<PAGE> 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 January 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 (I.R.S. 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 February 28, 1999, PMR Corporation had 6,987,714 shares of common
stock outstanding.
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PMR CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1.
Financial Condensed Consolidated Balance
Statements Sheets as of January 31, 1999
(Unaudited) and April 30, 1998 1
Condensed Consolidated Statements
of Operations for the three and
nine month periods ended January
31, 1999 and 1998 (Unaudited) 2
Condensed Consolidated Statements
of Cash Flows for the nine months
ended January 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 6
Item 3. Quantitative and Qualitative
Disclosures about Market Risks 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of
Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of
Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PMR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1999 1998
------------ ------------
ASSETS (Unaudited) (Restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 16,494,318 $ 18,522,859
Short-term investments, available-for-sale 19,733,956 20,257,045
Accounts receivable, net of allowance for uncollectible amounts
of $12,460,189 in 1999 and $9,081,610 in 1998 23,859,817 16,655,759
Prepaid expenses and other current assets 1,157,655 1,192,144
Deferred income tax benefit 4,136,000 4,136,000
------------ ------------
Total current assets 65,381,746 60,763,807
Furniture and office equipment, net of accumulated depreciation
of $1,342,760 in 1999 and $1,727,040 in 1998 2,709,085 3,492,449
Long-term receivables 5,339,471 2,976,918
Deferred income tax benefit 2,080,000 2,080,000
Other assets 956,479 1,135,880
------------ ------------
Total assets $ 76,466,781 $ 70,449,054
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities $ 794,532 $ 469,462
Accrued expenses 2,840,809 2,974,400
Accrued compensation and employee benefits 1,889,281 2,178,693
Advances from case management agencies 936,238 1,686,477
Income taxes payable 1,818,674 1,304,353
Payable to related party 2,770,869 --
------------ ------------
Total current liabilities 11,050,403 8,613,385
Note payable 323,232 392,024
Deferred rent expense 81,747 87,566
Contract settlement reserve 8,331,796 7,479,993
Minority interest 2,597,789 --
Commitments -- --
Stockholders' equity:
Common Stock, $.01 par value, authorized shares - 19,000,000;
issued and outstanding shares - 6,987,714 in 1999 and
6,949,650 in 1998 69,876 69,496
Additional paid-in capital 48,118,955 47,959,557
Retained earnings 6,591,733 5,847,033
Treasury stock, 90,000 shares of common stock at cost (698,750) --
------------ ------------
Total stockholders' equity 54,081,814 53,876,086
------------ ------------
Total liabilities and stockholders' equity $ 76,466,781 $ 70,449,054
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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PMR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31, NINE MONTHS ENDED JANUARY 31,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue - psychiatric care $ 13,227,364 $ 16,522,304 $ 41,845,979 $ 50,259,598
Revenue - pharmaceutical care 8,762,090 -- 20,411,648 --
------------ ------------ ------------ ------------
Total revenue 21,989,454 16,522,304 62,257,627 50,259,598
Expenses:
Cost of sales of pharmaceutical products 6,580,420 -- 15,603,174 --
Direct operating expenses - psychiatric care 9,140,864 11,541,613 28,707,291 35,518,340
Direct operating expenses - pharmaceutical care 1,157,955 -- 2,777,602 --
Marketing, general and administrative 2,984,038 2,188,307 8,013,199 6,618,429
Provision for bad debts 2,295,285 769,725 4,204,199 2,191,486
Depreciation and amortization 316,340 293,372 854,867 764,641
Acquisition expense -- -- 1,774,772 --
Special charge (credit) -- -- (678,292) --
Net interest (income) expense (275,448) (521,536) (1,266,574) (698,079)
------------ ------------ ------------ ------------
22,199,454 14,271,481 59,990,238 44,394,817
Income (loss) before minority interest, income taxes
and cumulative change (210,000) 2,250,823 2,267,389 5,864,781
Minority interest (511,948) -- -- --
------------ ------------ ------------ ------------
Income before income taxes and cumulative change 301,948 2,250,823 2,267,389 5,864,781
Income tax expense 124,000 923,279 930,000 2,405,000
------------ ------------ ------------ ------------
Net income before cumulative change 177,948 1,327,544 1,337,389 3,459,781
Cumulative change, net of income tax benefit -- -- 592,689 --
------------ ------------ ------------ ------------
