As filed with the Securities and Exchange Commission on January 22, 1997
Registration Number 0-16206
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NUMBER TWO TO
FORM SB-2 REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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OAK TREE MEDICAL SYSTEMS, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 8049 02-0401674
(State or other (Standard Industrial (IRS Employer
jurisdiction of incorporation) Classification Code Number) I.D. Number)
OAK TREE MEDICAL SYSTEMS, INC.
2 Gannett Drive, Suite 215
White Plains, New York 10604
(914) 694-2500
(Address, including zip code and telephone number,
including area code, of Registrants principal
executive offices and principal place of business)
William Kedersha
Chief Executive Officer
Oak Tree Medical Systems, Inc.
2 Gannett Drive, Suite 215
White Plains, New York 10604
(914) 694-2500
(Address, including zip code, and telephone number,
including area code, of agent for service.)
Copies to:
Bruce Rabb, Esq.
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
(212) 715-9100
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: [X]
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<CAPTION>
CALCULATION OF REGISTRATION FEE
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Maximum Maximum Amount of
Title of Each Class of Amount to Offering Price Offering Registration
Securities to be Registered be Registered(1) Per Unit (2) Price (2) Fee(3)
- --------------------------- ---------------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Common Stock, $.01 par value 347,200 $ 5.00 $ 1,736,000 $ 526.06
======================================================================================================
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(1) Pursuant to Rule 416, there are also being registered hereunder such
additional shares as may be issued to the Selling Stockholders because of
future stock dividends, stock distributions, stock splits or similar
capital readjustments.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c). The Proposed Maximum Offering Price Per Share is based upon
the average of the bid and asked price reported by the National Association
of Securities Dealers on January 15, 1997, which is within five business
days prior to the date of this Amendment to the Registration Statement.
(3) $364 was paid on June 24, 1996 in connection with the filing of the
original Registration Statement.
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The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement will thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY __, 1997
PROSPECTUS
347,200 Shares of Common Stock
Oak Tree Medical Systems, Inc.
This Prospectus relates to the offering of 347,200 shares (the
"Shares") of common stock, par value $.01 per share (the "Common Stock"), of Oak
Tree Medical Systems, Inc. (the "Company") by certain stockholders of the
Company (the "Selling Stockholders"). The Shares offered hereby include 142,200
shares of Common Stock acquired by Selling Stockholders from the Company in
private transactions and 205,000 shares of Common Stock issuable upon exercise
of stock options and warrants (the "Rights") issued by the Company in private
transactions to certain Selling Stockholders.
The Shares may be offered from time to time by the Selling Stockholders
through ordinary brokerage transactions in the over-the-counter markets, in
negotiated transactions or otherwise, at market prices prevailing at the time of
sale or at negotiated prices. The Company will not receive any of the proceeds
from the sale of Common Stock by the Selling Stockholders. The Company will pay
the expenses of the offering of the Shares, estimated at $_____. See "Selling
Stockholders" and "Plan of Distribution."
The resale of the Shares by the Selling Stockholders are subject to
prospectus delivery and other requirements of the Securities Act of 1933, as
amended ("Securities Act"). The Selling Stockholders and any agents or
broker-dealers that participate with the Selling Stockholders in the sale of the
Shares may be deemed "underwriters" under the Securities Act and commissions
received by them and any profit on the resale of the Shares may be deemed to be
underwriting commissions or discounts under the Securities Act.
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE IN NATURE AND
INVOLVE A HIGH DEGREE OF RISK. THEREFORE, EACH INVESTOR SHOULD CONSIDER VERY
CAREFULLY THE RISK FACTORS AND OTHER INFORMATION SET FORTH IN THE PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE NOR HAS THE COMMISSION OR ANY
STATE PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is [___________, 1997]
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission located at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, New York, New York 10048. Such material is also available on the
Commission's site on the World Wide Web at http:\\www.sec.gov. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The Company has filed with the Commission a registration statement on
Form SB-2 (the "Registration Statement") under the Securities Act with respect
to the shares of Common Stock offered by this Prospectus. This Prospectus, filed
as part of such Registration Statement, does not contain all of the information
set forth in, or annexed as exhibits, to, the Registration Statement, certain
portions of which have been omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and this
offering, reference is made to the Registration Statement, including the
exhibits filed therewith, which may be inspected without charge at the Office of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the
Registration Statement may be obtained from the Commission at its principal
office upon payment of prescribed fees. Statements contained in this Prospectus
as to the contents of any contract or other document are not necessarily
complete and, where the contract or other document has been filed as an exhibit
to the Registration Statement, each statement is qualified in all respects by
reference to the applicable document filed with the Commission.
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PROSPECTUS SUMMARY
The following is a summary of certain information contained in this
Prospectus, and is qualified in its entirety by the more detailed information
and financial statements, including the notes thereto, appearing elsewhere in
the Prospectus and should be read in conjunction with that information and those
financial statements and notes. Every prospective investor is urged to read this
Prospectus in its entirety.
The Company
Oak Tree Medical Systems, Inc., a Delaware corporation (the "Company"),
is engaged in the business of owning, operating and managing physical therapy
clinics, comprehensive outpatient rehabilitation facilities (CORF) and related
medical practices in Florida and New York. In North Florida, the Company owns
and operates three physical therapy clinics, a medical practice, specializing in
neurology and physiatry, and a comprehensive outpatient rehabilitation facility.
The Company also owns three New York City based physical therapy centers
acquired in October 1996, and four Long Island, New York based physical therapy
centers acquired in December 1996.
The Company intends to continue to explore opportunities for the
acquisition of physical therapy centers in the Northeast, where such centers can
be acquired at attractive prices and on other appropriate terms.
