<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1998
[ ] 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 0-17401
OPTIMUMCARE CORPORATION
(Exact name of registrant specified in its charter)
Delaware 33-0218003
- -------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30011 Ivy Glenn Drive, Ste 219
Laguna Niguel, CA 92677
- -------------------------------- -------------------
(714) 495-1100
(Registrants telephone number, including area code)
Not Applicable
----------------------------------------------------
(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 periods
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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Number of Shares Outstanding
----- at September 30, 1998
----------------------------
Common Stock, $.001 par value 6,038,997
-1-
<PAGE> 2
INDEX
OPTIMUMCARE CORPORATION
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements (Unaudited)
Balance Sheets as of September 30, 1998 and 3
December 31, 1997
Statements of Income for the Three Months and Nine Months 4
Ended September 30, 1998 and 1997
Statements of Cash Flows for the Three Months and Nine 5
Months Ended September 30, 1998 and 1997
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operation
PART II OTHER INFORMATION 11
SIGNATURE 12
</TABLE>
-2-
<PAGE> 3
OPTIMUMCARE CORPORATION
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
CASH $ 879,588 $ 945,404
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE OF $0 AT
SEPTEMBER 30, 1998 AND $560,198 AT DECEMBER 31, 1997 1,831,281 2,186,906
PREPAID EXPENSES 48,834 49,246
PREPAID INCOME TAXES 139,509 0
----------- -----------
TOTAL CURRENT ASSETS 2,899,212 3,181,556
NOTES RECEIVABLE FROM OFFICER 274,000 274,000
FURNITURE AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION OF $ 121,088 AT SEPTEMBER 30, 1998
AND $90,473 AT DECEMBER 31, 1997 63,244 86,685
INTANGIBLE ASSETS, LESS ACCUMULATED AMORTIZATION
OF $1,564 AT SEPTEMBER 30, 1998 AND $1,428 AT
DECEMBER 31, 1997 511 647
DEFERRED TAX ASSET 0 334,000
OTHER ASSETS 53,520 44,283
----------- -----------
TOTAL ASSETS $ 3,290,487 $ 3,921,171
=========== ===========
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 239,385 $ 270,178
ACCRUED VACATION 76,841 65,639
ACCRUED EXPENSES 130,689 111,887
LINE OF CREDIT 0 200,000
----------- -----------
TOTAL CURRENT LIABILITIES 446,915 647,704
STOCKHOLDERS' EQUITY
COMMON STOCK, $.001 PAR VALUE; AUTHORIZED
20,000,000 SHARES, 6,849,690 SHARES ISSUED,
6,038,997 SHARES OUTSTANDING AT SEPTEMBER 30, 1998,
6,902,611 SHARES ISSUED AND OUTSTANDING AT
DECEMBER 31, 1997 6,850 6,903
PAID-IN-CAPITAL 3,296,752 3,356,009
ACCUMULATED EARNINGS/(DEFICIT) 310,659 (89,445)
LESS COST OF 810,693 SHARES IN TREASURY (770,689) 0
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $ 2,843,572 $ 3,273,467
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,290,487 $ 3,921,171
=========== ===========
</TABLE>
See notes to financial statements.