Net income $ 177,948 $ 1,327,544 $ 744,700 $ 3,459,781
============ ============ ============ ============
Earnings per common share before cumulative change
Basic $ 0.03 $ 0.19 $ 0.19 $ 0.60
============ ============ ============ ============
Diluted $ 0.02 $ 0.18 $ 0.18 $ 0.54
============ ============ ============ ============
Earnings per common share
Basic $ 0.03 $ 0.19 $ 0.11 $ 0.60
============ ============ ============ ============
Diluted $ 0.02 $ 0.18 $ 0.10 $ 0.54
============ ============ ============ ============
Shares used in computing earnings per share
Basic 6,929,040 6,919,204 6,939,604 5,765,758
============ ============ ============ ============
Diluted 7,305,473 7,544,509 7,347,879 6,453,494
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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PMR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JANUARY 31,
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 744,700 $ 3,459,781
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Acquisition expense 1,774,772 --
Special charge (credit) (678,292) --
Depreciation and amortization 854,867 764,641
Provision for bad debts 4,204,199 2,191,486
Provision for deferred taxes -- 1,068,527
Cumulative effect of change in accounting principle 592,689 --
Changes in operating assets and liabilities:
Accounts and notes receivables (13,770,810) (8,845,416)
Prepaid expenses and other assets (53,397) (495,387)
Accounts payable and accrued expenses (1,323,750) (975,401)
Accrued compensation and employee benefits (289,412) (759,176)
Advances from case management agencies (750,239) 195,445
Payable to related party 2,770,869 --
Contract settlement reserve 851,803 537,374
Income taxes payable 926,189 696,591
Deferred rent expense (5,819) 42,787
------------ ------------
Net cash used in operating activities (4,151,631) (2,118,748)
INVESTING ACTIVITIES
Proceeds from the sale and maturity of short term investments 48,992,381 --
Purchases of short term investments (48,469,293) --
Purchases of furniture and office equipment (808,773) (2,239,233)
------------ ------------
Net cash used in investing activities (285,685) (2,239,233)
FINANCING ACTIVITIES
Proceeds from follow-on offering, net of offering costs -- 33,127,791
Proceeds from sale of common stock 159,778 897,764
Investment by joint venture partner 2,597,789 --
Purchase of treasury stock (280,000) --
Proceeds from issuance of note payable to bank -- 517,396
Payments on note payable to bank (68,792) (13,999)
------------ ------------
Net cash provided by financing activities 2,408,775 34,528,952
------------ ------------
Net increase (decrease) in cash & cash equivalents (2,028,541) 30,170,971
Cash at beginning of period 18,522,859 10,048,203
============ ============
Cash at end of period $ 16,494,318 $ 40,219,174
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
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PMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
January 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, 1998 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the financial position of PMR Corporation ("PMR" or "the
Company") have been included. Operating results for the nine months ended
January 31, 1999, are not necessarily indicative of the results that may be
expected for the year ending April 30, 1999. For further information, refer to
the financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K/A for the year ended April 30, 1998.
NOTE B - RECLASSIFICATION
Certain 1998 amounts have been reclassified to conform to the 1999 presentation.
NOTE C - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings per Share," which supersedes APB Opinion No. 15. SFAS 128 replaces the
presentation of primary earnings per share (EPS) with "Basic EPS" which includes
no dilution and is based on weighted-average common shares outstanding for the
period. Companies with complex capital structures, including PMR, will also be
required to present "Diluted EPS" that reflects the potential dilution of
securities such as employee stock options and warrants to purchase common stock.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997.
NOTE D - RESTATEMENT
As of April 30, 1998, the Company recorded an accrual for special charges
related to contract losses under certain contracts with Scripps Health. The
Company determined that its estimate of special charges related to contract
losses was overaccrued as of April 30, 1998 because all information available to
the Company was not used in determining the original estimate. The Company has
restated its previously issued financial statements as of April 30, 1998 to
reflect this correction of an error.
