-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IeJUs0Lz3mBsoo5vJo3YekEXLf5TgGIuuAzdRlWt7R6yTHjAHnaZ4sRQTXuaYfxZ XY8+mI6XK9T6ivYi/MQADw== 0000936392-98-001645.txt : 19981221 0000936392-98-001645.hdr.sgml : 19981221 ACCESSION NUMBER: 0000936392-98-001645 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981218 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PMR CORP CENTRAL INDEX KEY: 0000829608 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 232491707 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20488 FILM NUMBER: 98772376 BUSINESS ADDRESS: STREET 1: 501 WASHINGTON ST 5TH FL CITY: SAN DIEGO STATE: CA ZIP: 92103 BUSINESS PHONE: 6192952227 MAIL ADDRESS: STREET 1: 3990 OLD TOWN AVENUE SUITE 206A CITY: SAN DIEGO STATE: CA ZIP: 92110 FORMER COMPANY: FORMER CONFORMED NAME: ZARON CAPITAL INC DATE OF NAME CHANGE: 19891116 10-Q 1 FORM 10-Q DATED 10-31-98 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 1998 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 of Incorporation (I.R.S. Employer or Organization) Identification No.)
501 Washington Street, 5th Floor San Diego, California 92103 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code 619-610-4001 ------------ Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report Indicate by check [X] 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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: At November 30, 1998, PMR Corporation had 6,987,751 shares of common stock outstanding. 2 PMR CORPORATION INDEX
PART I FINANCIAL INFORMATION Page Item 1. Financial Condensed Consolidated Balance Statements Sheets as of October 31, 1998 1 (Unaudited) and April 30, 1998 Condensed Consolidated Statements of Income for the three and six month periods ended October 31, 1998 and 1997 (Unaudited) 2 Condensed Consolidated Statements of Cash Flows for the six months ended October 31, 1998 and 1997 (Unaudited) 3 Notes to Condensed Consolidated Financial Statements (Unaudited) 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 3. Quantitative and Qualitative 16 Disclosures about Market Risks PART II OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities and Use of 17 Proceeds Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of 17 Security Holders Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17-18
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PMR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 31, APRIL 30, 1998 1998 ------------ ------------ (Restated) ASSETS Current assets: Cash and cash equivalents $ 29,228,186 $ 18,522,859 Short-term investments, available-for-sale 9,343,280 20,257,045 Accounts receivable, net of allowance for uncollectible amounts of $10,869,082 in 1999 and $9,081,610 in 1998 23,618,298 16,655,759 Prepaid expenses and other current assets 958,488 1,192,144 Deferred income tax benefit 4,136,000 4,136,000 ------------ ------------ Total current assets 67,284,252 60,763,807 Furniture and office equipment, net of accumulated depreciation of $1,295,563 in 1999 and $1,727,040 in 1998 2,811,096 3,492,449 Long-term receivables 5,141,077 2,976,918 Deferred income tax benefit 2,080,000 2,080,000 Other assets 1,044,383 1,135,880 ------------ ------------ Total assets $ 78,360,808 $ 70,449,054 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and other current liabilities $ 670,656 $ 469,462 Accrued expenses 2,929,135 2,974,400 Accrued compensation and employee benefits 1,924,909 2,178,693 Advances from case management agencies 1,517,072 1,686,477 Income taxes payable 1,496,692 1,304,353 Payable to related party 6,836,088 -- ------------ ------------ Total current liabilities 15,374,552 8,613,385 Note payable 344,687 392,024 Deferred rent expense 86,173 87,566 Contract settlement reserve 7,763,810 7,479,993 Minority interest 511,948 -- Commitments Stockholders' equity: Common Stock, $.01 par value, authorized shares - 10,000,000; issued and outstanding shares - 6,985,769 in 1999 and 6,949,650 in 1998 69,857 69,496 Additional paid-in capital 48,214,747 47,959,557 Retained earnings 6,413,784 5,847,033 Treasury stock, 50,000 shares of common stock at cost (418,750) -- ------------ ------------ Total stockholders' equity 54,279,638 53,876,086 ------------ ------------ Total liabilities and stockholders' equity $ 78,360,808 $ 70,449,054 ============ ============
See notes to condensed consolidated financial statements. 1 4 PMR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED OCTOBER 31, SIX MONTHS ENDED OCTOBER 31, ------------------------------ ------------------------------ 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Revenue - psychiatric care $ 13,797,558 $ 17,560,514 $ 28,618,615 $ 33,737,294 Revenue - pharmaceutical care 8,619,593 -- 11,649,558 -- ------------ ------------ ------------ ------------ Total revenue 22,417,151 17,560,514 40,268,173 33,737,294 Expenses: Cost of sales of pharmaceutical products 6,747,636 -- 9,022,755 -- Direct operating expenses - psychiatric care 9,473,247 12,350,295 19,566,427 23,976,727 Direct operating expenses - pharmaceutical care 1,210,144 -- 1,619,647 -- Marketing, general and administrative 2,461,820 2,315,470 5,029,161 4,430,122 Provision for bad debts 1,192,475 758,231 1,908,914 1,421,761 Depreciation and amortization 299,333 255,654 538,527 471,268 Acquisition expense 1,774,772 -- 1,774,772 -- Special charge (678,292) -- (678,292) -- Net interest (income) expense (482,315) (87,796) (991,126) (176,544) ------------ ------------ ------------ ------------ 21,998,820 15,591,854 37,790,785 30,123,334 Income before minority interest, income taxes and cumulative change 418,331 1,968,660 2,477,388 3,613,960 Minority interest 272,654 -- 511,948 -- ------------ ------------ ------------ ------------ Income before income taxes and cumulative change 145,677 1,968,660 1,965,440 3,613,960 Income tax expense 57,000 807,147 806,000 1,481,721 ------------ ------------ ------------ ------------ Net income before cumulative change 88,677 