The Company was organized in May 1986 as Oak Tree Construction
Computers, Inc. In June 1994, the name of the Company was changed to Oak Tree
Medical Systems, Inc. Its executive offices are located at 2 Gannett Drive,
Suite 215, White Plains, New York 10604, and its telephone numbers is (914)
694-2500. References to the "Company" include Oak Tree Medical Systems, Inc.,
and its subsidiaries, unless the context otherwise requires.
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THE OFFERING
Common Stock offered by Selling
Stockholders.................... 347,200 shares.
Common Stock outstanding
immediately prior to the
Offering ....................... 2,734,383 shares.
Common Stock outstanding
after the Offering(1)........... 2,939,383 shares.
Risk Factors....................... The Common Stock offered hereby are
highly speculative in nature and involve
a high degree of risk. Therefore, each
investor should consider very carefully
the risk factors and conflicts of
interest described in this Prospectus.
See "Risk Factors" and "Dilution."
Use of Proceeds.................... The Company will not receive any
proceeds of any sale of any security by
the Selling Stockholders. Any proceeds
received by the Company from time to
time upon exercise of the Rights will be
used for working capital and general
corporate purposes.
---------------
(1) Includes 205,000 shares issuable upon exercise of the Rights but not any
other options or warrants.
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RISK FACTORS
THE SECURITIES REGISTERED HEREBY ARE HIGHLY SPECULATIVE IN NATURE AND
INVOLVE A HIGH DEGREE OF RISK, INCLUDING, BUT NOT NECESSARILY LIMITED TO, THE
RISK FACTORS DESCRIBED BELOW. THEY SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN
AFFORD TO LOSE THEIR ENTIRE INVESTMENT IN THE COMPANY. EACH PROSPECTIVE
INVESTOR, PRIOR TO MAKING AN INVESTMENT IN THE COMPANY, SHOULD CONSIDER VERY
CAREFULLY THE FOLLOWING RISK FACTORS, AS WELL AS ALL OTHER INFORMATION SET FORTH
IN THIS PROSPECTUS.
Limited History of Operating Physical Therapy Clinics
From 1986 to 1990, the Company was engaged in an unrelated business and
for a number of years thereafter the Company was inactive. In January 1995, the
Company acquired physical therapy and rehabilitation centers and related medical
practices in North Florida, and in October 1996, the Company began the
acquisition of clinics in the New York metropolitan area. Although the Company
anticipates that its future growth will occur primarily in the Northeast, it has
only recently begun its operations in this region. Because of the Company's
limited operating history, there can be no assurance that the Company will
realize its growth plans, that its operations will continue to be profitable or
that it will be successful in responding to future changes in the business and
regulatory environment in which it operates.
Significant Capital Requirements
The Company's capital requirements have been and will continue to be
significant, particularly with respect to acquisitions. The Company in the past
has used private placements of its equity securities to fund certain of its
capital requirements, including acquisitions. The Company continues to explore
opportunities to raise private equity capital, although the Company has no
current arrangements to do so and there can be no assurance that its efforts to
raise private capital will be successful. If the Company is unable to raise
additional capital, its future operations and growth strategy may be materially
adversely affected.
Competition
The physical therapy industry is highly competitive, with certain
competitors having substantially greater financial, marketing, development and
other resources than the Company. Both larger and smaller competitors may have
individual facilities with greater resources than individual, competing
facilities operated by the Company. Also, the industry is subject to continuous
changes regarding the provision of services and the selection of care providers,
and certain competitors may be more successful than the Company in adapting to
these changes in a timely and effective manner. In addition, many other
companies have been organized to pursue acquisition of health care-related
clinics. Such companies, certain of which may be better capitalized than the
Company, may be competing for acquisitions in the areas targeted by the
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Company for expansion, thereby frustrating or rendering more costly the
Company's growth strategy.
Government Regulation
The provision of health care services, including physical
therapy-related services, is subject to federal and state laws and regulations.
The Company believes that its operations comply with applicable laws and
regulations. However, many of such laws and regulations have not been
authoritatively interpreted by the courts or relevant administrative agencies or
contain ambiguous legal standards, so that the Company's statutory and
regulatory compliance may be subject to challenge. Moreover, there can be no
assurance that the subsequent adoption of laws or interpretations of existing
laws will not regulate, restrict or otherwise adversely affect the Company's
business.
The laws of a number of states, including New York where a substantial
number of the Company's clinics are located, prohibit a corporation from
engaging in the practice of health care, including physical therapy, or from
exercising control over professionals engaged in the health care field. Certain
states, including New York, also prohibit "fee splitting" between physicians and
non-physicians. Federal law prohibits the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of Medicare or
state health program patients or patient care opportunities, or in return for
the purchase, lease or order of items or services that are covered by Medicare
or state health programs. The Company believes that its ownership of physical
therapy clinics and the provision of equipment, location, managerial,
administrative and non-medical support services to the clinics does not
constitute the corporate practice of physical therapy, since licensed physical
therapists exercise complete control over the provision of all physical therapy
services. Nevertheless, there can be no assurance that the statutes prohibiting
the corporate practice of physical therapy services will not be construed or
modified in the future to prohibit the operations of the Company as they are
presently being conducted.
In the event that the Company is found to be engaged in a prohibited
practice, the Company would be required to restructure its operations so as to
be in compliance with applicable law. In addition, the Company could be subject
to fines and penalties.
Risks Associated with the Acquisition of Businesses
The Company's growth in the physical therapy business has been the
result of acquisitions. The Company's strategy for further growth calls for the
acquisition of additional physical therapy practices, particularly in the
Northeast. In this regard, the Company is continually reviewing potential
acquisition candidates. However, there can be no assurance that suitable
acquisitions will be available, that identified acquisition candidates will not
be lost to competitors with greater financial resources, that the Company will
be able to obtain sufficient funds to make such acquisitions, that such
acquisitions can be negotiated on acceptable terms or
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that the operations of acquired businesses can be effectively and profitably
integrated into the operations of the Company.
