<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1995 or
----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-20488
PMR CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2491707
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3990 Old Town Avenue, Suite 206A, San Diego, California, 92110
--------------------------------------------------------------
(Address of principal executive offices, including zip code)
(619) 295-2227
------------------------------------------------
Registrant's Telephone No., Including Area Code)
N/A
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes [X] No [ ]
------- -------
(2) Yes [X] No [ ]
------- -------
As of December 9, 1995, the Registrant has issued and outstanding 3,443,742
shares of common stock, par value $.01 per share.
<PAGE> 2
PMR CORPORATION
INDEX
<TABLE>
<S> <C> <C> <C>
PART I FINANCIAL INFORMATION Page
Item 1. Consolidated Condensed Balance Sheets as
of October 31, 1995 (Unaudited) and April
30, 1995 1
Consolidated Condensed Income and Loss
Statements for the three and six months
ended October 31, 1995 and 1994
(Unaudited) 2
Consolidated Condensed Statements of Cash
Flows for the six months ended October 31,
1995 and 1994 (Unaudited)
3
Notes to Consolidated Condensed Financial
Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 5
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of
Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
</TABLE>
<PAGE> 3
PMR Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
<TABLE>
<CAPTION>
October 31 April 30
1995 1995
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $981,678 $1,382,376
Notes and accounts receivable, net 11,198,602 8,465,568
Prepaid expenses and other current assets 364,607 289,996
Refundable income tax benefits 817,165 817,165
Deferred income tax benefits 1,217,000 1,217,000
----------- -----------
Total current assets 14,579,052 12,172,105
Furniture and office equipment, less accumulated
depreciation of $740,014 in October 1995 and $579,656 in April 1995 682,560 790,243
Long-term receivables 614,372 937,705
Other assets 2,078,397 910,701
----------- -----------
$17,954,381 $14,810,754
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued compensation $2,499,057 $1,909,625
Note payable to bank 1,200,000 1,200,000
Current portion of long term debt 190,633 206,550
----------- -----------
Total current liabilities 3,889,690 3,316,175
Reserve for contract settlement 4,808,044 3,523,223
Deferred income taxes 620,000 458,000
Other long term liabilities 336,246 451,762
Commitments
Stockholders' equity:
Common Stock, $.01 par value, authorized shares -
10,000,000; issued and outstanding shares - 3,443,742
in October 1995; 3,338,656 in April 1995. 35,459 33,385
Convertible preferred stock, $.01 par value,
authorized shares - 1,000,000
Series C - issued and outstanding - 700,000 shares
(aggregate liquidation preference $1,750,000) 7,000 7,000
Paid-in capital 8,111,682 7,050,263
Notes receivable from shareholders (59,742) (62,626)
Retained earnings 206,002 33,572
----------- -----------
8,300,401 7,061,594
----------- -----------
$17,954,381 $14,810,754
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
Page 1
<PAGE> 4
PMR Corporation and Subsidiaries
Consolidated Condensed Income and Loss Statements
(Unaudited)
<TABLE>
<CAPTION>
Second Quarter Year-to-Date
---------------------------- --------------------------------
Three Months Ended Six Months Ended
October 31 October 31
1995 1994 1995 1994
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Management fees & other revenues $8,215,153 $6,035,452 $14,220,704 $12,154,818
Expenses
Operating expenses 6,389,904 5,238,927 11,210,983 10,609,492
Marketing, general and administrative 1,079,836 752,961 1,883,610 1,672,847
Provision for bad debts 214,173 216,274 411,568 441,427
Depreciation and amortization 151,964 100,479 266,152 197,083
Interest - net 39,987 6,880 47,378 (4,134)
Minority interest in loss of subsidiary - (33,278) 524 (91,638)
---------- ---------- ----------- -----------
7,875,864 6,282,243 13,820,215 12,825,077
Income (loss) before income taxes 339,289 (246,791) 400,489 (670,259)
Less income tax expense (benefit) 139,000 (96,000) 162,000 (270,000)
---------- ---------- ----------- -----------
Net income (loss) 200,289 (150,791) 238,489 (400,259)
Less dividends on:
Series C convertible preferred stock 33,335 - 66,060 -
---------- ---------- ----------- -----------
