-specific protocols.
Case management for the SMI population is fundamentally different from
that required for commercially insured populations. The requirements are ongoing
rather than episodic; the covered services are broader and include housing and
basic support needs; and outcomes measurement is more multi-dimensional
including components related to impairment and disability.
The provider network is also different from that accessed by the
typical commercial patient. The "primary care" mental health care providers are
CMHC's or case management agencies. These organizations may have little
experience with risk contracts or the information systems required to operate in
a managed care environment.
The mission of the Case Management Program is to facilitate the
provision of the necessary and appropriate individualized assistance to
individuals within the SMI population and enable them to live more healthy,
independent, productive and satisfying lives in the community. This is
applicable in a fee-for-service environment as well as in a managed care
environment.
In the Fall of 1995, the Company installed and commenced operation of
its Case Management Program in conjunction with two case management agencies in
Tennessee. The Case Management Program was further expanded in July 1996 when a
program was launched in Little Rock, Arkansas in conjunction with a leading CMHC
in that market. Subsequently, programs were opened with CMHC's in Russellville
and El Dorado, Arkansas. As of June, 1997, the Company has enrolled more than
5,100 clients in its Case Management Programs.
The Company has developed a new clinical program which provides
psychiatric rehabilitation and community support services. This program is
complementary to Case Management and designed to be integrated with an existing
case management program. The
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program includes a continuum of rehabilitative services including three levels
of day treatment, skills development, skills maintenance, and individual and
small group rehabilitation services designed to assist individuals with an SMI
reach recovery goals.
CHEMICAL DEPENDENCY PROGRAM
Through wholly-owned subsidiaries, the Company operates and manages
programs devoted exclusively to substance abuse and rehabilitation in ambulatory
settings, primarily to patients of managed care organizations in Southern
California. The Company's chemical dependency and substance abuse programs are
operated both as free-standing treatment services or as part of a Management
Services Agreement with health care providers. All programs have received
accreditation by the Joint Commission of American Health Organizations
("JCAHO").
The Company also offers chemical dependency programs that have been
specially developed with application to public sector clients. Public sector
clients with chemical dependency problems often are also dually diagnosed with a
mental illness. Bridging the gap between the two systems (i.e. chemical abuse
and mental health) is often difficult due to different funding streams,
treatment philosophies and regulations pertaining to Medicaid and other public
sector payors. Meeting the needs of the public sector dually diagnosed client
requires cross training of staff and development of linkage between traditional
chemical dependency providers and providers of behavioral health services.
The Company works with providers to develop the programs and
technologies including a full range of screening, crisis management, ambulatory
care and utilization management services. Through a Management Services
Agreement, the Company works with providers to develop the following programs on
behalf of public sector clients: sobering and detoxification services, dual
diagnosis treatment and rehabilitation, and screening and assessment triage.
As of June 30, 1997 the Company operated four outpatient programs in
southern California under the name of Twin Town Treatment. The Company also
manages two programs in Arkansas which provides ambulatory detoxification
services for public sector clients.
SITE MANAGEMENT AND CLINICAL INFORMATION
In January 1997, the Company began the development of a site management
and clinical information division. This division, 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. The Company's objective is to build a
business model that contributes to the Company's revenues and earnings and to
develop an information asset that can improve and define "best practices" for
the SMI patient population. On January 24, 1997, the Company signed an agreement
with the Applied Healthcare Informatics division of United HealthCare with
respect to developing this business.
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The Company believes that its expanding service base is an excellent
platform for the development of research and clinical information business
lines. Key to that assumption is the Company's 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 an SMI.
The genetic and neurobiological bases of severe mental disorders will
continue to be the focus of intensive research attention in the field.
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").
As the need to reduce drug development time increases, the need for increasingly
effective management of clinical trials is growing. Delays in recruiting and
enrolling qualified patients, along with patient compliance with the protocols
are significant concerns for the CROs which manage the trials. Site Management
Organizations ("SMOs") are emerging as a new industry which provides
commercialized clinical trials services under contract with CROs or directly
with the pharmaceutical sponsor. The Company is currently in the process of
developing its capabilities as a site management organization. Through its
Outpatient and Case Management Programs, the Company has a large, multi-state
patient base. The company is identifying qualified investigators and study
coordinators, and may participate in an SMO capacity in Phase III - IV clinical
trials in Fiscal 1998.
PROGRAM LOCATIONS
OUTPATIENT PROGRAM
LOCATION CURRENT PROVIDER COMMENCEMENT
California
San Diego Hospital May 1988
El Centro Hospital January 1990
Culver City CMHC July 1990
Santee Hospital December 1990
San Francisco Hospital February 1991
Los Angeles CMHC October 1991
Studio City CMHC October 1991
Oakland Hospital January 1992
Santa Ana Hospital February 1992
Vista Hospital March 1992
Union City Hospital April 1992
Riverside Hospital August 1992
San Bernardino Hospital November 1992
Signal Hill Hospital February 1993
Sacramento Hospital November 1993
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Orange Hospital February 1995
San Jose County January 1996
La Jolla Hospital July 1996
Chula Vista Hospital January 1997
Arizona
Tucson CMHC April 1991
Phoenix CMHC June 1992
Tempe CMHC January 1995
Arkansas
Little Rock CMHC March 1994
Batesville CMHC October 1994
Russellville CMHC August 1996
Texas
Conroe CMHC November 1994
Dallas CMHC January 1996
Colorado
Denver Hospital June 1993
Hawaii
Honolulu Hospital March 1996
Illinois
Chicago Hospital April 1997
Indiana
Indianapolis CMHC July 1992
Kentucky
Frankfort Hospital April 1997
Tennessee
Kingsport Hospital April 1997
Madison Hospital April 1997
Nashville Hospital May 1997
Michigan
Detroit CMHC June 1996
CASE MANAGEMENT
LOCATION AVERAGE CLIENT POPULATION COMMENCEMENT
Tennessee
Memphis 2,361 October 1995
Nashville 1,946 September 1995
Arkansas
Little Rock 750 July 1996
El Dorado 522 September 1996
Russellville 480 September 1996
CHEMICAL DEPENDENCY
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LOCATION COMMENCEMENT
California / Twin Town
Burbank November 1993
Los Alamitos November 1993
Orange April 1994
Torrance July 1996
Arkansas
Little Rock January 1995
Russellville September 1996
CONTRACTS
OUTPATIENT PROGRAM
The Outpatient Program is generally administered and operated pursuant
to the terms of written management contracts ("Contracts") with Providers. The
Contracts generally govern the term of the program, the method by which the
program is to be operated by the Company, the responsibility of the Provider for
licensure, billing, insurance and the provision of healthcare services and the
methods by which the Company will be compensated. Each Contract also contains
certain exclusivity provisions, and establishes that the Company is an
independent contractor that is not acting as an employee of, or joint venture
partner with, the Provider.
Program revenue derived by the Company under the Contracts generally
fit within three types of arrangements: 1) an all inclusive fee arrangement
based on fee-for-service rates which provide that the Company is responsible for
substantially all program costs, 2) a fee-for-service arrangement whereby
substantially all program costs are the responsibility of the Provider, and 3) a
fixed fee arrangement. In all cases, the Company provides on-site managerial
personnel. The all-inclusive arrangements constituted approximately 70% of the
Company's revenues and 33 of the 36 existing Outpatient Programs. Regardless of
the type of arrangement with the Provider, all medical services rendered in the
programs are provided by the Provider.
A significant number of the Company's Contracts require the Company to
indemnify the Provider for some or all of the management fee paid to the Company
if either third party reimbursement for mental health services provided to
patients of the programs is denied or the management fee paid to the Company is
disallowed as a reimbursable cost by Medicare. See "Regulatory Matters" and
"Risk Factors" below, and "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
The Contracts are generally for a stated term (normally a duration
between two 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
In the past, the majority of the Company's Contracts have operated
through their stated expiration dates and have been renewed or satisfactorily
re-negotiated. As the Outpatient Programs mature and increase in number, the
Company anticipates that as a matter of normal business
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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
For the year ended April 30, 1997, the Company's Contracts covering
sites operated by hospitals operating under Scripps Health, a San Diego
provider, accounted for approximately 13% of the Company's revenues.
In August 1996 the Company signed an enabling agreement (the "Columbia
Agreement") with Columbia Healthcare Corporation ("Columbia"). The Columbia
Agreement relates specifically to the Company's Outpatient Program and
Columbia's ten state Mid-America Group which includes 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 for the
SMI in markets of the Mid-America Group where Columbia owns or manages a
hospital. As of June 1997 the Company manages five programs for Columbia
hospitals in Illinois, Kentucky and Tennessee and has signed contracts for two
additional programs.
CASE MANAGEMENT
Through implementation of its Case Management Program, the Company is
responsible to develop and implement detailed operating protocols relative to
training procedures, management information systems, utilization review,
coordination of quality assurance, contract development and other management and
administrative services and under certain contracts, the provision of mental
health services. The case management provider is responsible to provide to the
Company or in affiliation with the Company, staff personnel and program
facilities, and retain final discretionary authority to approve the related
policy manual, staffing issues and overall program operations.
In the Fall of 1995, pursuant to Management and Affiliation Agreements,
the Company commenced the operation of its Case Management Program with two case
management agencies in Nashville, Tennessee and Memphis, Tennessee. In March and
April 1996, the Company also executed Management and Affiliation Agreements with
three CMHCs in Arkansas and those agreements became operational in the summer of
1996. The terms of the Management and Affiliation Agreements range from four to
six years and may only be terminated for cause upon the occurrence of such
events such as (i) a loss of accreditation or other required licensing or
regulatory qualifications: (ii) material breach by either party; (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.
Pursuant to the terms of the Management and Affiliation Agreements,
through a wholly owned subsidiary, the Company manages and operates on behalf of
each case management provider, the delivery of case management and other covered
psychiatric services. Each Management and Affiliation Agreement can be operated
in a fee for service or managed care environment. In Tennessee it was
anticipated that the payor for services under the Management
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and Affiliation Agreements would be managed care organizations operating under
the Tennessee TennCare Partners State Medicaid Managed Care Program ("TennCare")
but implementation of TennCare for the SMI population was delayed until July 1,
1996 and thus, the Case Management Program was implemented on a fee for service
basis until conversion to TennCare at which time managed care organizations
became the payor for services.
