-----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, AWH0j3mQ9gXZB0pFm3aR686knKrk1tG4g5v4dgFTGr8anlBCEBE9TBfJ0uRCWPJD 280Eai0wP6DNIgEC+YB+1Q== 0000936392-99-001124.txt : 19990915 0000936392-99-001124.hdr.sgml : 19990915 ACCESSION NUMBER: 0000936392-99-001124 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990914 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: 99711132 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 FOR PERIOD ENDING JULY 31,1999 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 July 31, 1999 ------------- 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 (IRS Employer Incorporation 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 August 31, 1999, PMR Corporation had 6,988,878 shares of common stock outstanding. 2 PMR CORPORATION INDEX
PART I FINANCIAL INFORMATION Page Item 1. Financial Statements Condensed Consolidated Balance Sheets as of July 31, 1999 (Unaudited) and April 30, 1999 1 Condensed Consolidated Statements of Operations for the quarter ended July 31, 1999 and 1998 (Unaudited) 2 Condensed Consolidated Statements of Cash Flows for the three months ended July 31, 1999 and 1998 (Unaudited) 3 Notes to Condensed Consolidated Financial Statements (Unaudited) 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures about Market Risks 14 PART II OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15
3 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PMR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, APRIL 30, 1999 1999 ------------ ------------ ASSETS (UNAUDITED) (AUDITED) Current assets: Cash and cash equivalents $ 3,183,493 $ 5,441,012 Short-term investments, available for sale 26,334,969 27,509,554 Accounts receivable, net of allowance for uncollectible amounts of $13,330,000 in 2000 and $10,664,000 in 1999 22,027,232 20,002,894 Prepaid expenses and other current assets 2,028,391 1,787,859 Income taxes receivable 2,750,858 2,212,815 Deferred income tax benefit 4,653,000 4,653,000 ------------ ------------ Total current assets 60,977,943 61,607,134 Furniture and office equipment, net of accumulated depreciation of $1,599,000 in 2000 and $1,532,000 in 1999 3,116,940 2,863,934 Long-term receivables, net of allowance for uncollectible amounts of $3,528,000 in 2000 and $4,087,000 in 1999 5,057,636 4,742,329 Deferred income tax benefit 1,206,000 1,206,000 Other assets 522,883 546,621 ------------ ------------ Total assets $ 70,881,402 $ 70,966,018 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,142,242 $ 1,539,327 Accrued expenses 2,671,025 1,852,335 Accrued compensation and employee benefits 2,082,172 2,083,082 Advances from case management agencies 829,684 846,353 Payable to related party 4,782,264 3,052,610 ------------ ------------ Total current liabilities 11,507,387 9,373,707 Note payable 270,360 294,073 Deferred rent expense 52,194 53,438 Contract settlement reserve 6,689,922 6,672,727 Minority interest 1,451,313 1,921,057 Commitments Stockholders' equity: Convertible preferred stock, $.01 par value, authorized shares -- 1,000,000; issued & outstanding shares -- none in 2000 and 1999 -- -- Common Stock, $.01 par value, authorized shares -- 19,000,000; issued and outstanding shares -- 6,988,878 in 2000 and in 1999 69,889 69,889 Additional paid-in capital 48,123,385 48,123,385 Retained earnings 4,409,452 5,400,242 Treasury stock, 340,000 shares of common stock at cost (1,692,500) (942,500) ------------ ------------ Total stockholders' equity 50,910,226 52,651,016 ------------ ------------ Total liabilities and stockholders' equity $ 70,881,402 $ 70,966,018 ============ ============
See notes to condensed consolidated financial statements 1 4 PMR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended July 31, --------------------------------- 1999 1998 ------------ ------------ Revenue -- psychiatric care $ 12,823,964 $ 14,821,057 Revenue -- pharmaceutical care 9,599,625 3,029,965 ------------ ------------ Total revenue 22,423,589 17,851,022 Costs and expenses: Direct operating expenses -- psychiatric care 9,978,457 10,093,180 Cost of sales -- pharmaceuticals 7,231,410 2,275,119 Direct operating expenses -- pharmaceuticals 1,179,556 409,503 Marketing, general and administrative 3,586,286 2,567,341 Provision for bad debts 1,877,444 716,439 Depreciation and amortization 279,528 239,194 Special charge 816,574 -- Net interest (income) (377,132) (508,811) ------------ ------------ 24,572,123 15,791,965 Income (loss) before minority interest, income taxes and cumulative change (2,148,534) 2,059,057 Minority interest (469,744) 239,294 ------------ ------------ Income (loss) before income taxes and cumulative change (1,678,790) 1,819,763 Income tax (benefit) expense (688,000) 749,000 ------------ ------------ Net income (loss) before cumulative change (990,790) 1,070,763 Cumulative change, net of income tax benefit -- 592,689 ------------ ------------ Net Income (loss) $ (990,790) $ 478,074 ============ ============ Earnings (loss) per common share before cumulative change: Basic $ (0.15) $ 0.15 ============ ============ Diluted $ (0.15) $ 0.15 ============ ============ Earnings (loss) per common share : Basic $ (0.15) $ 0.07 ============ ============ Diluted $ (0.15) $ 0.07 ============ ============ Shares used in computing earnings (loss) per share: Basic 6,667,356 6,953,225 ============ ============ Diluted 6,667,356 7,320,778 ============ ============