Net income (loss) for common stock $ 166,954 $ (150,791) $ 172,429 $ (400,259)
========== ========== =========== ===========
Earnings (loss) per common share
Primary $ .04 $ (.05) $ .04 $ (.12)
========== ========== =========== ===========
Fully diluted $ .04 $ (.05) $ .04 $ (.12)
========== ========== =========== ===========
Shares used in computing earnings
Primary 4,451,395 3,343,285 4,351,283 3,345,624
========== ========== =========== ===========
Fully diluted 4,487,591 3,343,285 4,407,086 3,345,624
========== ========== =========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
Page 2
<PAGE> 5
PMR Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Second Quarter
Six Months Ended
October 31
----------------------------
1995 1994
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 172,429 $ (400,259)
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Provision for bad debts 411,568 441,427
Depreciation and amortization 266,152 197,083
Provision (benefit) for deferred taxes 162,000 (270,000)
Changes in operating assets and liabilities:
Accounts receivable (2,821,269) (5,414,496)
Other assets (1,091,591) (196,519)
Accounts payable and accrued compensation 605,209 (738,967)
Reserve for contract settlement 1,284,821 1,388,376
Other liabilities 743,178 (51,032)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (267,503) (5,044,387)
INVESTING ACTIVITIES
Purchases of furniture and equipment (52,707) (86,001)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (52,707) (86,001)
FINANCING ACTIVITIES
Decrease (increase) in notes receivable 19,123 463,412
Payments on notes payable (99,611) (93,394)
Proceeds from notes payable - 541,560
Proceeds from exercise of warrants & options - 116,013
Proceeds from sale of stock - 1,584,372
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (80,488) 2,611,963
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (400,698) $(2,518,425)
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
Page 3
<PAGE> 6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
PMR CORPORATION AND SUBSIDIARIES
October 31, 1995
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 complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended October
31, 1995, are not necessarily indicative of the results that may be expected
for the year ending April 30, 1996. 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, 1995.
NOTE B - ACQUISITION OF MINORITY INTEREST IN SUBSIDIARY
On July 13, 1995, the Company acquired the 49% partnership interest in the Twin
Town Outpatient partnership formerly held by a third party by paying $185,000
in cash and 97,087 shares of the Company's Common Stock valued at $550,000.
Prior to that date, the Company owned a 51% interest in the partnership which
resulted in consolidation for financial statement purposes.
NOTE C - CASE MANAGEMENT AGREEMENTS
The Company entered into management agreements with two case management
agencies in Tennessee, effective September 1 and October 1, 1995, respectively.
The Company has agreed to issue 50,000 shares of the Company's Common Stock,
valued at $225,000 and $256,250, respectively, to each agency in connection
with the agreements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
PMR Corporation (the "Company") is a manager of programs which treat
the diseases that comprise Serious and Persistent Mental Illness (SPMI). These
diseases are primarily Schizophrenia and Bipolar Disorder (Manic Depression).
In addition, the Company manages chemical dependency programs.
The Company's programs are outpatient and community based. They focus
on limiting hospitalization and returning the mentally disabled back to work,
or into other productive activities. The Company manages three distinct types
of programs.
First, PMR engages in the development and management of psychiatric
partial hospitalization programs (Programs). These are intensive outpatient
treatment programs designed for SPMI individuals as an alternative to inpatient
acute care. These Programs are operated in conjunction with Hospitals or
Community Mental Health Centers (CMHCs).
Second, the Company manages a complete mental health benefit for the
SPMI individuals and has expanded its focus to compete within the managed care
segment of the industry. In line with its strategic goals, during the second
quarter of fiscal year 1996, the case management division began operating in
September in Nashville and a second site was initiated in Memphis in October.