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The restatement had the effect of reducing previously reported accrued expenses
as of April 30, 1998 by $560,000 to $2,974,000, increased income taxes payable
by approximately $230,000 to $1,304,353, and increasing retained earnings by
approximately $330,000 to $5,847,033. For the year ended April 30, 1998, special
charge expense was reduced by $560,000 which increased the Company's net income
by $330,007 after taxes from $1,458,378 to $1,788,385. The increase of net
income increased basic EPS for the year ended April 30, 1998 from $.24 as
previously reported to $.30, and increased diluted EPS from $.22 as previously
reported to $.27.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When used in this Quarterly Report on Form 10-Q and in other public statements
by the Company and Company officers, the words "may", "will", "expect",
"anticipate", "continue", "forecast", "estimate", "project", "intend", and
similar expressions are intended to identify forward-looking statements
regarding events and financial trends which may affect the Company's future
operating results and financial position. Such statements are subject to risks
and uncertainties that could cause the Company's actual results and financial
position to differ materially. Among those factors are those discussed below and
in the Company's Annual Report on form 10-K/A for the fiscal year ended April
30, 1998 and the Company's periodic reports and other filings with the
Securities and Exchange Commission. The release of forward-looking statements
will not impose an obligation upon the Company to maintain or update these
statements in the future. The Company shall assume no responsibility to publicly
release the results of any revision of forward-looking statements to reflect
trends or circumstances after the date they are made or to reflect the
occurrence of unanticipated events.
OVERVIEW
PMR Corporation ("PMR" or "the Company") is a leading manager of
specialized mental health care programs and disease management services designed
to treat individuals diagnosed with a serious mental illness ("SMI"). PMR
manages the delivery of a broad range of outpatient and community-based
psychiatric services for SMI patients, consisting of 35 Outpatient Programs, one
Case Management Program and four Chemical Dependency Programs. In July 1998, the
Company formed a new company called Stadt Solutions, LLC ("Stadt Solutions")
which is jointly owned by PMR and Stadtco Holdings, Inc. (successor to
Stadtlander Drug Distribution Co., Inc.) ("Stadtco"). Stadt Solutions offers a
specialty pharmacy program for individuals with SMI, serving approximately 6,000
individuals through 14 pharmacies in 13 states. PMR, with Stadt Solutions,
operates in approximately 27 states and employs or contracts with more than 400
mental health and pharmaceutical industry professionals and provides services to
approximately 11,000 individuals diagnosed with SMI. PMR believes it is the only
private sector company focused on providing an integrated mental health disease
management model to the SMI population.
PMR's Outpatient Programs serve as a comprehensive alternative to
inpatient hospitalization and include partial hospitalization and lower
intensity outpatient services. The Case Management Program provides an
intensive, individualized primary care service which consists of a proprietary
case management model utilizing clinical protocols for delivering care to SMI
patients. The Company also provides Chemical Dependency Programs to patients
affiliated with managed care organizations and government-funded programs.
SOURCES OF REVENUE
Outpatient Programs. Outpatient Programs operated by PMR are the
Company's primary source of revenue. Revenue under these programs is derived
primarily from services provided
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under three types of agreements: (i) all-inclusive fee arrangements based on
fee-for-service rates (based on units of service provided) under which the
Company is responsible for substantially all direct program costs; (ii)
fee-for-service arrangements under which the provider maintains responsibility
for a larger extent of direct program costs; and (iii) fixed fee arrangements
where the Company's fee is a fixed monthly sum and the provider assumes
substantially all program costs. The all-inclusive arrangements are in effect at
29 of the 35 Outpatient Programs operated during the third quarter of fiscal
1999 and constituted 66.9% of the Company's psychiatric care revenue for the
three months ended January 31, 1999. Typical contractual agreements with these
providers, primarily acute care hospitals or Community Mental Health Centers
("CMHCs"), require the Company to provide, at its own expense, specific
management personnel for each program site. Patients served by the Outpatient
Programs typically are covered by Medicare.
Revenue under the Outpatient Program is recognized at estimated net
realizable amounts when services are rendered based upon contractual
arrangements with providers. Under certain of the Company's contracts, the
Company is obligated to indemnify the provider for all or some portion of the
Company's management fees that may not be deemed reimbursable to the provider by
Medicare's fiscal intermediaries. As of January 31, 1999, the Company had
recorded $8.3 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 1999.
