10-K405 1 a70167e10-k405.txt FORM 10-K 405 PERIOD ENDED DECEMBER 31, 2000 1 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, 2000 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 Commission File Number: 0-17401 OPTIMUMCARE CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 33-0218003 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30011 Ivy Glenn Drive, Suite 219 Laguna Niguel, California 92677 -------------------------------- ---------- (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (949) 495-1100 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value ----------------------------- (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 [ ] 2 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein [X] 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 2, 2001 (4,783,743 shares of Common Stock) was $3,587,807 based on the average bid and asked price of the Company's voting stock on February 2, 2001.* The number of shares outstanding of each of the Company's classes of Common Stock, as of February 2, 2001 was: Common Stock, - 5,908,675 shares $.001 par value Documents Incorporated by Reference None. * 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. 3 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 fee is received by the Company which averages $104,000 per month for inpatient contracts, and $61,000 per month for outpatient contracts. 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. During the fourth quarter of 2000, the Company entered into a contract with e-HQ, LLC, an e-commerce company that specializes in web technologies, to build, maintain and host an immediate on-demand therapy website. The website, optimumcare.com, will offer on-demand, one-on-one online therapy 24 hours a day 7 days a week to people in need of help via real-time counseling and secured e-mail. This website will offer counseling from a broad range of certified professionals including marriage and family therapists, licensed social workers, psychologists and psychiatrists. The Company is currently in the process of recruiting qualified psychiatric professionals to service the site. As of February 2, 2001, the Company has nine (9) Programs that are hosted by five (5) hospitals and one community mental health center: 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 1 4 PsychProgram through Citrus Valley Medical Center, West Covina, California, and one partial hospitalization PsychProgram at Friendship Community Mental Health Center, Phoenix, Arizona. (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 Psych Programs ("Inpatient Program") The Inpatient Program is a medically-supervised psychiatric care program for short term intensive evaluation and treatment of patients with diagnoses ranging from acute depression to serious and chronic behavioral health problems, such as schizophrenia. Patients receive treatment 24 hours per day, which includes individual psychotherapy, medication regimen, group therapy, and discharge planning and placement, under the supervision of a psychiatrist in conjunction with a multi disciplinary team (registered nurses, licensed vocational nurses, social workers, activity therapists, medical physicians, and mental health workers). The Company estimates that the average length of stay for a patient in an Inpatient Program is approximately 3-10 days. OptimumCare's Partial Hospitalization Program ("Partial Hospitalization") Partial Hospitalization is a treatment approach that provides an alternative to inpatient treatment. It provides a daily program for a maximum of 20 hours per week, prescribed by psychiatrist. It is for voluntary patients with serious behavioral health disorders who require intensive and multi disciplinary treatment which cannot be provided in a less intensive outpatient setting. As an alternative to inpatient treatment, it provides a more flexible, less costly and less restrictive form of treatment. Treatment consists of group therapy, activity therapy, medication monitoring, and individual therapy related to the specific needs of each client. The Program staff acts as a liaison in assisting the client in accessing resources within the community. The Company estimates that the average length of stay for a patient in a partial hospitalization program is approximately 3 weeks to 3 months. 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. 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. 2 5 On-Line Counseling During the fourth quarter of 2000, the Company entered into a contract with e-HQ, LLC, an e-commerce company that specializes in web technologies, to build, maintain and host an immediate on-demand therapy website. The website, optimumcare.com, will offer on-demand, one-on-one online therapy 24 hours a day 7 days a week to people in need of help via real-time counseling and secured e-mail. With 40% of health related Internet searches focused on mental health topics, as quoted by Behavioral Healthcare Tomorrow, OptimumCare believes that there is a tremendous demand and need for online counseling services. Therapy will be available for immediate access and, if desired, on a continuous basis. This website will offer counseling from a broad range of certified professionals including marriage and family therapists, licensed social workers, psychologists and psychiatrists. Resumes that include each counselor's education, experience, specialties and fees will assist individuals in making more informed decisions in selecting a therapist whose background corresponds to their particular needs and means. e-HQ, in addition to the design and development of the site, will market optimumcare.com through extensive radio, television, print and online campaigns that will target busy professionals, stay at home spouses, teens and young adults. The site is expected to launch during the first quarter of 2001. The Company is currently in the process of recruiting qualified psychiatric professionals to service the site. 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 therapist 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 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. 3 6 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. 