-3-
<PAGE> 4
OPTIMUMCARE CORPORATION
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 2,821,533 $ 3,076,658 $ 8,949,461 $ 8,958,114
INTEREST INCOME 6,586 1,926 18,650 4,989
----------- ----------- ----------- -----------
$ 2,828,119 $ 3,078,584 $ 8,968,111 $ 8,963,103
----------- ----------- ----------- -----------
OPERATING EXPENSES:
COSTS OF SERVICES PROVIDED $ 2,195,549 $ 2,302,422 $ 6,828,355 $ 6,572,782
PROVISION FOR DOUBTFUL ACCOUNTS 0 0 302,079 0
GENERAL AND ADMINISTRATIVE 387,170 396,625 1,197,202 1,200,490
INTEREST 95 3,205 2,401 30,570
MINORITY INTEREST 0 (12,137) 0 (34,513)
----------- ----------- ----------- -----------
2,582,814 2,690,115 8,330,037 7,769,329
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 245,305 388,469 638,074 1,193,774
INCOME TAXES 79,300 134,573 237,970 468,934
----------- ----------- ----------- -----------
NET INCOME $ 166,005 $ 253,896 $ 400,104 $ 724,840
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.03 $ 0.04 $ 0.06 $ 0.11
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.03 $ 0.04 $ 0.06 $ 0.10
=========== =========== =========== ===========
</TABLE>
See notes to financial statements
-4-
<PAGE> 5
OPTIMUMCARE CORPORATION
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDING
SEPTEMBER 30 SEPTEMBER 30
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income $ 400,104 $ 724,840
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & Amortization 30,751 58,886
Provision for Doubtful Accounts 302,079 0
Minority Interest 0 (34,513)
Changes in operating assets and liabilities:
Decrease/(Increase) in accounts receivable, net 53,546 (923,770)
Decrease/(Increase) in prepaid expenses 412 (23,822)
(Increase) in other assets (9,237) (12,849)
(Increase) in prepaid income taxes (139,509) 0
Decrease in deferred tax asset 334,000 0
(Decrease) in accounts payable (30,793) 67,039
Increase in accrued vacation 11,202 0
Increase in accrued liabilities 18,802 296,945
----------- -----------
CASH AND CASH EQUIVALENTS PROVIDED
BY OPERATING ACTIVITIES 971,357 152,756
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of furniture & equipment (7,173) (46,812)
----------- -----------
CASH AND CASH EQUIVALENTS (USED)
IN INVESTING ACTIVITIES (7,173) (46,812)
CASH FLOW FROM FINANCING ACTIVITIES
Purchase of treasury stock (837,500) 0
Note payable from bank (200,000) (500,000)
Exercise of stock options 7,500 0
----------- -----------
CASH AND CASH EQUIVALENTS (USED) BY
FINANCING ACTIVITIES (1,030,000) (500,000)
(DECREASE) IN CASH AND CASH EQUIVALENTS (65,816) (394,056)
Cash and cash equivalents at beginning of period 945,404 1,113,809
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 879,588 $ 719,753
=========== ===========
</TABLE>
See notes to financial statements.
-5-
<PAGE> 6
OPTIMUMCARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements for the three month period ended
September 30, 1998 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information 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 nine month periods ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. For further information, refer to the financial statements and footnotes
thereto included in the Company's Form 10-K for the year ended December 31,
1997.
NOTE B -- ALLOWANCE FOR DOUBTFUL ACCOUNTS
In February, 1997 the Company formed an alliance with Galaxy Health Care, Inc.
to develop community mental health centers. In August, 1997 the company
relicensed its Long Beach, California partial hospitalization program with
Galaxy. In December, 1997, an insurance reimbursement audit of Galaxy's Florida
treatment sites placed Galaxy under severe working capital constraints. The
Company has perfected a security interest in all funds due Galaxy arising from
the operation of the Long Beach program. The allowance for doubtful accounts at
December 31, 1997 reserved all amounts due from Galaxy at that point in time.
During 1998, the Company learned that the magnitude of debt owed by Galaxy from
this audit appeared to be extremely substantial. This caused the Company to
believe that the collectibility of its receivables covered by the security
interest was remote. As a result, the Company wrote off all amounts due from
Galaxy during the first quarter of 1998.
The Company has terminated its relationship with Galaxy and is seeking a new
host for its partial hospitalization treatment site in Long Beach, California.
The prepaid income tax account at September 30, 1998 and the deferred asset
account at December 31, 1997 represent the tax aspects associated with the
accounts receivable from Galaxy.
-6-
<PAGE> 7
NOTE C -- EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform with Statement 128 requirements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPT. 30, 1998 SEPT. 30, 1997 SEPT. 30, 1998 SEPT. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Numerator $ 166,005 $ 253,896 $ 400,104 $ 724,810
Denominator:
Denominator for basic
earnings per share -
weighted-average shares 6,545,334 6,895,411 6,775,662 6,860,315
Dilutive employee stock
options 79,025 263,009 164,565 354,300
Denominator for diluted
earnings per share 6,624,359 7,158,420 6,940,227 7,214,615
Basic earnings per share $ .03 $ .04 $ .06 $ .11
Diluted earnings per
share $ .03 $ .04 $ .06 $ .10
</TABLE>
NOTE D -- TREASURY STOCK
On March 19, 1998 Board of Directors of the Company approved a plan whereby the
Company could purchase through open market transactions up to 500,000 shares of
its common stock over the next twelve months. On September 1, 1998, Board of
Directors of the Company amended the plan whereby the Company could purchase an
additional 500,000 shares of its common stock through open market transactions
over the next twelve months. The Company has purchased 888,614 shares of its
common stock from April 21, 1998 through September 30, 1998, of which 77,921
shares have been retired at September 30, 1998.
