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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)
For the transition period from _____________________ to_____________________
Commission File Number: 0-17401
OPTIMUMCARE CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 33-0218003
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30011 Ivy Glenn Drive, Suite 219
Laguna Niguel, California 92677
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 495-1100
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
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(Title of Class)
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. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
Company on February 7, 2000 (4,716,743 shares of Common Stock) was $4,164,000
based on the average bid and asked price of the Company's voting stock on
February 4, 2000.*
The number of shares outstanding of each of the Company's classes of Common
Stock, as of February 7, 2000 was:
Common Stock, - 5,908,675 shares $.001 par value
Documents Incorporated by Reference
None.
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* This value is not intended to make any representation as to value or worth
of the Company's shares of Common Stock. The number of shares held by
non-affiliates of the Company has been calculated by subtracting shares held
by controlling persons of the Company from the number of issued and
outstanding shares of the Company.
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PART I
ITEM 1 - BUSINESS
(a) General Development of Business
OptimumCare Corporation (the "Company") was incorporated in California on
November 25, 1986 and was reincorporated in Delaware on June 29, 1987. In
mid-1987, the Company commenced the development and marketing of health care
facility-based programs ("Programs") to be managed by the Company primarily for
the treatment of depression and certain other mental health disorders
("PsychPrograms"), as well as programs for alcohol and drug abuse ("Treatment
Programs"). After the Company obtains a contract for the establishment of one or
more Programs at a host health care facility, the Company recruits and trains
the staff needed to operate its programs. Typically, the host health care
facility provides a specified number of beds for the Program, as well as all
other support services required for the operation of the Program, including
nursing, dietary, housekeeping, billing and other administrative functions. The
Company recruits and trains the staff to operate the Program. The Company's
staffing of a Program will usually include a medical director, a program
director, a psychologist, a chief therapist and one or more counselors or social
workers.
Contracts are individually negotiated with the host health care facility and
usually approximate 20 to 60 beds. Generally, the Company and the host health
care facility negotiate a management fee which depends on the scope of services
provided by the Company, number of beds, rates charged and reimbursements
received by the facility. A fixed monthly or a per patient fee is received by
the Company which averages $52,000 per month or $243 per inpatient day, and
$56,000 per month or $126 per outpatient visit. The health care facility charges
the patient on a daily basis in accordance with a fee schedule of prescribed
rates, except where the insurer provides for payment which is limited to a
maximum number of days per patient. In some cases, reimbursement of direct costs
are also received. Certain contracts contain provisions which deny portions or
all of the management fee should patient days be ultimately appealed and denied
by the patient payor.
As of February 7, 2000, the Company has eleven (11) Programs that are hosted by
five (5) hospitals and two community mental health centers: one inpatient and
one partial hospitalization PsychProgram at Huntington InterCommunity Hospital,
D/B/A Humana Hospital Huntington Beach, Huntington Beach, California, one
inpatient and one partial hospitalization PsychProgram at St. Francis Medical
Center, Lynwood, California, one partial hospitalization PsychProgram at Sherman
Oaks Hospital and Health Center, Sherman Oaks, California, one inpatient and one
partial hospitalization PsychProgram at Mission Community Hospital, San
Fernando, California, one partial hospitalization PsychProgram through Citrus
Valley Medical Center, West Covina, California, one partial hospitalization
PsychProgram at Friendship Community Mental Health Center, Phoenix, Arizona and
one partial hospitalization PsychProgram at Rhema Behavioral Health Center,
Houston, Texas. The Company also operates one partial hospitalization
PsychProgram in Las Vegas, Nevada for which it is seeking its own license as a
Community Mental Health Center (CMHC).
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During January 1999, the Company was informed by the Healthcare Financing
Administration (HCFA) that it "has been examining its process for approving new
applications and final decisions have not yet been reached." The process has
been extremely tedious and long. The Company has sent packages of further
documentation to HCFA during 1999 and as recently as February 2000. The Company
believes that HCFA is being extremely cautious in view of certain fraud
incidences which were discovered in some of the Southern states. The Company is
actively seeking the agency's approval, as it has two other locations (Long
Beach, California and Portland, Oregon) where it has leased facilities for
partial hospitalization programs.
(b) Financial Information About Industry Segments
The Company operates in one industry segment which is the development, marketing
and operation of Programs.
(c) Narrative Description of the Business
(i) and (ii) Products
OptimumCare's PsychPrograms ("PsychProgram")
The PsychProgram is a medically-supervised psychiatric care program for certain
types of mental health disorders that is offered on both an inpatient, partial
hospitalization and outpatient basis. The PsychProgram is directed at assisting
the patient to return to a normal life. The PsychProgram is designed to treat
patients with neuroses and personality disorders; however, the Company's
marketing focus is to attract patients who exhibit symptoms of depression.
Patients suffering from depressive mental illness manifest, among other things,
loss of interest in the world generally, loss of activity and capacity to love,
sadness, hopelessness, fatigue, boredom, restlessness, loss of belief in
personal future, anxiety and feelings of ill-at-ease. At the outset, a patient
receives a physical examination and diagnostic testing to eliminate any physical
illnesses which may evidence some symptoms of mental disorders.
Each PsychProgram also includes individual and group therapy and a full daily
regimen of activities including sessions for relaxation, assertiveness training,
exercise and men's and women's sexual awareness. The Company estimates that the
average stay for a patient in an inpatient PsychProgram is 7-10 days.
OptimumCare's Partial Hospitalization Program ("Partial Hospitalization")
Partial Hospitalization is a relatively new behavioral medicine outpatient
product that provides daytime treatment programs that employ an integrated and
individualized schedule of recognized psychiatric treatment modalities.
Partial Hospitalization is a treatment approach developed as an alternative to
inpatient treatment. It includes the major psychiatric evaluation and treatment
modalities (both psychosocial and biological), which are usually found in a
comprehensive psychiatric inpatient program. It is designed for voluntary
patients with serious mental disorders who require intensive and
multi-disciplinary treatment which cannot be provided in an outpatient setting.
By offering a medically-supervised alternative to inpatient treatment, it
provides a more flexible, less costly and less restrictive form of treatment.
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Partial Hospitalization can be utilized by individuals who are mentally or
emotionally impaired, but who are able to be maintained in the community at
least part of each day, and present little risk of imminent danger to themselves
or others. The Company believes that the benefits of partial hospitalization
include: lessening the disruption of social, family, and community ties;
allowing the patient to test new skills in a more natural environment than a
hospital setting; providing a treatment milieu that fosters independence and
self reliance; allowing daily feedback from the home environment thereby closely
involving members of the patient's family or supportive environment in the
treatment program; and providing flexibility in the number of treatment days per
week thus allowing a patient to pursue other activities such as a shortening of
the inpatient stay or preventing the need for full hospitalization.
OptimumCare's Outpatient Services
Outpatient Services is a component of a partial hospitalization program intended
for patients with long-term, chronic conditions. Treatment must, at a minimum,
be designed to reduce or control the patient=s psychiatric symptoms so as to
prevent relapse requiring a higher level of care. For patients with long-term,
chronic conditions, control of symptoms and maintenance of a functional level to
avoid further deterioration or hospitalization is an acceptable expectation of
improvement. "Improvement" in this context is measured by comparing the effect
of continuing treatment versus discontinuing it. Meeting this criteria of
improvement in patients with long-term, chronic conditions may be measured by
gradually reducing the treatment and measuring the effect on the patient.
Outpatient Services is a voluntary program. Patients attend up to a maximum of
10 hours a week, as prescribed by a psychiatrist, under the direct supervision
of the multi disciplinary team. Treatment includes individual and group therapy
with a range of activities geared toward the individual needs of each patient.
Length of stay varies, depending on the needs of the individual.
Outpatient Services provides a third level in the continuum of care that enables
patients to enter an OptimumCare program at an appropriate level, then advance
as their treatment progresses to a point where they feel confident, productive
and able to experience life fully with minimal intervention.
Expansion of Products
The Company is seeking to expand the scope of psychological services it offers
by enlarging the continuum of care it provides. The Company believes that it can
more effectively market its services to managed care payors by increasing the
scope of services it provides.
Staffing
The PsychProgram and Partial Hospitalization Programs are staffed by the Company
with a medical director, a program manager, and in some cases, a psychologist, a
chief therapist, and at least one counselor or social worker. The key staff
members are the medical director and the program manager. The medical director
is a licensed psychiatrist who is a staff member of the host health care
facility and is engaged as an independent contractor charged with the
responsibility for overseeing the administration of the Program from a
medical/regulatory compliance viewpoint. In addition to the medical director who
is responsible for administering the clinical aspects of the contract, the
Company often engages co-medical directors in each community in which a Program
is located. These co-medical directors are licensed psychiatrists or
psychologists. They provide administrative assistance to a Program and represent
it at various professional activities in the local community. The co-medical
directors are compensated at a fixed monthly rate, depending on the amount of
time they commit to supporting the Company's Programs. The Company's employees
and contractors at each program are subject to approval and pre-employment
screening by the host health care facility. The Company has not experienced any
difficulty in locating qualified medical
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directors from the hospital staff to affiliate with the Company's Programs. The
program manager is a full time employee of the Company and usually has completed
either a bachelor's or master's degree program in psychology or social work.
Program managers are officed at their respective Program's facility.
Contract Operations
The Company provides a host health care facility with staff recruitment, a
two-week pre-opening in-service nurse and hospital employee training program,
program management, continuing education, community education, ongoing public
relations and program quality assurance.
The Company provides these training programs to the host health care facility at
no charge. Typically, nursing, dietary, X-ray, laboratory, housekeeping,
admissions and billing are the responsibility of the host health care facility.
However, the Company has assumed some of the nursing and dietary aspects of the
programs under certain contracts. The expanded scope of services has evolved
from the desire of the host hospital to benefit from the Company's growing
expertise in those functions.
Existing contracts range from a period of one to five years and may be renewed
for subsequent terms, of usually one year periods. In some cases, if the Company
does not maintain a stipulated minimum average daily census for specified
periods, the health care facility may terminate the contract on reasonable
notice to the Company.
Payment for Services
Patients are screened by the host healthcare facility prior to admission.
Screening procedures include verification of the existence and extent of
insurance coverage.
It is the host health care facility's responsibility to bill and collect the
fees charged to the patient for all program services. The Company in turn bills
the host health facility for the total patient days of service provided at the
specified contract rate. Generally, the Company bills the host health care
facility within five (5) days after the close of the month in which the services
were rendered. Except in the cases where the contracts provide for specific hold
backs for ultimately denied days, the majority of the contracts do not
specifically provide that the Company shall bear any risk of non-payment by the
host healthcare facility. However, industry practice dictates that the Company
acknowledge that a certain percentage of the fees will be uncollected by the
host health care facility. Thus, accommodations are expected to be made on a
case-by-case basis with each host health care facility (except where there is an
express contractual provision which governs this issue) to offset some portion
of Program patients' bad debts experienced by the host health care facility.
Regulatory Matters
Many of the hospitals the Company contracts with have a large number of Medicare
and Medicaid patients. It is unknown, whether in the future other contracts or
programs will be dependent on a disproportionate amount of Medicare/Medicaid
patients. However, the Company has negotiated with these hospitals whereby it is
paid either a flat per diem rate or a per diem rate with a hold back for days
ultimately denied. Thus, the Company is not directly dependent on Medicare or
Medicaid for payment under its current contracts.
The healthcare facilities rely upon payment from Medicare. The healthcare
facilities are reimbursed their costs on an interim basis by Medicare fiscal
intermediaries and the health care facilities submit annual cost reimbursement
reports to the fiscal intermediaries for audit and payment reconciliation. The
healthcare facilities seek reimbursement of the Company's management fees from
these fiscal intermediaries as part of their overall payments from Medicare.
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Pending legislative proposals revising Medicare/Medicaid reimbursement, if
enacted, could have a negative effect on the revenues of the hospitals with
which the Company contracts. Generally, the Company's agreements with hospitals
require the Company and the hospital to renegotiate rates in the event of a
significant legislative change which affects the compensation received by the
hospital. It is uncertain at this time to what extent the Company's revenues may
be impacted by changes to Medicare/Medicaid policies.
Medicare is part of a federal health program which is administered by the U.S.
Department of Health and Human Services which has established Health Care
Financing Administration ("HCFA") to promulgate rules and regulations governing
Medicare and the benefits associated therewith.
All of the programs managed by the Company are treated as "provider based"
programs by HCFA. This designation is important since partial hospitalization
services are covered only when furnished by a "provider", i.e., a hospital or a
CMHC. To the extent the partial hospitalization programs are not located in a
site which is deemed by HCFA to be "provider-based", there would not be Medicare
coverage for the services furnished at the site under Medicare's partial
hospitalization benefit. In August, 1996, HCFA published criteria for
determining when programs operated in facilities separate from a hospital's or
CMHC's main premises may be deemed to be "provider-based" programs. The proper
interpretation and application of these criteria are not entirely clear, and
there is a risk that some of the sites managed by the Company could be found not
to be "provider-based".
Historically, CMHC's, unlike hospitals, were not surveyed by a Medicare
contractor before being permitted to participate in the Medicare program.
However, HCFA is now in the process of surveying all CMHC's to confirm that they
meet all applicable Medicare conditions for furnishing partial hospitalization
programs. Management believes that the CMHC which contracts with the Company is
in compliance with the applicable requirements.