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. The following is a list of current contracts: TYPE OF CONTRACT PROGRAM EXPIRATION DATE CONTRACT #1 INPATIENT NOVEMBER 2001(1) START DATE: CONTRACT #2 PARTIAL OCTOBER 2001(2) START DATE: 10/92 CONTRACT #3 INPATIENT AUGUST 31, 2001 START DATE: 9/98 CONTRACT #4 PARTIAL AUGUST 31, 2001 START DATE: 12/93 CONTRACT #5 PARTIAL FEBRUARY 28, 2001 START DATE: 7/94 CONTRACT #6 PARTIAL DECEMBER 31, 2001 START DATE: 9/95 CONTRACT #7 INPATIENT DECEMBER 31, 2002 START DATE: 11/95 CONTRACT #8 PARTIAL DECEMBER 31, 2002 START DATE: 1/96 CONTRACT #9 PARTIAL DECEMBER 7, 2010 START DATE: 4/96 (1) Automatically extended for successive 1 year periods, unless terminated w/ 120 days notice. (2) Automatically extended for successive 1 year periods, unless terminated w/ 90 days notice. 4 7 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 services 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 a flat monthly fee with a hold back for days ultimately denied which exceed a specified threshhold. 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. Revision of legislation related to 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 application of these criteria is subject to interpretation and is not entirely clear. Therefore, there is some risk that some of the sites managed by the Company could be found not to be "provider-based". 5 8 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. During August 2000, a prospective payment system for all outpatient hospital services was implemented. The amount paid by Medicare is a per diem fee adjusted by a geographic wage index, 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 will in some instances pay these amounts as allowable Medicare bad debts. Aggregate reimbursements to the healthcare facilities which the Company contracts with have not materially changed from those previously received prior to the implementation of the prospective payment system. 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. 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 6 9 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. (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. (vii) Dependence on a Few Customers The Company presently has nine (9) Programs operating through five (5) hospitals and one community mental health center. 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. During the years ended December 31, 2000 and 1999, the Company wrote off approximately $340,000 and $300,000 in bad debts related to Friendship Community Mental Health Center (FCMHC). On October 27, 1999, the Company was informed by FCMHC that it received adjustments to its June 30, 1997 cost report. The majority of the adjustments pertained to bad debts deducted by FCMHC disallowed by the Healthcare Financing Administration (HCFA). Since FCMHC did not have the funds to pay the audit assessment, HCFA withheld all payments to FCMHC for patients serviced by the program. During 2000, FCMHC was placed under "focused medical review" by its financial intermediary. This situation involved a detailed review of virtually all claims submitted by FCMHC before payment was made. This further compounded FCMHC's inability to pay the Company's management fees. During December 2000, FCMHC was purchased by another entity. Effective, December 7, 2000, the Company entered into a contract with the new owners of FCMHC which expires December 2010. In January 2001, the Company received a partial payment of its December 2000 invoice. Based on the above, the Company believes its current and future management fees generated from this program will be collectible. During 1998, one contract termination also required a bad debt write-off of approximately $300,000. 7 10 (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. 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 8 11 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 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 9 12 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 2, 2001, the Company employed approximately 60 persons full-time and 45 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 $2,130 which expires June 30, 2001. 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 $3,280 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 $1,189 which expires October 31, 2001. 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. The Company leases space under two separate lease agreements for the operation of its outpatient partial hospitalization programs. One agreement is between the Lessor and the Community Mental Health Center which expires November 30, 2003. However, the Company is obligated to pay the lease costs for the program, under its contract with the facility which expires December 6, 2010. The other agreement expires August 14, 2002. Aggregate monthly payments total $8,784. ITEM 3 - LEGAL PROCEEDINGS Inapplicable. ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS Inapplicable. 10 13 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 -------- ------- 2000: Fourth Quarter 29/32 5/8 Third Quarter 31/32 3/4 Second Quarter 1 21/32 First Quarter 1 1/16 17/32 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
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 2, 2001 is set forth below:
Approximate Title of Class Number of Record Holders 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. 11 14 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, 2000 and December 31, 1999 and for each of the fiscal years in the three year period ended December 31, 2000 are derived from the Company's Financial Statements for such years which were audited by Lesley, Thomas, Schwarz & Postma, Inc. for the years ended December 31, 2000 and 1999, and audited by Ernst & Young, LLP for the year ended December 31, 1998, 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
2000 1999 1998 1997 1996 ---------- ----------- ----------- ----------- ----------- NET REVENUES $8,010,491 $10,553,427 $11,409,690 $12,089,398 $10,676,237 NET INCOME 391,686 365,798 377,133 454,350 876,716 BASIC EARNINGS* PER SHARE OF COMMON STOCK .07 .06 .06 .07 .14 DILUTED EARNINGS* PER SHARE OF COMMON STOCK .06 .06 .06 .06 .13 WEIGHTED NUMBER OF SHARES OUTSTANDING 5,907,511 5,910,939 6,567,280 6,870,049 6,237,751 TOTAL DILUTED SHARES 6,164,139 6,028,496 6,699,648 7,194,872 6,677,156 CASH DIVIDENDS PER COMMON SHARE 0 0 0 0 0
BALANCE SHEET INFORMATION AS OF DECEMBER 31
2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- TOTAL ASSETS $3,920,204 $3,462,345 $3,154,744 $3,953,241 $3,980,307 CURRENT ASSETS 3,384,853 3,115,702 2,652,044 3,213,626 3,518,003 CURRENT LIABILITIES 465,417 415,182 429,375 679,774 1,244,909 NET WORKING CAPITAL 2,919,436 2,700,520 2,222,669 2,533,852 2,273,094 LONG-TERM OBLIGATIONS 0 0 0 0 0
