-----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, CzDff6AURkB+NZaFGYbL0CBIbcZcr8UpmkytLFw7Z7fKEA4qonk7yaSpSdlIPTyP SoA2KHnS3vqb+KwWtbEjHw== 0000936392-99-001441.txt : 19991216 0000936392-99-001441.hdr.sgml : 19991216 ACCESSION NUMBER: 0000936392-99-001441 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 19991215 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: 99775213 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 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, 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 Identification No.) Incorporation or Organization) 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, 1999, PMR Corporation had 6,213,877 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, 1999 (Unaudited) and April 30, 1999 1 Condensed Consolidated Statements of Operations for the three and six month periods ended October 31, 1999 2 and 1998 (Unaudited) Condensed Consolidated Statements of Cash Flows for the six months ended October 31, 1999 and 1998 (Unaudited) 3 Notes to Condensed Consolidated Financial 4 Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of 7 Operations Item 3. Quantitative and Qualitative Disclosures about Market Risks 17 PART II OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities and Use 18 of Proceeds Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a 18 Vote of Security Holders Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18
3 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS PMR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 31, APRIL 30, 1999 1999 ------------ ------------ ASSETS (UNAUDITED) (AUDITED) Current assets: Cash and cash equivalents $ 8,700,730 $ 5,441,012 Short-term investments, available for sale 23,947,764 27,509,554 Accounts receivable, net of allowance for uncollectible amounts of $15,213,636 in 2000 and $10,664,000 in 1999 19,727,828 20,002,894 Prepaid expenses and other current assets 1,808,688 1,787,859 Income taxes receivable 652,252 2,212,815 Deferred income tax benefit 4,653,000 4,653,000 ------------ ------------ Total current assets 59,490,262 61,607,134 Furniture and office equipment, net of accumulated depreciation 3,581,337 2,863,934 of $1,913,333 in 2000 and $1,532,000 in 1999 Long-term receivables, net of allowance for uncollectible amounts 4,353,244 4,742,329 of $3,527,602 in 2000 and $4,087,000 in 1999 Deferred income tax benefit 1,206,000 1,206,000 Other assets 602,773 546,621 ------------ ------------ Total assets $ 69,233,616 $ 70,966,018 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,490,761 $ 1,539,327 Accrued expenses 1,915,886 1,852,335 Accrued compensation and employee benefits 1,958,573 2,083,082 Advances from case management agencies 1,007,204 846,353 Payable to related party 4,780,569 3,052,610 ------------ ------------ Total current liabilities 11,152,993 9,373,707 Note payable 246,091 294,073 Deferred rent expense 49,706 53,438 Contract settlement reserve 7,259,172 6,672,727 Minority interest 764,337 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 - 6,238,878 in 2000 and 6,988,878 in 1999 69,889 69,889 Additional paid-in capital 48,123,385 48,123,385 Retained earnings 4,245,387 5,400,242 Treasury stock, 750,000 shares of common stock at cost (2,677,344) (942,500) ------------ ------------ Total stockholders' equity 49,761,317 52,651,016 ------------ ------------ Total liabilities and stockholders' equity $ 69,233,616 $ 70,966,018 ============ ============
See notes to condensed consolidated financial statements 1 4 PMR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months ended October 31, Six Months ended October 31, ----------------------------- ----------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Revenue - psychiatric care $ 12,505,848 $ 13,797,558 $ 25,329,812 $ 28,618,615 Revenue - pharmaceutical 10,240,842 8,619,593 19,840,467 11,649,558 ------------ ------------ ------------ ------------ Total revenue 22,746,690 22,417,151 45,170,279 40,268,173 Costs and expenses: Direct operating expenses - psychiatric care 9,541,131 9,473,247 19,519,588 19,566,427 Cost of sales - pharmaceuticals 7,317,639 6,747,636 14,549,049 9,022,755 Direct operating expenses - pharmaceuticals 1,474,306 1,210,144 2,653,862 1,619,647 Marketing, general and administrative 3,303,523 2,461,820 6,889,809 5,029,161 Provision for bad debts 2,254,811 1,192,475 4,132,255 1,908,914 Depreciation and amortization 337,378 299,333 616,906 538,527 Acquisition expense -- 1,774,772 -- 1,774,772 Special charge (credit) (133,813) (678,292) 682,761 (678,292) Net interest (income) (382,244) (482,315) (759,376) (991,126) ------------ ------------ ------------ ------------ 23,712,731 21,998,820 48,284,854 37,790,785 Income (loss) before minority interest, income taxes and cumulative