Currently proposed legislation would implement a prospective payment system for
all outpatient hospital services at some point during calendar year 2000.
Proposed reimbursement rates have been determined, and their effect is not
believed to be substantially different from what the hospitals are currently
receiving as reimbursement.
The amount paid by Medicare is the provider's reasonable cost less a
"coinsurance" of twenty percent (20%) of the charges which is ordinarily to be
paid by the patient. The coinsurance must be charged to the patient by the
provider unless the patient is indigent.
If the patient is indigent, or if the patient does not pay the provider the
billed coinsurance amounts after reasonable collection efforts, the Medicare
program has historically paid those amounts as allowable Medicare bad debts. The
allowability of Medicare bad debts to providers for whom the Company manages
partial hospitalization programs is significant since many of the patients in
programs managed by the Company are indigent or have very limited resources. The
reduction in allowable Medicare bad debts could have a materially adverse impact
on Medicare reimbursement to the healthcare facilities for which the Company
provides services and could further result in the restructuring or loss of
contracts.
To the extent that healthcare facilities which contract with the Company for
management services suffer material losses in Medicare payments, there is a
greater risk to the Company of non-payment, and a risk that the healthcare
facilities will terminate or not renew their contracts with the Company. Thus,
even though the Company does not submit claims to Medicare, it may be adversely
affected by reductions in Medicare payments or other Medicare policies.
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The Company anticipates that additional legislation may be adopted focusing on
controlling health care costs and improving access to medical services for
persons who are uninsured. Such legislation may also affect the amount which
health care providers can charge for services. The Company believes that it is
well positioned to respond to these changes and that it is likely that the
Company will experience a lesser impact than other companies in the health care
industry based on the fact that the Company has already focused its efforts on
shortening patient stays and has historically provided a greater percentage of
its services to Medicaid patients than have many of its competitors.
Marketing
The Company's marketing efforts are primarily directed toward increasing the
number of management contracts by either the takeover of existing programs
operated by others or the establishment of new Partial Hospitalization or
PsychPrograms in geographically desirable areas. The Company believes that its
ability to secure new contracts is based on its reputation as a quality provider
coupled with its history of low length of patient stays resulting in less
uncompensated care.
Sales calls are primarily directed at health care facilities which may be
experiencing a low or declining patient census and facilities in geographically
desirable areas. After a contract is obtained, the Company prepares a detailed
marketing development strategy aimed at attracting patients to the Programs.
The program director for each PsychProgram at the host health care facility
develops a local plan, in conjunction with the program community liaison. The
strategy is to increase public awareness of the Program. All Programs share the
goal that is consistent with the Company=s overall plan. The host hospital's
administrative and medical staff are also encouraged to participate in community
relations activities.
Direct contact with psychiatrists, psychologists and other licensed
professionals by the Company is emphasized because these individuals motivate
potential patients to seek inpatient treatment for their mental health. Licensed
Community Care Residential Facilities are also targeted because the residents
are the ones who will require inpatient psychiatric treatment. The Company=s
approach emphasizes the care giver to become involved in one on one
communication with the professionals who will provide patient referrals. These
professionals and care givers are invited to the Company sponsored community
relations activities, speaker programs and continuing education seminars.
(iii) Raw Materials
Inapplicable.
(iv) Patents and Trademarks
The Company holds a federal service mark, Registration #1628745, for its trade
name "OptimumCare". The Company has marketed its programs under the names
"OptimumCare PsychProgram" and "OptimumCare Treatment Program".
(v) Seasonality
The Company acknowledges that patient volume appears to be susceptible to some
seasonal variation. Census tends to substantially decrease near certain
holidays, particularly during the fourth quarter, where individuals are more
reluctant to hospitalize family members.
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(vi) Working Capital Items
The Company expects to experience an initial delay of up to 90 days in receipt
of revenues after each Program is opened due to the normal processing time for
the billing/payment cycle of the host health care facilities. However, this
delay may vary, as in the case of the Company seeking CMHC licensure for its Las
Vegas site, for which a healthcare provider/supplier application was filed with
the Healthcare Financing Administration on May 29, 1998.
(vii) Dependence on a Few Customers
The Company presently has eleven (11) Programs operating through five (5)
hospitals and two community mental health centers. If any of these Programs were
terminated, or if any of the accounts receivable from these contracts were to
become uncollectible, such events could have a material adverse effect on the
Company. On October 27, 1999, the Company was informed by Friendship Community
Mental Health Center (FCMHC) that it received an adjustment to its cost report
for the period ending June 30, 1997 of approximately $300,000 for its Medicare
program. The majority of the adjustment pertained to bad debts deducted by FCMHC
disallowed by the Healthcare Financing Administration (HCFA). FCMHC is in the
process of contesting HCFA=s findings. Since FCMHC does not have the funds to
pay the audit assessment, HCFA is currently withholding all payments to FCMHC
for patients serviced by the program. As a result, FCMHC has not been able to
pay the Company=s management fees. The Company has written off approximately
$300,000 in accounts receivable related to this event. The Company has a
contract with FCMHC which expires April 2002. The Company intends to terminate
this contract with FCMHC unless a favorable settlement between FCMHC and HCFA
can be reached. During 1998, one contract termination also required a bad debt
write-off of approximately $300,000.
(viii) Backlog
Inapplicable.
(ix) Government Contracts
Inapplicable.
(x) Competition
The Company competes with other health care management companies for contracts
with acute care hospitals. Also, the Company's Programs will compete for
patients with the programs of other hospitals and other health care facilities.
The success of the Company's Programs is also dependent on its ability to
establish relationships with sources of patient referrals.
The Company's principal competitors include Charter Medical Corporation,
Comprehensive Care Corporation, Mental Health Management, PMR Corporation and
Horizon Health Services, most of which have greater financial and other
resources and more experience than the Company. In addition, some health
maintenance organizations ("HMOs") offer competing programs; however, the
HMO-owned hospitals typically do not provide inpatient psychiatric services, nor
coverage for these services. Most HMOs also do not provide programs for partial
hospitalization or substance abuse, but often provide coverage for these
programs, usually at a reduced rate.
Other health care facilities offer comparable programs which compete with the
Company's Programs in each service area. The Company believes, however, that in
general its community awareness efforts are primarily effective within a ten
(10) mile radius around the host hospital and that patients outside such radius
are not directly affected by such advertising unless their personal physician
has admitting privileges and recommends the Company's program at that host
hospital.
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The Company believes that the principal competitive factors in obtaining
contracts with health care facilities are experience, reputation for quality
programs, the availability of program support services and price. The primary
competitive factors in attracting referral sources and patients are reputation,
record of success, quality of care and location and scope of services offered by
a host health care facility. The Company implements active promotional programs
and believes it is competitive in attracting referral sources and patients based
on these factors.
(xi) Research and Development
Inapplicable.
(xii) Government Regulation and or Environmental Protection
The health care industry is extensively regulated by federal, state and local
governments. Regulations which affect the Company relate to controlling the
growth of health care facilities, requiring licensure of the host health care
facility, requiring certification of the Program at the host facility and
controlling reimbursement for health care services. Licensure of facilities and
certification of Programs are state requirements, while certification for
Medicare is a federal requirement. Compliance with the licensure and
certification requirements is monitored by annual on-site inspections by
representatives of the licensing agencies. Loss of licensure or Medicare
certification by a host facility could result in termination of such contract.
Certificate of need ("CON") laws in some states require approval for capital
expenditures in excess of certain threshold amounts, expansion of bed capacity
or facilities, acquisition of medical equipment or institution of new services.
If a CON must be obtained, it may take up to 12 months to do so, and in some
instances longer, depending upon the state involved and whether the application
is contested by a competitor or the state agency. CON's usually are issued for a
specified maximum expenditure and require implementation of the proposed
improvement within a specified period of time. Certain states, including
California, Texas, Utah, Colorado and Arizona, have enacted legislation
repealing CON requirements for the construction of new health care facilities,
the expansion of existing facilities and the institution of new services. Some
states have enacted or have under legislative consideration "sunset" provisions
which require the review, modification or deletion of these statutes when no
longer needed. The Company is unable to predict whether such legislative
proposals will be enacted but believes that the elimination of CON requirements
positively impacts its business.
The Joint Commission on the Accreditation of Healthcare Organizations ("JCAHO"),
at a facility's request, will participate in the periodic surveys which are
conducted by state and local health agencies to ensure continuous compliance
with all licensing requirements by health care facilities. JCAHO accreditation
satisfies certain of the certification requirements for participation in the
Medicare and Medicaid programs. A facility found to comply substantially with
JCAHO standards receives accreditation. A patient's choice of a treatment
facility may be affected by JCAHO accreditation considerations because most
third-party payers limit coverage to services provided by an accredited
facility. All of the hospitals currently under contract with the Company have
received JCAHO accreditation.
The laws of various states in which the Company may choose to operate, including
California, generally prevent corporations from engaging in the practice of
medicine. These laws (e.g., Section 2052 of the California Business and
Professions Code), as well as applicable case law, were enacted
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to protect the public from the rendering of unnecessary medical or other
services for treatment of the ill. Although the Company has not obtained a legal
opinion, it believes that the establishment and operation of Programs will not
cause it to be engaged in the "practice of medicine" as that term is used in
such laws and regulations. These laws and regulations are subject to
interpretation and, accordingly, the issue is not free from doubt. Since the
Company has not sought or obtained any rulings, there can be no assurance that
state authorities or courts will not determine that the Company is engaged in
the unauthorized practice of medicine. If such a determination is made and is
not overturned, the Company would have to terminate its operations in that
state.
The Company's medical directors are engaged to provide administrative services,
including but not limited to planning the clinical program, supervising the
clinical staff, establishing standards of professional care, and advising the
Company and staff on questions of policy. The co-medical directors assist the
medical directors in performing their duties. Although the Company has not
obtained a legal opinion, it believes that the proposed agreements between the
Company and its medical and co-medical directors do not violate any fee-sharing
prohibitions. The federal prohibition, as it relates to the Medicare program, is
found at 42 U.S.C. 1320a-7b. Such prohibitions are found in Section 650 of the
California Business and Professional Code and Section 445 of the California
Health and Safety Code, as well as comparable statutes in other states. However,
future judicial, legislative or administrative interpretations of these
arrangements could prohibit the Company from hiring professionals which could
have a materially adverse effect on the Company.
Given the recent political mandate for health care reform, it appears likely
that health care cost containment will occur. However, legislation has begun to
recognize the need for placing mental health illness on par with other physical
ailments. For example, federal legislation effective in 1998, (the
Kennedy-Kassebaum bill), mandates parity with other reimbursable medical
services for those who receive behavioral health care. This law raised the
lifetime cap from the current $50,000 level to $1 million. The Company is
practiced in administrating "managed care type" programs and is familiar with
the pressures of improving productivity and reducing costs.
(xiii) Employees
As of February 7, 2000, the Company employed approximately 78 persons full-time
and 39 persons part-time. Those figures do not include physicians and
psychiatrists who are medical directors of the Company's Programs and not
employees.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
Inapplicable.
ITEM 2 - PROPERTIES
The Company maintains its corporate offices in an approximately
1,277-square-foot suite of executive offices in Laguna Niguel, California, under
a lease agreement providing for a monthly base rent of $2,010 which expires June
30, 2000. The Company leases additional satellite corporate offices in Culver
City and Venice, California. The lease agreement for Culver City, California
provides for a monthly base rent of $3,072 and expires November 30, 2001. The
lease agreement for Venice, California provides for a monthly base rent of
$2,800 and is on a month-to-month basis. The Company also maintains an office in
Mission Hills, California to service potential incoming patient inquiries under
a lease agreement providing for a monthly base rent of $1,139 which expires
October 31, 2000. The Company believes that this office space is adequate for
its reasonably foreseeable needs. It is expected that the expiring leases will
be renewed on similar terms.
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The Company leases space under five separate lease agreements for the operation
of its outpatient partial hospitalization programs. One agreement is between the
Lessor and the Community Mental Health Center. However, the Company is obligated
to pay the lease costs for the program, under its contract with the facility
which expires November 30, 2003. The remaining agreements expire June 30, 2000,
September 30, 2000, September 30, 2000 and August 14, 2002 respectively.
Aggregate monthly payments total $22,987 of which $5,474 is fully reimbursed
through a sublease with a host hospital. It is expected that the expiring leases
and subleases will be renewed on similar terms.
ITEM 3 - LEGAL PROCEEDINGS
Inapplicable.
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Inapplicable.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
(a) Market Information
The Company's common stock is currently quoted on the over the counter "OTC"
electronic bulletin board under the symbol OPMC.
High Bid Low Bid
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1999:
Fourth Quarter 7/8 1/2
Third Quarter 59/64 3/4
Second Quarter 51/64 1/2
First Quarter 59/64 21/32
1998:
Fourth Quarter 59/64 23/32
Third Quarter 63/64 23/32
Second Quarter 1 25/32
First Quarter 1 5/16 11/16
The listed prices represent inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
(b) Holders
The approximate number of holders of record each class of the Company's common
equity securities as of the close of business on February 7, 2000 is set forth
below:
Approximate
Title of Class Number of Record Holders
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Common Stock, $.001 par value 225
(c) Dividends
The Company has not paid or declared cash dividends on its Common Stock. The
Company does not anticipate the payment of cash dividends on its common stock in
the foreseeable future.