*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". 12 15 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 2000 and 1999, the Company's working capital was $2,919,436 and $2,700,520 respectively. The increase in working capital for the year is primarily due to the Company's net income and collections on accounts receivable. 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 $340,000 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 adjustments to its June 30, 1997 cost report. The majority of the adjustments pertained to bad debts deducted by FCMHC disallowed by the Healthcare Financing Administration (HCFA). Since FCMHC did not have the funds to pay the audit assessment, HCFA withheld all payments to FCMHC for patients serviced by the program. During 2000, FCMHC was placed under "focused medical review" by its financial intermediary. This situation involved a detailed review of virtually all claims submitted by FCMHC before payment was made. This further compounded FCMHC's inability to pay the Company's management fees. During December 2000, FCMHC was purchased by another entity. Effective, December 7, 2000, the Company entered into a contract with the new owners of FCMHC which expires December 2010. In January 2001, the Company received a partial payment of its December 2000 invoice. Based on the above, the Company believes its current and future management fees generated from this program will be collectible. Cash flows from operations were $2,099,720 for the year ended December 31, 2000, resulting from net income and collections on accounts receivable. Cash used in investing activities was $211,563 for the year ended December 31, 2000. Funds used were primarily for the purchase of computer software, used to build an on-demand therapy website. The Company expects to launch the site during the first quarter of 2001. The cash received from financing activities was $15,938 for the year ended December 31, 2000. This resulted from the exercise of one employee stock option. The Company has a line of credit which expires June 4, 2001. 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 2, 2001, approximately $607,000 is available for future draws on the line of credit agreement. The Company's principal sources of liquidity for the fiscal year 2001 are cash on hand, accounts receivable, the line of credit with a bank and continuing revenues from programs. (b) Results of Operations FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999. The Company operated eleven (11) programs during the years ended December 31, 2000 and 1999. As of February 2, 2001, the Company had three inpatient and six partial hospitalization programs. Generally, the size and profit potential of inpatient programs are greater than partial hospitalization programs. During the year ended December 31, 2000, the Company's earnings from inpatient programs approximated its earnings from operational partial 13 16 hospitalization programs. Net revenues were $8,010,491 and $10,553,427 for the years ended December 31, 2000 and 1999, respectively. The decrease is due to changes in the management fee agreements for two programs licensed through one hospital. Cost of services provided were $5,691,617 and $8,202,445 for the years ended December 31, 2000 and 1999. This decrease is due to changes in the services provided between the Company and one hospital discussed above. The provision for uncollectible accounts and selling general and administrative expenses have remained relatively stable among years. The Company's income taxes have decreased in 2000 over 1999 due to greater deduction for state taxes paid in 2000 than in 1999. Net income was $391,686 and $365,798 for the years ended December 31, 2000 and 1999, respectively. The increase was primarily attributable to a decrease in cost of services provided, partially offset by lower revenues. During the past two years, the Company restructured many of its contracts with its host hospitals. Most contracts now provide for fixed monthly management fees, which are based on census levels in theory and should not materially vary unless census significantly changes. The Company expects that the majority of existing contracts will be renewed on similar terms. However, the Company was recently informed of one hospital's intention not to renew its contract with the Company which expires February 28, 2001. The Company does not believe that this situation will significantly impair its revenues, cash flows and operations, since much of the patient census at this particular location may be absorbed by proposed expansion at existing facilities, for which an additional management fee would be earned. The Company expects to achieve an expansion in the number of operational programs in 2001. Marketing plans for expanding the volume of the business by obtaining new contracts with host hospitals and community mental health centers for programs exist. In addition, the Company expects to launch an on-demand therapy website during the first quarter of 2001. Although the Company anticipates that revenues will increase based on the above, it also expects that costs associated with the production of the revenues, particularly advertising, will also increase. However, it is uncertain at this time, to what extent the Company's costs will be impacted by expansion. Due to the Company's dependence on a relatively small customer base presently consisting of five hospitals and one community mental health center, the loss of any of its customers could have a significant adverse effect on the Company's operations. 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, 2000. 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 had three inpatient and 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 was 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 was 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 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 14 17 healthcare provider, during 1998. The Company's income taxes 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. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Immaterial. 