change (966,041) 418,331 (3,114,575) 2,477,388 Minority interest (686,976) 272,654 (1,156,720) 511,948 ------------ ------------ ------------ ------------ Income (loss) before income taxes and cumulative change (279,065) 145,677 (1,957,855) 1,965,440 Income tax (benefit) expense (115,000) 57,000 (803,000) 806,000 ------------ ------------ ------------ ------------ Net income (loss) before cumulative change (164,065) 88,677 (1,154,855) 1,159,440 Cumulative change, net of income tax benefit -- -- -- 592,689 ------------ ------------ ------------ ------------ Net income (loss) $ (164,065) $ 88,677 $ (1,154,855) $ 566,751 ============ ============ ============ ============ Earnings (loss) per common share before cumulative change: Basic $ (0.03) $ 0.01 $ (0.18) $ 0.17 ============ ============ ============ ============ Diluted $ (0.03) $ 0.01 (0.18) 0.16 ============ ============ ============ ============ Earnings (loss) per common share: Basic $ (0.03) $ 0.01 $ (0.18) $ 0.08 ============ ============ ============ ============ Diluted $ (0.03) $ 0.01 (0.18) 0.08 ============ ============ ============ ============ Shares used in computing earnings (loss) per share: Basic 6,433,606 6,936,548 6,433,606 6,944,886 ============ ============ ============ ============ Diluted 6,433,606 7,243,812 6,433,606 7,316,077 ============ ============ ============ ============
See notes to condensed consolidated financial statements 2 5 PMR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED OCTOBER 31, 1999 1998 ------------ ------------ OPERATING ACTIVITIES Net Income (Loss) $ (1,154,855) $ 566,751 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Write-off of costs related to terminated acquisition -- 1,774,772 Special charge 682,761 (678,292) Depreciation and amortization 616,906 538,527 Provision for bad debts 4,132,255 1,908,914 Cumulative effect of change in accounting principle -- 592,689 Income (loss) applicable to minority interest (1,156,720) 511,948 Deferred income taxes 1,560,563 -- Changes in operating assets and liabilities: Accounts and notes receivables (3,468,104) (11,035,612) Prepaid expenses and other assets (135,440) 152,763 Accounts payable and accrued expenses (667,776) (1,359,301) Accrued compensation and employee benefits (124,509) (253,784) Advances from case management agencies 160,851 (169,405) Payable to related party 1,727,959 6,836,088 Contract settlement reserve 586,446 283,817 Income taxes receivable/payable -- 604,207 Deferred rent expense (3,732) (1,393) ------------ ------------ Net cash provided by operating activities 2,756,605 272,689 INVESTING ACTIVITIES Proceeds from the sale and maturity of short term investments 6,799,666 46,475,547 Purchases of short term investments (3,237,877) (35,561,782) Purchases of furniture and office equipment (1,275,849) (689,341) ------------ ------------ Net cash provided by investing activities 2,285,940 10,224,424 FINANCING ACTIVITIES Proceeds from sale of common stock -- 255,551 Payments on note payable to bank (47,982) (47,337) Acquisition of treasury stock (1,734,844) -- ------------ ------------ Net cash provided (used in) by financing activities (1,782,826) 208,214 ------------ ------------ Net increase in cash 3,259,718 10,705,327 Cash at beginning of period 5,441,012 18,522,859 ------------ ------------ Cash at end of period $ 8,700,730 $ 29,228,186 ============ ============
See notes to condensed consolidated financial statements 3 6 PMR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) October 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 and six months ended October 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:
Six Months Ended October 31, --------------------------- 1999 1998 ----------- ----------- Numerator Net income (loss) available to common stockholders $(1,154,855) $ 566,751 =========== =========== Denominator: Weighted average shares outstanding for basic earnings per share 6,433,606 6,944,886 ----------- ----------- Effects of dilutive securities Employee stock options and warrants 0 371,191 ----------- ----------- Dilutive potential common shares 0 371,191 Shares used in computing diluted earnings per common share 6,433,606 7,316,077 =========== =========== Earnings (loss) per common share, basic $ (0.18) $ 0.08 =========== =========== Earnings (loss) per common share, diluted $ (0.18) $ 0.08 =========== ===========
Common stock equivalents of 2,636 shares for the six months ended October 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 six months ended October 31, 1999. 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 Pharmaceutical Care. 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:
Six Months Ended October 31, ------------------------------------------------------------------------------ Case Outpatient Management Pharmaceutical Programs Programs Care Other Total ------------ ------------ -------------- ------------ ------------ 1999 Revenues $ 17,666,720 $ 6,651,255 $ 19,840,467 $ 1,011,837 $ 45,170,279 Income (loss) before income taxes and cumulative change 3,671,877 444,841 (1,161,356) (4,913,217) (1,957,855) 1998 Revenues $ 22,886,589 $ 4,909,578 $ 11,649,558 $ 822,448 $ 40,268,173 Income (loss) before income taxes and cumulative change 5,582,232 294,258 0 (3,911,050) 1,965,440
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 37 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 8,000 individuals through sixteen pharmacies in fifteen 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 32 of the 37 Outpatient Programs operated during the second quarter and constituted 62.5% of the Company's psychiatric care revenue for the three months ended October 31, 1999. These contractual agreements are with hospitals or 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 7 10 Outpatient Programs typically are covered by Medicare. In light of the Company's recent financial performance and anticipated regulatory changes, the Company is in the process of restructuring its contracts. The Company cannot determine how many of the contracts will be successfully restructured. Those contracts that are not restructured will be candidates for sale or termination. To the extent there are program closures, the Company may incur restructuring charges associated with asset impairment, lease terminations and severance charges. 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. As of October 31, 1999, the Company had recorded $7.3 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. 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. The Company is negotiating to sell its Chemical Dependency Programs to a private company. The parties have agreed on a letter of intent, which establishes the economic terms of a transaction. The transaction is expected to close in the third quarter ended January 31, 2000. No assurance can be given that the transaction will be consummated. 8 11 RESULTS OF OPERATIONS - QUARTER ENDED OCTOBER 31, 1999 COMPARED TO QUARTER ENDED OCTOBER 31, 1998 Revenue - Psychiatric Care. Revenues from psychiatric care decreased from $13.8 million for the quarter ended October 31, 1998 to $12.5 million for the quarter ended October 31, 1999, a decrease of $1.3 million, or 9.4%. The Outpatient Programs recorded revenues of $8.4 million for the quarter ended October 31, 1999; a decrease of $2.2 million or 20.8% as compared to quarter ended October 31, 1998. Same site revenues decreased from $7.1 million for the quarter ended October 31, 1998 to $6.3 million for the quarter ended October 31, 1999, a decrease of 11.7% or $827,000. Closed sites accounted for a net revenue decrease of $1.4 million for the quarter ended October 31, 1999 when compared to the quarter ended October 31, 1998. The Outpatient Programs operated under an all-inclusive fee arrangement had operating margins of 32.4% in the quarter ended October 31, 1999 as compared to 38.9% in the quarter ended October 31, 1998. The primary reason for the reduction in operating margin was an increase in operating expenses as a percentage of psychiatric care revenue from 68.7% for the quarter ended October 31, 1998, to 76.3% for the quarter ended October 31, 1999. The Company's Case Management Programs recorded revenues of $3.6 million, an increase of $750,000, or 26.7%, from the quarter ended October 31, 1998. The increase in revenues was due to an increase in consumers of 50.3% as compared to the quarter ended October 31, 1998. Revenue from the Company's Chemical Dependency and other programs not included as outpatient or case management was $526,000 for the quarter ended October 31, 1999, an increase of 50.0% from the quarter ended October 31, 1998. Revenue - Pharmaceuticals. Revenues from Pharmaceuticals increased from $8.6 million for the quarter ended October 31, 1998 to $10.2 million for the quarter ended October 31, 1999, an increase of $1.6 million, or 18.8%. New facilities accounted for $1.1 million of increased revenue for the quarter ended October 31, 1999 as compared to the quarter ended October 31, 1998. Same site revenue increased by $487,000 in the quarter ended October 31, 1999 as compared to the quarter ended October 31, 1998. 