The transfer agent for the Company's common stock is American Stock Transfer &
Trust Company, New York, New York.
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ITEM 6 - SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Financial Statements and Notes thereto of the Company included elsewhere herein,
and such data should be read with "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The data at December 31, 1999
and December 31, 1998 and for each of the fiscal years in the three year period
ended December 31, 1999 are derived from the Company's Financial Statements for
such years which were audited by Lesley, Thomas, Schwarz & Postma, Inc. for the
period ended December 31, 1999 and audited by Ernst & Young, LLP for the years
ended December 31, 1998 and 1997, which Financial Statements are included
elsewhere herein.
A 20% stock dividend was declared by the Board of Directors on August 14, 1996
for stockholders of record on October 1, 1996. The stock dividend was issued on
October 18, 1996. Per share amounts for all periods presented have been restated
to reflect the stock dividend.
STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------
NET REVENUES $10,553,427 $11,409,690 $12,089,398 $10,676,237 $6,027,122
NET INCOME 365,798 377,133 454,350 876,716 2,070
BASIC EARNINGS* PER SHARE OF
COMMON STOCK .06 .06 .07 .14 .00
DILUTED EARNINGS* PER SHARE
OF COMMON STOCK .06 .06 .06 .13 .00
WEIGHTED NUMBER OF SHARES
OUTSTANDING 5,910,939 6,567,280 6,870,049 6,237,751 5,892,824
TOTAL DILUTED SHARES 6,028,496 6,699,648 7,194,872 6,677,156 6,388,570
CASH DIVIDENDS PER COMMON SHARE 0 0 0 0 0
BALANCE SHEET INFORMATION
AS OF DECEMBER 31
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------
TOTAL ASSETS $3,462,345 $3,154,744 $3,953,241 $3,980,307 $2,059,537
CURRENT ASSETS 3,115,702 2,652,044 3,213,626 3,518,003 1,731,290
CURRENT LIABILITIES 415,182 429,375 679,774 1,244,909 381,531
NET WORKING CAPITAL 2,700,520 2,222,669 2,533,852 2,273,094 1,349,759
LONG-TERM OBLIGATIONS 0 0 0 0 166,000
- ------------------
* Earnings per share for all periods prior to 1997 have been restated to conform
with the requirements of FASB statement No.128, "Earnings Per Share".
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Safe harbor statements under the Private Securities Litigation Reform Act of
1995
The statements in this Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Form 10-K are
forward-looking in time and involve risks and uncertainties, including the risks
associated with plans, the effect 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.
(a) Liquidity and Capital Resources
At fiscal year end 1999 and 1998, the Company's working capital was $2,700,520
and $2,222,669 respectively. The increase in working capital for the year is
primarily due to the Company=s net income. Much of this income is in accounts
receivable. There has been an increase in the Company=s accounts receivable
balances among periods, particularly with two programs licensed through one
hospital. During 1999, this hospital paid its management fees in approximately
30 days longer time than it did in 1998. The Company believes this was
principally due to a computer conversion by the hospital during 1999 and is not
indicative of an ultimate collection problem. The nature of the Company's
business does require 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 cancellation of any one
contract or the inability to collect any of the accounts receivable could
materially and adversely affect the Company's liquidity. Despite the write-off
of approximately $300,000 pertaining to one contract, the company has preserved
its working capital. On October 27, 1999, the Company was informed by Friendship
Community Mental Health Center (FCMHC) that it received an adjustment to its
cost report for the period ending June 30, 1997 of approximately $300,000 for
its Medicare program. The majority of the adjustment pertained to bad debts
deducted by FCMHC disallowed by the Healthcare Financing Administration (HCFA).
FCMHC is in the process of contesting HCFA=s findings. Since FCMHC does not have
the funds to pay the audit assessment, HCFA is currently withholding all
payments to FCMHC for patients serviced by the program. As a result, FCMHC has
not been able to pay the Company=s management fees. The Company has written off
approximately $300,000 in accounts receivable related to this event. The Company
has a contract with FCMHC which expires April 2002. The Company intends to
terminate this contract with FCMHC unless a favorable settlement between FCMHC
and HCFA can be reached.
Cash flows from operations were $150,990 for the year ended December 31, 1999,
resulting from net income partially offset by an increase in accounts
receivable.
Cash used in investing activities was $12,395 for the year ended December 31,
1999. Funds used in 1999 were for purchases of office equipment.
The cash used in financing activities was $44,004 for the year ended December
31, 1999. Funds used during 1999 were for the purchase of 50,000 shares of
treasury stock subsequently retired. The Company has a line of credit which
expires May 1, 2000. 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 February 7, 2000, approximately $1,310,000 is available for future draws on
the line of credit agreement. The Company's principal sources of liquidity for
the fiscal year 2000 are cash on hand, accounts receivable, the line of credit
with a bank and continuing revenues from programs.
(b) Results of Operations
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998.
The Company operated eleven (11) programs during the year ended December 31,
1999 and thirteen (13) programs during the year ended December 31, 1998. As of
February 7, 2000, the Company currently has three inpatient and
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eight partial hospitalization programs. Generally, the size and profit potential
of inpatient programs are greater than partial hospitalization programs. Net
revenues were $10,553,427 and $11,409,690 for the years ended December 31, 1999
and 1998, respectively. The decrease is due to changes in the management fee
agreements between the Company and two hospitals, as well as, a decrease in the
number of operating programs.
Cost of services provided were $8,202,445 and $8,977,538 for the years ended
December 31, 1999 and 1998. This decrease is due to changes in the services
provided between the Company and two hospitals, as well as, a decrease in the
number of operating programs.
The provision for uncollectible accounts remained stable among years.
Selling general and administrative expenses have decreased slightly from the
prior year. This was due to lower legal fees in 1999 over 1998, incurred in
connection with protecting the Company=s trade name against use by an East Coast
healthcare provider, during 1998.
The Company's income taxes have increased in 1999 over 1998 due to tax
write-offs of bad debts in 1998 pertaining to receivables which were reserved
and expensed in 1997 for financial statement purposes.
Net income was $365,798 and $377,133 for the years ended December 31, 1999 and
1998, respectively. The decrease was primarily attributable to lower revenues,
partially offset by a decrease in cost of services provided.
The Company has recently restructured many of its contracts with its host
hospitals. Most contracts now provide for fixed monthly management fees, which
although are based on census levels in theory, should not materially vary unless
census significantly changes. The modifications have and will continue to reduce
the Company=s revenues in 2000. However, many of the host hospitals have agreed
to assume some of the services (primarily nursing) which the Company has
historically provided. As a result, the Company=s cost of services provided
should also decrease in 2000.
The Company expects to achieve an expansion in the number of operational
programs in 2000. Sites in Long Beach, California and Portland, Oregon have been
retained for potential partial hospitalization programs. Marketing plans for
expanding the volume of the business by obtaining new contracts with host
hospitals and community mental health centers for programs also exist. However,
it is uncertain at this time, to what extent the Company's fixed costs will be
impacted by expansion. Due to the Company's dependence on a relatively small
customer base presently consisting of five hospitals and two community mental
health centers, the loss of any of its customers could have a significant
adverse effect on the Company's operations. Hence, there is a special emphasis
paragraph in the report of the Company's independent auditors of the financial
statements for the fiscal year ended December 31, 1999.
The Company upgraded its general ledger accounting system to be year 2000
compliant effective January 1, 1999. The cost of addressing the year 2000 issues
approximated $2,500 and was not material to the Company=s financial position,
operating results or cash flows. However, it does appear that the year 2000 was
a major concern for the Company=s host hospitals who had to implement new
computer systems to accommodate the year 2000. The trickle down effect of this
situation has delayed payments to the Company from one hospital hosting two
programs previously discussed. However, the Company believes that this is a
temporary cash flow delay and has sufficient resources to avoid liquidity
impairment.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997.
The Company operated thirteen (13) programs during the year ended December 31,
1998 and twelve (12) programs during the year ended December 31, 1997. As of
February 15, 1999, the Company had ten (10) operating programs. These were
composed of three inpatient and seven partial hospitalization programs.
Generally, the size and profit potential of inpatient programs are greater than
partial hospitalization programs. Net revenues were $11,409,690 and $12,089,398
for the years ended December 31, 1998 and 1997, respectively. This decrease was
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due to a greater number of programs generating revenue for a longer period of
time in 1997 versus 1998. This was particularly the case with two partial
hospitalization programs, one of which was consolidated into another program
during the second quarter of 1998. The other program operated, but did not
generate revenues during 1998. This was due to the Company=s inability to find a
host hospital for this location. During 1997, this program operated and
generated revenue for a portion of that year.
Cost of services provided were $8,977,538 and $8,894,987 for the years ended
December 31, 1998 and 1997. Costs remained relatively stable in the aggregate
among years. However, increases in wage, insurance and benefit expense at
certain individual programs occurred, which were offset by significant cost
reductions that were achieved from the consolidation of two partial
hospitalization programs which occurred during the second quarter of 1998.
The provision for uncollectible accounts decreased from the prior year primarily
due to the write off of receivables generated an alliance with one entity, which
was terminated during the first quarter of 1998.
Selling general and administrative expenses decreased from the prior year. This
was due to lower executive bonus compensation earned in 1998 versus 1997 based
on the Company=s interim profitability. The decrease was also due to the change
in the manner in which the Company records its workers compensation insurance
costs. During 1998, these costs were directly allocated to its individual
programs. This occurred due to a change in the reporting requirements of the
carrier, which necessitated the Company to be classification specific among
employees, and the growing magnitude of these costs. During 1997, these costs
were treated as general corporate overhead.
The Company recorded a charge to earnings for the unamortized balance of
goodwill during the fourth quarter of 1997 of $135,255 associated with the
purchase of the interest in the LLC. This decision was due to the LLC=s
insignificant revenues, net losses and negative cash flow. The LLC was inactive
during 1998 and has not resumed operations.
The Company's income taxes have remained relatively stable among years.
Net income was $377,133 and $454,350 for the years ended December 31, 1998 and
1997, respectively. The decrease was primarily attributable to lower revenues,
partially offset by a decrease in bad debts, general and administrative costs
and the absence of any goodwill impairment.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Immaterial.
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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
OPTIMUMCARE CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page Number
---------------
Reports of Independent Auditors F-1 through F-2
Consolidated Balance Sheets as of December 31, F-3 through F-4
1999 and December 31, 1998
Consolidated Statements of Income for the years
ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the
year ended December 31, 1999, 1998 and 1997 F-7 through F-8
Notes to Consolidated Financial Statements F-9 through F-18
Financial Statement Schedule F-19 through F-21
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 17, 2000, the Registrant determined that the firm of Ernst &
Young LLP would be dismissed as the Registrant's principal accountant and would
not be engaged to conduct the audit of the Registrant's financial statements
for the fiscal year ended December 31, 1999.
Ernst & Young LLP's reports on the financial statements of the
Registrant for the past two years did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified as to uncertainty, audit scope,
or accounting principles. In connection with the audits of the Registrant's
financial statements for each of the two years ended December 31, 1998, and in
the subsequent interim period through January 17, 2000, there were no
disagreements between the Registrant and Ernst & Young LLP, on any matter of
accounting principles or practices, financial statement disclosure, or audit
scope or procedures, which, if not resolved to the satisfaction of Ernst &
Young LLP, would have caused Ernst & Young LLP to make a reference to the
subject matter in their report.
The decision to change accountants was not approved by the board of
directors of the Registrant.
On January 17, 2000, the Registrant engaged Lesley, Thomas, Schwartz &
Postma, Inc. as its principal accountant to audit its financial statements for
the year ended December 31, 1999. During the Registrant's two most recent
fiscal years, the Registrant has not consulted with Lesley, Thomas, Schwartz &
Postma, Inc. on the application of accounting principles to a specified
transaction or the type of audit opinion that might be rendered on the
Registrant's financial statements.
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PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) and (b) Identification of Directors and Executive Officers
The directors and executive officers of the Company are:
NAME AGE POSITION
- ---- --- --------
Edward A. Johnson 54 Chief Executive Officer, Principal Financial
Officer, Secretary and Chairman of the Board
Mulumebet G. Michael 51 Director, President and Chief Operating Officer
Gary L. Dreher 53 Director
Michael S. Callison 61 Director
Jon E. Jenett 47 Director
Each director serves for a term of one year or until his successor has been
elected and qualified. Each executive officer serves at the pleasure of the
Board of Directors. Directors do not receive any director's fees or other
compensation for their services, as such, but receive reimbursement for their
expenses in attending meetings of the Board of Directors.
(c) Identification of Certain Significant Employees
Inapplicable.
(d) Family Relationships
Inapplicable.
(e) Business Experience
Edward A. Johnson - Chairman & CEO
Mr. Johnson has spent almost his entire professional career in behavioral
healthcare services and co-founded OptimumCare in 1986. As Chief Executive
Officer, Mr. Johnson has overall responsibility for developing strategic program
direction with the firm=s current and future healthcare providers at hospitals,
medical centers and community care centers. He also monitors and evaluates
trends shaping the healthcare industry that will impact the Company. In
response, from this larger perspective, he fashions policies, procedures and
systems to maximize patient service while enhancing profitability for
OptimumCare and value for its shareholders. Mr. Johnson received an M.S. degree
in psychology and a B.A. degree in business from Colorado State College. He is
also licensed in California as a Marriage and Family Counselor.