Partial Payment for Acquisitions with Registered Stock
The Company has in the past and intends in the future to make partial
payment of the cost of business acquisitions in shares of the Company's Common
Stock. The Company believes that the issuance of such shares will be
non-dilutive, in that the Company will receive fair value for its stock through
the ownership of the acquired businesses. However, the value of the acquired
businesses to the Company will depend on their future earnings and performance.
There can be no assurance that such earnings and performance will materialize as
anticipated at the time of the issuance of Company stock as purchase
consideration.
Control by Principal Stockholders
The two principal stockholders of the Corporation, Nevada Minerals
Corporation ("Nevada Minerals") and Irene Stack, own, beneficially, an aggregate
of approximately 48% of the issued and outstanding shares of Common Stock. These
stockholders are not presently acting together (and Nevada Minerals has sued Ms.
Stack claiming a return of certain of her shares). As in any company with a
limited shareholder base, a small minority of stockholders could place
themselves in a position to control the outcome of matters requiring a vote of
stockholders including the election of the members to the Board of Directors of
the Company. See "Principal Stockholders."
Dependence on and Changes in Management
The Company is dependent upon the services of its executive officers
and key employees for management of the Company and implementation of its growth
strategy. The loss of these executive officers or key employees could have a
material adverse effect on the Company's operations. As its operations expand,
the Company is also dependent upon its ability to attract and retain qualified
employees and consultants for ongoing business operations. The Company has
keyman insurance on its key officers and employees.
In August 1996, the Company's founder and chief executive officer since
inception resigned. Together with the appointment of a new chief executive
officer in September 1996, the Company has made various management changes,
particularly in connection with its North Florida operations. While the Company
believes that these management changes are in its best interests, the changes
may in the short term result in a loss of operational continuity, particularly
with respect to the Company's North Florida businesses.
Exposure to Professional Liabilities
The Company may become involved in malpractice claims with the
attendant risk of damage awards. Although the Company presently maintains
malpractice insurance in the
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aggregate amount of $3,000,000 and $1,000,000 on a per claim basis, there can be
no assurance that a future claim or claims will not exceed the limits of
available insurance coverage or that such coverage will continue to be available
at commercially reasonable rates, if at all. Therapists and other medical
personnel at the Company's clinics are not obligated to indemnify the Company in
the event of any loss sustained by the Company in connection with such
professionals' malpractice or other liability. In the event of a successful
claim against the Company that is uninsured in whole or in part, the Company's
business and financial condition could be materially adversely affected. See
"Business--Legal Proceedings."
Reimbursement of Health Care Costs
The Company's revenues are derived from managed care health plans, such
as health maintenance organizations or preferred provider groups, private payor,
government reimbursement programs and workman's compensation and personal injury
payors. Substantial health care reforms have been proposed, including the
implementation of a government-directed national health care system, stringent
health care cost-containment measures and other changes in the way health-care
related services may be delivered and priced. Adoption of certain of the
proposals could adversely effect the Company's business and prospects. The
implementation, extent, details, timing and particular effects on the Company of
these reforms cannot be predicted. In addition, continuing efforts of
third-party payors to reduce costs may result in more restrictive reimbursement
policies to service providers such as the Company. Implementation of such
policies could adversely affect the Company's financial performance.
Investment in Accord Futronics Corp.
In June 1995, the Company exchanged gold ore valued at $5,000,000 for
6,000,000 shares of common stock of Accord Futronics Corporation ("Accord"). The
gold ore was acquired in May 1993 from one of the Company's principal
stockholders in exchange for 1,350,000 shares of Common Stock. The Company has
the right to receive a royalty of 12 1/2% of the net mining income from
processing of the gold ore transferred to Accord. However, Accord is not
currently mining the gold ore, and the Company cannot predict when, if ever,
such mining will occur. The book value of the Accord common stock constitutes
approximately 39% of the book value of the Company's assets as of November 30,
1996. No current financial information is available for Accord, and, if the
Company cannot obtain such information, the Company may write down all or a
substantial portion of its investment in Accord. The Company does not anticipate
that such a write down would materially adversely affect the Company's medical
business or its growth and profitability in the medical business management
field.
No Cash Dividends
The Company has never paid dividends on its Common Stock. The payment
of dividends in the future rests within the discretion of the Company's Board of
Directors and will depend on the existence of sufficient earnings, the Company's
financial requirements and other factors.
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The Company does not anticipate paying cash dividends for the foreseeable future
and intends to devote any earnings to the development of the Company's business.
Limited Trading Market; Risks Relating to Low-Priced Stocks
The Common Stock is currently traded in the Over-the-Counter Market,
with bid and asked prices being reported on the OTC Electronic Bulletin Board of
the National Association of Securities Dealers (the "NASD"). The Company has
filed an application for the listing of the Common Stock on the Small Cap market
of The Nasdaq Stock Exchange, but there can be no assurance that the application
will be accepted or, if accepted, the timing thereof.
Because and for so long as the Common Stock is not traded on an
established securities exchange, investors may find it difficult to dispose of
or to obtain accurate quotations for the Common Stock. In addition, if the
trading price of the Common Stock were to remain below $5.00 per share, trading
in the Common Stock could also be subject to the requirements of certain rules
promulgated under the Exchange Act, which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-Nasdaq equity security that has a market price
of less than $5.00 per share, subject to certain exemptions). Such rules require
the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stock to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in the Common Stock, which could
severely limit the market liquidity of the Common Stock and the ability of
purchasers in this offering to sell their Common Stock in the secondary market.