Case Management Program. For its Case Management Program in Tennessee,
the Company receives a monthly case rate payment from the behavioral health
organization responsible for managing the Tennessee TennCare Partners State
Medical Managed Care Program ("TennCare") and is responsible for planning,
coordinating and managing psychiatric case management services for its consumers
who are eligible to participate in the TennCare program. The Company also is
responsible for providing a portion of the related outpatient clinical care for
certain consumers. Revenues under the TennCare program are recognized in the
period in which the related service is to be provided. These revenues represent
substantially all of the Company's case management revenues. The Company also
operates an urgent care program that receives interim payments that are adjusted
based on inpatient utilization statistics which are compared to a baseline.
Revenues are recognized based on the quarterly calculation of the statistical
trends.
Chemical Dependency Programs. In Southern California, the Company
contracts primarily with managed care companies and commercial insurers to
provide its outpatient chemical dependency services. The contracts are
structured as fee-for-service or case rate reimbursement and revenue is
recognized in the period in which the related service is delivered.
Pharmaceutical. In July 1998, the Company and Stadtco formed Stadt
Solutions, a Delaware limited liability company. Stadt Solutions offers
specialty pharmaceutical services to individuals with SMI and also offers site
management and clinical information services to pharmaceutical companies, health
care providers and public sector purchasers. Ownership of Stadt Solutions is
held 50.1% by PMR and 49.9% by Stadtco. Stadtco is entitled to receive a
priority distribution of income approximately equivalent to the operating income
Stadtco expected
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to be generated by Stadtco's base of approximately 6,000 clients existing at the
time of the formation of Stadt Solutions. The incremental operating income in
excess of this base, if any, will be distributed equally between the Company and
Stadtco.
Stadt Solutions commenced business with operations serving clients through 14
pharmacies in 13 states offering services to approximately 6,000 clients. These
individuals are presently receiving the drug clozaril, an anti-psychotic for
schizophrenia, as well as blood monitoring services. Stadt Solutions intends 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.
RESULTS OF OPERATIONS - QUARTER ENDED JANUARY 31, 1999 COMPARED TO QUARTER ENDED
JANUARY 31, 1998
Revenue - Psychiatric Care. Revenues from psychiatric care for the
quarter ended January 31, 1999 were $13.2 million, a decrease of $3.3 million,
or 19.9%, as compared to the quarter ended January 31, 1998. The Outpatient
Programs recorded revenues of $10.0 million, a decrease of $2.3 million, or
19.1%, from the quarter ended January 31, 1998. The decline in revenues was due
to a net reduction of nine outpatient programs versus the year ago quarter and a
decrease in same site revenues of 3.0% in the Outpatient Programs. The
Outpatient Programs operated under an all-inclusive fee arrangement had
operating margins of 35.4% in the quarter ended January 31, 1999 as compared to
40.9% in the quarter ended January 31, 1998. The Case Management Program
recorded revenues of $2.8 million, a decrease of $800,000, or 21.7% as compared
to the quarter ended January 31, 1998. The decrease in Case Management revenues
was due to the restructuring of the Company's relationship with Case Management,
Inc., a Memphis, Tennessee case management agency, which substantially reduced
the recognized revenue from this program as well as the termination of two Case
Management Programs in Arkansas. Revenues from the Company's Chemical Dependency
and other programs not included as outpatient or case management were $454,000,
a decrease of 31.3% from the quarter ended January 31, 1998. The decrease in
revenues was associated primarily with the Company's termination of two Chemical
Dependency Programs in Arkansas which generated no revenue in the third quarter
of fiscal 1999.
Revenue - Pharmaceutical Care. Revenues of $8.8 million from
pharmaceutical care represent sales of pharmaceutical products to approximately
6,000 individuals with SMI through 14 Stadt Solutions pharmacies for the quarter
ended January 31, 1999. Stadt Solutions was formed in July 1998 and, therefore
generated no revenue or expenses for the quarter ended January 31, 1998.
Cost of Sales of Pharmaceutical Products. Cost of sales of
pharmaceutical products of $6.6 million represent the cost of providing such
products by Stadt Solutions in the quarter ended January 31, 1999.
Direct Operating Expenses - Psychiatric Care. Direct operating expenses
of psychiatric care consist of costs incurred at the program sites and costs
associated with the field management responsible for administering the programs.