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 were unchanged at $9.5 million for the quarter ended October 31, 1998 and 1999, respectively. As a percentage of psychiatric care revenues, psychiatric care operating expenses were 76.3%, an increase from 68.7% for the quarter ended October 31, 1998. The increase in operating expenses as a percentage of psychiatric care revenues reflects the allocation of operational costs over fewer program sites and lower revenues. Cost of Sales - Pharmaceuticals. Cost of sales of Pharmaceutical products increased from $6.7 million for quarter ended October 31, 1998 to $7.3 million for the quarter ended October 31, 1999, a increase of 8.4% or $570,000. The costs represent 78.3% and 71.5% of Pharmaceutical revenue for the quarters ended October 31, 1998 and 1999 respectively. The increase in the cost of sales is primarily the result of the addition of new facilities. 9 12 Direct Operating Expenses - Pharmaceuticals. Direct operating expenses of Pharmaceuticals increased from $1.2 million for quarter ended October 31, 1998 to $1.5 million for the quarter ended October 31, 1999, an increase of $264,000 or 21.8%. The expenses represent 14.0% and 14.4% of Pharmaceutical revenue for the quarters ended October 31, 1998 and 1999, respectively. The increase in the direct operating expenses is primarily the result of the addition of new facilities. Marketing, General and Administrative. Marketing, general and administrative expenses increased from $2.5 million for the quarter ended October 31, 1998 to $3.3 million for the quarter ended October 31, 1999, an increase of $842,000 or 34.2%. The change consists of an increase for Stadt Solutions related to investments in infrastructure and support staff partially offset by a decrease in marketing, general and administrative expenses related to psychiatric care, case management and other programs. Pharmaceutical marketing, general and administrative expenses increased by $1.3 million for the quarter ended October 31, 1999 as compared to the quarter ended October 31, 1998, while non-pharmaceutical expenses decreased by $448,000 for the quarter ended October 31, 1999 as compared to the quarter ended October 31, 1998. As a percentage of total revenues, marketing, general and administrative expenses were 11.0% for the quarter ended October 31, 1998, as compared to 14.5% for quarter ended October 31, 1999. The increase in marketing, general and administrative expenses as a percent of revenue was due primarily to investments in infrastructure and support staff for Pharmaceutical operations. Provision for Bad Debts. Expenses related to the provision for bad debts increased from $1.2 million for the quarter ended October 31, 1998 to $2.3 million for the quarter ended October 31, 1999, an increase of $1.1 million, or 89.1%. The increase was due to reserves against increased revenue from sales of the Pharmaceutical products segment and to a higher provision rate for bad debt associated with a less than expected collection experience in Pharmaceutical products. As a percentage of revenues, the provision for bad debts was 5.3% of revenues for the quarter ended October 31, 1998 as compared to 9.9% for the quarter ended October 31, 1999. The Company expects the allowance for uncollectable accounts to fluctuate based on the amount of claims under review in its Outpatient Programs, the number of programs that the Company manages and its experience with Pharmaceutical products. The Company may need to further increase its provision for bad debts if program closures increase significantly due to the inability to restructure its contracts. Depreciation and Amortization. Depreciation and amortization expenses increased from $299,000 for the quarter ended October 31, 1998 to $337,000 for the quarter ended October 31, 1999, an increase of $38,000, or 12.7%. The increase was due to additional capital expenditures associated primarily with Pharmaceutical operations. Special Charge (Credit). In the quarter ended October 31, 1999, the Company closed two Outpatient Program locations, incurring a charge of $16,000 for lease termination costs. The Company also recognized a special charge credit in the amount of $150,000 associated with the receipt of funds related to a terminated agreement with a case management agency. As of October 31, 1999, the accrual for special charges included in the liabilities section in the consolidated balance sheet was $792,000. 10 13 Net Interest Income. Interest income, net of interest expense, decreased from $482,000 for the quarter ended October 31, 1998 to $382,000 for the quarter ended October 31, 1999, a decrease of $100,000, or 20.7%. 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 in prior quarters. Income (Loss) Before Minority Interest, Income Taxes and Cumulative Change. Income before minority interest, income taxes and cumulative change decreased from $418,000 for the quarter ended October 31 1998 to a loss of $966,000 for the quarter ended October 31, 1999, a decrease of $1.4 million. Minority Interest. Minority interest decreased from an operating gain of $272,000 for the quarter ended October 31, 1998 to an operating loss of $687,000 for the quarter ended October 31, 1999, a decrease of $959,000. 