15 18 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 2000 and December 31, 1999 Consolidated Statements of Income for the years F-5 ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the F-6 year ended December 31, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity for the F-7 years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements F-8 through F-16 Financial Statement Schedule F-17 through F-19 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 report on the financial statements of the Registrant for the year ended December 31, 1998 did not contain any adverse opinion or disclaimer of opinion, nor was it qualified as to uncertainty, audit scope, or accounting principles. In connection with the audit of the Registrant's financial statements for the year 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, Schwarz & Postma, Inc. as its principal accountant to audit its financial statements for the year ended December 31, 1999. Prior to the engagement of Lesley, Thomas, Schwarz & Postma, Inc. the Registrant has not consulted with Lesley, Thomas, Schwarz & 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. 16 19 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 55 Chief Executive Officer, Principal Financial Officer, Secretary and Chairman of the Board Mulumebet G. Michael 52 Director, President and Chief Operating Officer Gary L. Dreher 54 Director Michael S. Callison 62 Director Jon E. Jenett 48 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. The Company has an audit committee which is composed of Mr. Johnson, Mr. Dreher and Mr. Jenett. All three directors are financially literate. Mr. Dreher and Mr. Jenett are independent of the Company. The principal function of the committee is review of the financial statements and communication with the independent auditors of the Company. (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. 17 20 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 seventeen 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 100 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 30 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 41 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 was a founder of and served as President and Chief Financial Officer of Packet Video, 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. 18 21 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 ---------------------- PAYOUTS ---------------------------------------- AWARDS ------- OTHER NAME & ANNUAL RESTRICTED (#) ALL OTHER PRINCIPAL COMPEN- STOCK OPTIONS PAYOUTS COMPEN- POSITION YEAR SALARY($) BONUS($) SATION($) AWARDS($) /SARs ($) SATION ($) EDWARD A. JOHNSON, 2000 204,000 158,800 100,000 16,673 (1)(2) CHIEF EXECUTIVE 1999 204,000 98,847 450,000 17,906 (1)(2) OFFICER 1998 144,000 118,188 100,000 18,304 (1)(2) MULUMEBET G. 2000 172,545 68,944 100,000 MICHAEL 1999 167,841 83,201 400,000 PRESIDENT & CHIEF 1998 160,865 63,806 100,000 OPERATING OFFICER HELEN TVELIA 2000 62,974 66,000 PROGRAM DIRECTOR 1999 59,479 83,087 100,000 1998 62,400 71,917 25,000 LAURA CAMPBELL 2000 52,443 47,570 PROGRAM DIRECTOR 1999 50,482 43,656 1998 46,209 3,615
# 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. 19 22 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, 2000. 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 25,000 shares were exercised during fiscal year ended December 31, 2000. There are currently 150,000 shares available for option and no shares 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. 20 23 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 325,000 shares of common stock to various officers, directors and employees of the Company during 2000. On October 24, 2000, the Board of Directors granted options to Edward A. Johnson and Mulumebet G. Michael to each purchase 100,000 shares, granted options to Jon Jenett to purchase 50,000 shares and granted options to Michael S. Callison and Gary Dreher to each purchase 25,000 shares. The option exercise price is $.67. The options have a five year term and vest immediately. During 2000, no other options previously granted were exercised. (c) Options/SAR Grants in Last Fiscal Year The following table sets forth certain information concerning Options/SARs granted during 2000 to the named individuals:
POTENTIAL REALIZABLE VALUE AT ASSUMED INDIVIDUAL GRANTS ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM -------------------------------------------------------------------- -------------------- ---------- % OF TOTAL OPTIONS/SARs GRANTED TO EXERCISE EMPLOYEES OF BASE GRANT DATE OPTIONS/SARs IN FISCAL PRICE EXPIRATION PRESENT NAME GRANTED YEAR ($/SHARE) DATE 5% ($) 10% ($) VALUE ($)* ----------- ------------ ------------ --------- ---------- ------ ------- ---------- EDWARD A JOHNSON 100,000 31% $ .67 10/24/2005 21,000 44,000 32,000 MULUMEBET G MICHAEL 100,000 31% $ .67 10/24/2005 21,000 44,000 32,000
* 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 $.32 based on the following inputs: 21 24 Stock Price (Fair Market Value) at Grant $.6875 Exercise Price $.67 Expected Option Term 5 years Risk-Free Interest Rate 5.75% Stock Price Volatility 43% Dividend Yield 0%
The model assumes: (a) an Expected Option Term of 5 years which reflects the actual life of the option; (b) a Risk-Free Interest Rate that represents the interest rate on a U.S. Treasury Note with a maturity date corresponding to that of the Expected Option Term; and (c) Stock Price Volatility is calculated using quarterly stock prices over the period from January 1, 1996 to December 31, 2000. (d) Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values The following table summarizes options and SARs exercised during 2000, and presents the value of unexercised options and SARs held by the named individuals at fiscal year end:
VALUE OF NUMBER OF UNEXERCISED IN- SHARES UNEXERCISED THE-MONEY NAME ACQUIRED ON OPTIONS/SARs AT OPTIONS/SARs AT EXERCISE (#) VALUE REALIZED ($) FISCAL YEAR-END (#) FISCAL YEAR-END ($)* EDWARD A. JOHNSON 0 0 850,000 56,000 MULUMEBET G. 0 0 775,000 51,000 MICHAEL ** HELEN TVELIA 25,000 15,938 175,000 10,000
* The difference between fair market value at February 2, 2001 and the exercise price. ** 100,000 of options vest over five years, 80,000 of which are exercisable at 12/31/00. (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. Mr. Dreher received $12,000 in marketing fees during 2000 for the marketing of the Company's programs to the hospitals during 2000. (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. 22 25 (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, 2000 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.