Commencing on July 1, 1996, two managed care consortiums became the
payors for mental health care services under TennCare. These consortiums, known
respectively as Tennessee Behavioral Health ("TBH") and Premier Behavioral
Health ("Premier"), were fully at risk for the approximately 1.15 million
individuals who qualified for coverage based on Medicaid eligibility or other
indigency standards. The Company, through its Collaborative Care subsidiary
holds contracts for case management services with both of the managed care
consortiums. The Company has received information that Premier has notified the
state that it would withdraw from Tenncare effective, June 30, 1997. However,
the Company understands that the State of Tennessee has contested the
termination and that 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.
For the year ended April 30, 1997, case management contracts in Tennessee
accounted for 23.7% of the Company's revenues. The Company may find it necessary
to significantly restructure its contracts and relationships, depending on the
outcome of ongoing discussions among the interested parties in Tenncare. The
potential changes, which the Company cannot predict with any degree of
certainty, may have a material adverse impact on the Company's financial
condition and results of operations. SEE THE SECTION ENTITLED RISK
FACTORS-POTENTIAL CHANGES IN TENNCARE.
For the year ended April 30, 1997, case management contracts accounted
for 24.2% of the Company's revenues.
MARKETING AND COMMUNITY DEVELOPMENT
The Company's principal marketing efforts with respect to its
Outpatient Program is concentrated in the identification of prospective
Hospitals or CMHC's who may be suitable Providers. Also once having established
an affiliation, the Company assigns personnel to a program site for the purpose
of apprising health care and social service professionals in the local community
about the availability of the services, its benefits and the type of patient
clinically appropriate for service in the Outpatient Program setting. The
Company believes that its ability to secure new contracts with Providers is
based on its reputation for quality and the uniqueness of its services in its
market areas.
A significant factor in the Company's expansion into new market areas
is the ability to develop new contractual relationships with Hospitals or CMHCs.
Hospitals or CMHCs who may contract for the Company's services are identified
through an analysis of market need, discussions with key individuals in the
prospective area and an assessment of the financial and clinical profile of the
Provider.
The Company's marketing efforts with providers are undertaken by its
own marketing and development personnel who focus upon the dissemination of
information about the Company's
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programs as well as the generic benefits of case management services and
outpatient psychiatric programs.
The Company believes, and its marketing plan emphasizes, that its
Outpatient Program offers a cost effective alternative to inpatient care for
many patients and can serve to shorten or obviate inpatient stays by providing a
transition from the hospital for other patients. Additionally, the Company
believes that these cost saving benefits, coupled with the clinical benefits
provided by the less restrictive atmosphere of an intensive outpatient setting,
make its Outpatient Program attractive to third party payors, including
Medicare.
Marketing efforts for the Company's Case Management Program have
focused on developing opportunities for utilizing the Company's proprietary
systems and developing relationships with key local provider groups to be in a
position to respond with a strong, local support base. The Company will also
market the benefits of the Case Management Program to managed care organizations
and their provider networks as public-sector contracts are awarded.
The development of the Company's Chemical Dependency Program focuses on
expanding current contractual relationships and obtaining new provider
contracts. The Company's marketing for this program is focused on at-risk payors
where ambulatory chemical dependency services are of significant value.
REGULATORY MATTERS
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 managed for Providers. The Company bills
its management fee to the Provider as a purchased management and administrative
support service. Substantially all of the patients admitted to these programs
are eligible for Medicare coverage and thus, the Providers rely upon payment
from Medicare. The Providers are reimbursed their costs on an interim basis by
Medicare fiscal intermediaries and the Providers submit annual cost
reimbursement reports to the fiscal intermediaries for audit and payment
reconciliation. The Providers seek reimbursement of the Company's management
fees from these fiscal intermediaries as part of their overall payments from
Medicare. Under certain of the Company's contracts the Company is obligated
under warranty provisions 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 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
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policies. See "Risk Factors-Dependence Upon Third Party Reimbursement" below and
"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS."
The Medicare Program is part of a federal health program created in
1965 as part of the federal social security system. It is administered by the
U.S. Department of Health and Human Services which has established Health Care
Financing Administration ("HCFA") to promulgate rules and regulations governing
the Medicare program and the benefits associated therewith.
Medicare guidelines indicate that, subject to certain regulatory
requirements relating to reasonable costs imposed upon a Provider, contract
management services may be used in lieu or in support of in-house staff of the
Provider and are reimbursable by Medicare. As a general rule, Medicare
guidelines indicate that contract management services costs related to
furnishing services covered by Medicare are reasonable if the costs incurred are
comparable with marketplace prices for similar services. Management of the
Company believes that the value of the Company's services is comparable with
marketplace prices for similar services.
HCFA has published criteria which partial hospitalization services must
meet in order to qualify for Medicare funding. In transmittal letter number 1303
(effective January 2, 1997) and in subsequent criteria published in Section
230.50 of the Medicare Coverage Manual, HCFA requires partial hospitalization
services to be: (i) incident to a physician's service; (ii) reasonable and
necessary for the diagnosis or treatment of the patient's conditions; and (iii)
provided by a physician with a reasonable expectation of improvement of the
patient from the treatment. The Medicare criteria for coverage, specifically
what is "reasonable and necessary" in particular cases is a subjective
determination on which health care professionals may disagree. How Medicare
applies 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. The Company and its
Providers have quality assurance and utilization review programs to monitor
partial hospitalization programs managed by the Company to ensure that such
programs operate in compliance with the Company's understanding of all Medicare
coverage requirements.
All of the partial hospitalization programs managed by the Company are
treated as "provider based" programs by HCFA, which administers the Medicare
program. 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 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
operated in facilities separate from a hospital's or CMHC's main premises 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 sites managed by the Company will be found not to be
"provider-based". If such determination is made, HCFA has not ruled out, in some
situations, the possibility that it would seek retrospective recoveries from
providers.
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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 which contract with the Company
should be found in compliance with the applicable requirements, but it is
possible that some CMHCs contracting with the Company will be terminated from
the Medicare program. It is also possible that the government will attempt to
recover payments made to such CMHCs for services which had been furnished and
paid for by Medicare.
CHANGES IN MEDICARE'S COST BASED REIMBURSEMENT FOR PARTIAL
HOSPITALIZATION SERVICES
Currently proposed legislation would implement a prospective payment
system ("PPS") for all outpatient hospital services, including partial
hospitalization, for the calendar year beginning January 1, 1999. While the
actual reimbursement rates 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 if such legislation is enacted.
The Medicare partial hospitalization benefit has a coinsurance feature,
which means that the amount paid by Medicare is the provider's reasonable cost
less "coinsurance" which is ordinarily to be paid by the patient. The
coinsurance amount is 20 percent 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 pending budget reconciliation bills in Congress would reduce the
amount of Medicare allowable bad debts payable to providers, if enacted. Since
the House and Senate provisions are identical, the Company expects the following
reductions in Medicare allowable bad debts to occur: 25 percent for provider
fiscal years beginning on or after October 1, 1997; 40 percent for provider
fiscal years beginning on or after October 1, 1998; and 50 percent for provider
fiscal years beginning on or after October 1, 1999. The reduction in "allowable
Medicare bad debts" could have a materially adverse impact 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. 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
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which the Company offers, the impact of Medicaid reimbursement and regulatory
compliance with its rules could be material to the Company's 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 financial condition and results of operations.
The United States Congress continues to consider legislation to
substantially alter the overall Medicaid program, to give states greater
flexibility in the design and operation of their individual Medicaid program,
and to stabilize federal spending for such benefits. Various states are also
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.
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 CMHC's, thus subjecting such programs to regulation
by federal, state and local agencies. These regulations govern licensure and
conduct of operations at the facilities, review of construction plans, addition
of services and facilities and audit of cost allocations, cost reporting and
capital
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expenditures. The facilities occupied by the programs must comply with the
requirements of municipal building, health and fire codes. Inclusion of hospital
space where the Outpatient Programs are furnished within the hospitals license
is a prerequisite to participation in the Medicare programs. Additionally, the
Provider's premises and programs are subject to periodic inspection and
recertification.
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, although
the Company is not aware of any allegations 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 quitam provisions of the Federal False Claims Act
permit individuals to do so is that he or she will usually be entitled to
approximately 15 to 30 percent 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. 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 quitam relator in the name of
the government) will not assert that some conduct by the Company has given rise
to potentially a large liability.
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HUMAN RESOURCES
In the aggregate, as of April 30, 1997, the Company employed
approximately 800 employees, of which 434 are full-time employees. Approximately
714 employees staff clinical programs and 86 are in corporate management
including finance, accounting, development, utilization review, training and
education, information systems, human resources and legal. None of the Company's
employees are subject to a collective bargaining agreement, and the Company
believes that its employee relations are good.
COMPETITION
The Company competes with other health care management companies for
the establishment of affiliations with acute care hospitals to operate its
Outpatient Programs. Certain of the Company's competitors have greater financial
and personnel resources than the Company.
In general, the operation of psychiatric programs is characterized by
intense competition. General, community and specialty hospitals, including
national companies and their subsidiaries, provide many different programs and
services. The Company believes that the proprietary nature of its policy and
procedures manuals as well as the level of service it provides and the expertise
of its management and field personnel provides it with a leading position in the
development and management of Outpatient Programs.
In each of the Company's current and anticipated market areas, the
Company faces competition. The Company anticipates that competition will become
more intense as pressure to contain the rising costs of health care continues to
intensify, and programs such as those operated by the Company are perceived to
help contain mental health care costs.
The Company believes that the Case Management Program provides the
means to effectively control costs in a managed, public-sector mental health
system by reducing the costs for the population that consumes the largest
portion of the treatment dollars, the SMI population. In addition, the Company
believes that the Company's Case Management Model provides state-of-the-art
treatment and rehabilitation services which serve to upgrade the existing
provider network in a community. The Company believes the benefits of its Case
Management Model are recognized as a distinguishing feature for public-sector
managed care efforts.