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Mulumebet G. Michael - President, COO & Board Member
Ms. Michael joined OptimumCare in 1993 as a Program Administrator, advanced to
Executive Vice President and COO in 1997, and was named President and a member
of the Board of Directors in June 1998. Ms. Michael=s extensive experience both
as a registered nurse and in behavioral healthcare management over a sixteen
year career has provided superb insight, vision and knowledge, ensuring the best
behavioral health practices are incorporated into each OptimumCare program. She
manages the Company=s staff of more than 150 professionals and support
personnel. Ms. Michael completed a four-year nursing school curriculum leading
to her being a licensed nurse (RN) in three countries: America, Canada and
Ethiopia. She also completed a three-year advanced hospital management program
with the British Columbia Institute of Technology in Canada.
Gary L. Dreher - Director
Mr. Dreher was elected to the Board of Directors during September 1993. He
received his B.S. degree in Microbiology and Lab Technology from California
State University in 1971. He is President, Chief Executive Officer and a
Director of AMDL, an inventor and marketer of state-of-the-art diagnostic kits.
AMDL is a public company traded on the OTC - Electronic Bulletin Board. Prior to
this, Mr. Dreher was President of Medical Market International, a marketing and
management services company he co-founded. Mr. Dreher also served as Vice
President of International Sales for Apotex Scientific, an international
distributor network for Esoteric Diagnostic Tests, from 1992 to 1996. Mr. Dreher
has 29 years experience in the healthcare industry.
Michael Callison - Director
Mr. Callison was elected to the Board of Directors in September 1993. From 1990
to 1999, he was responsible for sales and business development, as well as
seeking out and nurturing relationships with strategic alliance partners to help
the Company expand its services and coverage area. His 40 years of healthcare
experience began while he attended college and worked as a psychiatric
technician at a Washington state veteran=s hospital. Thereafter, he held
positions of increasing responsibility primarily in sales and marketing with
Pfizer Labs, Borg Warner Healthcare and Hill-rom, a hospital architectural and
furnishing company. Mr. Callison received his B.A. degree in Economics from the
University of Puget Sound.
Jon E. Jenett - Director
Mr. Jenett was elected to the Board of Directors during December 1995. Mr.
Jenett is an Independent Consultant specializing in startups and high growth
companies. From October 1998 to April 1999, Mr. Jenett served as President and
Chief Financial Officer of M4 Labs, Inc., which sells a suite of software and
hardware products to manage video and multimedia in networked environments,
including cellular and the Internet. From 1990 to 1998, Mr. Jenett served as
Chief Financial Officer of Mission Electronics Corporation, a wholesale broker
of electronic components. From 1981-1990, he was a partner of Investment Group
of Santa Barbara, an investment fund specializing in small public and private
companies. Mr. Jenett received his B.A. degree from Harvard College and his
M.B.A from Stanford Business School.
Section 16(a) Beneficial Ownership Reporting Compliance
No director, officer or beneficial owner of ten percent (10%) or more of the
Company's common stock failed to file on a timely basis reports required by
Section 16(a) of the Securities Exchange Act of 1934 during the most recent
fiscal year or prior fiscal year as disclosed in Forms 3 and 4 amendments
thereto furnished to the Company pursuant to Section 240.16a-3 during its most
recent fiscal year and Form 5 and amendments thereto furnished to the Company
with respect to its most recent fiscal year and any written representation that
no Form 5 was required.
(f) Involvement in Certain Legal Proceedings
Inapplicable.
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ITEM 11 - EXECUTIVE COMPENSATION
(a) (b) Cash Compensation
The following table sets forth the elements of compensation paid, earned or
awarded for the named individuals. All aspects of executive compensation is
determined by the Board of Directors.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
--------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------- -------------------- --------
NAME AND OTHER RESTRICTED (#)
PRINCIPAL ANNUAL STOCK OPTIONS/ PAYOUTS ALL OTHER
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS($) SARs ($) COMPENSATION($)
- ------------------ ---- --------- --------- --------------- ---------- -------- ------- ---------------
EDWARD A. JOHNSON, 1999 $204,000 $ 98,847 450,000 $17,906(1)(2)
CHIEF EXECUTIVE 1998 144,000 118,188 100,000 18,304(1)(2)
OFFICER 1997 144,000 127,474 0 17,526(1)(2)
MULUMEBET G. MICHAEL 1999 $167,841 $ 83,201 400,000
PRESIDENT & CHIEF 1998 160,865 63,806 100,000
OPERATING OFFICER 1997 156,180 113,027 0
HELEN TVELIA 1999 $ 59,479 $ 83,087 100,000
PROGRAM 1998 62,400 71,917 25,000
DIRECTOR 1997 58,020 62,868 0
- ------------------
# NUMBER OF UNITS
$ DOLLAR AMOUNTS
(1) CAR ALLOWANCE
(2) LIFE INSURANCE PREMIUMS
Other Compensation
In addition to all other options held by him, the Company has obtained life
insurance on the life of Mr. Johnson in the amount of $2,000,000, $1,000,000 for
the benefit of the Company and $1,000,000 for the benefit of his estate.
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Compensation Pursuant to Plans
Stock Option Plans
1987 Plan
The Company's 1987 Stock Option Plan (the "Plan"), adopted by the Board of
Directors on July 28, 1987, and approved by the stockholders on August 28, 1987,
provided for the grant to officers, directors, employees and consultants of
nonqualified stock options and stock options to employees that qualify as
incentive stock options under Section 422A of the Internal Revenue Code of 1986.
The Plan terminated on July 28, 1997. The purpose of the Plan was to enable the
Company to attract and retain qualified persons as employees, officers and
directors and others whose services are required by the Company, and to motivate
such persons by providing them with an equity participation in the Company. A
maximum of 455,000 shares of the Company's Common Stock were reserved for
issuance pursuant to the Plan. No options to purchase shares were exercised
during fiscal year ended December 31, 1999. There are currently 100,000 shares
subject to options outstanding under the Plan. The Plan is administered by the
Board of Directors, which has, subject to specified limitations, the full
authority to grant options and establish the terms and conditions under which
they may be exercised.
The exercise price of incentive stock options granted under the Plan was
required to be not less than the fair market value of the common stock on the
date of grant (110% in the case of a greater than 10% stockholder). The exercise
price of nonqualified stock options could have been no less than 85% of the fair
market value on the date of grant, although the Company did not intend to grant
any such stock options at less than fair market value. In the discretion of the
Board, the exercise price may be payable in cash, by delivery of a promissory
note or in Common Stock of the Company.
The options are subject to forfeiture upon termination of employment or other
relationship with the Company except by reason of death or disability and are
nonassignable. Options were granted for terms up to 10 years (five years in the
case of incentive stock options granted to greater than 10% stockholders). No
optionee was granted incentive stock options such that the fair market value of
the options which first become exercisable in any one calendar year exceeded
$100,000. Options granted under the Plan to officers, employees or consultants
may be exercised only while the optionee is employed or retained by the Company
or within six (6) months after termination of the employment or consulting
relationship by reason of death or permanent disability, and three months after
termination for any other reason.
1994 Plan
On December 20, 1994, the Board of Directors re-adopted the Company's 1994 stock
option plan. The plan allows the Company to grant officers, directors, employees
and consultants nonqualified stock options. The Plan terminates on March 22,
2004. The purpose of the Plan is to enable the Company to attract and retain
qualified persons as employees, officers and directors and others whose services
are required by the Company, and to motivate such persons by providing them with
an equity participation in the Company. A maximum of 500,000 shares of the
Company's common stock were reserved for issuance pursuant to the plan. Options
to purchase 50,000 shares were exercised during fiscal year ended December 31,
1999. There are currently 75,000 shares subject to option outstanding under the
Plan. The Plan is administered by the Board of Directors, which has, subject to
specified limitations, the full authority to grant options and establish the
terms and conditions under which they may be exercised.
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The exercise price of nonqualified stock options can be no less than 85% of the
fair market value on the date of grant, although the Company does not intend to
grant any such stock options at less than fair market value. In the discretion
of the Board, the exercise price may be payable in cash, by delivery of a
promissory note or in Common Stock of the Company.
The options are subject to forfeiture upon termination of employment or other
relationship with the Company except by reason of death or disability and are
nonassignable. Options may be granted for terms up to 10 years. Options granted
under the Plan to officers, employees or consultants may be exercised only while
the optionee is employed or retained by the Company or within six (6) months
after termination of the employment or consulting relationship by reason of
death or permanent disability, and three months after termination for any
reason.
Other Options
The Company granted options to purchase 1,433,000 shares of common stock to
various officers, directors and employees of the Company during 1999. On April
19, 1999, the Board of Directors granted options to Edward A. Johnson and
Mulumebet G. Michael to each purchase 100,000 shares and granted options to
Michael S. Callison to purchase 75,000 shares. The option exercise price is
$.65. The options have a five year term and vest immediately. On December 15,
1999, the Board of Directors granted options to Edward A. Johnson to purchase
350,000 shares, granted options to Mulumebet Michael to purchase 300,000 shares,
granted options to Gary L. Dreher to purchase 75,000 shares and granted options
to Michael S. Callison and Jon Jenett to each purchase 25,000 shares. The option
exercise price is $.62. The options have a five year term and vest immediately.
During 1999, no other options previously granted were exercised.
(c) Options/SAR Grants in Last Fiscal Year
The following table sets forth certain information concerning Options/SARs
granted during 1999 to the named individuals:
POTENTIAL
REALIZABLE
VALUE
INDIVIDUAL GRANTS AT ASSUMED
- --------------------------------------------------------------------------------- ANNUAL RATES OF
% OF TOTAL STOCK PRICE GRANT DATE
OPTIONS/SARS APPRECIATION PRESENT VALUE
GRANTED TO EXERCISE OF FOR OPTION TERM GRANT DATE
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ------------------- PRESENT
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5%($) 10%($) VALUE($)*
- ----------------- ------------- ------------ ----------- ---------- ------ ------- -------------
EDWARD A. JOHNSON 350,000 24% $.65 4/19/2004 66,500 143,500 101,500
100,000 7% $.62 12/15/2004 18,000 39,000 28,000
MULUMEBET G. MICHAEL 300,000 21% $.65 4/19/2004 57,000 123,000 87,000
100,000 7% $.62 12/15/2004 18,000 39,000 28,000
HELEN TVELIA 100,000 5% $.65 4/19/2004 19,000 41,000 29,000
- --------------------
* Present values were calculated using the Black-Scholes options pricing model
which should not be viewed in any way as a forecast of the future
performance of the Company=s stock. The estimated present value of each
stock option is $.29 for the April 19, 1999 grant and $.28 for the December
15, 1999 grant based on the following inputs:
4/19/99 12/15/99
GRANT GRANT
------- --------
Stock Price (Fair Market Value) at Grant $.6563 $.625
Exercise Price $ .65 $ .62
Expected Option Term 5 years 5 years
Risk-Free Interest Rate 6.25% 6.13%
Stock Price Volatility 39.8% 39.8%
Dividend Yield 0% 0%
The model assumes: (a) an Expected Option Term of 5 years which reflects the
actual life of the option; (b) a Risk-Free Interest Rate that represents the
interest rate on a U.S. Treasury Note with a maturity date corresponding to that
of the Expected Option Term; and (c) Stock Price Volatility is calculated using
quarterly stock prices over the period from January 1, 1995 to December 31,
1999.
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(d) Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table summarizes options and SARs exercised during 1999, and
presents the value of unexercised options and SARS held by the named individuals
at fiscal year end:
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES ACQUIRED VALUE AT FISCAL AT FISCAL
NAME ON EXERCISE(#) REALIZED($) YEAR-END(#) YEAR-END($)*
---- --------------- ----------- ------------ -------------
EDWARD A. JOHNSON 50,000 $31,875 750,000 $104,250
MULUMEBET G. MICHAEL ** 0 0 700,000 93,000
HELEN TVELIA 0 0 200,000 28,438
- ---------------
* The difference between fair market value at February 4, 2000 and the exercise
price.
** 100,000 of options vest over five years, 60,000 of which are exercisable at
12/31/99.
(g) Compensation of Directors
Directors do not receive compensation for their services although they are
entitled to reimbursement for expenses incurred in attending board meetings.
Michael S. Callison received $37,500 of wages as Vice President of Corporate
Development in 1999. Mr. Dreher received $12,000 in marketing fees during 1999
for the marketing of the Company's programs to the hospitals during 1999.
(k) Board Compensation Committee Report on Executive Compensation
The entire Board of Directors is responsible for determining the Chief Executive
Officer's compensation. The Board's philosophy has been to offer a stable base
salary plus a monthly bonus based on a percentage of corporate monthly profits
before income taxes.
The Board's approach to base compensation is to offer competitive salaries in
comparison with market practices. However, base salaries have become a
relatively smaller element in the total executive officer compensation package
as the Company has introduced incentive compensation programs which it believes
reinforce strategic performance objectives.
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(L) STOCK PERFORMANCE GRAPH
The following graph sets forth the cumulative total shareholder return (assuming
reinvestment of dividends) to Company's stockholders during the five year period
ended December 31, 1999 as well as the U.S. NASDAQ stock market index and the
S&P Healthcare (Hospital) Management Index.