1,161,513 1,159,440 2,132,239 Cumulative change, net of income tax benefit -- -- 592,689 -- ------------ ------------ ------------ ------------ Net income $ 88,677 $ 1,161,513 $ 566,751 $ 2,132,239 ============ ============ ============ ============ Earnings per common share before cumulative change Basic $ 0.01 $ 0.22 $ 0.17 $ 0.41 ============ ============ ============ ============ Diluted $ 0.01 $ 0.19 $ 0.16 $ 0.36 ============ ============ ============ ============ Earnings per common share Basic $ 0.01 $ 0.22 $ 0.08 $ 0.41 ============ ============ ============ ============ Diluted $ 0.01 $ 0.19 $ 0.08 $ 0.36 ============ ============ ============ ============ Shares used in computing earnings per share Basic 6,936,548 5,251,935 6,944,886 5,189,008 ============ ============ ============ ============ Diluted 7,243,812 5,968,656 7,316,077 5,907,960 ============ ============ ============ ============
See notes to condensed consolidated financial statements. 2 5 PMR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED OCTOBER 31, 1998 1997 ------------ ------------ OPERATING ACTIVITIES Net income $ 566,751 $ 2,132,239 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Acquisition expense 1,774,772 -- Special charge (678,292) -- Depreciation and amortization 538,527 471,268 Provision for bad debts 1,908,914 1,421,761 Cumulative effect of change in accounting principle 592,689 -- Income applicable to minority interest 511,948 -- Changes in operating assets and liabilities: Accounts and notes receivables (11,035,612) (8,134,741) Prepaid expenses and other assets 152,763 204,598 Accounts payable and accrued expenses (1,359,301) 7,240 Accrued compensation and employee benefits (253,784) (190,607) Advances from case management agencies (169,405) (224,677) Payable to related party 6,836,088 -- Contract settlement reserve 283,817 1,283,550 Income taxes payable 604,207 852,462 Deferred rent expense (1,393) 46,627 ------------ ------------ Net cash provided by (used in) operating activities 272,689 (2,130,280) INVESTING ACTIVITIES Proceeds from the sale and maturity of short term investments 46,475,547 -- Purchases of short term investments (35,561,782) -- Purchases of furniture and office equipment (689,341) (1,352,661) ------------ ------------ Net cash provided by (used in) investing activities 10,224,424 (1,352,661) FINANCING ACTIVITIES Proceeds from secondary offering, net of offering costs -- 33,307,750 Proceeds from sale of common stock 255,551 824,122 Payments on note payable to bank (47,337) -- ------------ ------------ Net cash provided by (used in) financing activities 208,214 34,131,872 ------------ ------------ Net increase in cash & cash equivalents 10,705,327 30,648,931 Cash at beginning of period 18,522,859 10,048,203 ------------ ------------ Cash at end of period $ 29,228,186 $ 40,697,134 ============ ============
See notes to condensed consolidated financial statements. 3 6 PMR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) October 31, 1998 NOTE A - BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. The balance sheet at April 30, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position of PMR Corporation ("PMR" or "the Company") have been included. Operating results for the six months ended October 31, 1998, are not necessarily indicative of the results that may be expected for the year ending April 30, 1999. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K/A for the year ended April 30, 1998. NOTE B - RECLASSIFICATION Certain 1998 amounts have been reclassified to conform to the 1999 presentation. NOTE C - EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued SFAS 128, "Earnings per Share," which supersedes APB Opinion No. 15. SFAS 128 replaces the presentation of primary earnings per share (EPS) with "Basic EPS" which includes no dilution and is based on weighted-average common shares outstanding for the period. Companies with complex capital structures, including PMR, will also be required to present "Diluted EPS" that reflects the potential dilution of securities such as employee stock options and warrants to purchase common stock. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997. NOTE D - RESTATEMENT As of April 30, 1998, the Company recorded an accrual for special charges related to contract losses under certain contracts with Scripps Health. The Company determined that its estimate of special charges related to contract losses was overaccrued as of April 30, 1998 because all information available to the Company was not used in determining the original estimate. The Company has restated its previously issued financial statements as of April 30, 1998 to eliminate this overaccrual. 4 7 The restatement had the effect of reducing previously reported accrued expenses as of April 30, 1998 by $560,000 to $2,974,000, increased income taxes payable by approximately $230,000 to $1,304,353, and increasing retained earnings by approximately $330,000 to $5,847,033. For the year ended April 30, 1998, special charge expense was reduced by $560,000 which increased the Company's net income by $330,007 after taxes from $1,458,378 to $1,788,385. The increase in net income increased basic EPS for the year ended April 30, 1998 from $.24 as previously reported to $.30 and increased diluted EPS from $.22 as previously reported to $.27. 