See notes to condensed consolidated financial statements 2 5 PMR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
JULY 31, JULY 31, 1999 1998 ------------ ------------ OPERATING ACTIVITIES Net income (loss) $ (990,790) $ 478,074 Adjustments to reconcile net income to net cash used in operating activities: Provision for bad debts 1,877,444 716,439 Depreciation and amortization 279,528 239,194 Special charge 816,574 -- Cumulative effect of change in accounting principle -- 592,689 Income (loss) applicable to minority interest (469,744) 239,294 Deferred income taxes (538,043) (13,099) Changes in operating assets and liabilities: Accounts and notes receivables (4,217,090) (5,011,035) Prepaid expenses and other assets (245,399) (403,285) Accounts payable and accrued expenses (394,969) (673,986) Accrued compensation and employee benefits (910) (121,340) Advances from case management agencies (16,669) 94,247 Payable to related party 1,729,654 2,677,539 Contract settlement reserve 17,195 170,933 Income taxes receivable/payable -- 712,338 Deferred rent expense (1,245) 3,757 ------------ ------------ Net cash used in operating activities (2,154,464) (298,241) INVESTING ACTIVITIES Proceeds from the sale and maturity of short term investments 2,566,148 -- Purchases of short term investments (1,391,563) (2,146,237) Purchases of furniture and office equipment (503,927) (494,726) ------------ ------------ Net cash provided by (used in) investing activities 670,658 (2,640,963) FINANCING ACTIVITIES Proceeds from sale of common stock -- 42,530 Payments on note payable to bank (23,713) (23,774) Acquisition of treasury stock (750,000) -- ------------ ------------ Net cash provided (used in) by financing activities (773,713) 18,756 ------------ ------------ Net increase (decrease) in cash (2,257,519) (2,920,448) Cash at beginning of period 5,441,012 18,522,859 ------------ ------------ Cash at end of period $ 3,183,493 $ 15,602,411 ============ ============
See notes to condensed consolidated financial statements 3 6 PMR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) July 31, 1999 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 condensed consolidated balance sheet at April 30, 1999 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 three months ended July 31, 1999, are not necessarily indicative of the results that may be expected for the year ending April 30, 2000. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended April 30, 1999. 4 7 NOTE B -- EARNINGS PER SHARE Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, 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 the entity. The Company has calculated its earnings per share in accordance with SFAS No. 128 for all periods presented. The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended July 31, ------------------------------- 1999 1998 ------------------------------- Numerator Net income (loss) available to common shareholders $ (990,790) $ 478,074 =========== =========== Denominator: Weighted average shares outstanding for basic earnings per share 6,667,356 6,953,225 ----------- ----------- Effects of dilutive securities Employee stock options and warrants 0 367,553 ----------- ----------- Dilutive potential common shares 0 367,553 Shares used in computing diluted earnings per common share 6,667,356 7,320,778 =========== =========== Earnings (loss) per common share, basic $ (0.15) $ 0.07 =========== =========== Earnings (loss) per common share, diluted $ (0.15) $ 0.07 =========== ===========
Common stock equivalents of 20,638 shares for the quarter ended July 31, 1999 were excluded from the calculation of diluted earnings per share because of the anti-dilutive effect related to the net loss for the quarter. 5 8 NOTE C -- DISCLOSURES ABOUT REPORTABLE SEGMENTS In accordance with the criteria of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, the Company determined that it operates in three reportable segments: Outpatient Programs, Case Management Programs and Pharmaceuticals. The Company's reportable segments are strategic business units that offer different services to a variety of inpatient and outpatient recipients. Activities classified as Other in the following schedule relate to primarily unallocated home office items and activity from the Company's chemical dependency and other programs. A summary of segment activity is as follows:
Three Months Ended July 31, ----------------------------------------------------------------------------------------- Case Outpatient Management Pharmaceutical Programs Programs Care Other Total ----------------------------------------------------------------------------------------- 1999 Revenues $ 9,249,795 $ 3,087,983 $ 9,599,625 $ 486,186 $ 22,423,589 Income (loss) before income taxes and cumulative change 1,788,373 111,373 (471,626) (3,106,910) (1,678,790) 1998 Revenues $ 12,252,493 $ 2,096,647 $ 3,029,965 $ 471,917 $ 17,851,022 Income (loss) before income taxes and cumulative change 3,403,116 20,049 0 (1,603,402) 1,819,763
6 9 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 for the fiscal year ended April 30, 1999 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 and administers the delivery of a broad range of outpatient and community-based psychiatric services for SMI patients, consisting of a total of 41 Outpatient Programs, two Case Management Programs and four Chemical Dependency Programs. Stadt Solutions, LLC ("Stadt Solutions"), the Company's majority owned subsidiary with Stadt Holdings (formerly Stadtlander Drug Distribution Co., Inc.) ("Stadtlander"), offers a specialty pharmacy program for individuals with SMI, which presently serves approximately 7,500 individuals through fifteen pharmacies in fourteen states. Stadt Solutions received the Company's clinical research and information business upon formation. PMR, including Stadt Solutions, operates in approximately twenty-five states and employs or contracts with more than 400 mental health and pharmaceutical professionals and provides services to approximately 11,000 individuals diagnosed with SMI. SOURCES OF REVENUE Outpatient Programs. Outpatient Programs managed or administered by PMR are the Company's primary source of revenue. Revenue under these programs is derived primarily from services 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 large 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 36 of the 41 Outpatient Programs operated during the first quarter and constituted 67.8% of the Company's psychiatric care revenue for the three months ended July 31, 1999. These contractual agreements are with hospitals or 7 10 Community Mental Health Centers ("CMHCs"), and 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 fees that may not be deemed reimbursable to the provider by Medicare's fiscal intermediaries. At July 31, 1999, the Company had recorded $6.7 million in contract settlement reserves to provide for possible amounts ultimately owed to its provider customers resulting from disallowance of costs by Medicare and Medicare cost report settlement adjustments. Such reserves are classified as non-current liabilities because ultimate determination of substantially all of the potential contract disallowances is not anticipated to occur during fiscal 2000. Case Management Programs. For its Case Management Programs in Tennessee, the Company receives a monthly case rate fee from the managed care consortiums responsible for managing the Tennessee TennCare Partners State Medical Managed Care Program ("TennCare") and is responsible for the administration, provision or arranging for the provision of psychiatric case management services and related outpatient clinical care for consumers who are eligible to participate in the TennCare program. Revenue under the TennCare program is recognized in the period in which the related service is to be provided. These revenues represent substantially all of the Company's case management revenues. The urgent care program receives interim payments, which 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. Pharmaceuticals. Through Stadt Solutions, the Company offers specialty pharmaceutical services to individuals with SMI. Stadt Solutions also offers site management and clinical information services to pharmaceutical companies, health care providers and public sector purchasers. Stadt Solutions serves clients through a variety of pharmacies offering anti-psychotic or other medications for individuals with schizophrenia or other serious mental illnesses as well as offering blood monitoring services. Stadt Solutions will seek to 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. Stadt Solutions records pharmaceutical revenue when the product is sold to customers at pharmacies, net of any estimated contractual allowances. 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. 