Direct operating expenses for the quarter ended
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January 31, 1999 were $9.1 million, a decrease of $2.4 million, or 20.8%, as
compared to the quarter ended January 31, 1998. As a percentage of psychiatric
care revenues, operating expenses were 69.1%, down slightly from 69.9% for the
quarter ended January 31, 1998. The overall decrease in direct operating
expenses and the improvement in the operating expense ratio was primarily due to
the net closing of nine Outpatient Programs, three Case Management Programs and
two Chemical Dependency Programs, which in the aggregate, had lower patient
volume and higher expense ratios than the remaining programs. The Company also
restructured its agreement with Case Management, Inc., a case management agency
in Memphis, Tennessee, which reduced recognized revenue but improved operating
margins.
Direct Operating Expenses - Pharmaceutical Care. Direct operating
expenses of pharmaceutical care of $1.2 million consist of the operating costs
incurred at the 14 Stadt Solutions pharmacies and related billing costs for the
quarter ended January 31, 1999.
Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses consist of corporate overhead expenses and regional
administrative, development and clinical expenses which are not direct program
expenses. Marketing, general and administrative expenses for the quarter ended
January 31, 1999, were $3.0 million, an increase of $795,000 or 36.4%, as
compared to the quarter ended January 31, 1998. The increase was related to
investment in the home offices 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 13.6% in the quarter ended January 31, 1999, as
compared to 13.2% for the quarter ended January 31, 1998. The increase in
marketing, general and administrative expenses as a percent of revenue was due
primarily to an increase in Stadt Solutions and coordinated care initiative
support costs without a proportionate increase in coordinated care revenue.
Provision for Bad Debts. Expenses related to the provision for bad debts
for the quarter ended January 31, 1999, were $2.3 million, an increase of $1.5
million, or 198.2%, as compared to the quarter ended January 31, 1998. 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 associated with
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 increased to 10.4% of revenues in the quarter ended
January 31, 1999 from 4.7% in the quarter ended January 31, 1998. The Company
expects this accrual to fluctuate based on the amount of claims under review in
its Outpatient Programs and the number of programs that the Company operates
which serve a significant indigent population.
Depreciation and Amortization. Depreciation and amortization expenses
for the quarter ended January 31, 1999, were $316,000, an increase of $23,000,
or 7.8%, as compared to the quarter ended January 31, 1998. The increase was due
to additional capital expenditures associated with new Outpatient Programs and
increased capital expenditures for information systems.
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Net Interest Income. Interest income, net of interest expense, decreased
from $522,000 for the quarter ended January 31, 1998 to $275,000 for the quarter
ended January 31, 1999, a decrease of $247,000, or 47.3%. This decrease resulted
primarily from non-recurring interest expense on income taxes of approximately
$200,000 during the quarter ended January 31, 1999.
Income (Loss) Before Minority Interest, Income Taxes and Cumulative
Change. Loss before minority interest, income taxes and cumulative change was
$210,000 for the quarter ended January 31, 1999 compared to income before
minority interest, income taxes and cumulative change of $2.3 million for the
quarter ended January 31, 1998, a decrease of $2.5 million or 108.7%.
Minority Interest. Minority interest of $512,000 represents a
distribution of the operating losses of Stadt Solutions during the quarter ended
January 31, 1999 in its entirety to Stadtco.
RESULTS OF OPERATIONS - NINE MONTHS ENDED JANUARY 31, 1999 COMPARED TO NINE
MONTHS ENDED JANUARY 31, 1998
Revenue - Psychiatric Care. Revenues from psychiatric care for the nine
months ended January 31, 1999 were $41.8 million, a decrease of $8.4 million, or
16.7%, as compared to the nine months ended January 31, 1998. The Outpatient
Programs recorded revenues of $32.8 million, a decrease of $3.5 million, or
9.5%, from the nine months ended January 31, 1998. The decrease in revenues was
due to a net reduction of nine outpatient programs versus the year ago nine
month period. This reduction was partially offset by same site revenue growth of
10.8% in the Outpatient Programs. The Outpatient Programs operated under an
all-inclusive fee arrangement had operating margins of 35.5% in the nine months
ended January 31, 1999 as compared to 38.4% in the nine months ended January 31,
1998. The Company's Case Management Programs recorded revenues of $7.7 million,
a decrease of $4.0 million, or 33.9%, from the nine months ended January 31,
1998. The decrease in revenues was due to the restructuring of the Company's
relationship with Case Management, Inc. and the termination of two Case
Management Programs in Arkansas. Revenues from the Company's Chemical Dependency
and other programs not included as outpatient or case management were
$1,276,000, a decrease of 42.0% from the nine months ended January 31, 1998. The
decrease in revenues was associated primarily with the Company's termination of
two Chemical Dependency Programs in Arkansas.