5 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS When used in this Quarterly Report on Form 10-Q and in other public statements by the Company and Company officers, the words "may", "will", "expect", "anticipate", "continue", "forecast", "estimate", "project", "intend", and similar expressions are intended to identify forward-looking statements regarding events and financial trends which may affect the Company's future operating results and financial position. Such statements are subject to risks and uncertainties that could cause the Company's actual results and financial position to differ materially. Among those factors are those discussed below and in the Company's Annual Report on form 10-K/A for the fiscal year ended April 30, 1998 and the Company's periodic reports and other filings with the Securities and Exchange Commission. The release of forward-looking statements will not impose an obligation upon the Company to maintain or update these statements in the future. The Company shall assume no responsibility to publicly release the results of any revision of forward-looking statements to reflect trends or circumstances after the date they are made or to reflect the occurrence of unanticipated events. OVERVIEW PMR Corporation ("PMR" or "the Company") is a leading manager of specialized mental health care programs and disease management services designed to treat individuals diagnosed with a serious mental illness ("SMI"). PMR manages the delivery of a broad range of outpatient and community-based psychiatric services for SMI patients, consisting of 35 Outpatient Programs, one Case Management Program and four Chemical Dependency Programs. In July 1998, the Company formed a new company called Stadt Solutions, LLC ("Stadt Solutions") which is jointly owned by PMR and Stadtlander Drug Distribution Co., Inc. ("Stadtlander"). Stadt Solutions offers a specialty pharmacy program for individuals with SMI, initially serving approximately 6,000 individuals through 13 pharmacies in 13 states. PMR, with Stadt Solutions, operates in approximately 23 states and employs or contracts with more than 400 mental health and pharmaceutical industry professionals and provides services to approximately 11,000 individuals diagnosed with SMI. PMR believes it is the only private sector company focused on providing an integrated mental health disease management model to the SMI population. PMR's Outpatient Programs serve as a comprehensive alternative to inpatient hospitalization and include partial hospitalization and lower intensity outpatient services. The Case Management Program provides an intensive, individualized primary care service which consists of a proprietary case management model utilizing clinical protocols for delivering care to SMI patients. The Company also provides Chemical Dependency Programs to patients affiliated with managed care organizations and government-funded programs. SOURCES OF REVENUE Outpatient Programs. Outpatient Programs operated by PMR are the Company's primary source of revenue. Revenue under these programs is derived primarily from services 6 9 provided under three types of agreements: (i) all-inclusive fee arrangements based on fee-for-service rates (based on units of service provided) under which the Company is responsible for substantially all direct program costs; (ii) fee-for-service arrangements under which the provider maintains responsibility for a larger extent of direct program costs; and (iii) fixed fee arrangements where the Company's fee is a fixed monthly sum and the provider assumes substantially all program costs. The all-inclusive arrangements are in effect at 29 of the 35 Outpatient Programs operated during the second quarter of fiscal 1999 and constituted 69.0% of the Company's psychiatric care revenue for the three months ended October 31, 1998. Typical contractual agreements with these providers, primarily acute care hospitals or Community Mental Health Centers ("CMHCs"), require the Company to provide, at its own expense, specific management personnel for each program site. Patients served by the Outpatient Programs typically are covered by Medicare. Revenue under the Outpatient Program is recognized at estimated net realizable amounts when services are rendered based upon contractual arrangements with providers. Under certain of the Company's contracts, the Company is obligated to indemnify the provider for all or some portion of the Company's management fees that may not be deemed reimbursable to the provider by Medicare's fiscal intermediaries. As of October 31, 1998, the Company had recorded $7.8 million in contract settlement reserves to provide for possible amounts ultimately owed to its provider customers resulting from disallowance of costs by Medicare and Medicare cost report settlement adjustments. Such reserves are classified as non-current liabilities because ultimate determination of substantially all of the potential contract disallowances is not anticipated to occur during fiscal 1999. Case Management Program. For its Case Management Program in Tennessee, the Company receives a monthly case rate payment from the managed care consortiums responsible for managing the Tennessee TennCare Partners State Medical Managed Care Program ("TennCare") and is responsible for planning, coordinating and managing psychiatric case management services for its consumers who are eligible to participate in the TennCare program. The Company also is responsible for providing a portion of the related outpatient clinical care under certain of the agreements. Revenues under the TennCare program are recognized in the period in which the related service is to be provided. These revenues represent substantially all of the Company's case management revenues. The Company also operates an urgent care program that receives interim payments that are adjusted based on inpatient utilization statistics which are compared to a baseline. Revenues are recognized based on the quarterly calculation of the statistical trends. Chemical Dependency Programs. In Southern California, the Company contracts primarily with managed care companies and commercial insurers to provide its outpatient chemical dependency services. The contracts are structured as fee-for-service or case rate reimbursement and revenue is recognized in the period in which the related service is delivered. Pharmaceutical. In July 1998, the Company and Stadtlander formed Stadt Solutions, a Delaware limited liability company. Stadt Solutions offers specialty pharmaceutical services to individuals with SMI and