The Company's primary existing competitors in the case management
business are predominantly not for profit CMHC's and case management agencies.
The Company anticipates that mental health managed care companies will
eventually compete for this business. There can be no assurances that the
Company will be able to compete successfully with its present or future
competitors.
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RISK FACTORS
In addition to other information contained in this Annual Report on
Form 10-K, the following risk factors should be considered carefully by holders
of the Company's Common Stock.
1. DEPENDENCE UPON THIRD PARTY REIMBURSEMENT
A significant component of the Company's revenues derived from payments
made by Hospitals and CMHC's ("Providers") to the Company relative to the
management and administration by the Company of outpatient programs (the
"Programs") managed for Providers. The Company bills its management fee to the
Provider as a purchased management and administrative support service.
Substantially all of the patients admitted to these Programs are eligible for
Medicare coverage, thus, the Providers rely upon payment from Medicare. The
Providers are reimbursed their costs on an interim basis by Medicare fiscal
intermediaries and the Providers submit annual cost reimbursement reports to the
fiscal intermediaries for audit and payment reconciliation. The Providers seek
reimbursement of the Company's management fees from these fiscal intermediaries
as part of their overall payments from Medicare. As a general matter, 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 related claims submitted by the Provider are
denied by the 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 intermediaries for
reimbursement on the Provider's cost reimbursement report. The occurrence of
either of these events can have an adverse impact upon the Company's cash flow
and ultimate receipt of its management fees.
Applicable Medicare guidelines permit the reimbursement of contracted
for management services provided that, among other things, the associated fees
are "reasonable." As a general rule, Medicare guidelines indicate that contract
management services costs are "deemed" reasonable if the costs incurred are
comparable with marketplace prices for similar services. Although management of
the Company believes that the value of the Company's services is 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 finances.
HCFA has published criteria which partial hospitalization services must
meet in order to qualify for Medicare funding. In transmittal letter number 1303
(effective January 2, 1987) and in subsequent criteria published in Section
230.50 of the Medicare Coverage Manual, HCFA requires partial hospitalization
services to be: (i) incident to a physician's service; (ii) reasonable and
necessary for the diagnosis or treatment of the patient's conditions; and (iii)
provided by a physician with a reasonable expectation of improvement of the
patient from the treatment. 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 assurances 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.
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During the fourth quarter of Fiscal Year 1994, fiscal intermediaries
for Providers began a Focused Medical Review of claims for partial
hospitalization services throughout the country. A Focused Medical Review
consists of an intensive review by HCFA fiscal intermediaries on an
industry-wide basis of certain targeted claims which HCFA has identified as
being at risk of inappropriate program payment. This often occurs when HCFA
identifies significant industry-wide increases in payments of certain types of
services, as had been the case with the partial hospitalization benefit. The
Company's initial experience with the Focused Medical Review was that there were
numerous denials of Providers' claims and the denials had an adverse impact on
the Company's cash flow during Fiscal 1995 because Providers delayed payment of
the Company's management fee because of the substantial number of denials. On
behalf of the Providers, the Company strenuously disputed these denials,
particularly the interpretations implemented by one singular fiscal
intermediary.
The Focused Medical Review of claims for partial hospitalization
services conducted by fiscal intermediaries for the Providers has substantially
abated on programs managed by the Company. Although during Fiscal 1997, 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 assurances that a Focused
Medical Review of claims will not recur at the level previously experienced by
the Company.
2. CHANGES IN MEDICARE'S COST BASED REIMBURSEMENT FOR PARTIAL
HOSPITALIZATION SERVICES
Based on proposed legislation, a prospective payment system ("PPS") for
all outpatient hospital services, including partial hospitalization, would be
implemented for the calendar year beginning January 1, 1999. While the actual
reimbursement rates 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.
The Medicare partial hospitalization benefit has a coinsurance feature,
which means that the amount paid by Medicare is the provider's reasonable cost
less "coinsurance" which is ordinarily to be paid by the patient. The
coinsurance amount is 20 percent 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 pending budget reconciliation bills in Congress would reduce the
amount of Medicare allowable bad debts payable to providers. Since the House and
Senate provisions are identical, the Company expects the following reductions in
Medicare allowable bad debts to occur: 25 percent for provider fiscal years
beginning on or after October 1, 1997; 40 percent for provider fiscal years
beginning on or after October 1, 1998; and 50 percent for provider fiscal years
beginning on or after October 1, 1999. The reduction in "allowable Medicare bad
debts" could have a materially adverse impact on
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Medicare reimbursement to the Company's Providers and could further result in
the restructuring or loss of Provider contracts with the Company.
3. SUFFICIENCY OF EXISTING RESERVES TO COVER UNCERTAINTIES RELATIVE TO
REIMBURSEMENT ISSUES
Reimbursement of the Company's management fees to Providers under the
Medicare program provides a substantial source of the Company's revenues.
Accordingly, the Company's Programs must at all times operate in compliance with
applicable Medicare guidelines. Failure to meet such criteria could have an
adverse effect on the Company's finances should a Provider elect to withhold
payment of the Company's management fees or in the alternative seek a refund of
such fees following an event of disallowance.
The Company maintains significant reserves identified within its
financial statements to cover the effect of primarily two uncertainties: (i)
that the Company may have an obligation to indemnify certain Providers for some
portions of its management fee which may be subject to disallowance upon audit
of a Provider's cost report by fiscal intermediaries; and (ii) that 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 assurances to
that effect. The obligation to pay the amounts estimated within the Company's
financial statements (or such greater amounts as are due), when and if they
become due, could have a material adverse impact on the Company's short term
liquidity.
4. 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. These contracts generally have defined terms of duration and many have
automatic renewal terms subject to termination by either party. The contracts
often provide for early termination either by the Provider if specified
performance criteria are not satisfied or by Company under various other
circumstances.
The continued success of the Company is subject to its ability to
maintain, renew or extend existing management contracts and obtain new
management contracts. 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 convert their mental health programs from
independently managed programs to programs operated internally or to terminate
their mental health programs. 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 earlier if such management contract is
terminable prior to expiration. In addition, any changes in
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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 would 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 material number of management contracts could
result in a significant decrease in the Company's net revenues and could have a
material adverse effect on the Company's business, financial condition or
results of operations.
For the Fiscal Year ended April 30, 1997 ("Fiscal 1997"), there was
only one Provider that accounted for more than ten (10%) percent of the
Company's revenues. Furthermore, although not attributed to a particular
"customer," the Company's case management programs accounted for 24.2% of the
Company's revenues during Fiscal Year 1997. These programs were largely operated
under contracts with TBH and Premier and management agreements with two (2) 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 or results of operation.
5. POTENTIAL CHANGES IN TENNCARE
The Company, through its Collaborative Care subsidiary holds contracts
for case management services with both of the managed care consortiums. Premier
has notified the state that it would withdraw from Tenncare effective, June 30,
1997. But the effectiveness of that notice is in question 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 opportunity for the Company and its subsidiary
subsequent to a restructuring. The Company may find it prudent to significantly
restructure its contracts and relationships, depending on the outcome of ongoing
discussions among the interested parties in Tenncare. The potential changes,
which the Company cannot predict with any degree of certainty, may have a
material adverse impact on the Company's financial condition and results of
operations.
6. LIMITED OPERATING HISTORY OF CASE MANAGEMENT PROGRAMS
For the fiscal year ended April 30, 1997, the Company's Case Management
Programs accounted for 24.2% of the Company's total revenues. This reflects an
increase from 20.9% of revenues accounted for by these Programs during Fiscal
1996. 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 assurances that the Company will be able to maintain
these operations at the level realized during Fiscal 1997 or expand these
Programs after Fiscal 1997.
7. DIFFICULTIES OF MANAGING RAPID GROWTH
The Company expects that its outpatient psychiatric management services
business and the number of its acute outpatient, case management and chemical
dependency programs may increase
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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 operation, 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.
8. GOVERNMENT REGULATION
Mental health care is an area of extensive and frequent regulatory
change. Changes in the laws or new interpretations of existing laws can have a
significant effect on methods of doing business, costs of doing business and
amounts of reimbursement from governmental and other payers. 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. The
Company must operate in compliance with applicable Medicare and Medicaid
guidelines. The Company is also subject to fraud and abuse and other laws,
violations of which may result in civil and criminal penalties and exclusions
from participation in such programs. The Company at all times attempts to comply
with all such applicable laws; however, there can be no assurance that
administrative or judicial interpretation of existing laws or regulations will
not have a material adverse effect on the Company's operations or financial
condition.
The success of the Company will be dependent in part upon its ability
to satisfy the applicable regulations and requirements imposed upon its
operations. The Company's operations could also be adversely affected by, among
other things, regulatory developments such as mandatory increases in the scope
and quality of care and implementation of certain licensing and certification
standards. There can be no assurance that federal, state or local laws or
regulatory procedures which might adversely affect the Company's business,
financial condition, results or operations or prospects will not be expanded or
imposed. There can be no assurances that the regulations applicable to the
Company's operations and its arrangements with Providers will not change in the
future or that future interpretations of existing laws or new laws will not
result in the Company's services under its management contracts being deemed not
in compliance with federal Medicare/Medicaid laws.
9. DEPENDENCE ON KEY PERSONNEL
The Company depends, and will continue to depend, upon the services of
its senior management and skilled personnel. The Company presently has no
employment agreements with any of its senior executive officers. The Company is
also dependent upon its ability to attract and retain management personnel who
will be responsible for the day-to-day operations of the Company. The loss of
the services of any or all such officers or the Company's inability to attract
additional management personnel in the future could have a material adverse
effect on the Company's financial condition or results of operations.
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The Company's success and growth strategy also depend on its ability to
attract and retain qualified clinical, marketing and other personnel. The
Company competes with general acute care hospitals and other 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 for its business in the future.