The Company does not currently meet the standards required for trading on the
NASDAQ exchange, however the Company believes that the securities traded on this
exchange most closely resemble its market capitalization.
[PERFORMANCE GRAPH]
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
-------- -------- -------- -------- -------- --------
OPMC 100 144 176 170 109 84
S&P Hospital Management Index 100 139 164 143 117 132
NASDAQ Market Index 100 140 172 209 292 441
NOTE: The stock performance graph assumes $100 was invested on January 1, 1994.
23
25
ITEM 12 -- CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) and (b) Security Ownership
The following table sets forth certain information regarding the ownership of
the Company's Common Stock as of February 7, 2000, (i) by each person who is
known by the Company to own beneficially more than 5% of the outstanding shares
of Common Stock; (ii) by each of the Company's directors and named executive
officers; and (iii) by all directors and named executive officers of the Company
as a group. Unless otherwise indicated below, the person or persons named have
sole voting and dispositive power.
AMOUNT & NATURE OF PERCENT
NAME(1) BENEFICIAL OWNERSHIP OF CLASS
------- -------------------- --------
EDWARD A. JOHNSON 1,245,826(2) 18.9%
MULUMEBET G. MICHAEL 689,466(3) 10.5%
MICHAEL S. CALLISON 680,895(4) 11.2%
GARY L. DREHER 226,745(5) 3.7%
JON E. JENETT 159,000(6) 2.6%
ALL OFFICERS AND DIRECTORS
AS A GROUP (5 PERSONS) 3,001,932(7) 38.9%
- -------------------
(1) The addresses of these persons are as follows: Mr. Johnson - 24 South
Stonington Road, Laguna Beach, CA 92651; Ms. Michael - 5304 Shenandoah
Avenue, Los Angeles, CA 90056; Mr. Callison - 21972 Summerwind Lane,
Huntington Beach, CA 92646; Mr. Dreher - 6301 Acacia Hill Drive, Yorba
Linda, CA 92886; Mr. Jenett - 8 South Vista De La Luna, Laguna Beach, CA
92651.
(2) Includes presently exercisable options to purchase 700,000 shares of Common
Stock, with 17,578 shares held indirectly through an individual retirement
account.
(3) Includes presently exercisable options to purchase 660,000 shares of Common
Stock. All shares are directly owned.
(4) Includes presently exercisable options to purchase 175,000 shares of Common
Stock directly held, 480,000 shares held through a revocable living trust,
17,500 shares held indirectly through an individual retirement account,
2,395 shares held indirectly through a 401K plan and 6,000 shares held as
custodian for five of Mr. Callison's grandchildren.
(5) Includes presently exercisable options to purchase 150,000 shares of Common
Stock and 58,890 shares directly held, with 13,210 shares held indirectly
through an individual retirement account and 4,645 held indirectly through
an individual retirement account of Mr. Dreher's spouse.
(6) Includes presently exercisable options to purchase 125,000 shares of Common
Stock, with 34,000 shares held indirectly through an individual retirement
account.
(7) Includes presently exercisable options to purchase 1,810,000 shares of
Common Stock.
(c) Changes in Control
Inapplicable.
24
26
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions With Management and Others
Inapplicable.
(b) Certain Business Relationships
Inapplicable.
(c) Indebtedness of Management
The Company converted a series of short-term advances to Mr. Johnson and a
$274,000 note dated December 29, 1997 into a $392,070 promissory note due
from Mr. Johnson. The note accrues interest at the current prime rate and
provides for bi-monthly payments aggregating $6,500 per month.
(d) Transactions With Promoters
Inapplicable.
25
27
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) List of Financial Statements Filed as a Part of this Report
(Filed Under Item 8 above)
Page
Number
---------------
Reports of Independent Auditors F-1 through F-2
Consolidated Balance Sheets as of December 31, F-3 through F-4
1999 and December 31, 1998
Consolidated Statements of Income for the years F-5
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the F-6
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the F-7
year ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements. F-8 through F-17
(a)(2) List of Financial Statement Schedules filed as a Part of this Report
Schedule II - Valuation and Qualifying Accounts
OPTIMUMCARE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
------------------------------------
CHARGED
BALANCE AT CHARGED TO OTHER BALANCE
BEGINNING TO COSTS ACCOUNTS DEDUCTIONS AT END
OF PERIOD AND EXPENSES DESCRIBE DESCRIBE OF PERIOD
---------- ------------ -------- ---------- ---------
YEAR ENDED DECEMBER 31, 1999
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 0 $295,895 $0 $(295,895)* $ 0
YEAR ENDED DECEMBER 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $560,198 $334,564 $0 $(894,762)* $ 0
YEAR ENDED DECEMBER 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 0 $602,643 $0 $ (42,445)* $560,198
- ----------------
* Uncollectable accounts written-off, net of recoveries.
All other schedules for which provision is made in the applicable accounting
rules of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(a) (3) List of Exhibits Filed as a Part of This Report
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation incorporated by reference from Form S-18
Registration Statement (Registration No. 33-16313-LA) filed July 28,
1988, Exhibit 3.1.
3.2 Bylaws incorporated by reference from Form S-18 Registration Statement
(Registration No. 33-16313-LA) filed July 28, 1988, Exhibit 3.2.
3.3 Certificate of Amendment of Certificate of Incorporation filed
February 29, 1988. Incorporated by reference from Form S-18
Registration Statement (Registration No. 33-16313-LA) filed July 28,
1988, Exhibit 3.5.
26
28
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.4 Restated Certificate of Incorporation, filed October 3, 1989.
Incorporation by reference from Form 10-K for the year ended December
31, 1989.
10.1 Lease between the Company and Laguna Niguel Office Center dated June
23, 1988 which supersedes lease dated December 15, 1986, incorporated
by reference from Form S-18 Registration Statement (Registration No.
33-16313-LA) filed July 28, 1988, Exhibit 10.1.
10.6 Amended and Restated 1987 Stock Option Plan incorporated by reference
from Form S-18 Registration Statement (Registration No. 33-16313-LA)
filed July 28, 1988, Exhibit 10.6.
10.18 Form of Modification Agreement to Incentive Stock Option Agreement,
dated January 20, 1988, incorporated by reference from Form S-18
Registration Statement (Registration No. 33-16313-LA) filed July 28,
1988, Exhibit 10.18.
10.30 Lease amendment between the Company and Laguna Niguel Office Center
dated September 24, 1990 which supersedes lease dated June 23, 1988
incorporated by reference from Annual Report on Form 10-K for the year
ended December 31, 1990, Exhibit 10.30.
10.34 Agreement between Huntington Intercommunity Hospital and the Company
dated November 1, 1991 incorporated by reference from Annual Report on
Form 10-K for the year ended December 31, 1991, Exhibit 10.34.
10.38 Agreement between Huntington Intercommunity Hospital and the Company
dated October 1, 1992 incorporated by reference from Annual Report on
Form 10-K for the year ended December 31, 1992, Exhibit 10.38.
10.43 Lease amendment between the Company and Laguna Niguel Office Center
dated May 12, 1993 which supersedes lease dated June 23, 1988
incorporated by reference form Annual Report on Form 10-K for the year
ended December 31, 1993, Exhibit 10.43.
10.55 1994 Stock Option Plan incorporated by reference from Annual Report on
Form 10-K for the year ended December 31, 1994, Exhibit 10.55
10.60 Lease amendment between the Company and Laguna Niguel Office Center
dated July 7, 1994 which supersedes lease dated June 23, 1988
incorporated by reference from Annual Report on Form 10-K for the year
ended December 31, 1994, Exhibit 10.60.
10.66 Agreement between Sherman Oaks Hospital and Health Center dated March
30, 1995, incorporated by reference from Form 10-K for the year ended
December 31, 1995.
10.67 Loan Agreement between the Company and National Bank of Southern
California dated March 31, 1995, incorporated by reference from Form
10-K for the year ended December 31, 1995. (Modified)
10.68 Lease Agreement between the Company and Laguna Niguel Office Center
dated June 5, 1995 which supersedes lease dated June 23, 1988,
incorporated by reference from Form 10- K for the year ended December
31, 1995.
27
29
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.70 Lease Agreement between the Company and 757 Pacific Partnership dated
July 3, 1995, incorporated by reference from Form 10-K for the year
ended December 31, 1995.
10.73 Agreement between San Fernando Community Hospital, Inc. dba Mission
Community Hospital and the Company dated October 6, 1995, incorporated
by reference from Form 10-K for the year ended December 31, 1995.
10.77 Operating Agreement for Optimum Care Source, LLC incorporated by
reference from March 31, 1996 Form 10-Q Exhibit 10.77.
10.78 Master Joint Venture Agreement between Professional CareSource, Inc.
and the Company dated April 19, 1996 incorporated by reference from
March 31, 1996 Form 10-Q Exhibit 10.78.
10.82 Registration Agreement between Professional CareSource, Inc. and the
Company dated April 24, 1996 incorporated by reference from March 31,
1996 Form 10-Q Exhibit 10.82.
10.83 Non-qualified stock option Agreement between Joseph H. Dadourian and
the Company dated April 24, 1996 incorporated by reference from March
31, 1996 Form 10-Q Exhibit 10.83.
10.84 Non-qualified stock option Agreement between Teri L. Jolin and the
Company dated April 24, 1996 incorporated by reference from March 31,
1996 Form 10-Q Exhibit 10.84.
10.85 Non-qualified stock option Agreement between Margaret M. Minnick and
the Company dated April 24, 1996 incorporated by reference from March
1996 Form 10-Q Exhibit 10.85.
10.86 Agreement between Friendship Community Mental Health Center and the
Company dated April 25, 1996 incorporated by reference from March 31,
1996 Form 10-Q Exhibit 10.86.
10.87 Lease Agreement between the Company and Laguna Niguel Office Center
dated April 30, 1996 which supersedes lease dated June 23, 1988,
incorporated by reference from Form 10- K for the year ended December
31, 1996.
10.88 Lease Agreement between the Company and Jay Arteaga dated September
30, 1996, incorporated by reference from Form 10-K for the year ended
December 31, 1996.
10.90 Unanimous Written Consent dated December 31, 1996 of the Board of
Directors amending the promissory note between the Company and Edward
A. Johnson dated December 29, 1995, incorporated by reference from
Form 10-K for the year ended December 31, 1996.
10.91 Change in terms Agreement between the Company and National Bank of
Southern California dated January 28, 1997 (Modified), incorporated by
reference from Form 10-K for the year ended December 31, 1996.
10.94 Change in Terms Agreement between the Company and National Bank of
Southern California dated May 15, 1997, incorporated by reference from
Form 10-K for the year ended December 31, 1997.
28
30
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.95 Inpatient and Outpatient Psychiatric Unit Management Services
Agreement between the Company and Catholic Healthcare West Southern
California dated June 1, 1997, incorporated by reference from Form
10-K for the year ended December 31, 1997.
10.96 Lease Agreement between the Company and The Ribeiro Corporation dated
June 23, 1997, incorporated by reference from Form 10-K for the year
ended December 31, 1997.
10.97 Lease Agreement between the Company and Harriet Maizels, Daniel Gold,
Lesley Gold and Mildred Gold dated July 8, 1997, incorporated by
reference from Form 10-K for the year ended December 31, 1997.
10.100 Lease Agreement between the Company and Laguna Niguel Office Center
dated September 5, 1997 which supersedes lease dated June 23, 1988,
incorporated by reference from Form 10-K for the year ended December
31, 1997.
10.101 First Lease Extension Agreement between the Company and Whittier
Narrows Business Park and the Company dated September 11, 1997 which
supersedes lease dated January 10, 1994, incorporated by reference
from Form 10-K for the year ended December 31, 1997.
10.102 Lease Extension Agreement between the Company and 757 Pacific Avenue
Partnership dated September 19, 1997 which supersedes lease dated July
3, 1995, incorporated by reference from Form 10-K for the year ended
December 31, 1997.
10.103 Unanimous Written Consent dated December 29, 1997 of the Board of
Directors amending the Promissory Note between the Company and Edward
A. Johnson dated December 31, 1996, incorporated by reference from
Form 10-K for the year ended December 31, 1997.
10.105 Agreement between Friendship Community Mental Health Center and the
Company dated June 25, 1997 which supersedes the Agreement dated April
25, 1996, incorporated by reference from Form 10-K for the year ended
December 31, 1998.
10.106 Lease Agreement between the Company and Laguna Niguel Office Center
dated May 14, 1998 which supersedes lease dated June 23, 1988,
incorporated by reference from Form 10- K for the year ended December
31, 1998.
10.107 Change in terms Agreement between the Company and Southern California
Bank dated May 27, 1998, incorporated by reference from Form 10-K for
the year ended December 31, 1998.
10.108 Lease Agreement between Whittier Narrows Business Park and the Company
dated July 28, 1998, incorporated by reference from Form 10-K for the
year ended December 31, 1998.
10.109 Lease Agreement between the Company and P.S. Business Parks, L.P.
dated August 14, 1998, incorporated by reference from Form 10-K for
the year ended December 31, 1998.
10.110 Inpatient and Outpatient Psychiatric Unit Management Services
Agreement between the Company and Catholic Healthcare West Southern
California dated September 15, 1998 which supersedes Agreement dated
June 1, 1997, incorporated by reference from Form 10- K for the year
ended December 31, 1998.