Case management for SPMI is continual face to face contacts with patients in
the home, community or office. The case manager assists with access to all
health care social and daily living services needed to sustain living in the
community. It is believed to be the essential service required for SPMI in a
managed care environment.
Third, the Company, through its subsidiary, Twin Town Outpatient,
provides outpatient chemical dependency treatment services from detoxification
to rehabilitation and recovery for the principally for the commercial managed
care market.
RESULTS OF OPERATIONS
Second Quarter Operations
During the second quarter of fiscal year 1996, the Company earned
$167,000 on net revenues of $8.2 million. Comparable figures for the
equivalent prior year period reflected a loss of $151,000 on net revenue of
$6.0 million. The addition of case management revenues and the improved net
revenue per patient and improved margins in the Programs contributed to the
improved earnings. The Program's "same store" statistics were: an increase of
9% in patient census, an increase in net revenue of 13%, an increase in
operating expenses of 7%, and an increase in gross margin of 26%.
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Management Fee Revenue. Net revenues for the quarter were up $2.2
million, or 36% higher than the net revenues in the equivalent prior year
period, primarily as the result of revenue from the case management division of
approximately $1.6 million. In addition, patient census in the Programs was up
14% from the equivalent prior year period, but net revenue was up 22%,
reflecting an improvement in net revenue per patient of 13%. Net revenue for
chemical dependency treatment services was up 11% from the equivalent prior
year period.
Operating expenses. Operating expenses for the quarter of $6.4
million, up $1.2 million, reflected a 22% increase from the equivalent prior
year period, also primarily as the result of the case management division's
operating expenses of approximately $1.4 million. Program expenses increased
5% from the equivalent prior year period, but decreased 3% on a per patient
basis.
Marketing, general and administrative expenses. Marketing, general
and administrative expenses increased $327,000 or 43%, due to the
administrative costs associated with the addition of the case management
division.
Depreciation and amortization. Depreciation and amortization
increased $52,000 or 52% primarily as the result of the amortization of the
covenants not to compete associated with the acquisition of all of the other
partner's interest in the Twin Town Outpatient subsidiary.
Dividends. The Company accrued dividends on its Series C Convertible
Preferred Stock at the rate of 7.5% per annum.
Six Month Operations
For the six months ended October 31, 1995, the Company earned $172,000 on
net revenues of $14.2 million. Comparable figures for the equivalent prior
year period reflected a loss of $400,000 on net revenue of $12.2 million. The
Program's "same store" results were: an increase of 9% in patient census, an
increase in net revenue of 13%, an increase in operating expenses of 7%, and an
increase in gross margin of 26%.
Management Fee Revenue. Net revenues for the six months were 17%
higher than the net revenues in the equivalent prior year period, primarily as
the result of revenue from the case management division of approximately $1.6
million. In addition, volume in the Programs was up 6% from the equivalent
prior year period, but net revenue was up 15%, reflecting an improvement in net
revenue per patient of 9%. Net revenue for chemical dependency treatment
services was up 14% from the equivalent prior year period.
Operating expenses. Operating expenses for the quarter of $11.2
million reflected a 6% increase from the equivalent prior year period, also
primarily as the result of operating expenses of the case management division
of approximately $1.4 million. Program expenses increased 6% from the
equivalent prior year period, but decreased 2% on a per patient basis.
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Marketing, general and administrative expenses. Marketing, general
and administrative expenses increased $211,000 or 13%, due to the
administrative costs associated with addition of the case management division.
Depreciation and amortization. Depreciation and amortization
increased $69,000 or 35% primarily as the result of the amortization of the
covenants not to compete associated with the acquisition of all of the other
partner's interest in the Twin Town Outpatient subsidiary.
Dividends. The Company accrued dividends on its Series C Convertible
Preferred Stock at the rate of 7.5% per annum.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
At October 31, 1995, the Company had $981,000 in cash available for
working capital purposes, a decrease of approximately $401,000 from the end of
the prior year. Borrowings on the line of credit remained unchanged at $1.2
million. Management has received an extension to February 5, 1996, on its $2.0
line of credit and is currently negotiating an increase in the total
commitment.