Revenue - Pharmaceutical Care. Revenues of $20.4 million from
pharmaceutical care represents sales of pharmaceutical products to approximately
6,000 individuals with SMI through 14 Stadt Solutions pharmacies since its
formation in July 1998.
Cost of Sales of Pharmaceutical Products. Cost of sales of
pharmaceutical products of $15.6 million represent the cost of providing such
products since the formation of Stadt Solutions in July 1998.
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Direct Operating Expenses - Psychiatric Care. Direct operating expenses
for the nine months ended January 31, 1999 were $28.7 million, a decrease of
$6.8 million, or 19.2%, as compared to the nine months ended January 31, 1998.
As a percentage of psychiatric care revenues, operating expenses were 68.6%,
down from 70.7% for the nine months ended January 31, 1998. The overall decrease
in direct operating expenses and the improvement in the operating expense ratio
was primarily due to the net closing of nine Outpatient Programs, three Case
Management Programs and two Chemical Dependency Programs, which in the
aggregate, had lower patient volume and higher expense ratios than the remaining
programs. The Company also restructured its agreement with Case Management,
Inc., which reduced recognized revenue but improved operating margins.
Direct Operating Expenses - Pharmaceutical Care. Direct operating
expenses of pharmaceutical care of $2.8 million consist of the operating costs
incurred at the 14 Stadt Solutions pharmacies and related billing costs since
the formation of Stadt Solutions in July 1998.
Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses for the nine months ended January 31, 1999, were $8.0
million, an increase of $1.4 or 21.1%, as compared to the nine months ended
January 31, 1998. The increase was related to investment in the home offices 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 12.9% for
the nine months ended January 31, 1999, as compared to 13.2% for the nine months
ended January 31, 1998. The decrease in marketing, general and administrative
expenses as a percent of revenue was due to the significant increase in
pharmaceutical revenue without proportionate increases in administrative
expenses partially offset by an increase in support costs related to the
coordinated care initiative without a proportionate increase in coordinated care
revenue.
Provision for Bad Debts. Expenses related to the provision for bad debts
for the nine months ended January 31, 1999, were $4.2 million, an increase of
$2.0, or 91.8%, as compared to the nine months ended January 31, 1998. The
increase was due to reserve 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 increased to 6.8% of revenues in the nine months ended January 31,
1999 from 4.4% in the nine months ended January 31, 1998. The Company expects
this accrual to fluctuate based on the amount of claims under review in its
Outpatient Programs and the number of programs that the Company operates which
serve a significant indigent population.
Depreciation and Amortization. Depreciation and amortization expenses
for the nine months ended January 31, 1999, were $855,000, an increase of
$90,000, or 11.8%, as compared to the nine months ended January 31, 1998. The
increase was due to additional capital expenditures associated with new
Outpatient Programs and increased capital expenditures for information systems.
11
<PAGE> 14
Acquisition Expense. Acquisition expenses consist of legal, advisory,
accounting, consulting, and other costs related to the terminated definitive
merger agreements with Behavioral Health Corporation. Previously capitalized
acquisition expenses written-off for the nine months ended January 31, 1999 were
$1.8 million. No Acquisition expenses were recorded in the nine months ended
January 31, 1998.
Special Charge Credit. Special charge credit of $678,292 was recorded in
the quarter ended October 31, 1998 and was due primarily to a favorable
settlement of disputes and the restructuring of the relationship with Case
Management, Inc. ("CMI") on August 27, 1998. The Company had incurred a special
charge relating to the closing of several programs identified in the quarter
ended April 30, 1998, which included a special charge relating to CMI. The
outcome of the dispute in August 1998, which was better than anticipated as of
April 30, 1998, involved the return of common stock that was previously issued
to CMI as part of the consideration for a restrictive covenant, a cash
settlement, the release of claims against the Company for certain liabilities,
and a percentage of CMI's future cash flow in exchange for services.