also offers site management and clinical information services to 7 10 pharmaceutical companies, health care providers and public sector purchasers. Ownership of Stadt Solutions is held 50.1% by PMR and 49.9% by Stadtlander. Stadtlander is entitled to receive a priority distribution of income approximately equivalent to the operating income Stadtlander expected to be generated by Stadtlander's base of approximately 6,000 clients existing at the time of the formulation of Stadt Solutions. The incremental operating income in excess of this base, if any, will be distributed equally between the Company and Stadtlander. Stadt Solutions commenced business with operations serving clients through 13 pharmacies in 13 states offering services to approximately 6,000 clients. These individuals are presently receiving the drug clozaril, an anti-psychotic for schizophrenia, as well as blood monitoring services. Stadt Solutions will offer patients expanded services, including dispensing of all of the pharmaceuticals needed by these individuals and providing disease management services to improve compliance and education for the patient, the physician and family members. RESULTS OF OPERATIONS - QUARTER ENDED OCTOBER 31, 1998 COMPARED TO QUARTER ENDED OCTOBER 31, 1997 Revenue - Psychiatric Care. Revenues from psychiatric care for the quarter ended October 31, 1998 were $13.8 million, a decrease of $3.8 million, or 21.4%, as compared to the quarter ended October 31, 1997. The Outpatient Programs recorded revenues of $10.6 million, a decrease of $1.8 million, or 14.4%, from the quarter ended October 31, 1997. The decline in revenues was due to a net reduction of six outpatient programs versus the year ago quarter. This reduction was partially offset by an increase in same site revenues of 2.4% in the Outpatient Programs. The Outpatient Programs operated under an all-inclusive fee arrangement had operating margins of 38.9% in the quarter ended October 31, 1998 as compared to 40.1% in the quarter ended October 31, 1997. The Case Management Program recorded revenues of $2.8 million, a decrease of $1.6 million, or 35.7% as compared to the quarter ended October 31, 1997. The decrease in Case Management revenues was due to the restructuring of the Company's relationship with Case Management, Inc., a Memphis, Tennessee case management agency, which substantially reduced the recognized revenue from this program as well as the termination of two Case Management Programs in Arkansas. Revenues from the Company's Chemical Dependency Programs were $292,000, a decrease of 28.2% from the quarter ended October 31, 1997. The decrease in revenues was associated primarily with the Company's termination of two Chemical Dependency Programs in Arkansas which generated no revenue in the second quarter of fiscal 1999. Revenue - Pharmaceutical Care. Revenues of $8.6 million from pharmaceutical care represents sales of pharmaceutical products to approximately 6,000 individuals with SMI through 13 Stadt Solutions pharmacies for the quarter ended October 31, 1998. Stadt Solutions was formed in July 1998 and, therefore generated no revenue or expenses for the quarter ended October 31, 1997. Cost of Sales of Pharmaceutical Products. Cost of sales of pharmaceutical products of $6.7 million represent the cost of providing such products by Stadt Solutions in the quarter ended October 31, 1998. 8 11 Direct Operating Expenses - Psychiatric Care. Direct operating expenses of psychiatric care consist of costs incurred at the program sites and costs associated with the field management responsible for administering the programs. Direct operating expenses for the quarter ended October 31, 1998 were $9.5 million, a decrease of $2.9 million, or 23.3%, as compared to the quarter ended October 31, 1997. As a percentage of psychiatric care revenues, operating expenses were 68.7%, down from 70.3% for the quarter ended October 31, 1997. The overall decrease in direct operating expenses and the improvement in the operating expense ratio was primarily due to the net closing of six Outpatient Programs, three Case Management Programs and two Chemical Dependency Programs, which in the aggregate, had lower patient volume and higher expense ratios than the remaining programs. The Company also restructured its agreement with Case Management, Inc., a case management agency in Memphis, Tennessee, which reduced recognized revenue but improved operating margins. Direct Operating Expenses - Pharmaceutical Care. Direct operating expenses of pharmaceutical care of $1.2 million consist of the operating costs incurred at the 13 Stadt Solutions pharmacies and related billing costs for the quarter ended October 31, 1998. Marketing, General and Administrative Expenses. Marketing, general and administrative expenses consist of corporate overhead expenses and regional administrative, development and clinical expenses which are not direct program expenses. Marketing, general and administrative expenses for the quarter ended October 31, 1998, were $2.5 million, an increase of $146,000 or 6.3%, as compared to the quarter ended October 31, 1997. The increase was related to investment in the home offices to support existing and anticipated programs, including the Stadt Solutions venture and a managed care initiative in Southern California. As a percentage of total revenues, marketing, general and administrative expenses were 11.0% in the quarter ended October 31, 1998, as compared to 13.2% for the quarter ended October 31, 1997. The decrease in marketing, general and administrative expenses as a percent of revenue was due to the significant increase in pharmaceutical revenue without proportionate increases in administrative expenses. Provision for Bad Debts. Expenses related to the provision for bad debts for the quarter ended October 31, 1998, were $1.2 million, an increase of $434,000, or 57.3%, as compared to the quarter ended October 31, 1997. The increase was due