10. COMPETITION
The mental health services industry is highly competitive. There are
many other companies engaged in the management of outpatient psychiatric
Programs, and some of these companies are substantially more established and
have greater financial and other business resources than those presently
possessed by 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. The inability of the Company or its Providers to
compete effectively could have a material adverse effect on the Company's
business, financial condition or results of operations.
11. POSSIBLE VOLATILITY OF STOCK PRICES
The market price of the Common Stock could be subject to significant
fluctuations in response to various factors and events, including the liquidity
of the market for the Common Stock, variations in the Company's operating
results, 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. In addition, the stock market in recent
years has experienced broad 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. The
Company's Common Stock is traded on the Nasdaq National Market System. There can
be no assurances as to the future trading prices of the Common Stock. Trading of
a Company's securities depends upon a number of variables most of which are
beyond the control of the Company.
12. HEALTHCARE REFORM
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 reductions to the Medicare and Medicaid programs and
steps to permit greater flexibility in the administration of Medicaid. In
addition, some states in which the Company operates are considering various
health care reform proposals. It is uncertain at this time what legislation on
health care reform may ultimately be proposed or enacted or whether other
changes in the administration or interpretation of governmental health care
programs will occur. 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 or results of operations.
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13. CONCENTRATION OF OWNERSHIP; ANTI-TAKEOVER PROVISIONS
The officers and directors of the Company and their affiliates own over
fifty (50%) percent of the Company's issued and outstanding Common Stock.
Consequently, such persons will be able to elect a majority of the Company's
Board of Directors and control the Company's policies and day to day management
at least for the foreseeable future. The Company's Board of Directors has the
authority, without action by the stockholders, to issue additional shares of
Preferred Stock and to fix the rights and preferences of such shares. The
ability to issue additional shares of Preferred Stock together with certain
provisions of the Company's 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 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.
14. 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 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 financial
condition and results of operations. Claims against the Company, regardless of
their merit or eventual outcome, may also have a material adverse effect upon
the Company's ability to expand its business and would require management to
devote time to matters unrelated to the operation of the Company's business. In
addition, the Company's insurance policies must be renewed annually. There can
be no assurance that the Company will be able to obtain liability insurance
coverage in the future or that, if such coverage is available, it will be
available on acceptable terms.
15. POTENTIAL MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Future sales by existing stockholders could adversely affect the
prevailing market price of the Common Stock. The Company presently has 5,045,303
shares of Common Stock outstanding. Of these shares, 2,548,487 are eligible for
public resale as free-trading securities, and 2,661,222 shares are held by the
Company's affiliates (directors, officers and principal stockholders) and are
considered "restricted securities" under Rule 144 under the Securities Act of
1933, as amended (the "Securities Act").
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16. NEED FOR ADDITIONAL FINANCING TO FUND FUTURE GROWTH
The Company may require additional equity or debt financing,
collaborative arrangements with corporate partners or funds from other sources
in order to continue the establishment, development, management and marketing of
outpatient programs. No assurance can be given that funds will be available for
the Company for those purposes on acceptable terms, if at all. If additional
funds are raised by issuing equity securities, the Company's stockholders may
experience dilution.
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ITEM 2. 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 2002 and (ii) two leases for regional
administration offices for five years' duration, (iii) thirty (30) leases for
Program sites, ranging from three-to-five years' duration, none of which extend
beyond 2002. The Company anticipates that it will be moving into its new
facility in September 1997. The Company carries property and liability insurance
where required by lessors and sublessors. The Company believes that its
facilities are adequate for its short term needs.
Leases and subleases, other than the short-term and month-to-month
leases, generally provide for annual rental adjustments which are either indexed
to inflation or have been agreed upon, and further typically provide for
termination on not less than ninety (90) days' written notice.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings required
to be reported hereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matter was submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year covered by this Report.
ITEM 4A. EXECUTIVE OFFICERS OF THE CORPORATION
The executive officers of the Company and their ages as of July 25,
1997 are as follows:
NAME AGE POSITION
Allen Tepper 49 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
Susan Yeagley Sullivan 47 Senior Vice President-Finance and Treasurer
ALLEN TEPPER
Mr. Allen Tepper has been Chairman and CEO of the Company since October
31, 1989. Mr. Tepper was a co-founder of Consolidated Medical Corp. in 1979,
which was engaged in out-patient clinic management for acute care hospitals in
the Philadelphia area. The company was sold
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to the Berwind Corporation in 1984. Mr. Tepper holds a Masters of Business
Administration degree from Northwestern University and a Bachelors degree from
Temple University.
FRED D. FURMAN
Mr. Fred D. Furman has been President since April 1997. Previously, he
held the position of Executive Vice President - Administration and General
Counsel. Prior to that, Mr. Furman was a partner at a Philadelphia law firm from
1980 to 1995. Mr. Furman is a member of the National Health Lawyers Association.
He holds a Juris Doctor degree and a Bachelor's degree from Temple University.
MARK P. CLEIN
Mr. Mark P. Clein joined the Company in 1996 as Executive Vice
President and Chief Financial Officer. From 1982 to 1995, Mr. Clein had been
employed by several New York-based investment banking and venture capital firms,
including Jefferies & Co., where he held the position of managing director of
investment banking (specializing in the health care industry), Sprout Group, an
affiliate of Donaldson, Lufkin and Jenrette, Inc. and Merrill Lynch Venture
Capital, Inc., where he focused on early stage investing in the healthcare
industry. Mr. Clein holds a Masters of Business Administration degree from
Columbia University and a Bachelors degree from the University of North
Carolina.
SUSAN D. ERSKINE
Ms. Susan D. Erskine has been Secretary and a Director of the Company
since October 31, 1989. Ms. Erskine previously held management positions in the
areas of operations, marketing and development for acute care hospitals and a
public sector focused management services organization. She holds a Master's
degree in Health Science and completed post graduate work at Stanford University
in Education and Psychology. She has extensive experience in program
development, marketing and management of psychiatric programs, both inpatient
and outpatient.
SUSAN YEAGLEY SULLIVAN
Ms. Susan Yeagley Sullivan, CPA, has been Senior Vice President and
Treasurer since May of 1996. From July 1991 through May, 1996, she held the
position of Chief Financial Officer of the Company. Ms. Yeagley Sullivan was
previously the Chief Financial Officer of a San Diego home health agency and of
a psychiatric hospital, as well as several real estate development companies in
San Diego and Dallas. Prior to that, Ms. Yeagley Sullivan was in public
accounting, holding the position of audit manager at Kenneth Leventhal & Co and
Ernst & Young. She holds a Masters in Business Administration degree and a
Bachelors of Science in Accounting degree from San Diego State University.
All officers are elected annually by the Board of Directors. Each officer serves
at the discretion of the Board of Directors. There are no family relationships
among the directors, officers or key employees of the Company.
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PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock (NASDAQ symbol "PMRP") is traded publicly
through the NASDAQ National Market System. The following table represents
quarterly information on the price range of the Company's Common Stock. This
information indicates the high and low sale prices reported by the NASDAQ
National Market System. These prices do not include retail markups, markdowns or
commissions:
QUARTERS FOR THE YEAR ENDED APRIL 1997
7/31/96 10/31/96 1/31/97 4/30/97
----------- ------------ ----------- -----------
High 15.50 35.25 31.44 29.75
Low 8.50 14.13 20.25 16.75
QUARTERS FOR THE YEAR ENDED APRIL 1996
7/31/95 10/31/95 1/31/96 4/30/96
----------- ------------ -------------- -----------
High 6.00 5.63 5.63 10.19
Low 3.00 3.50 4.25 4.50
RECENT SALES OF UNREGISTERED SECURITIES
From May 1, 1996 to April 30, 1997, the Company has sold and issued (without
payment of any selling commission to any person) the following unregistered
securities:
1. During the period, the Company granted incentive stock options to
employees and officers of the Company under its Employees' Stock Option Plan of
1990 (the "1990 Plan") (as amended and restated, the "1997 Equity Incentive
Plan") covering an aggregate of 375,080 shares of the Company's Common Stock.
The incentive stock options had exercise prices equal to at least 100% of the
fair market value of a share of Common Stock on the date of grant and ranged
from $11.00 to $28.50. Certain of these options vest over a period of time
following their respective dates of grant.
2. On April 30, 1997, the Company granted stock options to certain
executive officers of the Company in connection with the employment of such
officers, covering an aggregate 87,757 shares of Common Stock at an exercise
price of $19.875 per share.
3. During May and June 1996, 48,000 shares of Common Stock were issued to
Ronald Slack, a former director of the Company, upon exercise of warrants for
an aggregate exercise price of $242,500.00.
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4. During June 1996, the Company issued 700,000 shares of Common Stock
upon conversion of the Company's Series C Convertible Preferred Stock by the
holders thereof. In addition, 525,000 shares of Common Stock were issued upon
the exercise of Class A Warrants, Class B Warrants and Class C Warrants (which
were issued in connection with the sale of Series C Convertible Preferred Stock
in a private placement transaction), for aggregate exercise prices for each
class of $525,000, $787,500 and $1,050,000, respectively. See "ITEM 7.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS- Liquidity and Capital Resources."
5. On July 1, 1996, the Company granted a consultant an option to purchase
up to 4,000 shares of Common Stock at an exercise price of $11.375 per share, in
connection with the services provided by the consultant.
6. On January 3, 1997, the Company granted a consultant an option to
purchase up to 20,000 shares of Common Stock at an exercise price of $23.375 per
share, in connection with the services provided by the consultant.
7. On April 27, 1997, the Company issued 39,524 shares of Common Stock to
Proactive Partners, L.P. and Proactive Investment Managers L.P. upon the
exercise of warrants issued to them in an earlier private placement transaction,
for an aggregate exercise price of $332,001.60.
The grant of stock options described in paragraphs 1 and 2 above were
exempt from registration under the Securities Act because such transactions did
not involve a "sale" of securities as such term is used in Section 2(3) of the
Securities Act.
The sales and issuances of securities in the transactions described in
paragraphs 3 and 4 above were deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2) and/or Regulation D promulgated
thereunder.