Volatility of Common Stock Price
The market price of the Company's Common Stock has been, and may in the
future be, highly volatile. Sales of a substantial number of shares of Common
Stock (including pursuant to this Prospectus), or the perception that such sales
could occur, could adversely affect prevailing market prices for the Common
Stock. In addition, factors such as a change in the services or products
provided by the Company or its competitors, as well as changes in the health
care industry generally, could have a significant impact on the market price of
the Common Stock. Further, in recent years, the securities markets have
experienced a high level of price and volume volatility and the market prices of
securities for many companies, particularly emerging companies, have experienced
wide fluctuations which have not necessarily been related to the operating
performance of such companies.
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Shares Eligible for Future Sale
Approximately [75%] of the approximately 2,700,000 shares of Common
Stock outstanding as of the date of this Prospectus are "restricted securities,"
as that term is defined under Rule 144 promulgated under the Act. As of the date
of this Prospectus, approximately [1,750,000] of such shares are eligible for
sale under Rule 144. No prediction can be made as to the effect, if any, that
sales of shares of Common Stock or the availability of such shares for sale will
have on the market prices prevailing from time to time. Nevertheless, the
possibility that substantial amounts of Common Stock may be sold in the public
market likely would have a material adverse effect on prevailing market prices
for the Common Stock and could impair the Company's ability to raise capital
through the sale of its equity securities.
Outstanding Options and Warrants
As of the date of this Prospectus, there are outstanding (vested and
unvested) stock options and warrants to purchase an aggregate of approximately
[750,000] shares of Common Stock at exercise prices ranging from $[1.6875] to
$[7.00] per share. To the extent that outstanding options or warrants are
exercised, dilution to the Company's stockholders will occur. Moreover, the
terms upon which the Company will be able to obtain additional equity capital
may be adversely affected since the holders of outstanding options and warrants
can be expected to exercise or convert them at a time when the Company would, in
all likelihood, be able to obtain any needed capital on terms more favorable to
the Company than the exercise or conversion terms provided by such outstanding
securities.
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USE OF PROCEEDS
The Company is not offering any securities pursuant to this prospectus
and will not receive any proceeds from the sale of Common Stock by the Selling
Stockholders. Upon the exercise of the Rights, the Company could realize up to
approximately $1,208,333 in exercise proceeds. Such proceeds may be used by the
Company for, among other things, working capital, general corporate purposes and
acquisitions. No assurance can be given that any Rights will be exercised. The
Company has agreed to pay the expenses incurred in connection with this
offering, estimated to be approximately $ ______.
DIVIDEND POLICY
To date, the Company has not paid any cash dividends on its Common
Stock. The payment of dividends, if any, in the future is within the discretion
of the Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition and other relevant factors. The Company
does not intend to declare any dividends in the foreseeable future.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock in the over-the-counter market on the OTC
Electronic Bulletin Board of the NASD. The following table sets forth, for the
periods indicated, high and low closing bid prices for the Common Stock in the
over-the-counter market as reported by the NASD. The information below reflects
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
Low Bid High Bid
Fiscal Year Ended May 31, 1995
First Quarter $ 1-3/8 $ 1-7/8
Second Quarter 3-1/4 4
Third Quarter 2-3/4 3-5/8
Fourth Quarter 1-3/4 3-1/4
Fiscal Year Ended May 31, 1996
First Quarter 2-3/4 8
Second Quarter 7 8-1/2
Third Quarter 6-1/8 9
Fourth Quarter 6 8-7/16
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Fiscal Year Ended May 31, 1997
First Quarter 4-5/8 7-3/4
Second Quarter 4 7-7/8
Third Quarter 3-5/8 5-1/2
(Through January 17, 1997)
As of November 30, 1996, there were approximately 130 holders of record
of the Company's Common Stock. The Company believes that, in addition, there are
in excess of 400 beneficial owners of its Common Stock whose shares are held in
"street name."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATION
Background
In January 1995, the Company acquired the assets and operations in
North Florida of five physical therapy clinics and an attendant neurology and
physiatry medical practice. Between March 1995 and March 1996, the Company
closed three clinic offices and opened one new facility. The Company acquired
two CORF licenses at the end of 1994 and the beginning of 1995. In October 1996,
the Company acquired three New York City based physical therapy centers, and in
December 1996, the Company acquired four Long Island, New York based physical
therapy centers. For a number of years prior to 1995, the Company was inactive.
Results of Operations
Six Months Ended November 30, 1996 Compared to Six Months Ended
November 30, 1995
Patient revenues increased by 11.8% to $2,239,145 from $2,003,592 in
the six months ended November 30, 1996 (the "Fiscal 1997 Six Month Period")
compared with the six months ended November 30, 1995 (the "Fiscal 1996 Six Month
Period"). The increase in revenues was primarily attributable to the acquisition
of three New York City clinics, whose results of operations were included with
the Company's results for October and November 1996. To a lesser extent, the
increase also reflects improved operations and more efficient billings at the
Company's North Florida clinics during the second quarter of fiscal 1997,
attributable, in part, to the implementation of new financial controls and
accounting systems.
Total expenses were $1,492,232 or 66.6% of revenues for the Fiscal 1997
Six Month Period, compared with expenses of $1,299,615 or 64.9% of revenues for
the Fiscal 1996 Six Month Period. Expenses increased as percentage of revenues
during the Fiscal 1997 Six Month Period as compared to the Fiscal 1996 Six Month
Period as a result of increased depreciation and amortization expenses
attributable to the New York City clinics acquired in the second quarter of the
fiscal 1997, and increased interest expense associated with a substantially
increased borrowings and higher interest rates. The increase was offset in part
by a percentage reduction in selling, general and administrative expenses, which
dropped to 58.2% of revenues in the Fiscal 1997 Six Month Period from 60% of
revenues in the Fiscal 1996 Six Month Period. The decline was primarily
attributable to a downward adjustment in allowance for doubtful accounts.