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. RESULTS OF OPERATIONS - SIX MONTHS ENDED OCTOBER 31, 1999 COMPARED TO SIX MONTHS ENDED OCTOBER 31, 1998 Revenue - Psychiatric Care. Revenues from psychiatric care decreased from $28.6 million for the six months ended October 31, 1998 to $25.3 million for the six months ended October 31, 1999, a decrease of $3.3 million, or 11.5%. The Outpatient Programs recorded revenues of $17.7 million, a decrease of $5.2 million or 22.8% as compared to six months ended October 31, 1998. Same site revenues decreased by 8.6% or $1.2 million as compared to the six months ended October 31, 1998. Closed sites accounted for a net revenue decrease of $3.8 million for the six months ended October 31, 1999 when compared to the six months ended October 31, 1998. A decrease of revenues of $575,000 for the six months ended October 31, 1999, as compared to the six months ended October 31, 1998, 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 32.3% in the six months ended October 31, 1999 as compared to 38.0% in the six months ended October 31, 1998. The primary reason for this reduction in operating margin was an increase in operating expenses as a percentage of psychiatric care revenue from 68.4% for the six months ended October 31, 1998, to 77.1% for the six months ended October 31, 1999. The Company's Case Management Programs recorded revenues of $6.7 million for the six months ended October 31, 1999, an increase of $1.7 million, or 35.5%, from the six months ended October 31, 1998. The increase in revenues was due to an increase in consumers of 50.1% as compared to the six months ended October 31, 1998. Revenue from the Company's Chemical Dependency and other programs not included as outpatient or case management was $1.0 million, an increase of 23.0% from the six months ended October 31, 1998. Revenue - Pharmaceuticals. Revenues from Pharmaceuticals increased from $11.6 million for the six months ended October 31, 1998 to $19.8 million for the six months ended October 31, 1999, an increase of $8.2 million, or 70.3%. The revenues for the six months ended October 31, 1998 included four months versus six months for the six months ended October 31, 1999. 11 14 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 $19.6 million for the six months ended October 31, 1998 to $19.5 million for the six months ended October 31, 1999, a decrease of $47,000, or 0.2%. As a percentage of psychiatric care revenues, psychiatric care operating expenses were 77.1% for the six months ended October 31, 1999, an increase from 68.4% for the six months ended October 31, 1998. The increase in operating expenses as a percentage of psychiatric care revenues related to the $575,000 reduction in Outpatient Programs revenue from an adjustment to the contractual settlement during the six months ended October 31, 1999 and the closing of nine program sites during the six months ended October 31, 1999. Cost of Sales - Pharmaceuticals. Cost of sales of Pharmaceutical products increased from $9.0 million for six months ended October 31, 1998 to $14.5 million for the six months ended October 31, 1999, an increase of 61.2%. The costs represent 77.5% and 73.3% of Pharmaceutical revenue for the quarters ended October 31, 1998 and 1999 respectively. The cost of sales for the six months ended October 31, 1998 included four months versus six months for the six months ended October 31, 1999. Direct Operating Expenses - Pharmaceuticals. Direct operating expenses of Pharmaceuticals increased from $1.6 million for six months ended October 31, 1998 to $2.6 million for the six months ended October 31, 1999, an increase of $1.0 million or 63.9%. The expenses represent 13.9% and 13.4% of Pharmaceutical revenue for six months ended October 31, 1998 and 1999, respectively. Direct operating expenses for the six months ended October 31, 1998 included four months versus six months for the six months ended October 31, 1999. Marketing, General and Administrative. Marketing, general and administrative expenses increased from $5.0 million for the six months ended October 31, 1998 to $6.9 million for the six months ended October 31, 1999, an increase of $1.9 million or 37.0%. The change consists of an increase for Stadt Solutions related to investments in infrastructure and support staff partially offset by a decrease in marketing, general and administrative expenses related to psychiatric care, case management and other programs. Pharmaceutical marketing, general and administrative expenses increased by $2.2 million, while non-pharmaceutical expenses decreased by $363,000 for the quarter ended October 31, 1999. As a percentage of total revenues, marketing, general