The ratio of current assets to current liabilities of 3.7 at the end
of the current quarter compares to a ratio of 3.6 at April 30, 1995. The
average number of days' revenue in accounts receivable of 123 days at the end
of the current quarter has declined from 134 at April 30, 1995 and from 142 at
the end of the equivalent prior year period.
Working capital is anticipated to be utilized during the year to
continue expansion of the Company's partial hospitalization programs which
typically require $45,000 to $60,000 for office equipment, supplies, lease
deposits, and the hiring and training of personnel prior to opening as well as
for the implementation and expansion of other Company programs. New programs
generally experience operating losses through an average of the first four
months of operation. Approximately $700,000 was used in the second quarter of
the current fiscal year to fund the initial operations of the case management
division. Additional funding of approximately $225,000 is expected to be used
in the third quarter for case management operations, but subsequent operations
are expected to be funded from cash collections of the case management
division. The Company expects to require additional funds for the expansion
or start up of additional case management networks, and Management is exploring
new sources of financing for expansion.
The Company has been advised by the Health Care Financing
Administration (HCFA) that certain Program-related costs are not allowable for
reimbursement. Although the Company believes that its management fee is fully
reimbursable, there can be no assurances that, upon regulatory or judicial
review, the Company's position will be sustained. If the Company's management
fee is not fully allowed, the Company may be responsible for reimbursement of
the
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amounts disallowed, pursuant to warranty obligations that exist with certain
Hospital and CMHCs. Even though the Company's financial statements provide a
reserve for any such payments, a short-term obligation to provide
reimbursement could have a material adverse impact upon the Company's
liquidity and capital resources. Management believes, however, that this is
unlikely to occur. Certain factors are, in management's view, likely to
lessen the impact of any such material adverse effect, including the
expectation that, if claims arise, they will arise on a periodic basis over
several years; that any disallowance will merely be offset against obligations
already owed by the Provider to the Company; and that, in certain instances,
funds have already been paid into an escrow account to cover any such
eventuality.
The Focused Medical Review of claims for partial hospitalization
services conducted by fiscal intermediaries for the Hospitals and CMHCs has
substantially abated. To the extent claims for services have been denied in
Programs managed by the Company, the great majority of the denied claims have
been appealed and the reversal rate has been favorable. The appeals process
continues for a significant number of the denied claims. Generally, to the
extent that a denied claim is not reversed, the Company is not entitled to a
management fee with respect to the denied claim. Management believes that the
Company's reserve for contract settlement should be adequate to offset the
negative impact of unsuccessful appeals of denied claims.
The Company, during the course of its ordinary business operations,
from time to time is faced with claims asserted by employees whose employment
have been terminated. Presently, one attorney represents two former employees
who have filed separate wrongful termination lawsuits against the Company. One
of these employees was involuntarily terminated by the Company and the other
voluntarily quit. The employee who was involuntarily terminated also filed a
complaint against the Company in the United States District Court, Northern
District of California, under the federal and state false claims acts alleging
the submission of false claims to Medicare. The complaint was filed on August
24, 1994, and was unsealed in June 1995. The United States declined to
intervene. The Company requested special counsel to review the assertions
regarding false claims. As a result of the Company's internal review and an
investigation performed by special counsel, management has concluded that these
lawsuits lack merit and will be defended vigorously. Management believes that
the resolution of these claims will not have a material adverse effect on the
Company's financial position or results of operations, although the Company
will be required to incur legal fees and costs in defending these lawsuits.