As a result of these factors, income from continuing operations
increased by 6% to $746,913 in the Fiscal 1997 Six Month Period from $703,977 in
the Fiscal 1996 Six Month Period. Net income increased by 8.9% to $485,724 in
the Fiscal 1997 Six Month Period from $445,877 in the Fiscal 1996 Six Month
Period.
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1996 Fiscal Year Compared to 1995 Fiscal Year
Because the Company commenced its current operations at the end of
January 1995, and was previously inactive, the fiscal year ended May 31, 1995
(the "1995 fiscal year") contains the operations of the Company for only four
months, as compared with the fiscal year ended May 31, 1996 (the "1996 fiscal
year"), which contains operations for a full fiscal year. For this reason, the
results of the Company's operations in the fiscal 1996 year and the fiscal 1995
year are not comparable in absolute terms. During the fiscal 1996 fiscal year,
the Company consolidated certain of its activities and moved certain of its
operations to new, expanded facilities in the Jacksonville, Florida area. The
resulting disruptions in patient care had a minor effect on the number of
patient visits and revenues in the 1996 fiscal year.
Revenues for the 1996 fiscal year were $4,663,792 compared to
$2,652,889 for the 1995 fiscal year.
Expenses were $3,419,184 for the 1996 fiscal year compared to
$2,264,932 for the 1995 fiscal year. The Company reduced its operating expenses
from 89% of the net patient service income in the 1995 fiscal year to 73% of net
patient service income in the 1996 fiscal year. Expenses include compensation
expense, selling, general and administrative expense, interest expense and
depreciation and amortization expense. Compensation expense increased from
$797,356 in the 1995 fiscal year to $1,910,452 in the 1996 fiscal year because
of increased compensation to employees in the 1996 fiscal year reflecting a full
year of operations, as well as the replacement in the 1996 of certain leased
personnel with Company employees. Selling, general and administrative expense
declined from $1,363,525 in the 1995 fiscal year to $1,197,027 in the 1996
fiscal year because of the closing of two clinics during the 1996 fiscal year,
resulting in a reduction of certain personnel, supply and rent expenses.
Interest expense increased from $38,600 in the 1995 fiscal year to $130,928 in
the 1996 fiscal year because of increased borrowing in 1996 and a loan broker's
fee included in the 1996 amount.
Income from operations for the 1996 fiscal year were $869,690 compared
to $260,957 for the 1995 fiscal year. Net income for the 1996 fiscal year was
$1,039,996 compared to $260,959 for the 1995 fiscal year. Net income for the
1996 fiscal year included cancellation of indebtedness income of $281,488, less
related income taxes of $111,190, in connection with the forgiveness of certain
obligations owed by the Company to certain of its stockholders and officers.
Liquidity and Capital Resources
The Company has been funding its capital requirements from operating
cash flow, loans against its accounts receivable, the sale of equity securities
and the issuance of equity securities in exchange for assets acquired and
services rendered. A significant portion of the revenues of the Company are for
services that are paid by third party payors, including insurance companies and
Medicare. As is typical in the health care industry, the Company receives
payment after the services are rendered. Such payment is based, in part, on
established cost reimbursement
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principles and is subject to audit and retroactive adjustment. While waiting for
payment from third party payors, the Company is required to fund its expenses
from internal, and to the extent available, external financing sources.
Because of the often substantial delay between billings and
collections, patient care receivables (net of allowances) constitute a
substantial portion of the Company's assets, approximately 90% of its current
assets at May 31, 1996 and 87% of its current assets at November 30, 1996. The
Company has recently implemented electronic billing and installed a new
computerized system in order to better track its patient care receivable. The
Company expects that this system will provide a more timely and accurate profile
of its patient care receivable, including amounts, aging and allowances for
doubtful accounts. Net patient care receivable increased by approximately 59%,
to $5,028,691 at November 30, 1996 from $3,158,325 at May 31, 1996, primarily as
a result of the acquisition of three New York City clinics in October 1996, but
also because of an improved patient care receivable system.
In June 1996, the Company was notified that Medicare Part A was
reviewing its CORF facility for Medicare Part A service recipients. This review
is for all of the CORF claims submitted by the Company from May 6, 1996 forward,
and is to verify and assure compliance with all Medicare documentation
requirements. This review has caused a slowdown on Medicare Part A claims
payments. The Company has submitted a written corrective action plan to Medicare
Part A which was accepted in August 1996. The Company has implemented this plan
and currently is submitting claims and documentation in accordance with it. The
Company anticipates the review being lifted in March 1997. As a consequence of
the review, the Company has experienced certain cash-flow difficulties, but
these difficulties are expected to be eliminated upon termination of the review.
In September 1996, the Company obtained a term loan in the amount of
$400,000 from a bank to fund the acquisition of the Company's New York City
clinics. This loan bears interest at the lender's prime rate plus one percent
and matures on March 31, 1998. The Company also has a revolving line of credit
in the amount of $200,000 with the same bank. Also in September 1996, the
Company obtained a loan in the amount of $1,250,000, collateralized by
$2,600,000 of its accounts receivable. Under the terms of the loan, the Company
is obligated to repay the lender $1,912,500, plus twenty percent of the
receivables collected over the $1,912,500. The lender is responsible for the
servicing and collecting of the accounts receivable designated as collateral. A
$425,000 receivables financing facility of the Company expired in November 1996
and was not renewed.