to additional reserves against revenue from sales of pharmaceutical products and to a higher accrual rate for bad debt associated with certain Outpatient Programs that were subject to a high level of review from fiscal intermediaries. As a percentage of revenues, the provision for bad debts increased to 5.3% of revenues in the quarter ended October 31, 1998 from 4.3% in the quarter ended October 31, 1997. The Company expects this accrual to fluctuate based on the amount of claims under review in its Outpatient Programs and the number of programs that the Company operates which serve a significant indigent population. Depreciation and Amortization. Depreciation and amortization expenses for the quarter ended October 31, 1998, were $299,000 an increase of $44,000, or 17.1%, as compared to the quarter ended October 31, 1997. The increase was due to additional capital expenditures 9 12 associated with new Outpatient Programs and increased capital expenditures for information systems. Acquisition Expense. Acquisition expenses consist of legal, advisory, accounting, consulting and other costs related to the terminated definitive merger agreement with Behavioral Health Corporation. Previously capitalized Acquisition expenses written-off for the quarter ended October 31, 1998 were $1.8 million. No Acquisition expenses were recorded in the quarter ended October 31, 1997. Special Charge. Special Charge expenses consist of expenses related to the closing of several programs identified in the quarter ended April 30, 1998. Special Charge income of $678,000 was recorded in the quarter ended October 31, 1998, due primarily to a favorable settlement of disputes and the restructuring of the relationship with Case Management, Inc. The outcome of the dispute, which was better than anticipated, involved the release of claims against the Company for certain liabilities, the return of common stock that was issued to the agency as part of the consideration for a restrictive covenant, and the establishment of a new contractual relationship that entitles the Company to a percentage of the agencies future cash flow in exchange for certain services. The Company has reflected the return of common stock as treasury stock in stockholders' equity at a value of $418,750. No Special Charge expenses were recorded in the quarter ended October 31, 1997. Net Interest Income. Interest income increased from $88,000 for the quarter ended October 31, 1997 to $482,000 for the quarter ended October 31, 1998, an increase of $395,000, or 449.4%. This increase resulted from higher cash and cash equivalent and short-term investment balances resulting from the completion of the Company's follow-on common stock offering in October 1997. Income Before Minority Interest, Income Taxes and Cumulative Change. Income before minority interest, income taxes and cumulative change decreased from $2.0 million for the quarter ended October 31, 1997 to $418,000 for the quarter ended October 31, 1998, a decrease of $1.5 million or 78.8%. Income before minority interest, income taxes and cumulative change as a percentage of revenue decreased from 11.2% to 1.9% over this period of time. Minority Interest. Minority interest of $272,000 represents a distribution of the operating profits of Stadt Solutions in its entirety to Stadtlander. RESULTS OF OPERATIONS - SIX MONTHS ENDED OCTOBER 31, 1998 COMPARED TO SIX MONTHS ENDED OCTOBER 31, 1997 Revenue - Psychiatric Care. Revenues from psychiatric care for the six months ended October 31, 1998 were $28.6 million, a decrease of $5.1 million, or 15.2%, as compared to the six months ended October 31, 1997. The Outpatient Programs recorded revenues of $22.9 million, a decrease of $1.0 million, or 4.2%, from the six months ended October 31, 1997. The decrease in revenues was due to a net reduction of six outpatient programs versus the year ago 10 13 quarter. This reduction was partially offset by same site revenue growth of 7.3% in the Outpatient Programs. The Outpatient Programs operated under an all-inclusive fee arrangement had operating margins of 38.0% in the six months ended October 31, 1998 as compared to 40.4% in the six months ended October 31, 1997. The Company's Case Management Programs recorded revenues of $4.9 million, a decrease of $3.4 million, or 40.7%, from the six months ended October 31, 1997. The decrease in revenues was due to the restructuring of the Company's relationship with Case Management, Inc. and the termination of two Case Management Programs in Arkansas. Revenues from the Company's Chemical Dependency Programs were $595,000, a decrease of 29.0% from the six months ended October 31, 1997. The decrease in revenues was associated primarily with the Company's termination of two Chemical Dependency Programs in Arkansas. Revenue - Pharmaceutical Care. Revenues of $11.6 million from pharmaceutical care represents sales of pharmaceutical products to approximately 6,000 individuals with SMI through 13 Stadt Solutions pharmacies since its formation in July 1998. Cost of Sales of Pharmaceutical Products. Cost of sales of pharmaceutical products of $9.0 million represent the cost of providing such products since the formation of Stadt Solutions in July 1998. Direct Operating Expenses - Psychiatric Care. Direct operating expenses for the six months ended October 31, 1998 were $19.6 million, a decrease of $4.4 million, or 18.4%, as compared to the six months ended October 31, 1997. As a percentage of psychiatric care revenues, operating expenses were 68.4%, down from 71.1% for the six months ended October 31, 1997. The overall decrease in direct operating expenses and the improvement in the operating expense ratio was primarily due to the net closing of six Outpatient Programs, three Case Management Programs and two Chemical Dependency Programs, which in the aggregate, had lower patient volume and higher expense ratios than the remaining programs. The Company also restructured its agreement