The Company has reflected the return of common stock as treasury stock in
stockholders' equity at a fair market value of $418,750 at the date of
settlement. At the time of original issuance, an intangible asset for the common
stock was valued at fair market value of $256,250 and was amortized over the
term of the restrictive covenant of 72 months. At April 30, 1998, the net book
value of the intangible asset was $158,000 and was fully reserved in the special
charge. The other components of the special charge credit in the quarter ended
October 31, 1998 were a cash settlement of $150,000 for accounts receivable
which were fully reserved, the release of certain liabilities relating to
unemployment taxes of $94,000 and other items of $15,542.
At January 31, 1999, the remaining accrual for special charge totaling $785,236
was included in accrued liabilities in the consolidated balance sheet.
Net Interest Income. Interest income, net of interest expense, increased
from $698,000 for the nine months ended January 31, 1998 to $1,267,000 for the
nine months ended January 31, 1999, an increase of $569,000, or 81.5%. This
increase resulted from higher cash and cash equivalent and short-term investment
balances resulting from the completion of the Company's follow-on common stock
offering in October 1997, partially offset by non-recurring interest expense on
income taxes of $200,000.
Income Before Minority Interest, Income Taxes and Cumulative Change.
Income before minority interest, income taxes and cumulative change decreased
from $5.9 million for the nine months ended January 31, 1998 to $2.3 million for
the nine months ended January 31, 1999, a decrease of $3.6 million or 61.0%.
Income before minority interest, income taxes and cumulative change as a
percentage of revenue decreased from 11.7% to 3.6% over the same period.
Cumulative Change. The cumulative change of $593,000 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.
12
<PAGE> 15
Restatement. As of April 30, 1998, the Company recorded an accrual for
special charges related to contract losses under certain contracts with Scripps
Health. The Company determined that its estimate of special charges related to
contract losses was over accrued as of April 30, 1998 because all information
available to the Company was not used in determining the original estimate. The
Company has restated its previously issued financial statements as of April 30,
1998 to reflect this correction of an error.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended January 31, 1999, net cash used in operating
activities was $4.2 million. Working capital at January 31, 1999 was $54.3
million, an increase of $2.2 million, or 4.2%, as compared to working capital at
April 30, 1998. Cash and cash equivalents and short-term investments at January
31, 1999 were $36.2 million, a decrease of $2.6 or 6.7% as compared to April 30,
1998.
The Company experienced growth in accounts receivable due to significant
revenue increases combined with an increase in days revenue outstanding to 101
at January 31, 1999 (versus 88 at April 30, 1998). The increase in days revenue
outstanding was due to focused reviews of claims by fiscal intermediaries at
several Outpatient Programs, and the restructuring and termination of Case
Management Programs which have historically experienced shorter payment cycles
than the Outpatient Programs. The largest source of accounts receivable growth
has been from Stadt Solutions, which has accumulated $8.1 million in accounts
receivable since the commencement of operations on July 1, 1998. The other
significant use of cash was leasehold improvements associated with recently
opened sites and investment in information technology.
Working capital available to finance fiscal 1999 obligations is expected
to be provided principally from operations, as well as from a $10 million line
of credit from Sanwa Bank. Interest is payable under this line of credit at
either the bank's reference rate or the Eurodollar rate plus 2%. As of January
31, 1999 no balance was outstanding under the line of credit. Working capital is
anticipated to be utilized during fiscal 1999 to continue expansion of the
Company's Outpatient and Case Management Programs, for expansion of Stadt
Solutions and its site management and clinical information business, and for the
development of a risk based coordinated care project. Pursuant to the terms of
the Stadt Solutions Subscription Agreement and Operating Agreement, the Company
invested approximately $2.5 million into Stadt Solutions during the quarter
ended January 31, 1999 to fund the second closing and provide sufficient working
capital for operations. 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 stock compensation plans. The purchases
will be made from time to time in open market transactions. In December 1998,
the Company repurchased 40,000 shares of its common stock at a price of $7 per
share, or $280,000, in an open market transaction. At January 31, 1999, these
shares were held in treasury.
13
<PAGE> 16
The opening of a new Outpatient Program site typically requires $45,000
to $150,000 for office equipment, supplies, lease deposits, leasehold
improvements and the hiring and training of personnel prior to opening. These
programs generally experience operating losses through an average of the first
four months of operation. The Company expects to provide cash for the start up
of the site management and clinical information business as part of the
formation of Stadt Solutions.