-7-
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
SAFE HARBOR STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains statements which are forward-looking in time and involve
risks and uncertainties, including the risks associated with plans, the effects
of changing economic and competitive conditions, government regulation which may
affect facilities, licensing, healthcare reform which may affect payment amounts
and timing, availability of sufficient working capital, program development
efforts and timing and market acceptance of new programs which may affect future
sales growth and/or costs of operations.
MATERIAL CHANGES IN FINANCIAL CONDITION
At September 30, 1998 and December 31, 1997, the Company's working capital was
$2,452,297 and $2,533,852 respectively. The nature of the Company's business
requires significant working capital to fund operations of its programs as well
as to fund corporate expenditures until receivables can be collected. Moreover,
because each of the existing contracts represents a significant portion of the
Company's business, the inability to collect any of the accounts receivable
could materially and adversely affect the Company's liquidity. Despite the
write-off of the Galaxy receivable previously discussed in Note B of the Notes
to the Financial Statements, the Company has been able to effectively manage
collections on other receivables and payments for services such that there has
been no significant impairment of working capital.
Cash flows from operations were $971,357 and $152,756 for the periods ended
September 30, 1998 and 1997, respectively. Positive cash flow for the nine
months ended September 30, 1998 was due to the net income for the period,
improved collections on receivables, and the positive cash flow tax aspects
associated with the write-off of the Galaxy receivable during 1998.
Cash flows used in investing activities were ($7,173) and ($46,812) for the
periods ended September 30, 1998 an 1997, respectively. Funds used during both
periods were expended for office furniture and equipment.
The cash flows used in financing activities were ($1,030,000) and ($500,000) for
the periods ended September 30, 1998 and 1997 respectively. Funds used during
1998 were for the purchase of 888,614 shares of treasury stock as discussed in
Note D of the Notes to the Financial Statements, and for pay downs on the
Company's line of credit agreement with the bank, which were drawn during 1997.
Funds used in 1997 were for paydowns on the Company's line of credit with the
bank which were drawn during 1996.
The line of credit expires May 1, 1999. The maximum indebtedness of the line is
$1,500,000. Amounts allowable for draw are based on 75% of certain qualified
accounts receivable. As of September 30, 1998, approximately $1,277,750 is
available for future draws on the line of credit agreement.
The Company's principal sources of liquidity for the fiscal year 1998 are cash
on hand, accounts receivable, the line of credit with a bank and continuing
revenues from programs.
-8-
<PAGE> 9
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
The Company operated ten (10) programs during the three months ended September
30, 1998 and thirteen (13) programs during the three months ended September 30,
1997. Net Revenues were $2,821,533 and $3,076,658 for the three months ended
September 30, 1998 and 1997, respectively. The decrease in revenues for the
three months ended September 30, 1998 over September 30, 1997 is due to a number
of factors. Lower revenues are somewhat due to the decrease in the number of
operational programs. In addition, the Company currently operates one partial
hospitalization program which is temporarily unable to generate revenue, until a
suitable host facility can be found. However, high census and increased
collections in patient revenues have occurred at other programs at host
facilities during the third quarter of 1998, to somewhat compensate for these
circumstances.
Cost of services provided were $2,196,049 and $2,302,422 for the three months
ended September 30, 1998 and 1997 respectively. Costs have decreased due to the
decrease in programs. In particular, significant cost reductions were achieved
from the consolidation of two partial hospitalization programs which occurred
during the second quarter of 1998.
Selling, general and administrative expenses for the three months ending
September 30, 1998 have remained relatively stable in comparison to the three
months ended September 30, 1997.
Net income was $165,505 and $253,896 for the three months ending September 30,
1998 and 1997, respectively. The decrease in net income is attributable to lower
revenues offset by a decrease in operating expenses.