29
31
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.111 Agreement between Citrus Valley Medical Center and the Company dated
September 18, 1998, incorporated by reference from Form 10-K for the
year ended December 31, 1998.
10.112 Sublease Agreement between Citrus Valley Medical Center and the
Company dated September 23, 1998, incorporated by reference from Form
10-K for the year ended December 31, 1998.
10.113 Lease Agreement between the Company and Coldwell Banker dated November
1, 1998, incorporated by reference from Form 10-K for the year ended
December 31, 1998.
10.114 Amendment to the Agreement dated June 25, 1997 between Friendship
Community Mental Health Center and the Company dated November 12,
1998, incorporated by reference from Form 10-K for the year ended
December 31, 1998.
10.115 Change in Terms Agreement between the Company and Southern California
Bank dated April 27, 1999, incorporated by reference from Form 10-Q
for the quarter ended June 30, 1999.
10.116 Lease Agreement between the Company and Laguna Niguel Office Center
dated May 12, 1999 which supersedes the lease dated June 23, 1988,
incorporated by reference from Form 10-Q for the quarter ended June
30, 1999.
10.117 Contract amendment between the Company and Huntington Intercommunity
Hospital d/b/a Humana Hospital Huntington Beach dated August 1, 1999
which supersedes the contract dated November 5, 1991, incorporated by
reference from Form 10-Q for the quarter ended September 30, 1999.
10.118 Contract amendment between the Company and Huntington Intercommunity
Hospital d/b/a Humana Hospital Huntington Beach dated August 1, 1999
which supersedes the contract dated October 1, 1992, incorporated by
reference from Form 10-Q for the quarter ended September 30, 1999.
10.119 Inpatient Psychiatric Services contract amendment dated August 6, 1999
between the Company and Huntington Intercommunity Hospital d/b/a
Humana Hospital Huntington Beach which supersedes contract amendment
dated August 1, 1999, incorporated by reference from Form 10-Q for the
quarter ended September 30, 1999.
10.120 Partial Hospitalization Agreement contract amendment dated August 6,
1999 between the Company and Huntington Intercommunity Hospital d/b/a
Humana Hospital Huntington Beach which supersedes contract amendment
dated August 1, 1999, incorporated by reference from Form 10-Q for the
quarter ended September 30, 1999.
10.121 Psychiatric Partial Hospitalization Management Agreement between the
Company and Rhema Behavioral Health Center dated August 1, 1999,
incorporated by reference from Form 10-Q for the quarter ended
September 30, 1999.
10.122 First amendment to lease between the Company and Jay Arteaga dated
October 11, 1999 which supercedes lease dated September 30, 1996,
incorporated by reference from Form 10-Q for the quarter ended
September 30, 1999.
30
32
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.123 Mental health inpatient and outpatient hospitalization services
agreements between the Company and San Fernando Community Hospital
d/b/a Mission Community Hospital dated December 31, 1999. Supercedes
the agreements dated October 6, 1995.
23 Consent of Independent Auditor's.
27 Financial Data Schedule
(b) Reports on Form 8-K
During January 2000, the Company filed an 8-K, 8-K/A and 8-K/A2 reporting a
change in certifying accountants.
31
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 29, 2000 OPTIMUMCARE CORPORATION
By: /s/ EDWARD A. JOHNSON
--------------------------------
Edward A. Johnson,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the persons on behalf of the registrant in the
capacities and on the dates indicated.
/s/ EDWARD A. JOHNSON Chief Executive Officer March 29, 2000
- ------------------------------------- and Director (Principal Financial
Edward A. Johnson and Accounting Officer)
/s/ MULUMEBET G. MICHAEL Director, President and March 29, 2000
- ------------------------------------- Chief Operating Officer
Mulumebet G. Michael
/s/ MICHAEL S. CALLISON Director March 29, 2000
- ------------------------------------
Michael S. Callison
/s/ GARY L. DREHER Director March 29, 2000
- ------------------------------------
Gary L. Dreher
/s/ JON E. JENETT Director March 29, 2000
- ------------------------------------
Jon E. Jenett
32
34
Page
Number
---------------
Reports of Independent Auditors F-1 through F-2
Consolidated Balance Sheets as of December 31, F-3 through F-4
1999 and December 31, 1998
Consolidated Statements of Income for the years F-5
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the F-6
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the F-7
year ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements. F-8 through F-17
35
February 29, 2000
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
OptimumCare Corporation
We have audited the accompanying consolidated balance sheet of
OptimumCare Corporation and its subsidiary as of December 31, 1999, and their
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended. In connection with our audit of the financial
statements, we have also audited the financial statement schedule listed at Item
14(a)(2) as of and for the year ended December 31, 1999. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 8 to the consolidated financial statements, the
Company is dependent upon a small number of contracts, the loss of any of which
could have a significant adverse effect on the Company's operations.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of OptimumCare
Corporation and its subsidiary as of December 31, 1999, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.
/s/ Lesley, Thomas, Schwarz & Postma Inc.
A Professional Accountancy Corporation
Newport Beach, California
F-1
36
Report of Independent Auditors
The Stockholders and Board of Directors
OptimumCare Corporation
We have audited the accompanying consolidated balance sheet of OptimumCare
Corporation and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the two years in the period ended December
31, 1998. Our audits also included the financial statement schedule listed in
the Index at Item 14(a) for the two years in the period ended December 31, 1998.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 8 to the consolidated financial statements, the Company is
dependent upon a small number of contracts, the loss of any of which could have
a significant adverse effect on the Company's operations.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
OptimumCare Corporation at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Orange County, California
March 5, 1999
F-2
37
OPTIMUMCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------------
1999 1998
---------- ----------
CURRENT ASSETS
Cash $ 283,227 $ 188,636
Accounts receivable, net of allowance of $0 in
1999 and 1998 2,621,181 2,293,583
Note receivable from officer (Note 2) 156,000 78,000
Prepaid expenses 30,837 71,537
Deferred tax asset (Note 7) 24,457 20,288
---------- ----------
Total current assets 3,115,702 2,652,044
NOTE RECEIVABLE FROM OFFICER (Note 2) 236,070 314,070
FURNITURE AND EQUIPMENT, less accumulated
depreciation of $170,716 in 1999
and $131,062 in 1998 (Note 1) 32,268 59,527
DEFERRED TAX ASSET (Note 7) 25,994 75,817
OTHER ASSETS 52,311 53,286
---------- ----------
Total assets $3,462,345 $3,154,744
========== ==========
See the accompanying notes to these consolidated financial statements
F-3
38
OPTIMUMCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
----------------------------
1999 1998
---------- ----------
CURRENT LIABILITIES
Accounts payable $ 177,903 $ 244,525
Accrued vacation 44,926 50,720
Accrued expenses 192,353 134,130
---------- ----------
Total current liabilities 415,182 429,375
---------- ----------
COMMITMENTS (Notes 3, 4 and 5)
STOCKHOLDERS' EQUITY (Note 6)
Preferred stock, $.001 par value;
10,000,000 shares authorized
0 shares issued and outstanding at
December 31, 1999 and 1998 -- --
Common stock, $.001 par value;
20,000,000 shares authorized
5,883,675 and 5,919,897 shares issued
and outstanding at December 31, 1999
and 1998, respectively 5,884 5,920
Paid-in-capital 2,387,793 2,431,761
Retained earnings 653,486 287,688
---------- ----------
Total stockholders' equity 3,047,163 2,725,369
---------- ----------
Total liabilities and stockholders' equity $3,462,345 $3,154,744
========== ==========
See the accompanying notes to these consolidated financial statements
F-4
39
OPTIMUMCARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
NET REVENUES $10,553,427 $11,409,690 $12,089,398
INTEREST INCOME 36,261 24,736 7,685
----------- ----------- -----------
10,589,688 11,434,426 12,097,083
----------- ----------- -----------
OPERATING EXPENSES
Costs of services provided 8,202,445 8,977,538 8,894,987
Selling, general and administrative 1,435,708 1,505,169 1,724,942
Provision for uncollectible accounts 295,895 334,564 602,643
Goodwill impairment -- -- 135,255
Interest 2,528 2,401 31,906
----------- ----------- -----------
Total operating expenses 9,936,576 10,819,672 11,389,733
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 653,112 614,754 707,350
PROVISION FOR INCOME TAXES (Note 7) 287,314 237,621 253,000
----------- ----------- -----------
NET INCOME $ 365,798 $ 377,133 $ 454,350
=========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.06 $ 0.06 $ 0.07
=========== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.06 $ 0.06 $ 0.06
=========== =========== ===========
See the accompanying notes to these consolidated financial statements
F-5
40
OPTIMUMCARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
RETAINED
COMMON STOCK EARNINGS/
--------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
--------- ------- ----------- ------------ -----------
BALANCE, December 31, 1996 6,786,218 $ 6,786 $ 3,272,407 $(543,795) $ 2,735,398
Exercise of stock options 25,000 25 9,350 -- 9,375
Common stock issued for consulting fees 91,393 92 74,252 -- 74,344
Net income -- -- -- 454,350 454,350
---------- ------- ----------- --------- -----------
BALANCE, December 31, 1997 6,902,611 6,903 3,356,009 (89,445) 3,273,467
Exercise of stock options 25,000 25 7,475 -- 7,500
Purchase and retirement of treasury stock (1,007,714) (1,008) (931,723) -- (932,731)
Net income -- -- -- 377,133 377,133
---------- ------- ----------- --------- -----------
BALANCE, December 31, 1998 5,919,897 5,920 2,431,761 287,688 2,725,369
Exercise of stock options 13,778 14 (14) -- --
Purchase and retirement of treasury stock (50,000) (50) (43,954) -- (44,004)
Net income -- -- -- 365,798 365,798
---------- ------- ----------- --------- -----------
BALANCE, December 31, 1999 5,883,675 $ 5,884 $ 2,387,793 $ 653,486 $ 3,047,163
========== ======= =========== ========= ===========
See the accompanying notes to these consolidated financial statements
F-6
41
OPTIMUMCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
--------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 365,798 $ 377,133 $ 454,350
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 39,654 40,589 38,338
Amortization -- -- 40,777
Provision for uncollectible accounts 295,895 334,564 602,643
Common stock issued as consulting fees -- -- 74,344
Impairment of goodwill -- -- 135,255
Deferred taxes 45,654 237,895 (334,000)
Changes in operating assets and liabilities
Increase in accounts receivable (623,493) (441,241) (400,530)
Decrease (increase) in prepaid expenses 40,700 9,779 (34,071)
(Increase) decrease in other assets 973 (8,356) 12,846
(Decrease) increase in accounts payable (66,623) (25,653) 42,889
(Decrease) increase in accrued expenses 52,429 (24,746) (194,282)
--------- ----------- -----------
Net cash provided by operating activities 150,987 499,964 438,559
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment (12,392) (13,431) (51,527)
Note receivable from officer -- (118,070) (119,000)
--------- ----------- -----------
Net cash used in investing activities (12,392) (131,501) (170,527)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable to bank 650,000 -- --
Note payable to bank pay downs (650,000) (200,000) (445,812)
Purchase of treasury stock (44,004) (932,731) --
Exercise of stock options -- 7,500 9,375
--------- ----------- -----------
Net cash used in financing activities (44,004) (1,125,231) (436,437)
--------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 94,591 (756,768) (168,405)
CASH, beginning of year 188,636 945,404 1,113,809
--------- ----------- -----------
CASH, end of year $ 283,227 $ 188,636 $ 945,404
========= =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 2,528 $ 2,401 $ 32,912
========= =========== ===========
Income taxes paid $ 237,500 $ 11,366 $ 629,000
========= =========== ===========
See the accompanying notes to these consolidated financial statements
F-7
42
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - OptimumCare Corporation (the "Company") develops,
markets and manages hospital-based programs for the treatment of psychiatric
disorders on both an inpatient and outpatient basis. Hospitals are primarily
reimbursed by Medicare and Medicaid for the majority of these programs, which in
turn pay the Company a contracted management fee. The Company's programs are
currently being marketed in the United States, principally California, to
independent acute general hospitals and other health care facilities.
The accompanying financial statements include the accounts of the
Company and its majority owned subsidiary, Optimum CareSource, LLC (discussed
below). All significant intercompany transactions have been eliminated in
consolidation.
BUSINESS ACQUISITION- On April 19, 1996, the Company completed the
acquisition of a seventy percent (70%) interest in certain contracts of
Professional CareSource, Inc. through the formation of Optimum CareSource, LLC
(the "LLC"). The Company acquired a seventy percent (70%) ownership interest in
the LLC and Professional CareSource, Inc. holds a thirty percent (30%) ownership
interest in the LLC. The Company considers the LLC to be a seventy percent (70%)
owned subsidiary of the Company. The Company paid $11,000 in cash to each of the
three (3) principals of Professional CareSource, Inc. and made an initial
contribution of $50,000 to the LLC for working capital.
The Company is required to purchase all of Professional CareSource,
Inc.'s interest in the LLC by April 29, 2001, but may elect to purchase the
interest at any time after April 29, 2000 at a specified price, which
approximates Professional CareSource's ownership percentage in the LLC
multiplied by five (5) times the LLC's net profit after taxes as reflected on
its most recent Form 1065 after agreed upon taxes.
