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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 8, 2003.

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OPTIMUMCARE CORPORATION

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August 8, 2003

 
Independent Accountants’ Review Report

 
To the Board of Directors of OptimumCare Corporation:

     We have reviewed the accompanying condensed consolidated balance sheet of OptimumCare Corporation and its subsidiaries as of June 30, 2003, and the related condensed consolidated statements of operations for the three months and six months ended June 30, 2003 and 2002 and cash flows for the six months ended June 30, 2003 and 2002, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of OptimumCare Corporation.

     A review of interim financial information consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

     Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

     We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended (not presented herein), and in our report dated February 28, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

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OPTIMUMCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements.

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OPTIMUMCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See notes to condensed consolidated financial statements.

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OPTIMUMCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See notes to condensed consolidated financial statements.

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OPTIMUMCARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2003

NOTE A — BASIS OF PRESENTATION

The accompanying unaudited financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany transactions, if any, have been eliminated. The unaudited financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. For further information, refer to the financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2002.

NOTE B — STOCK-BASED COMPENSATION

The Company accounts for its stock option plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under its plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.

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NOTE C — - INVESTMENTS

Investments consist of federal home loan bank bonds and U.S. treasury notes with an aggregate principal amount of $0 and $330,268 at June 30, 2003 and December 31, 2002 respectively. The bonds were liquidated to fund working capital needs and pay off an existing line of credit during the period ended June 30, 2003.

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NOTE D — EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

NOTE E — BUSINESS SEGMENTS

The Company’s principal business is to develop, market and manage hospital based programs for the treatment of psychiatric disorders on both an inpatient and outpatient basis. However, with the acquisition of three (3) healthcare staffing companies during the past nine months, the Company adopted Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”). The Company has two (2) segments, psychiatric programs and temporary staffing.

The Company evaluates segment performance and allocates resources based on several factors, of which, net sales, accounts receivable and operating income are the primary financial measures. The accounting policies of the reportable segments are the same as those described in Note 1 to the consolidated financial statements.

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(1)

The temporary staffing business is part of the Company’s wholly owned subsidiaries, which are accounted for separately internally. However, the assets of the parent company’s corporate offices are not maintained separately from those that are associated with the psychiatric programs such as, cash, fixed assets, etc. and therefore, cannot be reported individually.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Safe harbor statements under the Private Securities Litigation Reform Act of 1995

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements which are forward-looking in time and involve risks and uncertainties, including the risks associated with plans, the effects of changing economic and competitive conditions, government regulation which may affect facilities, licensing, healthcare reform which may affect payment amounts and timing, availability of sufficient working capital, program development efforts and timing and market acceptance of new programs which may affect future sales growth and/or costs of operations.

Material Changes in Financial Condition

At June 30, 2003 and December 31, 2002, the Company’s working capital was $1,644,085 and $2,093,033, respectively. The decrease in working capital for the period is primarily due to the Company’s net loss, growth in the temporary staffing business and associated accounts receivable, and the acquisition of a new business entity on March 12, 2003. The nature of the Company’s business requires significant working capital to fund operations of its programs as well as to fund corporate expenditures until receivables can be collected. Moreover, because each of the existing contracts represents a significant portion of the Company’s contract business, the inability to collect certain of the accounts receivable could materially and adversely affect the Company’s liquidity. The accounts receivable of the temporary staffing business are less concentrated, with no customer representing more than 25%. The Company evaluates the collectibility of its receivables on a case-by-case basis. Accounts receivable at June 30, 2003 have increased from those that existed at December 31, 2002. This is due to growth in the existing staffing business and the receivables from the new business entity acquired in March 2003. Temporary staffing receivables at June 30, 2003 were $918,965 of which 8 accounts comprise approximately 40%. Management believes that no collection problems with respect to these receivables exist. Accordingly, no allowance for doubtful accounts has been recorded at June 30, 2003.

Cash used in operations was $114,416 for the six month period ending June 30, 2003 compared to cash generated of $397,919 for the six month periods ended June 30, 2002. Cash used during the six months ended June 30, 2003 was primarily due to the Company’s net loss for the period and an increase in accounts receivable.

Cash provided by investing activities was $43,864 for the six month period ended June 30, 2003 compared to cash provided by investing activities of $103,805 for the same period of 2002. Cash was generated from the proceeds from sale of marketable securities and was primarily used during the six months ended June 30, 2003 for the purchase of a new business entity on March 12, 2003.