The Company anticipates the costs of operating its current programs to remain
stable. Revenues are expected to increase as new programs are opened and all
programs are generating revenue. The Company is actively pursuing the formation
of its own Community Mental Health Centers to host certain of its partial
hospitalization programs. This is a natural progression which has stemmed from
the Company continually providing a larger scope of services to its customers
for a greater management fee. In addition, the Company currently has
applications pending with regulatory agencies for three partial hospitalization
programs.
An increase in revenues should cause gross profit to rise favorably and
disproportionately due to the increase in costs for such programs. However,
should patient census and the resulting revenue decrease (especially below the
minimum break even level), costs could be disproportionately high, which would
adversely impact the results of operations, and the company's available
resources. Due to the Company's dependence on a relatively small customer base
presently consisting of four (4) hospitals and one community mental health
center, the loss of any of its customers could have a significant adverse effect
on the Company's operations.
-9-
<PAGE> 10
The Company does not anticipate that the cost of addressing the year 2000 will
be material to its financial position, operating results or cash flows. The
Company intends to upgrade its general ledger accounting system effective
January 1, 1999. Quotes have been sought and it is anticipated that the new
system will run parallel to the current system. However, it does appear that
this is a major concern for its host hospitals and the various insurance
companies from which the hospitals receive reimbursements. The large volume,
small dollar transactions processed by these entities' computer systems would
most likely require reconfiguration to accommodate the year 2000. The trickle
down effect of this situation to the Company is not yet known at this point in
time.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net revenues decreased slightly for the nine months ended September 30, 1998
over the comparable nine months ended September 30, 1997.
The Company had twelve (12) operational Programs during the nine month period
ended September 30, 1998 and fourteen (14) operational programs during the six
month period ended September 30, 1997. The decrease in net revenues among
comparative periods is due to the decrease in the number of operational
programs. In addition, the Company currently operates one partial
hospitalization program which is temporarily unable to generate revenue, until a
suitable host facility can be found. However, high census and increased
collections in patient revenues have occurred at other programs at host
facilities during 1998 to somewhat compensate for these circumstances.
Although there was a decrease in revenue among comparative periods, there has
been an increase in the cost of services provided. Part of the increase is due
to an increase in dietary costs for certain programs which the Company began to
assume responsibility for during the last half of 1997. The remainder of the
increase is due to pre-operating costs that the Company has incurred in
connection with two partial hospitalization programs awaiting licensure.
The provision for doubtful accounts at September 30, 1998 represents the
write-offs of the receivables generated from the Galaxy alliance during the
first quarter of 1998 as discussed in Note B to the Financial Statements.
Management believes the collectibility of these receivables is remote. No such
similar situation existed during the nine month period ending September 30,
1997.
General and administrative expenses remained fairly stable in the aggregate
among periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
-10-
<PAGE> 11
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Not applicable.
ITEM 2 CHANGES IN SECURITIES
Not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
On September 1, 1998, the Company filed a report on Form
8-K announcing an amendment to its Stock Repurchase
Program authorizing the purchase of an additional 500,000
shares of its own common stock over the next twelve
months.
-11-
<PAGE> 12
SIGNATURE
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 authorized.
OPTIMUMCARE CORPORATION
A Delaware Corporation
Dated October 22, 1998 By: /s/ EDWARD A. JOHNSON
-------------------------------------
Edward A. Johnson
Chairman of the Board &
Principal Financial Officer
-12-
<PAGE> 13
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Ex. 27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 879,588
<SECURITIES> 0
<RECEIVABLES> 1,831,281
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,899,212
<PP&E> 63,244
<DEPRECIATION> 121,088
<TOTAL-ASSETS> 3,290,487
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 6,850
<OTHER-SE> 3,296,752
<TOTAL-LIABILITY-AND-EQUITY> 3,290,487
<SALES> 2,821,533
<TOTAL-REVENUES> 2,828,119
<CGS> 2,195,549
<TOTAL-COSTS> 2,582,814
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95
<INCOME-PRETAX> 245,305
<INCOME-TAX> 79,300
<INCOME-CONTINUING> 166,005
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 166,005
<EPS-PRIMARY> $.03
<EPS-DILUTED> $.03
</TABLE>