Three (3) principals of Professional CareSource, Inc. were each given
one (1) year employment contracts with the LLC. In connection with the
employment agreements, the Company granted nonqualified stock options to
purchase 33,000 shares of common stock at $.92 per share, which vest over five
(5) years, to each of the principals of Professional CareSource, Inc. No options
have been exercised under these grants. Optimum CareSource, LLC, headquartered
in Southern California, provides mental health services at long-term care
facilities.
The purchase method of accounting was used to record the transaction.
No tangible assets of the LLC were acquired and as such, the purchase price was
allocated to intangibles to be amortized over five (5) years.
F-8
43
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During 1997, based on recurring losses at the LLC and a lack of
substantive new contracts, management determined that this goodwill was impaired
and based on its estimate of discounted cash flows, the Company wrote off the
remaining balance of $135,000 at December 31, 1997. The impairment loss is
recorded as a separate line item in operating expenses on the accompanying
statements of income.
CASH AND CASH EQUIVALENTS - For purposes of the balance sheet and
statement of cash flows, cash and cash equivalents consist of all cash balances
and highly liquid investments with an initial maturity of three (3) months or
less. At December 31, 1999 and 1998, there were no cash equivalents.
FURNITURE AND EQUIPMENT - Furniture and equipment is stated at cost.
Depreciation is computed on the straight-line method based upon the estimated
useful lives of the related assets, which range from three (3) to five (5)
years.
REVENUE RECOGNITION - Revenues are recognized in the period services
are provided and are recorded net of contractual adjustments representing the
difference between standard rates and estimated net realizable amounts under
reimbursement agreements with customers.
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.
INCOME TAXES - The Company accounts for income taxes in accordance with
the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting For Income Taxes", which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and the tax basis of assets and
liabilities using enacted rates in effect for the periods in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions about the future that affect the amounts reported
in the financial statements. These estimates include assessing the
collectibility of accounts receivable and the usage and recoverability of
long-lived assets. The actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial
instruments consist principally of cash, accounts and note receivable, and
current liabilities. The Company believes all of the financial instruments'
recorded values approximate fair values.
F-9
44
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROFESSIONAL LIABILITY INSURANCE - Effective October 7, 1997,
OptimumCare maintains an occurrence based professional liability insurance
coverage of up to $500,000 per occurrence, $5,000,000 annual aggregate.
RISKS AND UNCERTAINTIES - The Company contracts with hospitals which
are primarily reimbursed by Medicare and Medicaid for the majority of the
Company's programs. Laws and regulations governing Medicare and Medicaid
reimbursement programs are complex and subject to interpretation. The Company is
indirectly affected by such laws and regulations governing Medicare and Medicaid
programs. The Company believes that it is in compliance with all applicable laws
and regulations and is not aware of any pending or threatened investigations
involving allegations of potential wrong doing. While no such regulatory
inquiries have been made, compliance with such laws and regulations can be
subject to future government review and interpretation.
RECLASSIFICATIONS - Certain amounts for prior periods have been
reclassified to conform with the current year presentation.
NOTE 2 - NOTE RECEIVABLE FROM OFFICER
During 1998, the Company converted a series of short-term advances and
a $274,000 note dated December 29, 1997 into a promissory note from an officer
totaling $392,070. The note accrues interest at the current prime rate and
provides for a bi-monthly payment plan. On January 4, 2000, principal payments
totaling $78,000 were received by the Company.
NOTE 3 - LINE OF CREDIT
The Company has a line of credit with a bank which allows the Company
to borrow up to seventy-five percent (75%) of certain qualified receivables with
a maximum indebtedness of $1,500,000. The interest rate is based on the Wall
Street Journal prime plus .50%. The weighted average interest rate was 8.71% and
9.60% in the years ended December 31, 1999 and 1998, respectively. The line of
credit matures on May 1, 2000 and is collateralized by substantially all of the
Company's assets. At December 31, 1999, $1,310,000 was available for future
draws under the line of credit agreement, and no amounts were outstanding.
F-10
45
NOTE 4 - EMPLOYEE BENEFIT PLAN
Effective January 1, 1997, the Company provided a 401(k) Plan for all
employees having completed one (1) year of service. Under the 401(k) Plan,
eligible employees voluntarily contribute to the Plan up to fifteen percent
(15%) of their salary through payroll deductions which vested over six (6)
years. OptimumCare matches fifty percent (50%) of the first four percent (4%) of
employee contributions to the Plan through payroll deductions. Effective January
1, 1999, the Company adopted a 401(k) Safe Harbor Plan. The Plan provides for
immediate vesting of employee contributions. The Company matches one hundred
percent (100%) of the first three percent (3%), and fifty percent (50%) of
employee contributions from three percent (3%) to five percent (5%) to the Plan
through payroll deductions. Expenses associated with employer contributions were
$98,018, $54,181, and $40,190 for 1999, 1998 and 1997, respectively.
NOTE 5 - LEASE COMMITMENTS
The Company leases four (4) office facilities under lease agreements.
One agreement is on a month to month basis. The remaining agreements expire June
30, 2000, October 31, 2000 and November 30, 2001, respectively. The Company also
leased space under five (5) separate lease agreements for the operation of five
(5) of its outpatient partial hospitalization psychiatric program sites. One
agreement is between the lessor and the community mental health center. However,
the Company is obligated to pay the lease costs for the program under its
contract with the facility which expires November 30, 2003. The remaining
agreements expire June 30, 2000, September 30, 2000, September 30, 2000 and
August 14, 2002, respectively. Aggregate future minimum lease payments under
remaining noncancelable leases with terms in excess of one (1) year are as
follows:
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- --------
2000 $140,626
2001 141,488
2002 88,488
2003 50,094
--------
$420,696
========
The Company has a sublease with one of its host hospitals. Sublease
rental income was $67,244, $87,693 and $57,844 for the years ended December 31,
1999, 1998 and 1997, respectively. Rent expense was $388,601, $354,520 and
$307,192 for the years ended December 31, 1999, 1998 and 1997, respectively.
F-11
46
NOTE 6 - STOCKHOLDERS' EQUITY
STOCK OPTION PLANS - The Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25) and related Interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting provided for
under Statement No. 123, Accounting for Stock-Based Compensation, requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, no compensation expense is recognized because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant.
In July 1987, the Company adopted a stock option plan (the "1987 Plan")
including incentive stock options and nonqualified stock options. A maximum of
455,000 shares of the Company's common stock was reserved for issuance under the
1987 Plan. Under the 1987 Plan, incentive stock options were granted at an
exercise price not less than one hundred percent (100%) of the fair market value
on the date of grant (110% for greater than 10% stockholders) and, nonqualified
stock options were granted at an exercise price not less than eighty-five
percent (85%) of the fair market value on the date of grant. Options were
granted for terms up to ten (10) years (five years for greater than 10%
stockholders). No options have been granted after July 1997, but options granted
before such date may still be exercisable after such date.
In March 1994, the Company adopted and approved the 1994 Stock Option
Plan (the "1994 Plan") including incentive stock options and nonqualified stock
options. In December 1995, the Company readopted and approved the 1994 Stock
Option Plan. A maximum of 500,000 shares of the Company's common stock has been
reserved for issuance under the 1994 Plan. Incentive stock options may be
granted at an exercise price which is not less than one hundred percent (100%)
of the fair market value on the date of grant (110% for greater than 10%
stockholders) and, nonqualified stock options may be granted at an exercise
price which is no less than eighty-five percent (85%) of the fair market value
on the date of grant. Options may be granted for terms up to ten (10) years
(five years for greater than 10% stockholders).
In October 1997, the Company granted non-qualified options to purchase
48,000 shares of its common stock at prices ranging from $1.21 to $1.81 per
share which vested over six (6) months. No options have been exercised under
these grants and those options were canceled during 1999.
On February 3, 1998, the Company granted to certain officers,
directors, employees and consultants, non-qualified options to purchase 350,000
shares of its common stock at $1.00 per share. All options are vested upon
grant.
During various dates in 1999, the Company granted to certain officers,
directors, employees and consultants, non-qualified options to purchase
1,433,000 shares of its common stock at prices ranging from $0.62 to $0.90 per
share. Options to purchase 1,283,000 shares are vested upon grant. Options to
purchase 150,000 shares vest over six (6) months. No options have been exercised
under these grants.
F-12
47
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
A summary of stock option activity during 1999, 1998 and 1997 is as
follows:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
VARIOUS EXERCISE 1987 EXERCISE 1994 EXERCISE
NON-PLAN PRICE PLAN PRICE PLAN PRICE
---------- -------- ------- -------- ------- --------
Outstanding, December 31, 1996 733,000 $1.25 150,000 $ .83 200,000 $ .58
Granted 48,000 1.51 -- -- -- --
Exercised -- -- (25,000) .375 -- --
Canceled (200,000) 1.50 -- -- (25,000) .91
---------- ----- -------- ------ -------- ------
Outstanding, December 31, 1997 581,000 1.18 125,000 .92 175,000 .54
Granted 350,000 1.00 -- -- -- --
Exercised -- -- (25,000) .30 -- --
Canceled -- -- -- -- -- --
---------- ----- -------- ------ -------- ------
Outstanding, December 31, 1998 931,000 1.11 100,000 1.08 175,000 .54
Granted 1,433,000 .66 -- -- -- --
Exercised -- -- -- -- (50,000) .6375
Canceled (48,000) 1.51 -- -- (50,000) .6375
---------- ----- -------- ------ -------- ------
Outstanding, December 31, 1999 2,316,000 $ .82 100,000 $ 1.08 75,000 $ .83
========== ===== ======== ====== ======== ======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ----------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE AT 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/99 EXERCISE PRICE
- ---------------- ----------- ---------------- --------------- --------------- --------------
$ .6375 25,000 .5 years $.6375 25,000 $.6375
.91 25,000 .5 years .91 25,000 .91
.93 25,000 .5 years .93 25,000 .93
.901 to 1.3133 633,000 1.5 years 1.13 579,800 1.13
1.00 350,000 3.5 years 1.00 350,000 1.00
.62 to .90 1,433,000 4.5 years .66 1,283,000 .66
- --------------- --------- --------- ------ --------- ------
$ .62 to 1.3133 2,491,000 3.5 years $ .83 2,287,800 $ .84
=============== ========= ========= ====== ========= ======
A total of 2,491,000 shares of common stock are reserved for future
issuance upon the exercise of stock options at December 31, 1999. A total of
100,000 options were available for future grant at December 31, 1999 under
existing stock option plans.
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of
6.20%, 6.31% and 6.625% a dividend yield of 0%; a volatility factor of the
expected market price of the Company's common stock of .398, .380 and .521 for
1999, 1998 and 1997, respectively.
F-13
48
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because of the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- -------- --------
Net income
As reported $365,798 $377,133 $454,350
Pro forma $134,719 $244,153 $374,270
Earnings per share
Basic as reported $ .06 $ .06 $ .07
Diluted as reported $ .06 $ .06 $ .06
Basic pro forma $ .02 $ .04 $ .05
Diluted pro forma $ .02 $ .04 $ .05
Weighted average exercise price of:
Options whose exercise price equals
the market price of the stock on
the grant date $ -- $ -- $ --
Options whose exercise price is less
than the market price of the stock
on the grant date $ .65 $ -- $ 1.21
Options whose exercise price is more
than the market price of the stock
on the grant date $ .64 $ 1 $ 1.81
Weighted average fair value of:
Options whose exercise price equals
the market price of the stock on the
grant date $ -- $ -- $ --
Options whose exercise price is less
than the market price of the stock
on the grant date $ .29 $ -- $ .67
Options whose exercise price is more
than the market price of the stock
on the grant date $ .27 $ .46 $ .52
Because Statement 123 is applicable only to options granted subsequent
to December 31, 1994, its pro forma effect is not fully reflected until 1998.
F-14
49
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
EARNINGS PER SHARE - The following table sets forth the computation of
basic and diluted earnings per share:
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
---------- ---------- ----------
Numerator: net income $ 365,798 $ 377,133 $ 454,350
---------- ---------- ----------
Denominator:
Denominator for basic earnings per share -
weighted-average shares outstanding 5,910,939 6,567,280 6,870,049
Dilutive employee stock options 117,557 132,368 324,823
---------- ---------- ----------
Denominator for diluted earnings per share 6,028,496 6,699,648 7,194,872
========== ========== ==========
Basic earnings per share $ .06 $ .06 $ .07
========== ========== ==========
Diluted earnings per share $ .06 $ .06 $ .06
========== ========== ==========
NOTE 7 - INCOME TAXES
A reconciliation of the provision for income taxes using the federal
statutory rate to the book provision for income taxes follows:
YEARS ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
-------- --------- ---------
Statutory federal provision for income taxes $222,000 $ 209,000 $ 240,499
Increase (decrease) in taxes resulting from:
Change in valuation allowance -- -- (71,000)
Permanent differences and other 7,614 (5,379) 25,596
State tax, net of federal benefit 57,700 34,000 57,905
-------- --------- ---------
$287,314 $ 237,621 $ 253,000
======== ========= =========
F-15
50
NOTE 7 - INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes are as
follows:
YEARS ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
-------- --------- ---------
Current:
Federal $191,180 $ (1,124) $ 449,000
State 45,682 850 138,000
-------- --------- ---------
Total current 236,862 (274) 587,000
-------- --------- ---------
Deferred:
Federal 40,362 185,239 (284,000)
State 10,090 52,656 (50,000)
-------- --------- ---------
Total deferred 50,452 237,895 (334,000)
-------- --------- ---------
$287,314 $ 237,621 $ 253,000
======== ========= =========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The components
of the net deferred tax asset at December 31, 1999 and 1998 consist of the
following:
DECEMBER 31,
----------------------
1999 1998
------- -------
Net operating loss carryback $29,881 $ --
Accruals not currently deductible
for tax purposes 3,036 20,288
Depreciation and amortization not
currently deductible for tax purposes
17,535 75,817
------- -------
Total deferred tax assets 50,452 96,105
Less valuation allowance -- --
------- -------
Net deferred tax asset $50,452 $96,105
======= =======
F-16
51
NOTE 8 - MAJOR CUSTOMERS
The Company is dependent upon a small number of hospitals and the loss
of any contract could have a significant adverse effect on the Company's
operations. Further, certain contracts are terminable on ninety (90) day notice
and if certain patient census is not maintained. Management intends to use its
best efforts to retain existing contracts and expand the scope of services on
these contracts, obtain new contracts, and maintain patient census at the same
or higher levels than has historically been experienced.