The grant of stock options to the consultants described in paragraphs 5
and 6 above, were exempt from registration under the Securities Act because such
transactions did not involve a "sale" of securities as such term is used in
Section 2(3) of the Securities Act. Alternatively, if such grants did involve a
sale, such grants were exempt from registration under the Securities Act by
virtue of Section 4(2) and/or Regulation D promulgated thereunder.
The recipients of the securities set forth above in paragraphs 2, 3, 4,
5, 6 and 7 represented their intention to acquire the securities for investment
purposes only and not with a view to the distribution thereof. Appropriate
legends are affixed to all stock certificates issued in such transactions. All
recipients either received adequate information about the Registrant or had
access through employment or other relationships, to such information.
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ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
FOR THE YEAR ENDED APRIL 30
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
INCOME STATEMENT INFORMATION
Revenues $ 56,637 $ 36,315 $ 21,747 $ 22,786 $ 16,615
Net Income (loss) 3,107 918 (2,352) 825 1,157
Net Income (loss) per share
Primary .54 .23 (.70) .24 .30
Fully Diluted .54 .21 (.70) .24 .30
Weighted Shares Outstanding
Primary 5,772 4,540 3,337 3,312 2,839
Fully Diluted 5,772 5,043 3,337 3,313 2,858
BALANCE SHEET INFORMATION
Working Capital $ 20,641 $ 10,911 $ 8,790 $ 7,705 $ 7,843
Total Assets 33,085 21,182 14,811 13,671 11,289
Long Term Debt 0 0 126 320 135
Total Liabilities 16,837 12,070 7,749 5,972 4,625
Stockholders' Equity 16,248 9,112 7,062 7,699 6,664
QUARTERS FOR THE YEAR ENDED APRIL 1997 QUARTERS FOR THE YEAR ENDED APRIL 1996
7/31/96 10/31/96 1/31/97 4/30/97 7/31/95 10/31/95 1/31/96 4/30/96
------- -------- ------- ------- ------- -------- ------- -------
Revenues 13,028 14,293 14,190 15,126 6,006 8,215 10,154 11,940
Net Income (loss) 583 799 831 894 5 167 222 524
Net Income (loss)
per share
Primary .12 .13 .14 .15 .00 .04 .06 .11
Fully Diluted .11 .13 .14 .15 .00 .04 .06 .10
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially form those
discussed here. Factors that could cause or contribute to such differences
include, without limitation, those discussed in "ITEM 1. Business", including
the section entitled "Risk Factors", as well as those discussed in any document
incorporated herein by reference.
OVERVIEW
The following table presents a year-by-year analysis of certain of the
material items that comprise elements of the Company's result of operations for
the periods contained within the financial statements included in this Form
10-K. References to "fiscal year" refer to the Company's fiscal years ended
April 30 of the relevant year.
Percentage of Revenues Percentage
Year Ended April 30 Increase/Decrease
1997 1996
1997 1996 1995 vs. 1996 vs. 1995
---- ----- ----- --------- --------
Revenues 100% 100% 100% 56% 67%
Operating Expenses 73% 78% 95% 45% 38%
Marketing, General and 11% 11% 14% 58% 35%
Administrative
Depreciation and Amortization 1% 2% 2% 18% 48%
Other Operating Expense 6% 4% 6% 98% 14%
Income (Loss) before Income Taxes 9% 5% (17%) 198% N/A
Provision for Income Taxes (Benefit) 4% 2% (6%) 198% N/A
Net Income (Loss) 5% 3% (11%) 238% N/A
In Fiscal 1997, the Company recorded net income of $3.1 million, which
compares to net income of $.9 million during Fiscal 1996. The increase in
profitability was due to a significant increase in revenues without a
concomitant increase in operating expenses.
In Fiscal 1997, revenues in the Company's Outpatient Program expanded
by 49.3% as compared to Fiscal 1996 due to a significant increase in both
patient census and net revenue per patient. Net revenue per patient increased as
the Company maintained the focus initiated in Fiscal 1996 of providing higher
intensity services to a higher acuity patient population. As most of the
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costs of an outpatient center are fixed or semi-fixed, the Company experienced
significant unit level operating leverage with respect to its acute outpatient
program, which was the primary factor in reducing operating expenses from 78.4%
of revenue in Fiscal 1996 to 73.1% of revenue in Fiscal 1997. These improvements
were realized notwithstanding a significant increase in operational
infrastructure in the Company's Mid-America region in anticipation of expected
growth in Fiscal 1998 and beyond. While the Company anticipates that it may
continue to experience additional efficiencies in its Outpatient business, it
does not anticipate that improvements in margins will continue at the rate
realized in Fiscal 1997.
In Fiscal 1997, revenues in the case management business grew 80.3% due
to the effect of a full year of operation in Tennessee, increases in enrollment
in Tennessee and the launch of the business in Arkansas. Before corporate
allocation, case management was modestly unprofitable as increased profits in
Tennessee were balanced by start-up losses in Arkansas. The Company anticipates
increasing pressure on revenues and profit margins in Tennessee given the
potential restructuring of Tenncare and the continued losses experienced by
Premier and TBH, the consortiums which have contracted with the Company to
provide case management services. See - "ITEM 1. BUSINESS - CONTRACTS - CASE
MANAGEMENT".
Marketing, General and Administrative expenses increased slightly as a
percentage of revenues in Fiscal 1997 as the Company invested significantly in
operational infrastructure in the Company's Mid-America region in anticipation
of expected growth in Fiscal 1998 and beyond. The Company does not anticipate
material improvements in margins at the marketing, general and administrative
level until several of the recently launched and anticipated programs in the
Mid-America region begin to mature.
Revenues from the Company's Outpatient, Case Management and Chemical
Dependency Programs were 70.6%, 24.2%, and 5.2% respectively of total revenues
in Fiscal 1997, compared to 73.8%, 20.9%, 5.3% respectively of total revenues in
Fiscal 1996. The changes in the revenue mix were due primarily to the effect of
a full year of operation of the Tennessee Case Management Program in Fiscal 1997
as compared to approximately eight months of operation in Fiscal 1996 as well as
the commencement of the Arkansas Case Management Program in Fiscal 1997.
Internal growth rates were strong within all of the business lines.
RESULTS OF OPERATIONS - FISCAL YEAR ENDED APRIL 30, 1997 COMPARED TO FISCAL YEAR
ENDED APRIL 30, 1996
Revenues. Revenues for Fiscal 1997 were $56.6 million, an increase of
$20.3 million, or 56.0% as compared to Fiscal 1996. Of this increase, $6.1
million, or 30.0%, resulted from the Company's Case Management Program in
Tennessee and Arkansas. Five percent of the increase in revenues, or $1.0
million, was attributed to growth in the Chemical Dependency Programs. These
programs benefited from a full year of operation of the Little Rock public
sector program in Arkansas, and from growth in the managed care business in
California. Total revenue growth in Chemical Dependency was 53.0% in Fiscal
1997. The remainder of the increase in revenues came from the Company's
Outpatient Program which recorded revenues of $40.0 million, an increase of
49.3% from Fiscal 1996. The growth in this business line was a combination of
same site revenue increases of 40% as compared to Fiscal
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1996 and the addition of eight new programs in Fiscal 1997. The Company closed
two sites during Fiscal 1997.
Operating Expenses. Operating expenses for Fiscal 1997 were $41.4
million, an increase of $13 million, or 45.5% as compared to Fiscal 1996. Of
this increase, $5.4 million or 42.0%, resulted from the effect of a full year of
operations of the Case Management Program in Tennessee and the launch of the
Case Management Program in Arkansas. The remainder of the increase in operating
expenses was associated primarily with increased costs to support the revenue
growth at existing outpatient sites and the net increase of six Outpatient
Programs during Fiscal 1997.
Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses for Fiscal 1997 were $6.4 million, an increase of $2.3
million, or 58.0% as compared to Fiscal 1996. The increase was related to the
following factors: the reorganization of the Company into three regions; the
significant investment in the Mid-America region to prepare for anticipated
growth associated with the agreement with Columbia Healthcare Corporation; the
start-up of the site management and clinical information division; and increases
in personnel in information systems, product development and utilization review.
Depreciation and Amortization. Depreciation and amortization expenses
for Fiscal 1997 were $701,000, an increase of $105,000, or 17.6% as compared to
Fiscal 1996. The increase was due to additional capital expenditures associated
with the start up of eight new programs and to increased capital expenditures
for information systems.
Provision for Bad Debts. Expenses related to the provision for bad
debts for Fiscal 1997 were $3.1 million, an increase of approximately $1.6
million or 112.4% as compared to Fiscal 1996. The growth in the provision was
due to an increase in the accrual rate for bad debt from 4.0% in Fiscal 1996 to
5.4% in Fiscal 1997 partially associated with higher rates of indigent clients
in the Case Management Program, limited collection experience in the Case
Management and Arkansas Chemical Dependency Program, and a more conservative
accrual for denials by third party payors.
Interest. Interest income was $217,000 in Fiscal 1997, compared to
interest expense of $2,000 in Fiscal 1996. The improvement was due to growing
cash balances throughout Fiscal 1997 and the absence of bank debt.
Dividends. Dividends were $17,000, a decrease of 114,000, or 86.9%
from Fiscal 1996. In June 1996, all shares of Series C Convertible Preferred
Stock were surrendered and converted into 700,000 shares of common stock, thus
ceasing any future dividend requirements on the Preferred Stock. See "Liquidity
and Capital Resources."
RESULTS OF OPERATIONS - FISCAL YEAR ENDED APRIL 30, 1996 COMPARED TO FISCAL YEAR
ENDED APRIL 30, 1995
Revenues. Revenues for Fiscal 1996 were $36.3 million, an increase of
$14.6 million, or 67.0% as compared to Fiscal 1995. Of this increase, $7.6
million, or 52.1%, resulted from the
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commencement of the Company's Case Management Program in Tennessee. The
remainder of the increase in revenues came predominantly from the Company's
Outpatient Program which recorded revenues of $26.8 million, an increase of
33.3% from Fiscal 1996. Same store revenue increased 31.5% as compared to Fiscal
1995. The growth in the Outpatient Program was due to increases in average
patient census and net revenue per patient at existing sites, and the opening of
five programs at new sites during Fiscal 1996. The Company closed two sites
during Fiscal 1996. Revenues at the Company's chemical dependency subsidiary
increased 21.5% during Fiscal 1996.