In January and March 1996, the Company completed the private placement
of an aggregate of 82,200 shares of Common Stock at a gross sales price of
$439,000. The Company issued 54,237 shares of Common Stock in connection with
the acquisition of its New York City clinics in October 1996. In connection with
the acquisition of its Long Island, New York clinics in December 1996, the
Company issued 6,000 shares of Common Stock, and committed to issue an
additional 126,190 shares (increasing to 160,287 shares if the price per share
of Common
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Stock does not equal or exceed $7.00 at any time prior to the eighteen month
anniversary of the acquisition).
In January 1995, the Company acquired its 1st Coast subsidiary, which
owns and operates the Company's North Florida clinics, through the issuance of
400,000 shares of Common Stock. The acquisition agreement provided that if the
fair market value of such shares is less than $1,000,000 within 30 days of
January 16, 1997, the Company will issue additional shares of Common Stock
valued in the amount of the shortfall. The agreement also obligates the Company
to issue to the seller of 1st Coast additional shares of Common Stock based upon
the pre-tax earnings of 1st Coast in each of the four years following the
acquisition.
Subject to the lifting of the Medicare Part A review discussed above,
the Company believes that its cash flow, together with its available borrowing
facilities, will be sufficient to fund its operations at their current levels
for the foreseeable future. In order to pursue its strategy of growth through
acquisitions, and to enhance services at its existing clinic facilities, the
Company will require additional sources of capital. The Company continues to
explore opportunities to raise private equity capital, although the Company has
no current arrangements to do so and there can be no assurance that its efforts
to raise private capital will be successful. If the Company is unable to raise
additional capital, its future operations and growth strategy may be materially
adversely affected.
In June 1995, the Company exchanged gold ore valued at $5,000,000 for
6,000,000 shares of common stock of Accord Futronics Corporation ("Accord"). The
gold ore was acquired in May 1993 from one of the Company's principal
stockholders in exchange for 1,350,000 shares of Common Stock. The Company has
the right to receive a royalty of 12 1/2% of the net mining income from
processing of the gold ore transferred to Accord. However, Accord is not
currently mining the gold ore, and the Company cannot predict when, if ever,
such mining will occur. The book value of the Accord common stock constitutes
approximately 39% of the book value of the Company's assets as of November 30,
1996. No current financial information is available for Accord, and, if the
Company cannot obtain such information, the Company may write down all or a
substantial portion of its investment in Accord. The Company does not anticipate
that such a write down would materially adversely affect the Company's medical
business or its growth and profitability in the medical business management
field.
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BUSINESS
BUSINESS DESCRIPTION
Background
Oak Tree Medical Systems, Inc., a Delaware corporation (the "Company"),
was incorporated in Delaware on May 27, 1986, as Oak Tree Construction
Computers, Inc. From 1986 through 1990, the Company was engaged in the sale of
computer systems for the construction industry. For a number of years
thereafter, the Company was inactive. The Company changed its name to Oak Tree
Medical Systems, Inc. in June 1994. Since January 1995, the Company has been
engaged in the business of owning, operating and managing physical therapy
clinics, comprehensive outpatient rehabilitation facilities (CORF) and related
medical practices.
The Company has operations in Florida and New York. In Florida, the
Company's physical therapy and medical care services are provided through the
two wholly owned subsidiaries: Acorn CORF I, Inc., a Nevada corporation
("Acorn"), and Riverside CORF, Inc., a Nevada corporation ("Riverside"), both
acquired in 1995. Acorn owns and operates three physical therapy clinics and a
related medical practice specializing in neurology and physiatry; Riverside owns
and operates a comprehensive outpatient rehabilitation facility. The Company
also owns three New York City based physical therapy centers acquired in October
1996, and four Long Island, New York based physical therapy centers acquired in
December 1996. The New York clinics are operated through Oak Tree Medical
Management, Inc., a subsidiary of the Company.
Growth Strategy
The Company believes that the provision of physical therapy and related
rehabilitative services represents a growth area in the health care industry.
Purchasers and providers of health care services such as employers, insurance
companies and health maintenance organizations are seeking to save on
traditional health care services. Physical therapy and rehabilitation services
are cost-effective in that they may prevent short-term disabilities from
becoming chronic conditions, and may accelerate recovery from surgery and
musculoskeletal injuries. Changes in both public and private health insurance
reimbursement have encouraged early hospital discharge, another trend which
promotes the need for outpatient physical therapy services. Also, the aging of
the U.S. population has increased demand for rehabilitation programs to treat
chronic conditions of the elderly.
The Company's strategy is to take advantage of these trends to acquire
and integrate a network of physical therapy and rehabilitation centers,
particularly in the Northeastern United States. The Company believes that
attractive acquisition opportunities exist in its industry because of health
care's current cost containment economics, recent legislation that bars health
care practitioners from referring to entities in which they have an ownership
interest and the
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resulting professional insecurity among health care practitioners. New
reimbursement schedules and conventions have put particular pressure on the
traditional private practice of medicine and allied health care services.
Government health programs, private insurers and health maintenance type
organizations have in many cases reduced payments to health care professionals
and in some cases have substituted capitation or fixed reimbursement for the
traditional "fee for service" payments.
In this environment, the importance of conducting health care
practices, including physical therapy services, in an efficient and
cost-effective manner has increased. By centralizing non-medical activities,
such as administration, accounting, billing, marketing, procurement and human
resources, health care providers can reduce unit costs, enhance efficiencies and
promote profitability. Centralized management of medical practices also
facilitates identification, negotiation and consummation of advantageous
contractual relationships with health maintenance organizations, preferred
provider organizations, hospitals, nursing homes, school systems and similar
institutions. Referrals and contract work from such organizations and
institutions may be essential to the long-term viability of providers of
outpatient rehabilitative services.