with Case Management, Inc., which reduced recognized revenue but improved operating margins. Direct Operating Expenses - Pharmaceutical Care. Direct operating expenses of pharmaceutical care of $1.6 million consist of the operating costs incurred at the 13 Stadt Solutions pharmacies and related billing costs since the formation of Stadt Solutions in July 1998. Marketing, General and Administrative Expenses. Marketing, general and administrative expenses for the six months ended October 31, 1998, were $5.0 million, an increase of $599,000 or 13.5%, as compared to the six months ended October 31, 1997. The increase was related to investment in the home offices to support existing and anticipated programs, including the Stadt Solutions venture and a managed care initiative in Southern California. As a percentage of total revenues, marketing, general and administrative expenses were 12.5% in the six months ended October 31, 1998, as compared to 13.1% for the six months ended October 31, 1997. The decrease in marketing, general and administrative expenses as a percent of revenue was due to 11 14 the significant increase in pharmaceutical revenue without proportionate increases in administrative expenses. Provision for Bad Debts. Expenses related to the provision for bad debts for the six months ended October 31, 1998, were $1.9 million, an increase of $487,000, or 34.3%, as compared to the six months ended October 31, 1997. The increase was due to additional reserve against revenue from sales of pharmaceutical products. As a percentage of revenues, the provision for bad debts increased slightly to 4.7% of revenues in the six months ended October 31, 1998 from 4.2% in the six months ended October 31, 1997. The Company expects this accrual to fluctuate based on the amount of claims under review in its Outpatient Programs and the number of programs which the Company operates which serve a significant indigent population. Depreciation and Amortization. Depreciation and amortization expenses for the six months ended October 31, 1998, were $539,000, an increase of $67,000, or 14.3%, as compared to the six months ended October 31, 1997. The increase was due to additional capital expenditures associated with new Outpatient Programs and increased capital expenditures for information systems. Acquisition Expense. Acquisition expenses written-off for the six months ended October 31, 1998 were $1.8 million. Special Charge. Special Charge income of $678,000 was recorded in the six months ended October 31, 1998, due primarily to a favorable settlement of disputes with Case Management, Inc. The outcome of the dispute, which was better than anticipated, involved the release of claims against the Company for certain liabilities, the return of common stock that was issued to the agency as part of the consideration for a restrictive covenant, and the establishment of a new contractual relationship that entitles the Company to a percentage of the agencies future cash flow in exchange for certain services. Net Interest Income. Interest income increased from $176,000 for the six months ended October 31, 1997 to $991,000 for the six months ended October 31, 1998, an increase of $815,000, or 461.4%. This increase resulted from higher cash and cash equivalent and short-term investment balances resulting from the completion of the Company's follow-on common stock offering in October 1997. Income Before Minority Interest, Income Taxes and Cumulative Change. Income before minority interest, income taxes and cumulative change decreased from $3.6 million for the six months ended October 31, 1997 to $2.5 million for the six months ended October 31, 1998, a decrease of $1.1 million or 31.5%. Income before minority interest, income taxes and cumulative change as a percentage of revenue decreased from 10.7% to 6.2% over this period of time. Minority Interest. Minority interest of $512,000 represents a distribution of the operating profits of Stadt Solutions in its entirety to Stadtlander. 12 15 Cumulative Change. The cumulative change of $593,000 represents the effect, net of income tax benefit of $412,000, of writing off previously capitalized start-up costs. The Company adopted this change in accounting principle in the first six months of fiscal 1999 consistent with the requirements of Accounting Standards Executive Committee's Statement of Position 98-5 Reporting on Costs of Start-up Activities. Restatement. As of April 30, 1998, the Company recorded an accrual for special charges related to contract losses under certain contracts with Scripps Health. The Company determined that its estimate of special charges related to contract losses was overaccrued as of April 30, 1998 because all information available to the Company was not used in determining the original estimate. The Company has restated its previously issued financial statements as of April 30, 1998 to eliminate this overaccrual. LIQUIDITY AND CAPITAL RESOURCES For the six months ended October 31, 1998, net cash provided by operating activities was $273,000. Working capital at October 31, 1998 was $51.9 million, a decrease of $241,000, or .5%, as compared to working capital at April 30, 1998. Cash and cash equivalents and short-term investments at October 31, 1998 were $38.6 million, a decrease of $209,000 or .5% as compared to April 30, 1998. The Company experienced growth in accounts receivable due to significant revenue increases combined with an increase in days revenue outstanding to 97 at October 31, 1998 (versus 88 at April 30, 1998). The increase in days revenue outstanding was due to focused reviews of claims by fiscal intermediaries at several Outpatient Programs, and the restructuring and termination of Case Management Programs which have historically experienced shorter payment cycles than the Outpatient Programs. The largest source of accounts receivable growth has been from Stadt Solutions, which has accumulated $7.5 million in accounts