Uncertainty Associated with Health Care Regulations
Since approximately 98% of the patients in the Programs administered
by the Company are Medicare-eligible persons, much of its revenue is dependent
upon Medicare reimbursement rules. Revisions or modifications to Medicare
rules and regulations could have a material adverse effect on the Company. The
Company and its Hospital and CMHC contracting agencies have quality assurance
and utilization review programs to ensure that the Programs are operated in
compliance with all Medicare requirements. Management and administrative
support services related to patient care have been specifically approved in
published Medicare guidelines as a
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Medicare-reimbursable expense as long as the costs for such services are
reasonable and records are submitted for the purchased services so that the
Hospital and CMHC contracting agencies can continue to reassess the
effectiveness of such services. In addition, substantially all of the funds
paid to the case management agencies that the Company is managing is derived
from Federal and State Medicaid funds.
In the present period of legislative uncertainty and deficit Federal
spending, financing the Medicare and Medicaid programs will continue to be a
target for reduced spending and the rules and regulations will continue to be
refined and changed. It is impossible to predict what changes will be made
and, therefore, one cannot speculate as to the impact of future changes on the
Company's contracts or revenues. Management believes it is unlikely that
funding will cease for the treatment of psychiatric illness. Further, in view
of the continued emphasis on outpatient treatment programs, management believes
changes in Medicare or Medicaid regulations will not disqualify its Program
conceptually, although modification of its contracts or adjustments in its
Programs may be required.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Company conducted an Annual Meeting of the stockholders on
October 18, 1995.
b) At the Annual Meeting, the following members were elected to
the Company's Board of Directors: Allen Tepper, Susan D. Erskine, Daniel L.
Frank, Eugene D. Hill III, Charles C. McGettigan, and Richard A. Niglio.
c) At the Annual Meeting, the stockholders voted upon and approved
three motions in the following manner:
i) As to the election of each director:
<TABLE>
<CAPTION>
Nominee Shares Voted in Favor Shares Opposed Abstentions
------- --------------------- -------------- -----------
<S> <C> <C> <C>
Allen Tepper 3,606,926.12 -0- 76,100
Susan D. Erskine 3,606,926.12 -0- 76,100
Daniel L. Frank 3,585,198.12 -0- 97,828
Eugene D. Hill III 3,585,198.12 -0- 97,828
Charles C. McGettigan 3,585,198.12 -0- 97,828
Richard A. Niglio 3,585,198.12 -0- 97,828
</TABLE>
ii) To increase the number of shares of Common Stock available for
option grant to 2,000,000 from 500,000; 2,546,639.12 FOR; 273,478 AGAINST; 4,451
ABSTAIN.
iii) To ratify the selection of Ernst & Young as the Company's
Independent Auditor for its fiscal year ending April 30, 1996: 3,524,690.12 FOR;
157,595 AGAINST; 741 ABSTAIN.
ITEM 5 - OTHER INFORMATION
The management of the Company is not aware of any events required to
be reported hereunder.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: December 13, 1995
PMR CORPORATION
BY: Allen Tepper
--------------------------------------
ALLEN TEPPER
President and Chief Executive Officer
(Principal Executive Officer)
BY: Susan Yeagley Sullivan
--------------------------------------
SUSAN YEAGLEY SULLIVAN
Chief Financial Officer
(Principal Financial Officer)
Page 11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> OCT-31-1995
<CASH> 981,678
<SECURITIES> 0
<RECEIVABLES> 11,951,332
<ALLOWANCES> 752,729
<INVENTORY> 0
<CURRENT-ASSETS> 14,579,052
<PP&E> 1,422,574
<DEPRECIATION> 740,014
<TOTAL-ASSETS> 17,954,381
<CURRENT-LIABILITIES> 3,889,690
<BONDS> 1,432,636
<COMMON> 35,459
0
7,000
<OTHER-SE> 8,257,942
<TOTAL-LIABILITY-AND-EQUITY> 17,954,381
<SALES> 14,220,704
<TOTAL-REVENUES> 14,220,704
<CGS> 0
<TOTAL-COSTS> 11,210,983
<OTHER-EXPENSES> 266,152
<LOSS-PROVISION> 411,568
<INTEREST-EXPENSE> 47,378
<INCOME-PRETAX> 400,489
<INCOME-TAX> 162,000
<INCOME-CONTINUING> 238,489
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 172,429
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