The Company seeks to identify and acquire individual or small groups of
physical therapy centers and allied health care service providers, whose
owner-managers are prepared to sell at prices that the Company considers
attractive in exchange for an affiliation with a larger and geographically more
diverse public company. In general, sellers would continue to manage their
formerly owned centers as employees or consultants of the Company, under
incentive arrangements that in part would tie compensation to the financial
success of the acquired clinics. The Company intends where possible to structure
its acquisitions with consideration payable at least in part in stock of the
Company. Use of stock based consideration should preserve cash, avoid
over-leveraging the Company with debt and align the interests of the
seller-managers of the clinics with those of the Company.
The Company has targeted the Northeastern region of the United States,
and particularly the New York metropolitan area, for expansion. In the last
several months, the Company has made two acquisitions of physical therapy
centers and related assets in this area. See "Existing Facilities--New York
Clinics." There can be no assurance, however, that the Company will continue to
identify rehabilitation service providers for acquisition on terms acceptable to
the Company or that the Company will have the resources successfully to
consummate such acquisitions.
Existing Facilities
Florida Therapy Centers
In January 1995, the Company acquired certain of the assets of 1st
Coast Physical Medicine Associates, Inc. ("1st Coast"), a Jacksonville, Florida
based chain of five physical therapy centers and an attendant physiatry and
neurology medical practice. The clinics were
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purchased for 400,000 shares of Common Stock, subject to certain adjustments,
and additional stock payable based upon the future earnings of 1st Coast. At the
end of 1994 and beginning of 1995, the Company also purchased two CORF licenses
to provide outpatient rehabilitative services for Medicare patients in the
Jacksonville, Florida area. See "Government Regulation--CORF Licenses."
Subsequently, between March 1995 and March 1996, the Company closed three of the
Jacksonville clinics and opened one new expanded clinic. In connection with the
acquisition of 1st Coast, the Company entered into a three-year employment
agreement with 1st Coast's founding physician and selling shareholder, who
continues to serve as 1st Coast's medical director.
New York Clinics
In October 1996, the Company acquired three New York City based
physical therapy clinics for cash and assumed debt totaling $900,000. The
clinics had combined revenues of approximately $2.5 million in their most
recently completed year of operation. Included in the acquisition was a contract
for the provision of physical therapy services to a county hospital in
Westchester, New York. In connection with the acquisition, the Company entered
into a three-year employment agreement with the seller of the clinics, a
licensed physical therapist who continues to serve as the director of operations
of the New York City clinics.
In December 1996, the Company acquired four Long Island, New York based
physical therapy clinic and an affiliated medical billing company. The clinics
and billing company were acquired for cash and stock in the amount of $1.5
million, plus additional consideration to be paid if certain performance
benchmarks are satisfied. The clinics had combined billings of approximately $3
million in their most recently completed fiscal year. Each of the clinics shares
on-site facilities with state-of-the-art health and fitness clubs. Certain of
the individual sellers will continue to operate the clinics pursuant to
employment arrangements with the Company. The sellers of the Long Island clinics
have the right to repurchase these clinics in the event of a change of control
of the Company (as defined) occurring within two years of the acquisition date.
In compliance with the laws of the State of New York, all treatment
related activities at the Company's New York City and Long Island clinics are
conducted by Oak Tree Medical Practice, P.C. ("Oak Tree P.C."), an independently
owned professional corporation. The Company has entered into agreements with Oak
Tree P.C. pursuant to which the Company provides to Oak Tree P.C. all
administrative and management services and leases to Oak Tree P.C. facilities
and equipment. Because of the significant influence and control exercised by the
Company over Oak Tree P.C. (other than in respect of patient treatment), the
financial results of Oak Tree P.C. are consolidated with those of the Company.
Physical Therapy Services
Physical therapy aids in the restoration of patients who have been
disabled by injury or disease or recovering from surgery. The Company's physical
therapy centers offer preventive,
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rehabilitative and pre- and post-operative care for neuromuscular,
musculoskeletal and cardiovascular injury or disease. These may include a
variety of orthopedic-related disorders, sports-related injuries, neurologically
related injuries, motor vehicle injuries and work-related injuries.
Patients are referred to one of the Company's rehabilitation facilities
by physicians. Licensed physical therapists evaluate each patient and develop a
program of rehabilitation to achieve the patient's rehabilitation goals.
Treatments may include traction, ultrasound, electrical stimulation, therapeutic
exercise, heat treatment and hydrotherapy. Patients are usually treated for one
hour per day, three days per week over a period of two to five weeks. Where
appropriate, patients are provided post treatment home maintenance and exercise
programs.
Certain of the Company's clinics offer specific programs for injured
workers compensation patients. The clinic will evaluate the worker's physical
condition and capacity to perform the requirements of his employment. This
evaluation may be used by insurers to estimate the extent of rehabilitation
treatment or as a basis for settlement of disability claims. Thereafter, the
clinic will prescribe and implement a course of "work conditioning" (hardening),
which includes graduated exercise and work stimulation therapies. Patients in a
work conditioning program gradually build up their treatment time from three to
seven hours per day, five days per week for a four to six week period.
Marketing
Because physicians are the primary source of referrals to the Company's
clinics, the clinics individually focus their marketing efforts on local
orthopedic surgeons, neurosurgeons, physiatrists, occupational medicine
practitioners, and general practitioners. On a corporate level, the Company
seeks to establish referral relationships with health maintenance organizations,
preferred provider organizations, industry and case managers and insurance
companies. The Company is also pursuing contractual relationships for the
provision of rehabilitative services with medical institutions, schools, nursing
homes and home health care companies.
Reimbursement, Billing and Collection
The Company receives payment for services from Medicare, commercial
insurance carriers, worker's compensation insurance, managed care providers and
individuals. Medicare reimbursement for outpatient physical and/or occupational
therapy furnished by a Medicare-certified rehabilitation agency is equal to the
lesser of the providers's "reasonable costs" as allowed under Medicare
regulations or the providers's customary charges. Medicare's allowed costs are
typically established annually and are published according to so-called CPT
procedure codes. Medicare will pay up to 80% of the allowed reasonable costs,
with the balance payable either by the patient or by "Medigap" coinsurance.