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 nine months of
fiscal 1998 and 1999, a majority of the Company's revenue was derived from the
management of its Outpatient Programs. Since substantially all of the patients
of the Outpatient Programs are eligible for Medicare, collection of a
significant component of the Company's management fees is dependent upon
reimbursement of claims submitted to fiscal intermediaries by the hospitals or
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.
14
<PAGE> 17
IMPACT OF INFLATION
A substantial portion of the Company's revenue is subject to
reimbursement rates that are regulated by the federal and state governments and
that do not automatically adjust for inflation. As a result, increased operating
costs due to inflation, such as labor and supply costs, without a corresponding
increase in reimbursement rates, may adversely affect the Company's earnings in
the future.
IMPACT OF YEAR 2000 COMPUTER ISSUES
The year 2000 issue is the result of computer applications being written
using two digits rather than four to define the applicable year. Certain
computer applications (including computer applications that may be used by the
Company and 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. At January 31, 1999 substantially all corrections to the
Company's material computer applications have been made and implemented. The
total costs associated with these revisions were not material and were charged
to expense as incurred. For externally maintained systems, the Company has begun
working with vendors to ensure that each system is currently year 2000 compliant
or will be made year 2000 compliant in early 1999. The cost to be incurred by
the Company related to externally maintained systems is expected to be minimal.
Externally maintained systems which the Company currently relies include
environmental and building systems related to its headquarters and field
offices, payroll, banking and billing systems.
The Company believes that by completing its planned corrections to its
computer applications and identifying and confirming the correction of year 2000
compliance problems of its vendors, the year 2000 issue with respect to the
Company's systems and externally maintained systems can be mitigated. However,
if such corrections cannot be completed on a timely basis, the year 2000 issue
could have a material adverse impact on the Company's business, financial
condition and results of operations. Because of the many uncertainties
associated with year 2000 compliance issues, and because the Company's
assessment is necessarily based on information from third party lessors,
manufactures, vendors and suppliers, there can be no assurance that the
Company's assessment is correct and it is not possible to predict the
materiality or effect of any failure of such assessment to be correct.
Significant failures or erroneous applications experienced by HCFA or
other third party payors or providers could cause a delay in the Company's
receipt of payments from its customers. For example, such failures could cause
difficulties in processing Medicare or other claims in a timely manner,
collecting accurate claims or data or enrolling new patients. The Company has
initiated a program to determine whether the computer applications of its
significant payors and contract providers are year 2000 compliant or will be
upgraded to be compliant in a timely manner. The Company has not completed this
review and it is unknown whether computer applications of contract providers and
HCFA and other payors will be year 2000 compliant.
15
<PAGE> 18
Although the Company has not determined the extent to which any disruptions as
described above (either individually or in the aggregate) could affect the
Company's operations, any such disruption could have a substantial adverse
impact on Medicare or Medicaid payments to providers and, in turn, payments to
the Company, resulting in a material adverse effect upon the Company's business,
financial condition and results of operations.
The Company's priority with respect to year 2000 compliance has been to
identify potential processing concerns and to evaluate the risk of processing
failure. The Company has begun to develop contingency plans relating to the
areas of year 2000 risk exposure and expects to substantially complete such
plans by the second quarter of fiscal 2000. However, there can be no assurance
that the Company will complete its contingency planning within such time period
or that its contingency plans will contemplate all possible risks of any
failures related to the year 2000 problem.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
16
<PAGE> 19
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
(a) Exhibits
Exhibit Number 27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the third quarter of fiscal 1999, the Company filed the following
report on Form 8-K:
On November 5, 1998 the Company filed a current report on Form 8-K
relating to the termination of the definitive merger agreement with
Behavioral Healthcare Corporation.
17
<PAGE> 20
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: March 15, 1999
PMR CORPORATION
BY: /s/ Allen Tepper
------------------------------------
ALLEN TEPPER
Chief Executive Officer
(Principal Executive Officer)
BY: /s/ Mark P. Clein
------------------------------------
MARK P. CLEIN
Chief Financial Officer
(Principal Financial Officer)
18
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<PERIOD-START> MAY-01-1998
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