Operating Expenses. Operating expenses for Fiscal 1996 were $28.5
million, an increase of $7.8 million, or 37.9% as compared to Fiscal 1995. Of
this increase, $6.9 million or 88.7%, resulted from the commencement of the
Company's Case Management Program in Tennessee. The remainder of the increase in
operating expenses was associated with increased costs to support the revenue
growth at existing outpatient sites and the net increase of three Outpatient
Programs during Fiscal 1996.
Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses for Fiscal 1996 were $4.0 million, an increase of $1.0
million, or 35.0% as compared to Fiscal 1995 and as compared to an increase in
revenues of 67.0%. The increase was related primarily to the following factors:
the preparation for and commencement of the Company's Case Management service in
Tennessee; the preparation for the commencement of the Case Management Program
in Arkansas; and increased marketing of the Outpatient Program.
Depreciation and Amortization. Depreciation and amortization expenses
for Fiscal 1996 were $596,000, an increase of $193,000, or 47.8% as compared to
Fiscal 1995. The increase was due largely to the amortization of intangible
assets associated with the acquisition of the remaining interest of the Twin
Town Outpatient subsidiary and covenants not to compete in Tennessee.
Provision for Bad Debts and Interest Expense(net). Expenses related to
the provision for bad debts and interest expense for Fiscal 1996 were $1.4
million, an increase of approximately $70,000, or 5.1% as compared to Fiscal
1995. The percentage increase for this category of expense was substantially
less than the percentage increase in revenues and other expenses due to a lower
provision for bad debt on Case Management revenues, substantially higher cash
balances and the repayment of outstanding bank debt in the fourth fiscal
quarter.
Dividends. Dividends were $132,000, an increase of 100% from Fiscal
1995. In June 1996, subsequent to the end of Fiscal 1996, all shares of Series C
Convertible Preferred Stock were surrendered and converted into 700,000 shares
of common stock. See "Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
For Fiscal 1997, net cash provided by operating activities was $3.2
million, which compares to $4.1 million in Fiscal 1996. Working capital at April
30, 1997 was $20.6 million, an increase of $9.7 million, or 90.4%, as compared
to April 30, 1996. Cash and cash equivalents at April 30, 1997 were $10.0
million, an increase of $6.1 million, or 156.4% as compared to April 30, 1996.
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The increases in operating cash flow, working capital and cash and cash
equivalents are due to the substantial improvement in net income during Fiscal
1997, stabilization of collections of accounts receivable, and proceeds from the
exercise of outstanding options and warrants.
Accounts receivable increased by $2.0 million, or 21.3% during Fiscal
1997, substantially less than the 56.0% increase in revenues during the same
period. As measured by days of revenue outstanding, accounts receivable declined
from 69 at April 30, 1996 to 66 at April 30, 1997.
In Fiscal 1997 the Company received $3.5 million in proceeds from the
exercise of outstanding options and warrants. Approximately $2.3 million of
these proceeds were generated from the exercise of certain outstanding warrants
that were components of a private placement transaction undertaken during Fiscal
1995.
Working capital was utilized to open six additional Outpatient Programs
and to fund the start up of the Arkansas Case Management Program. The Company
anticipates modest additional funding requirements for case management in
Arkansas in Fiscal 1998, and expects this program to be cash flow neutral during
Fiscal 1998.
Working capital is anticipated to be utilized during the year for
operations, to continue expansion of the Company's Outpatient and Case
Management Programs, for the development of the site management and clinical
information business, and for the implementation and expansion of other Company
programs. During Fiscal 1998, working capital is expected to be realized
principally from operations, as well as from a new $10 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 business, however, in amounts
that are not yet certain due to the early stage of the program's development.
The Company is also in the process of refining the specifications for the
purchase and development of a new care management information system which will
be a state of the art data collection and repository system for the Company's
clinical information. The Company anticipates investing approximately $500,000
in this system during Fiscal 1998.
From time to time, the Company recognizes charges upon working capital
as a result of certain uncertainties associated with the health care
reimbursement rules as they apply to the Company's Outpatient Program. During
Fiscal 1997, a majority of the Company's revenues were derived from the
Company's management of its Outpatient Program. Since substantially all of the
patients of the Company's Outpatient Program are eligible for Medicare,
collection of a significant component of the Company's management fees is
dependent upon reimbursement of claims
39
40
submitted to fiscal intermediaries by the Hospitals or CMHCs (Providers) on
whose behalf these programs are managed. See "ITEM 1. BUSINESS - RISK FACTORS -
DEPENDENCE ON THIRD PARTY REIMBURSEMENT".
The Company maintains reserves to cover the effect of primarily two
uncertainties: 1) that the Company may have an obligation to indemnify certain
Providers for some portions of its management fee which may be subject to
disallowance upon audit of the Providers' cost reports by fiscal intermediaries;
and 2) that the Company may not receive full payment of the management fees owed
to it by the Providers during the periodic review of the Providers' claims by
the fiscal intermediaries. In the event that a significant amount of fees
payable to the Company are disallowed, the Company's financial condition and
results of operations would be materially adversely affected.
The Company has been advised by HCFA that certain program-related costs
are not allowable for reimbursement. Under the Company's contracts with its
Providers, the Company may be responsible to indemnify Provider's 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 when and if they become due, could have a material adverse impact on the
Company's short term liquidity. Certain factors are, in management's view,
likely to lessen the impact of any such effect, including the expectation that,
if claims arise, they will arise on a periodic basis over several years; that
any disallowance will merely be offset against obligations already owed by the
Provider to the Company. During Fiscal 1997, the Company recognized $634,000 in
charges to working capital as a result of satisfying indemnity obligations for
Providers that experienced disallowances related to the Company's management
fee. The Company was fully reserved for these disallowances.
The Focused Medical Review of claims for partial hospitalization
services conducted by fiscal intermediaries for the Providers has substantially
abated on programs managed by the Company. This has occurred as a result of a
number of factors, such as the issuance of a Medicare Program Memorandum by HCFA
during June 1995 (which defines partial hospitalization eligibility and the
scope of covered services), as well as the intensification of the Company's
utilization review and utilization management efforts. Specifically, the number
of denials reported to the Company in Fiscal 1997 represented less than 2% of
the estimated number of total claims submitted by Providers to fiscal
intermediaries. The periodic review of claims by HCFA fiscal intermediaries will
likely continue at one or more programs from time to time.
To the extent claims for services have been denied in Outpatient
Programs managed by the Company, the great majority of the denied claims have
been appealed. Approximately 47% of these appeals have reached resolution and
the Company has succeeded in securing a reversal in the substantial majority of
these cases. The appeals process continues for the substantial balance of the
denied claims. Given these results, and given the Company's experience during
Fiscal 1997 (during which the rate of denials has declined to a modest rate),
and in view of the existing reserves
40
41
established within the Company's financial statements, management does not
believe fiscal intermediaries' review of outstanding claims will likely have a
material adverse effect upon the Company's liquidity and capital resources
during Fiscal 1998. However, there could be no assurance that increased review
of outstanding claims will not recur at the level previously experienced by the
Company. See "ITEM 1. BUSINESS Risk Factors."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements of the Company for the three fiscal years ended
April 30, 1997 and specific supplementary financial information are included in
this Report on pages S-1 and F-1 through F-16.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no matters to be reported hereunder.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information with regard to this item is incorporated by reference to
the definitive 1997 Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days of April 30, 1997, under the caption "Election of
Directors," or in an Amendment to this Report to be filed with the Securities
and Exchange Commission. See "Item 4A. EXECUTIVE OFFICERS OF THE CORPORATION"
with regard to Executive Officers.
ITEM 11. EXECUTIVE COMPENSATION
Information with regard to this item is incorporated herein by
reference to the definitive 1997 Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days of April 30, 1997, under the caption
"ADDITIONAL INFORMATION - Management Compensation," or in an Amendment to this
Report to be filed with the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with regard to this item is incorporated herein by
reference to the definitive 1997 Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days of April 30, 1997, under the caption
"PRINCIPAL STOCKHOLDERS," or in an Amendment to this Report to be filed with the
Securities and Exchange Commission.
41
42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with regard to this item is incorporated herein by
reference to the definitive 1997 Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days of April 30, 1997, under the caption
"ADDITIONAL INFORMATION - Certain Transactions," or in an Amendment to this
Report to be filed with the Securities and Exchange Commission.
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Page
(a) The following documents are filed as part of this Report:
1. Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheets as of April 30, 1997 and 1996 F-2
Consolidated Statements of Operations for the fiscal years F-3
ended April 30, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the F-4
fiscal years ended April 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the fiscal F-5
years ended April 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements F-6-F-16
2. Financial Statement Schedules - The following financial schedule
is included herein:
Page Reference
Schedule II - PMR Corporation Valuation
and Qualifying Accounts S-1
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are included in the financial statements or
the notes thereto and therefore have been omitted.
42
43
3. The following Exhibits are filed as part of this Report:
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
3.1 Restated Certificate of Incorporation of the Registrant Filed herewith
3.2 Amended and Restated ByLaws of the Registrant Filed herewith
4.1 Common Stock Specimen Certificate Incorporated by reference to the
Company's Registration Statement
on Form S-18 (Reg. No. 23-20095-A)
filed on February 11, 1988.
10.1 1997 Equity Incentive Plan (the "1997 Plan"). Filed herewith.
10.2 Form of Incentive Stock Option Agreement under the 1997 Plan. Filed herewith.
10.3 Form of Nonstatutory Stock Option Agreement under the 1997 Filed herewith.
Plan.
10.4 Outside Directors' NonQualified Stock Option Plan of 1992 Filed herewith.
(the "1992 Plan").
10.5 Form of Outside Directors' NonQualified Stock Option Filed herewith.
Agreement.
10.6 Amended and Restated Stock Option Agreement dated April 30, Filed herewith.
1996, evidencing aware to Allen Tepper.