receivable since the initiation of operations on July 1, 1998. This receivable growth represents the anticipated working capital investment which will be funded by the Company and Stadtlanders during the third fiscal quarter. The other significant use of cash was leasehold improvements associated with recently opened sites and investment in information technology. Working capital available to finance fiscal 1999 obligations is expected to be provided principally from operations, as well as from a $10 million line of credit from Sanwa Bank. Interest is payable under this line of credit at either the bank's reference rate or the Eurodollar rate plus 2%. As of October 31, 1998 no balance was outstanding under the line of credit. Working capital is anticipated to be utilized during fiscal 1999 to continue expansion of the Company's Outpatient and Case Management Programs, for expansion of Stadt Solutions and its site management and clinical information business, and for the development of a risk based managed care project. Pursuant to the terms of the Stadt Solutions Subscription Agreement and Operating Agreement, the Company anticipates investing between $2.5 and $3.0 million into Stadt Solutions to fund the second closing and provide sufficient working capital for operations. 13 16 The Company also anticipates using working capital and, if necessary, incurring indebtedness in connection with, selective acquisitions. In December 1998, the Board of Directors authorized the Company to repurchase up to 350,000 shares of its common stock, approximately 5% of the Company's outstanding primary shares. Purchased shares will be used for corporate purposes including issuance under PMR's stock compensation plans. The purchases will be made from time to time in open market transactions. 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 as part of the formation of Stadt Solutions. The Company also is in the process of developing a new care management information system that will be a data collection and repository system for the Company's clinical information. The Company anticipates investing up to $1,000,000 in this system during fiscal 1999 and fiscal 2000. From time to time, the Company recognizes charges to operations as a result of particular uncertainties associated with the health care reimbursement rules as they apply to the Outpatient Programs. During the first six months of fiscal 1998 and 1999, a majority of the Company's revenue was derived from the management of its Outpatient Programs. Since substantially all of the patients of the Outpatient Programs are eligible for Medicare, collection of a significant component of the Company's management fees is dependent upon reimbursement of claims submitted to fiscal intermediaries by the hospitals or CMHCSs on whose behalf these programs are managed. Under the Company's contracts with its providers, the Company may be responsible to indemnify providers for the portion of the Company's management fee disallowed for reimbursement pursuant to warranty obligations that exist with certain providers. Although the Company believes that its potential liability to satisfy such requirements has been adequately reserved in its financial statements, the obligation to pay such amounts, if and when they become due, could have a material adverse effect on the Company's short term liquidity. Certain factors are, in management's view, likely to lessen the impact of any such effect, including the expectation that, if claims arise, they will arise on a periodic basis over several years and that any disallowance will merely be offset against obligations already owed by the provider to the Company. The Company maintains significant reserves to cover the potential impact of two primary uncertainties: (i) the Company may have an obligation to indemnify certain providers for some portions of its management fee which may be subject to disallowance upon audit of a provider's cost report by fiscal intermediaries; and (ii) the Company may not receive full payment of the management fees owed to it by a provider during the periodic review of the provider's claims by the fiscal intermediaries. 14 17 The Company has been advised by Health Care Financing Administration that certain program-related costs are not allowable for reimbursement. The Company may be responsible for reimbursement of the amounts previously paid to the Company that are disallowed pursuant to obligations that exist with certain providers. Although the Company believes that its potential liability to satisfy such requirements has been adequately reserved in its financial statements, there can be no assurance that such reserves will be adequate. The obligation to pay the amounts estimated within the Company's financial statements (or such greater amounts as are due), if and when they become due, could have a material adverse effect upon the Company's business, financial condition and results of operations IMPACT OF INFLATION A substantial portion of the Company's revenue is subject to reimbursement rates that are regulated by the federal and state governments and that do not automatically adjust for inflation. As a result, increased operating costs due to inflation, such as labor and supply costs, without a corresponding increase in reimbursement rates, may adversely affect the Company's earnings in the future. IMPACT OF YEAR 2000 COMPUTER ISSUES The year 2000 issue is the result of computer applications being written using two digits rather than four to define the applicable year. Certain computer applications (including computer applications that may be used by the Company and any of the Company's customers, vendors, payors or other business partners) may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruption of operations. The Company has completed a thorough review of its material computer applications and has identified and scheduled necessary corrections for its computer applications. Corrections