and administrative expenses were 12.5% for the six months ended October 31, 1998, as compared to 15.3% for six months ended October 31, 1999. The increase in marketing, general and administrative expenses as a percent of revenue was due primarily to investments in infrastructure and support staff for Pharmaceutical operations. Provision for Bad Debts. Expenses related to the provision for bad debts increased from $1.9 million for the six months ended October 31, 1998 to $4.1 million for the six months ended October 31, 1999, an increase of $2.2 million, or 116.5%. The increase was due entirely to reserves against revenue from sales of the new product segment Pharmaceutical products. As a percentage of revenues, the provision for bad debts was 4.7% of revenues for the six months ended October 31, 1998 as compared to 9.1% for the six months ended October 31, 1999. The Company expects the allowance for uncollectable amounts to fluctuate based on the amount of claims under review in its Outpatient Programs, the number of programs that the Company manages and its experience with Pharmaceutical products. The Company may need to further 12 15 increase its provision for bad debts if program closures increase significantly due to the inability to restructure its contracts. Depreciation and Amortization. Depreciation and amortization expenses increased from $539,000 for the six months ended October 31, 1998 to $616,900 for the six months ended October 31, 1999, an increase of $78,000, or 14.6%. The increase was due to additional capital expenditures associated primarily with Pharmaceutical operations. Special Charge. For the six months ended October 31, 1999, the Company closed nine outpatient psychiatric program locations, incurring a charge of approximately $683,000. 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 as a special charge in connection with the restructuring. As of October 31, 1999, the accrual for special charges included in the liabilities section in the consolidated balance sheet was $792,000. Net Interest Income. Interest income, net of interest expense, decreased from $991,000 for the six months ended October 31, 1998 to $759,000 for the six months ended October 31, 1999, a decrease of $232,000, or 23.4%. 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 in prior quarters. Income (Loss) Before Minority Interest, Income Taxes and Cumulative Change. Income before minority interest, income taxes and cumulative change decreased from $2.5 million for the six months ended October 31 1998 to a loss of $3.1 million for the six months ended October 31, 1999, a decrease of $5.6 million. Minority Interest. Minority interest decreased from an operating gain of $512,000 for the six months ended October 31, 1998 to an operating loss of $1.2 million for the six months ended October 31, 1999, a decrease of $1.7 million. Minority interest represents the allocation of the operating gains or losses of Stadt Solutions during the six months to the minority shareholder as required by the Stadt Solutions Operating Agreement. Cumulative Change. The cumulative change of $593,000 for the six months ended October 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 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. LIQUIDITY AND CAPITAL RESOURCES For the six months ended October 31, 1999, net cash provided in operating activities was $2.8 million. Working capital as of October 31, 1999 was $48.3 million, a decrease of $3.9 13 16 million, as compared to working capital at April 30, 1999. Cash, cash equivalents and short-term investments totaled $32.6 million as of October 31, 1999, a decrease of $302,072 or 0.9% as compared to April 30, 1999. Cash was provided by operating activities during the six months ended October 31, 1999 due to intensified collection of accounts receivable and receipt of a tax refund of $2.2 million from the IRS. The Company experienced growth in accounts receivable due to an increase in days revenue outstanding from 76 at April 30, 1999 to 92 as of October 31, 1999. The increase in days revenue outstanding was primarily due to focused review of claims by fiscal intermediaries at several outpatient programs. 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 October 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 Case Management Programs, and for the development of a risk based coordinated care project. The Company also may use working capital and, if necessary, incur 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 stock compensation plans. 