12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 OPMC 100 122 120 75 53 51 S&P Hospital Management Index 100 117 102 84 94 153 NASDAQ Market Index 100 123 149 208 387 235
NOTE: The stock performance graph assumes $100 was invested on January 1, 1995. 23 26 ITEM 12 - SECURITY OWNERSHIP OF 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 2, 2001, (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 NAME (1) BENEFICIAL OWNERSHIP PERCENT OF CLASS EDWARD A. JOHNSON 1,295,826 (2) 19.5% MULUMEBET G. MICHAEL 784,466 (3) 11.8% MICHAEL S. CALLISON 772,895 (4) 12.7% 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) 3,079,932 (7) 39.2%
(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 750,000 shares of Common Stock, with 17,578 shares held indirectly through an individual retirement account. (3) Includes presently exercisable options to purchase 755,000 shares of Common Stock. All shares are directly owned. (4) Includes presently exercisable options to purchase 175,000 shares of Common Stock, 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, 92,000 shares directly owned 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 1,955,000 shares of Common Stock. (c) Changes in Control Inapplicable. 24 27 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 bimonthly payments. Principal payments of $95,434 were received by the Company during January 2000. Principal payments of $78,000 were received by the Company during February 2001. (d) Transactions With Promoters Inapplicable. 25 28 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 2000 and December 31, 1999 Consolidated Statements of Income for the years F-5 ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the F-6 year ended December 31, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity for the F-7 years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements. F-8 through F-16 (a) (2) List of Financial Statement Schedules filed as a Part of this Report Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation 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 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 29 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. 10.34 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. 10.55 1994 Stock Option Plan incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1994, Exhibit 10.55 10.66 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. 10.73 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
27 30 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. 10.88 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. 10.95 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. (Expired) 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. 10.101 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. (Expired) 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. (Expired) 10.109 Lease Agreement between the Company and P.S. Business Parks, L.P. dated August 14,
28 31 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. 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
29 32 Rhema Behavioral Health Center dated August 1, 1999, incorporated by reference from Form 10-Q for the quarter ended September 30, 1999. (Terminated) 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, which supercedes the agreements dated October 6, 1995, incorporated by reference from Form 10-K for the year ended December 31, 1999. 10.124 Inpatient and Outpatient Psychiatric Unit Management Services Agreement between Company and Catholic Healthcare West Southern California effective September 1, 1999 which supercedes Agreement dated September 15, 1998, incorporated by reference from Form 10-Q for the quarter ended June 30, 2000. 10.125 Lease Amendment between the Company and Laguna Niguel Office Center dated May 31, 2000 which supercedes the lease dated June 23, 1988, incorporated by reference from Form 10-Q for the quarter ended June 30, 2000. 10.126 Loan agreement between the company and US Bank dated July 14, 2000, incorporated by reference from Form 10-Q for the quarter ended September 30, 2000. 10.127 Psychiatric Partial Hospitalization Management agreement between the Company and New Life Guidance Center dated October 1, 2000, incorporated by reference from Form 10-Q for the quarter ended September 30, 2000. 10.128 Agreement between the Company and Sherman Oaks Hospital and Health Center dated January 1, 1999, which supercedes the agreement dated March 30, 1995. 10.129 First amendment to agreement between the Company and Sherman Oaks Hospital and Health Center dated July 17, 2000, which supercedes the agreement dated January 1, 1999. 10.130 Second amendment to lease between the Company and Jay Arteaga dated September 21, 2000, which supercedes the lease dated October 11, 1999. 10.131 Agreement between the Company and Friendship Community Mental Health Center dated December 7, 2000, which supercedes the agreement dated June 25, 1997. 23 Consent of Independent Auditors.
(b) Reports on Form 8-K Inapplicable. 30 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 26, 2001 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 March 26, 2001 ---------------------------------- Edward A. Johnson, Chief Executive Officer and Director (Principal Financial and Accounting Officer) /s/ MULUMEBET G. MICHAEL March 26, 2001 ---------------------------------- Mulumebet G. Michael, Director, President and Chief Operating Officer /s/ MICHAEL S. CALLISON March 26, 2001 ---------------------------------- Michael S. Callison, Director /s/ GARY L. DREHER March 26, 2001 ---------------------------------- Gary L. Dreher, Director /s/ JON E. JENETT March 26, 2001 ---------------------------------- Jon E. Jenett, Director 31 34 OPTIMUMCARE CORPORATION CONTENTS PAGE ---- INDEPENDENT AUDITORS' REPORT F-1 through F-2 FINANCIAL STATEMENTS: Consolidated Balance Sheets F-3 through F-4 Consolidated Statements of Income F-5 Consolidated Statements of Cash Flows F-6 Consolidated Statements of Stockholders' Equity F-7 Notes to Consolidated Financial Statements F-8 through F-16 Financial Statement Schedule F-17 through F-19 i 35 February 2, 2001 Independent Auditors' Report To the Stockholders and Board of Directors of OptimumCare Corporation We have audited the accompanying consolidated balance sheets of OptimumCare Corporation and its subsidiary as of December 31, 2000 and 1999, and their related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed at item 14(a)(2) as of and for the years ended December 31, 2000 and 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 9 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, 2000 and 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 consolidated balance sheet of OptimumCare Corporation as of December 31, 1998 (not presented separately herein) and the related consolidated statements of income, stockholders' equity, and cash flows for the year ended December 31, 1998. Our audit also included the financial statement schedule listed in the Index at Item 14(a) for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. As discussed in Note 9 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 the consolidated results of its operations and its cash flows for the year 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. Ernst & Young LLP Orange County, California March 5, 1999 F-2 37 OPTIMUMCARE CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