8 11 RESULTS OF OPERATIONS -- QUARTER ENDED JULY 31, 1999 COMPARED TO QUARTER ENDED JULY 31, 1998 Revenue -- Psychiatric Care. Revenues from psychiatric care decreased from $14.8 million for the quarter ended July 31, 1998 to $ 12.8 million for the quarter ended July 31, 1999, a decrease of $ 2.0 million, or 13.5%. The Outpatient Programs recorded revenues of $9.2 million, a decrease of $3.1 million or 25% as compared to quarter ended July 31, 1998. Same site revenues decreased by 13.2% or $1.0 million as compared to the quarter ended July 31, 1998. In addition, seven sites were closed during the quarter ended July 31, 1999, which recorded revenues of $1.0 million less in the quarter ended July 31, 1999 as compared to the quarter ended July 31, 1998. A decrease of revenues of $575,000 for the quarter ended July 31, 1999, related to a revision of estimated contractual settlement with a certain provider. The Outpatient Programs operated under an all-inclusive fee arrangement had operating margins of 25.7% in the quarter ended July 31, 1999 as compared to 37.3% in the quarter ended July 31, 1998. The Company's Case Management Programs recorded revenues of $3.1 million, an increase of $1.0 million, or 47.6%, from the quarter ended July 31, 1998. The increase in revenues was due to a corresponding increase in consumers of 48.2% as compared to the quarter ended July 31, 1998. Revenue from the Company's Chemical Dependency and other programs not included as outpatient or case management was $486,000, an increase of 3.0% from the quarter ended July 31, 1998. Revenue -- Pharmaceuticals. Revenues from Pharmaceuticals increased from $3.0 million for the quarter ended July 31, 1998 to $9.6 million for the quarter ended July 31, 1999, a increase of $6.6 million, or 220.0%. The revenues for the quarter ended July 31, 1998 included only one month versus three months for the quarter ended July 31, 1999. Direct Operating Expenses -- Psychiatric Care. Direct operating expenses consist of costs incurred at the program sites and costs associated with the field management responsible for administering the programs. Direct operating expenses decreased from $10.1 million for the quarter ended July 31, 1998 to $10.0 million for the quarter ended July 31, 1999, a decrease of $100,000, or 1.0%. As a percentage of psychiatric care revenues, psychiatric care operating expenses were 78.1%, an increase from 68.2% for the quarter ended July 31, 1998. The increase in operating expenses as a percentage of psychiatric care revenues primarily related to the $575,000 reduction in Outpatient Programs revenue from an adjustment to the contractual settlement during the quarter ended July 31, 1999, and the inclusion of operating expenses for managed care and research without a corresponding increase in revenue contribution. Cost of Sales -- Pharmaceuticals. Cost of sales of pharmaceutical products increased from $2.3 million for quarter ended July 31, 1998 to $7.2 million for the quarter ended July 31, 1999, a increase of 213.0%. The costs represent 75.1% and 75.3% of pharmaceutical revenue for the quarters ended July 31, 1998 and 1999 respectively. The cost of sales for the quarter ended July 31, 1998 included only one month versus three months for the quarter ended July 31, 1999. Direct Operating Expenses -- Pharmaceuticals. Direct operating expenses of pharmaceuticals increased from $410,000 for quarter ended July 31, 1998 to $1.2 million for the quarter ended July 31, 1999, an increase of $790,000 or 192.7%. The expenses represent 13.5% 9 12 and 12.3% of pharmaceutical revenue for quarter ended July 31, 1998 and 1999, respectively. Direct operating expenses for the quarter ended July 31, 1998 included only one month versus three months for the quarter ended July 31, 1999. Marketing, General and Administrative. Marketing, general and administrative expenses increased from $2.6 million for the quarter ended July 31, 1998 to $3.6 million for the quarter ended July 31, 1999, an increase of $1.0 million or 38.5%. The increase was related to investment in the corporate headquarters to support existing and anticipated programs, including the Stadt Solutions venture and a coordinated care initiative in Southern California. As a percentage of total revenues, marketing, general and administrative expenses were 14.5% for the quarter ended July 31, 1998, as compared to 16.1% for quarter ended July 31, 1999. The increase in marketing, general and administrative expenses as a percent of revenue was due to an increase in support costs related to the coordinated care initiative without a proportionate increase in coordinated care revenue, partially offset by a significant increase in pharmaceutical revenues without proportionate increases in administrative expenses. Provision for Bad Debts. Expenses related to the provision for bad debts increased from $716,000 for the quarter ended July 31, 1998 to $1.9 million for the quarter ended July 31, 1999, an increase of $1.2 million, or 165.4%. The increase was due to reserves against revenue from sales of the new product segment pharmaceutical products and to a higher provision rate for bad debt associated with a less than expected collection experience in pharmaceutical products and 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 was 4.0% of revenues for the quarter ended July 31, 1998 as compared to 8.4% for the quarter ended July 31, 1999. 