10.7 Amended and Restated Stock Option Agreement dated April 30, Filed herewith.
1996, evidencing award to Susan Erskine.
10.8 Amended and Restated Stock Option Agreement dated February Filed herewith.
1, 1996, evidencing award to Mark Clein.
10.9 Amended and Restated Stock Option Agreement dated February Filed herewith.
1, 1996, evidencing award to Mark Clein.
10.10 Amended and Restated Stock Option Agreement dated February Filed herewith.
1, 1996, evidencing award to Mark Clein.
10.11 Amended and Restated Warrant dated July 9, 1997, evidencing Filed herewith.
award to Fred Furman.
10.12 Restated Management Agreement dated April 11, 1997 with Filed herewith.
Scripps Health.
10.13 Sublease dated April 1, 1997 with CMS Development and Filed herewith.
Management Company, Inc.
10.14 Management and Affiliation Agreement dated April 13, 1995, Filed herewith.
between Mental Health Cooperative, Inc. and Tennessee Mental
Health Cooperative, Inc. (Tennessee Mental Health
Cooperative, Inc. subsequently changed its name to
Collaborative Care Corporation)
10.15 Provider Services Agreement dated April 13, 1995, Filed herewith.
43
44
between Tennessee Mental Health Cooperative, Inc. and
Mental Health Cooperative, Inc. (Tennessee Mental Health
Cooperative, Inc. subsequently changed its name to
Collaborative Care Corporation)
10.16 Management and Affiliation Agreement dated April 13, 1995, Filed herewith.
between Case Management, Inc. and Tennessee Mental Health
Cooperative, Inc. (Tennessee Mental Health Cooperative,
Inc. subsequently changed its name to Collaborative Care
Corporation)
10.17 Provider Services Agreement dated April 13, 1995, between Filed herewith.
Tennessee Mental Health Cooperative, Inc. and Case
Management, Inc. (Tennessee Mental Health Cooperative,
Inc. subsequently changed its name to Collaborative Care
Corporation)
21 Subsidiaries of the Corporation Filed herewith.
23.1 Consent of Ernst & Young Filed herewith.
27 Financial Data Schedule Filed herewith.
All other exhibits for which provision is made in the applicable
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the last quarter of the
fiscal year ended April 30, 1997.
44
45
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PMR CORPORATION
Dated: July 19, 1997
BY:/s/ Allen Tepper
-------------------------------
Allen Tepper
Chief Executive Officer
BY:/s/ Mark P. Clein
-------------------------------
Mark P. Clein
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this Form 10-K has
been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
/s/ Allen Tepper Chairman, Chief Executive Officer July 19, 1997
- --------------------------- and Director
Allen Tepper
/s/ Susan D. Erskine Secretary, Treasurer and July 19, 1997
- --------------------------- Director
Susan D. Erskine
/s/ Daniel L. Frank Director July 15, 1997
- ---------------------------
Daniel L. Frank
/s/ Charles McGettigan Director July 15, 1997
- ---------------------------
Charles C. McGettigan
/s/ Richard A. Niglio Director July 16, 1997
- ---------------------------
Richard A. Niglio
/s/ Eugene D. Hill Director July 16, 1997
- ---------------------------
Eugene D. Hill
45
46
Schedule II
PMR Corporation
Valuation and Qualifying Accounts
COL. A COL. B COL. C COL. D COL. E
Additions
Charged to
Description Balance at Charged to Other
Beginning of Costs and Accounts Deductions - Balance at End
Period Expenses Describe Describe of Period
------ -------- -------- -------- ---------
Year ended April 30, 1997
Allowance for doubtful accounts $1,759,182 $3,084,166 $ -- $ (237,829)(1) $5,081,177
Contract settlement reserve $5,499,020 $3,927,371 $ -- $ 634,463 (2) $8,791,928
Year ended April 30, 1996
Allowance for doubtful accounts $1,423,054 $1,447,983 $ -- $ 1,111,855 (1) $1,759,182
Contract settlement reserve $3,523,223 $2,390,196 $ -- $ 414,399 $5,499,020
Year ended April 30, 1995
Allowance for doubtful accounts $ 400,000 $1,317,483 $ -- $ 294,429 $1,423,054
Contract settlement reserve $2,871,462 $3,899,000 $ -- $ 3,247,239 (2) $3,523,223
(1) Uncollectible accounts written off, net of recoveries
(2) Write off of hospital receivables based on disallowances of the
Company's management fee on Provider's cost reimbursement report and
the Company's indemnity obligation.
S-1
47
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, 1997 and 1996, 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. Our audits also included the financial
statement schedule listed in the index at Item 14(a). 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, 1997 and 1996, 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.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
San Diego, California
June 13, 1997
F-1
48
PMR Corporation
Consolidated Balance Sheets
APRIL 30
1997 1996
----------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,048,203 $ 3,917,922
Accounts receivable, net of allowance for uncollectible
amounts of $5,081,177 in 1997 and $1,759,000 in 1996 11,268,962 9,289,895
Prepaid expenses and other current assets 572,136 321,506
Deferred income tax benefits 6,069,000 2,701,000
----------------------------------
Total current assets 27,958,301 16,230,323
Furniture and office equipment, net of accumulated depreciation of
$1,175,980 in 1997 and $869,261 in 1996 1,263,743 649,312
Long-term receivables 2,360,872 2,444,055
Other assets 1,501,622 1,858,102
----------------------------------
Total assets $ 33,084,538 $ 21,181,792
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,735,658 $ 1,522,721
Accrued compensation and employee benefits 2,951,867 2,276,809
Advances from case management agencies 926,712 1,012,847
Income taxes payable 1,703,000 308,489
Dividends payable -- 71,739
Other current liabilities -- 127,213
----------------------------------
Total current liabilities 7,317,237 5,319,818
Deferred rent expense 92,822 149,531
Deferred income taxes 635,000 1,101,000
Contract settlement reserve 8,791,928 5,499,020
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 - 5,033,507 in 1997 and
3,577,917 in 1996 50,334 35,778
Additional paid-in capital 12,138,569 8,259,243
Notes receivable from stockholders -- (141,547)
Retained earnings 4,058,648 951,949
----------------------------------
16,247,551 9,112,423
----------------------------------
$ 33,084,538 $ 21,181,792
==================================
See accompanying notes.
F-2
49
PMR Corporation
Consolidated Statements of Operations
YEAR ENDED APRIL 30
1997 1996 1995
----------------------------------------------------------
Revenue $ 56,636,902 $ 36,315,921 $ 21,746,663
Expenses:
Operating expenses 41,423,157 28,471,644 20,647,965
Marketing, general and administrative 6,350,101 4,018,685 2,976,600
Provision for bad debts 3,084,166 1,447,983 1,317,483
Depreciation and amortization 700,734 595,896 403,294
Interest, (income), expense (217,297) 2,174 61,979
Minority interest in loss of subsidiary -- (524) (108,201)
----------------------------------------------------------
51,340,861 34,535,858 25,299,120
----------------------------------------------------------
Income (loss) before income taxes 5,296,041 1,780,063 (3,552,457)
Income tax expense (benefit) 2,172,000 730,000 (1,266,000)
----------------------------------------------------------
Net income (loss) 3,124,041 1,050,063 (2,286,457)
Less dividends on:
Series C Convertible Preferred Stock 17,342 131,686 65,537
----------------------------------------------------------
Net income (loss) for common stock $ 3,106,699 $ 918,377 $ (2,351,994)
==========================================================
Earnings (loss) per common share
Primary $ .54 $ .23 $ (.70)
==========================================================
Fully diluted $ .54 $ .21 $ (.70)
==========================================================
Shares used in computing earnings (loss) per share
Primary 5,772,210 4,540,280 3,337,484
==========================================================
Fully diluted 5,772,210 5,042,879 3,337,484
==========================================================
See accompanying notes.
F-3
50
PMR Corporation
Consolidated Statements of Stockholders' Equity
SERIES C
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
Balance at April 30, 1994 - $ - 3,307,653 $33,075
Issuance of Series C convertible preferred stock,
net of issuance costs of $105,628 700,000 7,000 - -
Exercise of Redeemable A Warrants to purchase
common stock - - 29,003 290
Issuance of common stock under stock option plan - - 2,000 20
Accrued interest on stockholder notes - - - -
Dividend payable on Series C preferred stock - - - -
Net loss - - - -
-------------------------------------------------------------
Balance at April 30, 1995 700,000 7,000 3,338,656 33,385
Issuance of common stock under stock option plans - - 17,174 172
Issuance of common stock for non-compete
agreements and acquisition of minority interest - - 197,087 1,971
Issuance of common stock for a note receivable - - 25,000 250
Accrued interest on stockholder notes - - - -
Dividend payable on Series C preferred stock - - - -
Proceeds from payment of stockholder notes - - - -
Net income - - - -
-------------------------------------------------------------
Balance at April 30, 1996 700,000 7,000 3,577,917 35,778
Issuance of common stock under stock option plans
including realization of income tax benefit of
$369,000 - - 96,016 960
Dividend payable on Series C preferred stock - - - -
Proceeds from payment of stockholder notes - - - -
Exercise of warrants to purchase common stock - - 657,524 6,575
Issuance of common stock for consulting services - - 2,050 21
Conversion of Series C convertible preferred stock (700,000) (7,000) 700,000 7,000
Net income - - - -
-------------------------------------------------------------
Balance at April 30, 1997 - $ - 5,033,507 $50,334
=============================================================
NOTES RECEIVABLE
PAID-IN FROM RETAINED TOTAL STOCKHOLDERS'
CAPITAL STOCKHOLDERS EARNINGS EQUITY
-----------------------------------------------------------------------
Balance at April 30, 1994 $5,280,687 $ - $2,385,566 $7,699,328
Issuance of Series C convertible preferred stock,
net of issuance costs of $105,628 1,637,372 (60,000) - 1,584,372
Exercise of Redeemable A Warrants to purchase
common stock 115,723 - - 116,013
Issuance of common stock under stock option plan 16,480 - - 16,500
Accrued interest on stockholder notes - (2,626) - (2,626)
Dividend payable on Series C preferred stock - - (65,537) (65,537)
Net loss - - (2,286,457) (2,286,457)
-----------------------------------------------------------------------
Balance at April 30, 1995 7,050,262 (62,626) 33,572 7,061,593
Issuance of common stock under stock option plans 61,202 1,184 - 62,558
Issuance of common stock for non-compete
agreements and acquisition of minority interest 1,029,279 - - 1,031,250
Issuance of common stock for a note receivable 118,500 (118,750) - -
Accrued interest on stockholder notes - (4,507) - (4,507)
Dividend payable on Series C preferred stock - - (131,686) (131,686)
Proceeds from payment of stockholder notes - 43,152 - 43,152
Net income - - 1,050,063 1,050,063
-----------------------------------------------------------------------
Balance at April 30, 1996 8,259,243 (141,547) 951,949 9,112,423
Issuance of common stock under stock option plans
including realization of income tax benefit of
$369,000 729,189 - - 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 3,104,801 - - 3,111,376
Issuance of common stock for consulting services 45,336 - - 45,357
Conversion of Series C convertible preferred stock
- - - -
Net income - - 3,124,041 3,124,041
-----------------------------------------------------------------------
Balance at April 30, 1997 $12,138,569 $ - $4,058,648 $16,247,551
=======================================================================
See accompanying notes.
