October 26, 1998
OPTIMUMCARE CORP /DE/ (OPMC)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
SAFE HARBOR STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements which are forward-looking in time and involve risks and uncertainties, including the risks associated with plans, the effects of changing economic and competitive conditions, government regulation which may affect facilities, licensing, healthcare reform which may affect payment amounts and timing, availability of sufficient working capital, program development efforts and timing and market acceptance of new programs which may affect future sales growth and/or costs of operations.
MATERIAL CHANGES IN FINANCIAL CONDITION
At September 30, 1998 and December 31, 1997, the Company's working capital was $2,452,297 and $2,533,852 respectively. The nature of the Company's business requires significant working capital to fund operations of its programs as well as to fund corporate expenditures until receivables can be collected. Moreover, because each of the existing contracts represents a significant portion of the Company's business, the inability to collect any of the accounts receivable could materially and adversely affect the Company's liquidity. Despite the write-off of the Galaxy receivable previously discussed in Note B of the Notes to the Financial Statements, the Company has been able to effectively manage collections on other receivables and payments for services such that there has been no significant impairment of working capital.
Cash flows from operations were $971,357 and $152,756 for the periods ended September 30, 1998 and 1997, respectively. Positive cash flow for the nine months ended September 30, 1998 was due to the net income for the period, improved collections on receivables, and the positive cash flow tax aspects associated with the write-off of the Galaxy receivable during 1998.
Cash flows used in investing activities were ($7,173) and ($46,812) for the periods ended September 30, 1998 an 1997, respectively. Funds used during both periods were expended for office furniture and equipment.
The cash flows used in financing activities were ($1,030,000) and ($500,000) for the periods ended September 30, 1998 and 1997 respectively. Funds used during 1998 were for the purchase of 888,614 shares of treasury stock as discussed in Note D of the Notes to the Financial Statements, and for pay downs on the Company's line of credit agreement with the bank, which were drawn during 1997. Funds used in 1997 were for paydowns on the Company's line of credit with the bank which were drawn during 1996.
The line of credit expires May 1, 1999. The maximum indebtedness of the line is $1,500,000. Amounts allowable for draw are based on 75% of certain qualified accounts receivable. As of September 30, 1998, approximately $1,277,750 is available for future draws on the line of credit agreement.
The Company's principal sources of liquidity for the fiscal year 1998 are cash on hand, accounts receivable, the line of credit with a bank and continuing revenues from programs.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
The Company operated ten (10) programs during the three months ended September 30, 1998 and thirteen (13) programs during the three months ended September 30, 1997. Net Revenues were $2,821,533 and $3,076,658 for the three months ended September 30, 1998 and 1997, respectively. The decrease in revenues for the three months ended September 30, 1998 over September 30, 1997 is due to a number of factors. Lower revenues are somewhat due to the decrease in the number of operational programs. In addition, the Company currently operates one partial hospitalization program which is temporarily unable to generate revenue, until a suitable host facility can be found. However, high census and increased collections in patient revenues have occurred at other programs at host facilities during the third quarter of 1998, to somewhat compensate for these circumstances.
Cost of services provided were $2,196,049 and $2,302,422 for the three months ended September 30, 1998 and 1997 respectively. Costs have decreased due to the decrease in programs. In particular, significant cost reductions were achieved from the consolidation of two partial hospitalization programs which occurred during the second quarter of 1998.
Selling, general and administrative expenses for the three months ending September 30, 1998 have remained relatively stable in comparison to the three months ended September 30, 1997.
Net income was $165,505 and $253,896 for the three months ending September 30, 1998 and 1997, respectively. The decrease in net income is attributable to lower revenues offset by a decrease in operating expenses.
The Company anticipates the costs of operating its current programs to remain stable. Revenues are expected to increase as new programs are opened and all programs are generating revenue. The Company is actively pursuing the formation of its own Community Mental Health Centers to host certain of its partial hospitalization programs. This is a natural progression which has stemmed from the Company continually providing a larger scope of services to its customers for a greater management fee. In addition, the Company currently has applications pending with regulatory agencies for three partial hospitalization programs.
An increase in revenues should cause gross profit to rise favorably and disproportionately due to the increase in costs for such programs. However, should patient census and the resulting revenue decrease (especially below the minimum break even level), costs could be disproportionately high, which would adversely impact the results of operations, and the company's available resources. Due to the Company's dependence on a relatively small customer base presently consisting of four (4) hospitals and one community mental health center, the loss of any of its customers could have a significant adverse effect on the Company's operations.
The Company does not anticipate that the cost of addressing the year 2000 will be material to its financial position, operating results or cash flows. The Company intends to upgrade its general ledger accounting system effective January 1, 1999. Quotes have been sought and it is anticipated that the new system will run parallel to the current system. However, it does appear that this is a major concern for its host hospitals and the various insurance companies from which the hospitals receive reimbursements. The large volume, small dollar transactions processed by these entities' computer systems would most likely require reconfiguration to accommodate the year 2000. The trickle down effect of this situation to the Company is not yet known at this point in time.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net revenues decreased slightly for the nine months ended September 30, 1998 over the comparable nine months ended September 30, 1997.
The Company had twelve (12) operational Programs during the nine month period ended September 30, 1998 and fourteen (14) operational programs during the six month period ended September 30, 1997. The decrease in net revenues among comparative periods is due to the decrease in the number of operational programs. In addition, the Company currently operates one partial hospitalization program which is temporarily unable to generate revenue, until a suitable host facility can be found. However, high census and increased collections in patient revenues have occurred at other programs at host facilities during 1998 to somewhat compensate for these circumstances.
Although there was a decrease in revenue among comparative periods, there has been an increase in the cost of services provided. Part of the increase is due to an increase in dietary costs for certain programs which the Company began to assume responsibility for during the last half of 1997. The remainder of the increase is due to pre-operating costs that the Company has incurred in connection with two partial hospitalization programs awaiting licensure.
The provision for doubtful accounts at September 30, 1998 represents the write-offs of the receivables generated from the Galaxy alliance during the first quarter of 1998 as discussed in Note B to the Financial Statements. Management believes the collectibility of these receivables is remote. No such similar situation existed during the nine month period ending September 30, 1997.
General and administrative expenses remained fairly stable in the aggregate among periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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