December 31, -------------------------- 2000 1999 ---------- ---------- CURRENT ASSETS Cash and cash equivalents $2,187,322 $ 283,227 Accounts receivable, net of allowance of $0 and $765,317 in 2000 and 1999, respectively (Note 2) 938,562 2,621,181 Note receivable from officer (Note 2) 138,566 156,000 Prepaid expenses 100,810 30,837 Deferred tax asset (Note 8) 19,593 24,457 ---------- ---------- Total current assets 3,384,853 3,115,702 NOTE RECEIVABLE FROM OFFICER, less current portion (Note 2) 158,070 236,070 FURNITURE AND EQUIPMENT, less accumulated depreciation of $178,416 in 2000 and $170,716 in 1999 (Note 5) 34,382 32,268 SOFTWARE 285,000 -- DEFERRED TAX ASSET (Note 8) 12,997 25,994 OTHER ASSETS 44,902 52,311 ---------- ---------- Total assets $3,920,204 $3,462,345 ========== ==========
See the accompanying notes to these financial statements F-3 38 OPTIMUMCARE CORPORATION CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, -------------------------- 2000 1999 ---------- ---------- CURRENT LIABILITIES Accounts payable $ 189,995 $ 177,903 Accrued vacation 40,858 44,926 Accrued expenses 234,564 192,353 ---------- ---------- Total current liabilities 465,417 415,182 ---------- ---------- COMMITMENTS (Notes 3, 4 and 6) STOCKHOLDERS' EQUITY (Note 7) Preferred stock, $.001 par value; 10,000,000 shares authorized 0 shares issued and outstanding at December 31, 2000 and 1999 -- -- Common stock, $.001 par value; 20,000,000 shares authorized 5,908,675 and 5,883,675 shares issued and outstanding at December 31, 2000 and 1999, respectively 5,909 5,884 Paid-in-capital 2,403,706 2,387,793 Retained earnings 1,045,172 653,486 ---------- ---------- Total stockholders' equity 3,454,787 3,047,163 ---------- ---------- Total liabilities and stockholders' equity $3,920,204 $3,462,345 ========== ==========
See the accompanying notes to these financial statements F-4 39 OPTIMUMCARE CORPORATION CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, --------------------------------------------- 2000 1999 1998 ----------- ----------- ----------- NET REVENUES $ 8,010,491 $10,553,427 $11,409,690 INTEREST INCOME 94,625 36,261 24,736 ----------- ----------- ----------- 8,105,116 10,589,688 11,434,426 ----------- ----------- ----------- OPERATING EXPENSES Costs of services provided 5,691,617 8,202,445 8,977,538 Selling, general and administrative 1,421,001 1,435,708 1,505,169 Provision for uncollectible accounts 340,009 295,895 334,564 Interest 507 2,528 2,401 ----------- ----------- ----------- Total operating expenses 7,453,134 9,936,576 10,819,672 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 651,982 653,112 614,754 PROVISION FOR INCOME TAXES (Note 8) 260,296 287,314 237,621 ----------- ----------- ----------- NET INCOME $ 391,686 $ 365,798 $ 377,133 =========== =========== =========== BASIC EARNINGS PER SHARE $ 0.07 $ 0.06 $ 0.06 =========== =========== =========== DILUTED EARNINGS PER SHARE $ 0.06 $ 0.06 $ 0.06 =========== =========== ===========
See the accompanying notes to these financial statements F-5 40 OPTIMUMCARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------- 2000 1999 1998 ----------- --------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 391,686 $ 365,798 $ 377,133 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 19,883 39,654 40,589 Provision for uncollectible accounts 340,009 295,895 334,564 Deferred taxes 17,861 45,654 237,895 Changes in operating assets and liabilities Decrease (increase) in accounts receivable 1,342,611 (623,493) (441,241) Decrease (increase) in prepaid expenses (69,973) 40,700 9,779 (Increase) decrease in other assets 7,408 973 (8,356) (Decrease) increase in accounts payable 12,092 (66,623) (25,653) (Decrease) increase in accrued expenses 38,143 52,429 (24,746) ----------- --------- ----------- Net cash provided by operating activities 2,099,720 150,987 499,964 ----------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of software (285,000) -- -- Purchases of equipment, net (21,997) (12,392) (13,431) Note receivable from officer 95,434 -- (118,070) ----------- --------- ----------- Net cash used in investing activities (211,563) (12,392) (131,501) ----------- --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from note payable to bank -- 650,000 -- Note payable to bank pay downs -- (650,000) (200,000) Purchase of treasury stock -- (44,004) (932,731) Exercise of stock options 15,938 -- 7,500 ----------- --------- ----------- Net cash used in financing activities 15,938 (44,004) (1,125,231) ----------- --------- ----------- NET INCREASE (DECREASE) IN CASH 1,904,095 94,591 (756,768) CASH, beginning of year 283,227 188,636 945,404 ----------- --------- ----------- CASH, end of year $ 2,187,322 $ 283,227 $ 188,636 =========== ========= =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 507 $ 2,528 $ 2,401 =========== ========= =========== Income taxes paid $ 248,000 $ 237,500 $ 11,366 =========== ========= ===========
See the accompanying notes to these financial statements F-6 41 OPTIMUMCARE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
RETAINED COMMON STOCK EARNINGS/ ---------------------- PAID-IN (ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT) TOTAL ---------- ------- ----------- ----------- ----------- 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 Exercise of stock options 25,000 25 15,913 -- 15,938 Net income -- -- -- 391,686 391,686 ---------- ------- ----------- ----------- ----------- BALANCE, December 31, 2000 5,908,675 $ 5,909 $ 2,403,706 $ 1,045,172 $ 3,454,787 ========== ======= =========== =========== ===========