F-4
51
PMR Corporation
Consolidated Statements of Cash Flows
YEAR ENDED APRIL 30
1997 1996 1995
----------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 3,124,041 $ 1,050,063 $ (2,286,457)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 700,734 595,896 403,294
Issuance of stock for consulting services 45,357 -- --
Provision for losses on accounts receivable 3,084,166 1,447,983 1,317,483
Accrued interest income on notes receivable from
stockholders -- (4,507) (2,626)
Deferred income taxes (3,834,000) (841,000) (924,000)
Minority interest in loss of joint venture -- (524) (108,201)
Changes in operating assets and liabilities:
Accounts and notes receivable (4,980,050) (3,778,660) (3,142,713)
Refundable income tax -- 817,165 (817,165)
Prepaid expenses and other assets (250,630) (88,487) (176,474)
Accounts payable and accrued expenses 212,937 474,124 154,831
Accrued compensation and employee benefits 675,058 1,415,780 (13,776)
Advances from case management agencies (86,135) 1,012,847 --
Other liabilities (127,213) (205,034) (193,742)
Contract settlement reserve 3,292,908 1,975,797 651,761
Income taxes payable 1,394,511 308,489 (356,000)
Deferred rent expense (56,709) (60,331) 83,830
----------------------------------------------------------
Net cash provided by (used in) operating activities 3,194,975 4,119,601 (5,409,955)
INVESTING ACTIVITIES
Purchases of furniture and office equipment (958,685) (179,281) (164,916)
Acquisition of Twin Town minority interest -- (185,000) --
----------------------------------------------------------
Net cash used in investing activities (958,685) (364,281) (164,916)
FINANCING ACTIVITIES
Proceeds from sale of preferred stock -- -- 1,584,372
Proceeds from sale of common stock and notes receivable from
stockholders 3,983,072 105,710 132,513
Proceeds from note payable to bank -- 800,000 2,800,000
Payments on note payable to bank -- (2,000,000) (1,600,000)
Cash dividend paid (89,081) (125,484) --
----------------------------------------------------------
Net cash provided by (used in) financing activities 3,893,991 (1,219,774) 2,916,885
----------------------------------------------------------
Net increase (decrease) in cash 6,130,281 2,535,546 (2,657,986)
Cash at beginning of year 3,917,922 1,382,376 4,040,362
----------------------------------------------------------
Cash at end of year $ 10,048,203 $ 3,917,922 $ 1,382,376
==========================================================
SUPPLEMENTAL INFORMATION:
Taxes paid $ 4,611,489 $ 380,735 $ 830,000
==========================================================
Interest paid
$ 17,612 $ 129,108 $ 107,831
==========================================================
See accompanying notes.
F-5
52
PMR Corporation
Notes to Consolidated Financial Statements
April 30, 1997
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, 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.
F-6
53
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE AND OFFICE EQUIPMENT
Furniture and office equipment are stated at cost and are depreciated over
their estimated useful lives using the straight-line method. Depreciation
expense for each of the three years ended April 30, 1997 was $344,254, $320,212
and $297,240, respectively.
OTHER ASSETS
Other assets are comprised of the following at April 30:
1997 1996
------------------------------
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 878,165 521,685
------------------------------
$1,501,622 $1,858,102
==============================
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 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, 1997, 1996 and 1995
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
F-7
54
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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, 1997, 1996 and 1995 was
$1,673,000, $1,898,000 and $1,592,000, 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.
F-8
55
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
56
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (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.
F-10
57
PMR Corporation
Notes to Consolidated Financial Statements (continued)
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.
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.
F-11
58
PMR Corporation
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
Warrants to purchase shares of the Company's common stock were issued in each
of the three years in the period ended April 30, 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, 1997 and 1996,
follows:
1997 1996
----------------------------
Pro forma net income (in thousands) $ 1,968 $ 98
Pro forma income per share $ .34 $ .02
Pro forma income per share, fully diluted $ .34 $ .02
The pro forma effect on net income for the year ended April 30, 1997 and 1996
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.
F-12
59
PMR Corporation
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of the Company's stock option activity and related information for
the years ended April 30, is as follows:
WEIGHTED-AVERAGE
EXERCISE
SHARES PRICE
-------------------------------------------
Outstanding April 30, 1994 401,739 $ 4.99
Granted 355,620 3.55
Exercised (29,003) 4.00
Forfeited (29,232) 4.50
-------------------------------------------
Outstanding April 30, 1995 (699,124) 4.41
Granted 897,526 7.57
Exercised (13,174) 3.40
Forfeited (32,423) 4.11
-------------------------------------------
Outstanding April 30, 1996 1,551,053 6.63
Granted 486,837 20.50
Exercised (228,540) 5.17
Forfeited (27,744) 8.44
-------------------------------------------
Outstanding April 30, 1997 1,781,606 $ 14.72
===========================================
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 $15.21 and $4.48 in
fiscal years 1997 and 1996, respectively.
A summary of options outstanding and exercisable as of April 30, 1997 follows:
WEIGHTED- WEIGHTED- WEIGHTED-
OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE EXERCISE CONTRACTUAL EXERCISABLE EXERCISE
(IN THOUSANDS) RANGE PRICE LIFE (IN THOUSANDS) PRICE
- -------------------------------------------------------------------------------------------------------
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 - $ -
F-13
60
PMR Corporation
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES
Income tax expense (benefit) consists of the following:
YEAR ENDED APRIL 30
1997 1996 1995
-------------------------------------------------------
Federal:
Current $ 4,868,000 $ 1,220,000 $ (284,000)
Deferred (3,009,000) (685,000) (698,000)
-------------------------------------------------------
1,859,000 535,000 (982,000)
State:
Current 1,138,000 351,000 (58,000)
Deferred (825,000) (156,000) (226,000)
-------------------------------------------------------
313,000 195,000 (284,000)
-------------------------------------------------------
$ 2,172,000 $ 730,000 $(1,266,000)
=======================================================
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.
1997 1996
---------- ----------
Deferred tax assets:
Contract settlement reserve $3,609,000 $2,405,000
Accrued compensation and employee benefits 531,000 501,000
Allowance for bad debts 1,979,000 497,000
State income taxes 280,000 87,000
Depreciation and amortization 163,000 77,000
Other 159,000 129,000
---------- ----------
Total deferred tax assets 6,721,000 3,696,000
Deferred tax liabilities:
Non-accrual experience method 326,000 227,000
Accrual to cash method of accounting -- 577,000
Contractual retainers 961,000 1,292,000
---------- ----------
Total deferred tax liabilities 1,287,000 2,096,000
---------- ----------
Net deferred tax assets $5,434,000 $1,600,000
========== ==========
F-14
61
PMR Corporation
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
A reconciliation between the federal income tax rate and the effective income
tax rate is as follows:
YEAR ENDED APRIL 30
1997 1996 1995
--------------------------------
Statutory federal income tax rate 35% 34% 34%
State income taxes, net of federal tax benefit 6 7 6
Other -- -- (4)
--------------------------------
Effective income tax rate 41% 41% 36%
================================
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.
YEAR ENDED APRIL 30
Provider 1997 1996 1995
-----------------------------------------------------------
A 23 21% -
B 13 11 16%
C - 11
D 11
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, 1997, 1996 and 1995, the Company contributed $186,000,
$138,000 and $134,000, respectively, to match employee deferrals.
F-15
62
PMR Corporation
Notes to Consolidated Financial Statements (continued)
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 $2,690,800, $1,950,000 and $1,811,000 for the year ended
April 30, 1997, 1996 and 1995, respectively.
F-16
63
Schedule
64
Schedule II
PMR Corporation
Valuation and Qualifying Accounts
- ----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
----------------------------------
CHARGED TO
DESCRIPTION BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING OF COSTS AND ACCOUNTS- DEDUCTIONS - END OF
PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------------------------------------------------------------------------------------------------------------------------------
Year ended April 30, 1997
Allowance for doubtful accounts $1,759,182 $3,084,166 $(237,829) (1) $5,081,177
Contract settlement reserve $5,499,020 $3,927,371 $634,463 (2) $8,791,928
Year ended April 30, 1996
Allowance for doubtful accounts $1,423,054 $1,447,983 $ - $1,111,855 (1) $1,759,182
Contract settlement reserve $3,523,223 $2,390,196 $ - $414,399 (2) $5,499,020
Year ended April 30, 1995
Allowance for doubtful accounts $400,000 $1,317,483 $ - $294,429 (1) $1,423,054
Contract settlement reserve $2,871,462 $3,899,000 $ - $3,247,239 (2) $3,523,223
- ------------------
(1) Uncollectible accounts written off, net of recoveries
(2) Write off of hospital receivables based on denials or estimated
adjustments by Medicare
18