The following table summarizes the amount of revenue for each customer
representing greater than ten percent (10%) of total revenues for the:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1999 1998 1997
----------------------- ---------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- -------
Hospital 1 $1,860,585 17.6% $2,563,088 22.5% $3,182,156 26.3%
Hospital 2 1,066,709 10.1% 1,381,666 12.1% 1,433,494 11.9%
Hospital 3 5,136,268 48.7% 4,838,421 42.4% 4,753,094 39.3%
Hospital 4 648,000 6.1% 1,396,317 12.2% 1,160,444 9.6%
Hospital 5 1,177,623 11.2% --- --- --- ---
In addition, these hospitals accounted for approximately $2,527,425,
$2,138,861, and $2,006,817 of accounts receivable at December 31, 1999, 1998 and
1997, respectively.
F-17
52
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation incorporated by reference from Form S-18
Registration Statement (Registration No. 0033-16313-LA) filed July 28,
1988, Exhibit 3.1.
3.2 Bylaws incorporated by reference from Form S-18 Registration Statement
(Registration No. 33-16313-LA) filed July 28, 1988, Exhibit 3.2.
3.3 Certificate of Amendment of Certificate of Incorporation filed
February 29, 1988. Incorporated by reference from Form S-18
Registration Statement (Registration No.33-16313-LA) filed July 28,
1988, Exhibit 3.5.
3.4 Restated Certificate of Incorporation, filed October 3, 1989.
Incorporation by reference from Form 10-K for the year ended December
31, 1989.
10.1 Lease between the Company and Laguna Niguel Office Center dated June
23, 1988 which supersedes lease dated December 15, 1986, incorporated
by reference from Form S-18 Registration Statement (Registration No.
33-16313-LA) filed July 28, 1988, Exhibit 10.1.
10.6 Amended and Restated 1987 Stock Option Plan incorporated by reference
from Form S-18 Registration Statement (Registration No. 33-16313-LA)
filed July 28, 1988, Exhibit 10.6.
10.18 Form of Modification Agreement to Incentive Stock Option Agreement,
dated January 20, 1988, incorporated by reference from Form S-18
Registration Statement (Registration No. 33-16313-LA) filed July 28,
1988, Exhibit 10.18.
10.30 Lease amendment between the Company and Laguna Niguel Office Center
dated September 24, 1990 which supersedes lease dated June 23, 1988
incorporated by reference from Annual Report on Form 10-K for the year
ended December 31, 1990, Exhibit 10.30.
10.34 Agreement between Huntington Intercommunity Hospital and the Company
dated November 1, 1991 incorporated by reference from Annual Report on
Form 10-K for the year ended December 31, 1991, Exhibit 10.34.
10.38 Agreement between Huntington Intercommunity Hospital and the Company
dated October 1, 1992 incorporated by reference from Annual Report on
Form 10-K for the year ended December 31, 1992, Exhibit 10.38.
10.43 Lease amendment between the Company and Laguna Niguel Office Center
dated May 12, 1993 which supersedes lease dated June 23, 1988
incorporated by reference form Annual Report on Form 10-K for the year
ended December 31, 1993, Exhibit 10.43.
10.55 1994 Stock Option Plan incorporated by reference from Annual Report on
Form 10-K for the year ended December 31, 1994, Exhibit 10.55
10.60 Lease amendment between the Company and Laguna Niguel Office Center
dated July 7, 1994 which supersedes lease dated June 23, 1988
incorporated by reference from Annual Report on Form 10-K for the year
ended December 31, 1994, Exhibit 10.60.
10.66 Agreement between Sherman Oaks Hospital and Health Center dated March
30, 1995, incorporated by reference from Form 10-K for the year ended
December 31, 1995.
10.67 Loan Agreement between the Company and National Bank of Southern
California dated March 31, 1995, incorporated by reference from Form
10-K for the year ended December 31, 1995. (Modified)
10.68 Lease Agreement between the Company and Laguna Niguel Office Center
dated June 5, 1995 which supersedes lease dated June 23, 1988,
incorporated by reference from Form 10- K for the year ended December
31, 1995.
53
EXHIBIT INDEX (Continued)
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.70 Lease Agreement between the Company and 757 Pacific Partnership dated
July 3, 1995, incorporated by reference from Form 10-K for the year
ended December 31, 1995.
10.73 Agreement between San Fernando Community Hospital, Inc. dba Mission
Community Hospital and the Company dated October 6, 1995, incorporated
by reference from Form 10-K for the year ended December 31, 1995.
10.77 Operating Agreement for Optimum Care Source, LLC incorporated by
reference from March 31, 1996 Form 10-Q Exhibit 10.77.
10.78 Master Joint Venture Agreement between Professional CareSource, Inc.
and the Company dated April 19, 1996 incorporated by reference from
March 31, 1996 Form 10-Q Exhibit 10.78.
10.82 Registration Agreement between Professional CareSource, Inc. and the
Company dated April 24, 1996 incorporated by reference from March 31,
1996 Form 10-Q Exhibit 10.82.
10.83 Non-qualified stock option Agreement between Joseph H. Dadourian and
the Company dated April 24, 1996 incorporated by reference from March
31, 1996 Form 10-Q Exhibit 10.83.
10.84 Non-qualified stock option Agreement between Teri L. Jolin and the
Company dated April 24, 1996 incorporated by reference from March 31,
1996 Form 10-Q Exhibit 10.84.
10.85 Non-qualified stock option Agreement between Margaret M. Minnick and
the Company dated April 24, 1996 incorporated by reference from March
1996 Form 10-Q Exhibit 10.85.
10.86 Agreement between Friendship Community Mental Health Center and the
Company dated April 25, 1996 incorporated by reference from March 31,
1996 Form 10-Q Exhibit 10.86.
10.87 Lease Agreement between the Company and Laguna Niguel Office Center
dated April 30, 1996 which supersedes lease dated June 23, 1988,
incorporated by reference from Form 10- K for the year ended December
31, 1996.
10.88 Lease Agreement between the Company and Jay Arteaga dated September
30, 1996, incorporated by reference from Form 10-K for the year ended
December 31, 1996.
10.90 Unanimous Written Consent dated December 31, 1996 of the Board of
Directors amending the promissory note between the Company and Edward
A. Johnson dated December 29, 1995, incorporated by reference from
Form 10-K for the year ended December 31, 1996.
10.91 Change in terms Agreement between the Company and National Bank of
Southern California dated January 28, 1997 (Modified), incorporated by
reference from Form 10-K for the year ended December 31, 1996.
10.94 Change in Terms Agreement between the Company and National Bank of
Southern California dated May 15, 1997, incorporated by reference from
Form 10-K for the year ended December 31, 1997.
54
EXHIBIT INDEX (Continued)
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.95 Inpatient and Outpatient Psychiatric Unit Management Services
Agreement between the Company and Catholic Healthcare West Southern
California dated June 1, 1997, incorporated by reference from Form
10-K for the year ended December 31, 1997.
10.96 Lease Agreement between the Company and The Ribeiro Corporation dated
June 23, 1997, incorporated by reference from Form 10-K for the year
ended December 31, 1997.
10.97 Lease Agreement between the Company and Harriet Maizels, Daniel Gold,
Lesley Gold and Mildred Gold dated July 8, 1997, incorporated by
reference from Form 10-K for the year ended December 31, 1997.
10.100 Lease Agreement between the Company and Laguna Niguel Office Center
dated September 5, 1997 which supersedes lease dated June 23, 1988,
incorporated by reference from Form 10-K for the year ended December
31, 1997.
10.101 First Lease Extension Agreement between the Company and Whittier
Narrows Business Park and the Company dated September 11, 1997 which
supersedes lease dated January 10, 1994, incorporated by reference
from Form 10-K for the year ended December 31, 1997.
10.102 Lease Extension Agreement between the Company and 757 Pacific Avenue
Partnership dated September 19, 1997 which supersedes lease dated July
3, 1995, incorporated by reference from Form 10-K for the year ended
December 31, 1997.
10.103 Unanimous Written Consent dated December 29, 1997 of the Board of
Directors amending the Promissory Note between the Company and Edward
A. Johnson dated December 31, 1996, incorporated by reference from
Form 10-K for the year ended December 31, 1997.
10.105 Agreement between Friendship Community Mental Health Center and the
Company dated June 25, 1997 which supersedes the Agreement dated April
25, 1996, incorporated by reference from Form 10-K for the year ended
December 31, 1998.
10.106 Lease Agreement between the Company and Laguna Niguel Office Center
dated May 14, 1998 which supersedes lease dated June 23, 1988,
incorporated by reference from Form 10- K for the year ended December
31, 1998.
10.107 Change in terms Agreement between the Company and Southern California
Bank dated May 27, 1998, incorporated by reference from Form 10-K for
the year ended December 31, 1998.
10.108 Lease Agreement between Whittier Narrows Business Park and the Company
dated July 28, 1998, incorporated by reference from Form 10-K for the
year ended December 31, 1998.
10.109 Lease Agreement between the Company and P.S. Business Parks, L.P.
dated August 14, 1998, incorporated by reference from Form 10-K for
the year ended December 31, 1998.
10.110 Inpatient and Outpatient Psychiatric Unit Management Services
Agreement between the Company and Catholic Healthcare West Southern
California dated September 15, 1998 which supersedes Agreement dated
June 1, 1997, incorporated by reference from Form 10- K for the year
ended December 31, 1998.
55
EXHIBIT INDEX (Continued)
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.111 Agreement between Citrus Valley Medical Center and the Company dated
September 18, 1998, incorporated by reference from Form 10-K for the
year ended December 31, 1998.
10.112 Sublease Agreement between Citrus Valley Medical Center and the
Company dated September 23, 1998, incorporated by reference from Form
10-K for the year ended December 31, 1998.
10.113 Lease Agreement between the Company and Coldwell Banker dated November
1, 1998, incorporated by reference from Form 10-K for the year ended
December 31, 1998.
10.114 Amendment to the Agreement dated June 25, 1997 between Friendship
Community Mental Health Center and the Company dated November 12,
1998, incorporated by reference from Form 10-K for the year ended
December 31, 1998.
10.115 Change in Terms Agreement between the Company and Southern California
Bank dated April 27, 1999, incorporated by reference from Form 10-Q
for the quarter ended June 30, 1999.
10.116 Lease Agreement between the Company and Laguna Niguel Office Center
dated May 12, 1999 which supersedes the lease dated June 23, 1988,
incorporated by reference from Form 10-Q for the quarter ended June
30, 1999.
10.117 Contract amendment between the Company and Huntington Intercommunity
Hospital d/b/a Humana Hospital Huntington Beach dated August 1, 1999
which supersedes the contract dated November 5, 1991, incorporated by
reference from Form 10-Q for the quarter ended September 30, 1999.
10.118 Contract amendment between the Company and Huntington Intercommunity
Hospital d/b/a Humana Hospital Huntington Beach dated August 1, 1999
which supersedes the contract dated October 1, 1992, incorporated by
reference from Form 10-Q for the quarter ended September 30, 1999.
10.119 Inpatient Psychiatric Services contract amendment dated August 6, 1999
between the Company and Huntington Intercommunity Hospital d/b/a
Humana Hospital Huntington Beach which supersedes contract amendment
dated August 1, 1999, incorporated by reference from Form 10-Q for the
quarter ended September 30, 1999.
10.120 Partial Hospitalization Agreement contract amendment dated August 6,
1999 between the Company and Huntington Intercommunity Hospital d/b/a
Humana Hospital Huntington Beach which supersedes contract amendment
dated August 1, 1999, incorporated by reference from Form 10-Q for the
quarter ended September 30, 1999.
10.121 Psychiatric Partial Hospitalization Management Agreement between the
Company and Rhema Behavioral Health Center dated August 1, 1999,
incorporated by reference from Form 10-Q for the quarter ended
September 30, 1999.
10.122 First amendment to lease between the Company and Jay Arteaga dated
October 11, 1999 which supercedes lease dated September 30, 1996,
incorporated by reference from Form 10-Q for the quarter ended
September 30, 1999.
10.123 Mental health inpatient and outpatient hospitalization services
agreements between the Company and San Fernando Community Hospital
d/b/a Mission Community Hospital dated December 31, 1999. Supercedes
the agreements dated October 6, 1995.
23 Consent of Independent Auditors.
27 Financial Data Schedule