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 manages. Depreciation and Amortization. Depreciation and amortization expenses increased from $239,000 for the quarter ended July 31, 1998 to $280,000 for the quarter ended July 31, 1999, an increase of $41,000, or 17.2%. The increase was due to additional capital expenditures associated with new Outpatient Programs and increased capital expenditures for information systems. Special Charge. In the first quarter ended July 31, 1999, the Company closed seven outpatient psychiatric program locations, incurring a charge of approximately $521,000. The charge consists of lease termination costs, operating losses and write-offs of various fixed assets. In addition, the Company has restructured certain departments company wide involving the reduction in force of approximately 19 employees. Severance costs of approximately $296,000 were incurred in connection with the restructuring. At July 31, 1999, an accrual for special charges of $557,000 was included in accrued liabilities in the consolidated balance sheet. Net Interest Income. Interest income, net of interest expense, decreased from $509,000 for the quarter ended July 31, 1998 to $377,000 for the quarter ended July 31, 1999, a decrease of $132,000, or 25.9%. This decrease resulted from lower cash, cash equivalents and short-term investment balances resulting from the purchase of Treasury Stock and the use of cash in operations. 10 13 Income (Loss) Before Minority Interest, Income Taxes and Cumulative Change. Income (loss) before minority interest, income taxes and cumulative change decreased from $2.1 million for the quarter ended July 31 1998 to a loss of $2.1 million for the quarter ended July 31, 1999, a decrease of $4.2 million. Minority Interest. Minority interest decreased from an operating gain of $239,000 for the quarter ended July 31, 1998 to an operating loss of $470,000 for the quarter ended July 31, 1999, a decrease of $709,000. Minority interest represents the allocation of the operating gains or losses of Stadt Solutions during the quarter to the minority shareholder as required by the Stadt Solutions Operating Agreement. Cumulative Change. The cumulative change of $593,000 for the quarter ended July 31, 1998, represents the effect, net of income tax benefit of $411,000, of writing off previously capitalized start-up costs. The Company adopted this change in accounting principle in the first quarter 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. LIQUIDITY AND CAPITAL RESOURCES For the quarter ended July 31, 1999, net cash used in operating activities was $2.2 million. Working capital at July 31, 1999 was $49.5 million, a decrease of $2.7 million, as compared to working capital at April 30, 1999. Cash, cash equivalents and short-term investments at July 31, 1999 were $29.5 million, a decrease of $3.5 million or 10.6% as compared to April 30, 1999. The use of cash for operating activities during the quarter ended July 31, 1999 was due to delayed collection of accounts receivable. The Company experienced growth in accounts receivable due to an increase in days revenue outstanding from 76 at April 30, 1999 to 90 at July 31, 1999. The increase in days revenue outstanding was primarily due to focused review of claims by fiscal intermediaries at several outpatient programs. 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 2000 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 July 31, 1999, no balance was outstanding under the line of credit. Working capital is anticipated to be utilized during fiscal 2000 to continue expansion of the Company's Outpatient and Case Management Programs, for expansion of Stadt Solutions' pharmacy services, and for the development of a risk based coordinated care project. 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 common stock. Purchased shares will be used for corporate purposes including issuance under PMR's 11 14 stock compensation plans. The purchases will be made from time to time in open market transactions. As of April 30, 1999, the Company repurchased 90,000 shares of its common stock at an average price of $5.81 per share, or $523,750, in open market transactions. In May 1999, the Company repurchased an additional 200,000 shares of its common stock at a price of $3.75 per share, or $750,000, in open market transactions. These shares are held in treasury. In May 1999, the Board of Directors authorized an additional 5% of the Company's outstanding common stock for repurchase. 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 growth strategy of Stadt Solutions. 