See the accompanying notes to these financial statements F-7 42 OPTIMUMCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 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. 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, 2000 and 1999, 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. SOFTWARE -- Computer software costs related to the creation of an on-demand therapy website which have been acquired for internal use are stated at the direct cost of materials and services consumed from one vendor. Amortization will begin when the software is ready for its intended use and all substantial testing is completed. 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 -- The Company accounts for earnings per share in accordance with the provisions of Statement of Financial Accounting Statement No. 128, "Earnings Per Share". Statement 128 excludes any dilutive effects of options, warrants and convertible securities in basic earnings per share. F-8 43 NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. PROFESSIONAL LIABILITY INSURANCE -- OptimumCare maintains an occurrence based professional liability insurance coverage of up to $1,000,000 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. The Company's cash and cash equivalents are deposited with a large financial institution. Though substantially all of these deposits may not be covered by federal insurance programs, the Company believes the institution to be financially sound. The Company's policy generally does not require collateral to cover credit risk. F-9 44 NOTE 2 -- RELATED PARTY TRANSACTIONS 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. During 2000, principal payments totaling $95,434 were received by the Company. During February 2001 principal payments of $78,000 were received by the Company. Approximately $39,000 and $35,000 due from officers are included in accounts receivable for the years ended December 31, 2000 and 1999, respectively. 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 9.67 and 8.71% in the years ended December 31, 2000 and 1999, respectively. The line of credit matures on June 4, 2001 and is collateralized by substantially all of the Company's assets. At December 31, 2000, $607,000 was available for future draws under the line of credit agreement, and no amounts were outstanding. NOTE 4 -- EMPLOYEE BENEFIT PLAN The Company provides 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 vests 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 $89,694, $98,018, and $54,181, for 2000, 1999 and 1998, respectively. NOTE 5 -- FURNITURE AND EQUIPMENT Major classifications of furniture and equipment are as follows: December 31, ---------------------------- 2000 1999 --------- --------- Furniture and fixtures $ 55,776 $ 55,776 Machinery and equipment 141,947 145,133 Automobile 13,000 -- Trademark 2,075 2,075 --------- --------- 212,798 202,984 Less: accumulated depreciation (178,416) (170,716) --------- --------- $ 34,382 $ 32,268 ========= ========= F-10 45 NOTE 6 -- 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, 2001, October 31, 2001 and November 30, 2001, respectively. The Company also leased space under two (2) separate lease agreements for the operation of two (2) of its outpatient partial hospitalization psychiatric program sites. One agreement is between the lessor and the community mental health center which expires November 30, 2003. However, the Company is obligated to pay the lease costs for the program under its contract with the facility which expires December 6, 2010. The remaining agreement expires August 14, 2002. 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 ------------------------- -------- 2001 $105,409 2002 88,489 2003 50,095 -------- $243,993 ======== The Company has a sublease with one of its host hospitals. Sublease rental income was $65,685, $67,244, and $87,693 for the years ended December 31, 2000, 1999 and 1998, respectively. The sublease will expire on February 28, 2001. Rent expense was $361,197, $388,601, and $354,520 for the years ended December 31, 2000, 1999 and 1998, respectively. NOTE 7 -- 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. F-11 46 NOTE 7 -- STOCKHOLDERS' EQUITY (CONTINUED) 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). 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. On October 24, 2000, the Company granted to certain officers, directors and employees, more nonqualified options to purchase 325,000 shares of its common stock at $0.67 per share. All options are vested upon grant. A summary of stock option activity during 2000, 1999 and 1998 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, 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 Granted 325,000 .67 -- -- -- -- Exercised -- -- -- -- (25,000) .6375 Canceled -- -- -- -- (50,000) .92 ---------- ----- -------- ----- -------- ------ Outstanding, December 31, 2000 2,641,000 $ .80 100,000 $1.08 -- $ -- ========== ===== ======== ===== ======== ======
F-12 47 NOTE 7 -- STOCKHOLDERS' EQUITY (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- -------------------------------- WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICE AT 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/00 EXERCISE PRICE --------------- ----------- ---------------- --------------- ----------- -------------- $.901 to 1.3133 633,000 0.5 years $1.13 606,400 $1.13 1.00 350,000 2.5 years 1.00 350,000 1.00 .62 to .90 1,433,000 3.5 years .66 1,433,000 .66 .67 325,000 4.5 years .67 325,000 .67 --------------- --------- --------- ----- --------- ----- $ .62 to 1.3133 2,741,000 2.5 years $ .81 2,714,400 $ .81 =============== ========= ========= ===== ========= =====
A total of 2,741,000 shares of common stock are reserved for future issuance upon the exercise of stock options at December 31, 2000. A total of 150,000 options were available for future grant at December 31, 2000 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 2000, 1999 and 1998, respectively: risk-free interest rates of 5.75%, 6.20% and 6.31%; a dividend yield of 0%; a volatility factor of the expected market price of the Company's common stock of .433, .398 and .380 for 2000, 1999 and 1998, respectively. 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, ---------------------------------------- 2000 1999 1998 -------- -------- -------- Net income As reported $391,686 $365,798 $377,133 Pro forma $296,526 $134,719 $244,153 Earnings per share Basic as reported $ .07 $ .06 $ .06 Diluted as reported $ .06 $ .06 $ .06 Basic pro forma $ .05 $ .02 $ .04 Diluted pro forma $ .05 $ .02 $ .04 F-13 48 NOTE 7 -- STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, ------------------------ 2000 1999 1998 ---- ---- ---- 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 $.67 $.65 $ -- Options whose exercise price is more than the market price of the stock on the grant date $ -- $.64 $ 1 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 $.26 $.29 $ -- Options whose exercise price is more than the market price of the stock on the grant date $ -- $.27 $.46
EARNINGS PER SHARE --- The following table sets forth the computation of basic and diluted earnings per share:
YEARS ENDED DECEMBER 31, ------------------------------------------ 2000 1999 1998 ---------- ---------- ---------- Numerator: net income $ 391,686 $ 365,798 $ 377,133 ---------- ---------- ---------- Denominator: Denominator for basic earnings per share -- weighted-average shares outstanding 5,907,511 5,910,939 6,567,280 Dilutive employee stock options 256,629 117,557 132,368 ---------- ---------- ---------- Denominator for diluted earnings per share 6,164,140 6,028,496 6,699,648 ========== ========== ========== Basic earnings per share $ .07 $ .06 $ .06 ========== ========== ========== Diluted earnings per share $ .06 $ .06 $ .06 ========== ========== ==========
NOTE 8 -- 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,
2000 1999 1998 -------- -------- --------- Statutory federal provision for income taxes $221,000 $222,000 $ 209,000 Increase (decrease) in taxes resulting from: Permanent differences and other 2,644 7,614 (5,379) State tax, net of federal benefit 36,652 57,700 34,000 -------- -------- --------- $260,296 $287,314 $ 237,621 ======== ======== =========
F-14 49 NOTE 8 -- INCOME TAXES (CONTINUED) Significant components of the provision for income taxes are as follows: YEARS ENDED DECEMBER 31, ----------------------------------------- 2000 1999 1998 -------- -------- --------- Current: Federal $191,523 $191,180 $ (1,124) State 50,911 45,682 850 -------- -------- --------- Total current 242,434 236,862 (274) -------- -------- --------- Deferred: Federal 14,111 40,362 185,239 State 3,751 10,090 52,656 -------- -------- --------- Total deferred 17,862 50,452 237,895 -------- -------- --------- $260,296 $287,314 $ 237,621 ======== ======== ========= 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, 2000 and 1999 consist of the following: DECEMBER 31, ---------------------- 2000 1999 ------- ------- Net operating loss carryback $ -- $29,881 Accruals not currently deductible for tax purposes 17,504 3,036 Depreciation and amortization not currently deductible for tax purposes 9,864 17,534 State taxes 5,222 -- ------- ------- Total deferred tax assets 32,590 50,451 Less valuation allowance -- -- ------- ------- Net deferred tax asset $32,590 $50,451 ======= ======= F-15 50 NOTE 9 -- 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, ------------------------------------------------------------------ 2000 1999 1998 -------------------- -------------------- -------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ---------- ------- ---------- ------- ---------- ------- Hospital 1 $1,740,000 21.7% $1,860,585 17.6% $2,563,088 22.5% Hospital 2 843,633 10.5% 1,066,709 10.1% 1,381,666 12.1% Hospital 3 2,972,555 37.1% 5,136,268 48.7% 4,838,421 42.4% Hospital 4 696,000 8.7% 648,000 6.1% 1,396,317 12.2% Hospital 5 1,224,066 15.3% 1,177,623 11.2% -- -- In addition, these hospitals accounted for approximately $789,603, $2,527,425 and $2,138,861 of accounts receivable at December 31, 2000, 1999 and 1998, respectively. NOTE 10 -- SUBSEQUENT EVENT One of the Company's major customers' contract will terminate on February 28, 2001. Approximately $87,000 per month of revenues will be lost. However, management believes that additional revenues can be earned through its proposed expansion of its existing facilities. These additional revenues may negate the revenues lost from the termination of this contract. F-16 51 FINANCIAL STATEMENT SCHEDULE F-17 52 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, 2000 Reserves and allowances deducted from asset accounts: Allowance for uncollectable accounts $ 0 $340,009 $0 $(340,009)* $0 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
-------------- * Uncollectable accounts written-off, net of recoveries. F-18 53 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. F-19 54 INDEX TO EXHIBITS
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.
55 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. 10.34 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. 10.55 1994 Stock Option Plan incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1994, Exhibit 10.55 10.66 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. 10.73 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
56 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. 10.88 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. 10.95 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. (Expired) 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. 10.101 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. (Expired) 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. (Expired) 10.109 Lease Agreement between the Company and P.S. Business Parks, L.P. dated August 14,
57 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. 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
58 Rhema Behavioral Health Center dated August 1, 1999, incorporated by reference from Form 10-Q for the quarter ended September 30, 1999. (Terminated) 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, which supercedes the agreements dated October 6, 1995, incorporated by reference from Form 10-K for the year ended December 31, 1999. 10.124 Inpatient and Outpatient Psychiatric Unit Management Services Agreement between Company and Catholic Healthcare West Southern California effective September 1, 1999 which supercedes Agreement dated September 15, 1998, incorporated by reference from Form 10-Q for the quarter ended June 30, 2000. 10.125 Lease Amendment between the Company and Laguna Niguel Office Center dated May 31, 2000 which supercedes the lease dated June 23, 1988, incorporated by reference from Form 10-Q for the quarter ended June 30, 2000. 10.126 Loan agreement between the company and US Bank dated July 14, 2000, incorporated by reference from Form 10-Q for the quarter ended September 30, 2000. 10.127 Psychiatric Partial Hospitalization Management agreement between the Company and New Life Guidance Center dated October 1, 2000, incorporated by reference from Form 10-Q for the quarter ended September 30, 2000. 10.128 Agreement between the Company and Sherman Oaks Hospital and Health Center dated January 1, 1999, which supercedes the agreement dated March 30, 1995. 10.129 First amendment to agreement between the Company and Sherman Oaks Hospital and Health Center dated July 17, 2000, which supercedes the agreement dated January 1, 1999. 10.130 Second amendment to lease between the Company and Jay Arteaga dated September 21, 2000, which supercedes the lease dated October 11, 1999. 10.131 Agreement between the Company and Friendship Community Mental Health Center dated December 7, 2000, which supercedes the agreement dated June 25, 1997. 23 Consent of Independent Auditors.