are currently being made and are expected to be substantially implemented by the third quarter of fiscal 1999. The Company expects that the total cost associated with these revisions will not be material. These costs will be primarily incurred during fiscal 1999 and be charged to expense as incurred. For externally maintained systems, the Company has begun working with vendors to ensure that each system is currently year 2000 compliant or will be made year 2000 compliant in early 1999. The cost to be incurred by the Company related to externally maintained systems is expected to be minimal. Externally maintained systems which the Company currently relies include environmental and building systems related to its headquarters and field offices, payroll, banking and billing systems. The Company believes that by completing its planned corrections to its computer applications and identifying and confirming the correction of year 2000 compliance problems of its vendors, the year 2000 issue with respect to the Company's systems and externally maintained systems can be mitigated. However, if such corrections cannot be completed on a timely basis, the year 2000 issue could have a material adverse impact on the Company's business, financial condition and results of operations. Because of the many uncertainties 15 18 associated with year 2000 compliance issues, and because the Company's assessment is necessarily based on information from third party lessors, manufactures, vendors and suppliers, there can be no assurance that the Company's assessment is correct and it is not possible to predict the materiality or effect of any failure of such assessment to be correct. Significant failures or erroneous applications experienced by HCFA or other third party payors or providers could cause a delay in the Company's receipt of payments from its customers. For example, such failures could cause difficulties in processing Medicare or other claims in a timely manner, collecting accurate claims or data or enrolling new patients. The Company has initiated a program to determine whether the computer applications of its significant payors and contract providers are year 2000 compliant or will be upgraded to be compliant in a timely manner. The Company has not completed this review and it is unknown whether computer applications of contract providers and HCFA and other payors will be year 2000 compliant. Although the Company has not determined the extent to which any disruptions as described above could affect the Company's operations, any such disruption could have a substantial adverse impact on Medicare or Medicaid payments to providers and, in turn, payments to the Company, resulting in a material adverse effect upon the Company's business, financial condition and results of operations. The Company's priority with respect to year 2000 compliance has been to identify potential processing concerns and to evaluate the risk of processing failure. The Company has begun to develop contingency plans relating to the areas of year 2000 risk exposure and expects to substantially complete such plans by the second quarter of fiscal 2000. However, there can be no assurance that the Company will complete it contingency planning within such time period or that its contingency plans will contemplate all possible risks of any failures related to the year 2000 problem. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not Applicable. 16 19 PART II - OTHER INFORMATION Item 1 - Legal Proceedings The Company's arbitration and disputes with Case Management, Inc., a case management agency in Memphis, Tennessee previously disclosed by the Company under Item 3. "Legal Proceedings" of its Annual Report on Form 10-K/A for the year ended April 30, 1998 (the "1998 Form 10-K/A"), have been settled, and the Company has entered into a new service agreement with the case management agency. The Company received a letter from the U.S. Attorney for the Northern District of Texas dated October 7, 1998, notifying the Company that the U.S. Attorney declined to pursue any claims under the False Claims Act related to the Company's former Dallas program (previously disclosed under Item 3. "Legal Proceedings" of the 1998 Form 10-K/A). On September 9, 1998, the U.S. Attorney for the Southern District of California filed a Notice of Election of the United States to Decline Intervention relating to its decision not to intervene in the qui tam suit filed by the former employee of the Company. (The qui tam suit was also previously disclosed under Item 3. "Legal Proceedings" of the 1998 form 10-K/A). The Company has not been served with a summons and complaint by the qui tam relator. Item 2 - Changes in Securities and Use of Proceeds None Item 3 - Defaults upon Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders None Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number: 27.1 Financial Data Schedule (b) Reports on Form 8-K During the second quarter of fiscal 1999, the Company filed the following reports on Form 8-K: 17 20 1. Report on Form 8-K dated August 4, 1998 and filed on August 5, 1998 announcing the definitive merger agreement between the Company and Behavioral Healthcare Corporation. 18 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: December 17, 1998 PMR CORPORATION BY: /s/ Allen Tepper ------------------------------------ ALLEN TEPPER Chief Executive Officer (Principal Executive Officer) BY: /s/ Mark P. Clein ------------------------------------ MARK P. CLEIN Chief Financial Officer (Principal Financial Officer) 19 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 6-MOS APR-30-1999 MAY-01-1998 OCT-31-1998 29,228,186 9,343,280 34,487,380 10,869,082 0 67,284,252 4,106,659 1,295,563 78,360,808 15,374,552 0 0 0 69,857 54,209,781 78,360,808 0 40,268,173 9,022,755 21,186,074 538,527 1,908,914 (991,126) 2,477,388 806,000 1,159,440 0 0 592,689 566,751 0.17 0.16
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