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. In May 1999, the Board of Directors authorized the repurchase of an additional 5% of the Company's outstanding common stock. During the quarter ended October 31, 1999, the Company repurchased 410,000 shares of its common stock at an average price of $2.33 per share, or $984,844, in open market transactions. As of October 31, 1999, the Company has repurchased 700,000 shares of common stock. All shares repurchased are held in treasury. The Company began a research and development effort in August 1999 related to work done in connection with the case management and coordinated care projects. The Company is seeking to develop and commercialize software for the electronic prescribing of medications for the SMI population. The Company intends to initially target community mental health organizations with this software product. As of October 31, 1999, the Company has expended $256,000 in this effort of which $140,000 has been capitalized in accordance with FASB Statement No. 86 Accounting for Software Costs. The Company anticipates ongoing expenditures to complete and commercialize this effort, with portions of the expenditures capitalized according to FASB Statement No. 86. 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 1999 and 2000, a majority of the Company's psychiatric care revenue was derived from the management of its Outpatient Programs. Since 14 17 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 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. 15 18 The Company has completed a thorough review of its material computer applications and has identified and scheduled necessary corrections for its computer applications. All known corrections have been accomplished as of quarter ended October 31, 1999. The total cost associated with these revisions was not material. These costs were primarily incurred during fiscal 1999 and charged to expense as incurred. For externally maintained systems, the Company has worked with vendors to ensure that each system is currently year 2000 compliant. The Company will continue to work with vendors in the event new areas are identified regarding year 2000 computer issues. The cost to be incurred by the Company related to externally maintained systems has been minimal to date. The Company believes that it has, to the best of its knowledge, completed its planned corrections to its computer applications for the year 2000 issue. However, if such corrections have not been adequately completed, 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 completed this review, but it is still unknown whether computer applications of contract providers and Medicare and other payors will be year 2000 compliant. The Company has not been able to determine 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. 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 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 has completed all required remediation. The cost incurred by Stadt Solutions related to such remediation, and the extent of such remediation, has been minimal to date. Stadt Solutions believes that it has, to the best of its knowledge, completed its planned corrections to its computer applications for the year 2000 issue. However, if such corrections have not been completed, adequately 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. 16 19 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 six months 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. 17 20 PART II - OTHER INFORMATION Item 1 - Legal Proceedings None 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 On October 21, 1999, the Company held its Annual Meeting of Stockholders where Allen Tepper, Charles McGettigan and Mark Clein were re-elected as directors of the Company. The following directors continued in office after the meeting: Susan Erskine, Daniel Frank, Richard Niglio and Eugene Hill. In addition, the Company's stockholders ratified the selection of Ernst & Young LLP as the Company's auditors for the fiscal year ending April 30, 2000. The re-election of each of Allen Tepper, Charles McGettigan and Mark Clein was approved with 4,930,491.56, 4,940,491.56 and 4,940,491.56, respectively, in favor; 0, 0, and 0, respectively, against; and 19,663, 9,663 and 9,663, respectively, abstentions. The ratification of the selection of the auditors was approved with 4,943,225.56 in favor, 6,400 votes against, and 529 abstentions. Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K None 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 14, 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) 19 EX-27 2 EXHIBIT 27
5 6-MOS APR-30-2000 MAY-01-1999 OCT-31-1999 8,700,730 23,947,764 34,941,464 15,213,636 0 59,490,262 5,494,670 1,913,333 69,233,616 11,152,993 0 0 0 69,889 49,691,428 69,233,616 0 45,170,279 14,549,049 22,173,450 616,906 4,132,255 (759,376) (3,114,575) (803,000) (1,154,855) 0 0 0 (1,154,855) (0.18) (0.18)
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