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Cash flows from financing activities were zero for the period ended ending June 30, 2003. The Company has terminated its line of credit facility and is currently in discussions with several lenders who could provide working capital lines of credit on competitive terms. The Company’s principal sources of liquidity for fiscal year 2003 are cash on hand, accounts receivable, and continuing revenues from programs and from the recently acquired staffing businesses.

Material Changes in Results of Operations

Three Months Ended June 30, 2003 compared to Three Months Ended June 30, 2002

The Company operated four (4) contract programs during the three months ended June 30, 2003 and six (6) contract programs during the three months ended June 30, 2002. Net revenues from the contract programs were $684,602 and $1,247,750 for the three months ended June 30, 2003 and 2002, respectively. The decrease in net revenues among periods is primarily due to the decrease in the number of operating programs. Cost of contract services provided were $458,639 and $713,089 for the three months ended June 30, 2003 and 2002, respectively. The decrease in cost of contract services provided among periods is due to the decrease in the number of programs.

Revenues for temporary staffing services were $1,213,228 for the three month period ended June 30, 2003. Costs of providing these services were $1,245,595 for the same period. Revenues and operations for this business segment commenced during the third quarter of 2002 and, therefore, there are no corresponding amounts for the previous year.

General and administrative expenses were $357,696 and $399,023 for the three months ended June 30, 2003 and June 30, 2002, respectively. The decrease in costs was primarily due to an aggressive effort on the part of management to deliver services more cost effectively.

The company’s income tax benefit has increased for the three months ended June 30, 2003 over the comparable three months ended June 30, 2002 due to a net loss for the period.

Net loss was $97,162 for the three months ended June 30, 2003 compared to net income of $83,382 for the three months ended June 30, 2002. The prior year period included a one-time early termination fee from a hospital. The loss before income taxes for the three months ended June 30, 2002 excluding the one-time fee would have been comparable to the current quarter.

Six Months Ended June 30, 2003 compared to Six Months Ended June 30, 2002

The Company operated four (4) contract programs during the three months ended June 30, 2003 and six (6) contract programs during the three months ended June 30, 2002. Net revenues from the contract programs were $1,371,494 and $2,636,608 for the six months ended June 30, 2003 and 2002, respectively. The decrease in net revenues among periods is primarily due to the decrease in the number of operating programs. Cost of contract services provided were $916,692 and $1,963,551 for the six months ended June 30, 2003 and 2002, respectively. The decrease in cost of contract services provided among periods is due to the decrease in the number of programs.

Revenues for temporary staffing services were $1,945,186 for the six month period ended June 30, 2003. Costs of providing these services were $1,988,787 for the same period. Revenues and operations for this business segment commenced during the third quarter of 2002 and, therefore, there are no corresponding amounts for the previous year.

General and administrative expenses were $677,173 and $747,347 for the six months ended June 30, 2003 and June 30, 2002, respectively. The decrease in costs was primarily due to an aggressive cost reduction effort and the reversal of year end accruals made during the six months ended June 30, 2003.

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The company’s income tax benefit has increased for the six months ended June 30, 2003 over the comparable three months ended June 30, 2002 due to a larger net loss for the period.

Net loss was $168,844 and $42,769 six months ended June 30, 2003 and 2002, respectively.

The Company has a significant amount of variable expenses associated with the production of its revenues, although certain fixed costs do exist. To that end, the loss of certain customers could have a significant adverse effect on the Company’s profit margin.

The Company is continuing to make efforts to expand the number of its operational contract programs and has contracted with a consulting firm managed by one of the Company’s previous directors to manage an aggressive marketing program. The Company’s contract business has a dependence on a small customer base, presently consisting of three hospitals.

The health care temporary staffing services segment has a fairly large customer base consisting of approximately 80 active hospitals. The Company acquired two health care temporary staffing businesses during 2002 and acquired an additional health care staffing business in March 2003. The Company has identified other acquisition candidates and intends to continue to pursue this line of business.

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Statement by Management Concerning Review of Interim Financial Information by Independent Certified Public Accountants

The June 30, 2003 condensed consolidated financial statements included in this filing on Form 10-Q have been reviewed by Lesley, Thomas, Schwarz & Postma, Inc., independent certified public accountants, in accordance with established professional standards and procedures for such review. The report of Lesley, Thomas, Schwarz & Postma, Inc. commenting upon their review accompanies the condensed consolidated financial statements included in Item 1 of Part 1.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Immaterial.

Item 4. Controls and Procedures

Within the 90 days prior to the date of this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer/Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon and as of the date of that evaluation, the Company’s Chief Executive Officer/Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the last day they were evaluated.

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PART II

OTHER INFORMATION

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized.

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EXHIBIT INDEX

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