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 quarter of fiscal 1999 and 2000, a majority of the Company's psychiatric care 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 CMHCs on whose behalf these programs are managed. Certain of the Company's contracts with its providers contain warranty obligations that require the Company to indemnify such providers for the portion of the Company's management fee disallowed for reimbursement. 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. 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 indemnity 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 12 15 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. The Company's computer applications (and computer applications used by 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 second quarter of fiscal 2000. The Company expects that the total cost associated with these revisions will not be material. These costs were primarily incurred during fiscal 1999 and 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 during fiscal 2000. The cost to be incurred by the Company related to externally maintained systems is expected to be minimal. The Company believes that by completing its planned corrections to its computer applications, the year 2000 issue with respect to the Company's 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 associated with year 2000 compliance issues, and because the Company's assessment is necessarily based on information from third party vendors and suppliers, there can be no assurance that the Company's assessment is correct or as to the materiality, worst case scenario or effect of any failure of such assessment to be correct. The Company has initiated a program to determine whether the computer applications of its significant payors and contract providers will be upgraded in a timely manner. The Company has not completed this review and it is unknown whether computer applications of contract providers and Medicare and other payors will be year 2000 compliant. The Company has not determined the extent to which any disruption in the billing practices of providers or the payment practices of Medicare or other payors caused by the year 2000 issues will affect the Company's operations. However, any such disruption in the billing or reimbursement process could have a substantial adverse impact on Medicare or Medicaid payments to providers and, in turn, payments to the Company. Any such disruption could have a material adverse effect upon the Company's 13 16 business, financial condition and results of operations. The Company has not established a contingency plan in the event of any such disruption or worst case scenario. Stadt Solutions has completed a review and assessment of its applications and systems and is expected to complete all required remediation. The cost to be incurred by Stadt Solutions related to such remediation, and the extent of such remediation, is expected to be minimal. Stadt Solutions believes that by completing the planned corrections to its applications and systems, the year 2000 issue with respect to its applications and 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 Stadt Solutions' business, financial condition and results of operations. Because of the many uncertainties associated with year 2000 compliance issues, including uncertainties or disruption in the payment practices of Medicaid or other payors, and because Stadt Solutions' assessment is necessarily based on information from third party vendors and suppliers and Stadtlander, there can be no assurance that the Company's assessment is correct or as to the materiality, worst case scenario or effect of any failure of such assessment to be correct. Stadt Solutions has not established a contingency plan in the event of any such disruption or worst case scenario. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company does not and did not invest in market risk sensitive instruments in the first quarter of fiscal 2000. The Company had and has no exposure to market risk with regard to changes in interest rates. The Company does not and has not used derivative financial instruments for any purposes, including hedging or mitigating interest rate risk. 14 17 PART II -- OTHER INFORMATION Item 1 -- Legal Proceedings Not Applicable 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 None 15 18 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: September 13, 1999 PMR CORPORATION BY: /s/ Mark Clein ------------------------------------ MARK CLEIN Chief Executive Officer (Principal Executive Officer) BY: /s/ Michael Feori ------------------------------------ MICHAEL FEORI Controller (Principal Accounting Officer) 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS APR-30-2000 MAY-01-1999 JUL-31-1999 3,183,493 26,334,969 35,357,629 13,330,397 0 60,977,943 4,716,014 1,599,074 70,881,402 11,507,387 0 0 0 69,889 50,840,337 70,881,402 0 22,423,589 7,231,410 11,158,013 279,528 1,877,444 (377,132) (2,148,534) (688,000) (1,678,790) 0 0 0 (990,790) (.15) (.15)
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