Medicare regulations require that a physician must certify the need for physical
therapy services for each patient and that these services must be provided in
accordance with an established plan of treatment which is periodically revised.
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State Medicaid programs generally do not provide coverage for outpatient
physical therapy, and, therefore, Medicaid is not a material payor for the
Company.
Commercial insurance companies are also billed according to the CPT
procedure codes, but follow their own payment schedules. Managed care providers
generally pay in accordance with their contractual arrangements with the
Company's clinics. Both commercial insurers and managed care providers usually
require the patient to pay an annual deductible amount and to make a per visit
co-insurance payment. Workers' compensation laws generally require employers to
pay for employees' costs of medical rehabilitation, lost wages, legal fees and
other costs associated with work-related injuries and disabilities and, in
certain jurisdictions, mandatory vocational rehabilitation. These benefits are
required to be offered to employees without any deductibles, co-payments or cost
sharing.
Most third-party payors (other than workman's compensation and personal
injury payors, which are considerably slower) pay between 21 and 60 days after
the Company's submission of its bill. However, Medicare and other payors may and
sometimes do challenge or reject the Company's bills, for submission errors or
otherwise, and resolution of such challenges or rejections may significantly
delay payment to the Company. The Company also has the right to dispute and
request review of payments made by third-party payors, which on occasion will
result in an increase in such payments.
In June 1996, the Company was notified that Medicare Part A was
reviewing its CORF facility for Medicare Part A service recipients. This review
has resulted in a slow-down in Medicare payments. The Company has submitted a
written corrective action plan to Medicare Part A which was accepted in August
1996. The Company has implemented this plan and currently is submitting claims
and documentation in accordance with it. The Company anticipates the review
being lifted in March 1997.
Government Regulation
The health care industry is subject to federal, state and local
regulations. The Company is also subject to laws and regulations relating to
business corporations generally. The Company believes its operations are in
material compliance with applicable law. Nevertheless, because of the complexity
of the statutes and regulations in the health care area, many of which have not
been subject to judicial or regulatory interpretation, there can be no assurance
that aspects of the Company's operations will not be subject to legal or
administrative challenge. Also, the health care regulatory environment has been
in the past and is likely to be in the future subject substantial and ongoing
change. Accordingly, there can be no assurance that future changes in the law
will not restrict or otherwise adversely affect the Company's business.
The laws of a number of states, including New York where a substantial
number of the Company's clinics are located, prohibit a corporation from
engaging in the practice of health care, including physical therapy, or from
exercising control over professionals engaged in the health care field. The
Company believes that its ownership of physical therapy clinics and the
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provision of equipment, location, managerial, administrative and non-medical
support services to the clinics does not constitute the corporate practice of
physical therapy, since licensed physical therapists exercise complete control
over the provision of all physical therapy services. Nevertheless, there can be
no assurance that the statutes prohibiting the corporate practice of physical
therapy services will not be construed or modified in the future to prohibit the
operations of the Company as they are presently being conducted.
The Company's clinics are certified Medicare providers. See "--CORF
Licenses" below. In order to receive Medicare reimbursement, a clinic must meet
the applicable conditions for participation prescribed by the Department of
Health and Human Services. These conditions relate to the type of facility, its
equipment, recordkeeping, personnel and standards of medical care, as well as
compliance with all state and local laws. Clinics are subject to periodic
inspections to determine compliance. See "Reimbursement, Billing and Collection"
above.
The Social Security Act imposes criminal sanctions and/or penalties
upon persons who pay or receive any "remuneration" in connection with the
referral of Medicare or Medicaid patients. The "anti-kickback" laws prohibit
providers and others from offering or paying (or soliciting or receiving),
directly or indirectly, any remuneration to induce or in return for making a
referral for, or ordering or recommending (or arranging for ordering or
recommending) a Medicare-covered service. Each violation of these rules may be
punished by a fine (of up to $250,000 for individuals and $500,000 for
corporations, or twice the pecuniary gain to the defendant or loss to another
from the illegal conduct) and or imprisonment for up to five years. In addition,
a provider may be excluded from participation in Medicaid or Medicare for
violation of these prohibitions through an administrative proceeding, without
the need for any criminal proceeding. Many states have similar laws, which apply
whether or not Medicare or Medicaid patients are involved.
Because the anti-kickback laws have been broadly interpreted to apply
where even one purpose (as opposed to a sole or primary purpose) of a payment is
to induce referrals, they may limit the relationships which the Company may have
with referral sources, including ownership relationships. The anti-kickback laws
may also apply to acquisitions of physician-owned physical therapy clinics, to
the extent that any portion of the purchase price or terms of payment are deemed
to be an inducement to the physician to make referrals to the clinic. The
federal government has published regulations that provide "safe harbors" for
certain transactions that will not be deemed to violate the federal
anti-kickback laws. These include provisions relating to the sale of
practitioner practices, management and personal service agreements, employee
relationships and referrals within group practices. The Company believes that
its operations, including its clinic acquisitions, have been in compliance with
the anti-kickback laws and intends to structure its future operations and
acquisitions to maintain such compliance.
Another federal law, known as the "Stark Law" was expanded in 1993 to
impose a prohibition on referrals of Medicare or Medicaid patients for health
care services, including physical therapy services, by physicians who have a
financial relationship with the provider furnishing the services. With certain
specified exceptions, the referral prohibition applies to any
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physician who has (or whose immediate family member has) a direct or indirect
ownership or investment interest in, or compensation relationship with, a
provider of "designated health services," including physical therapy services.
The Stark law is broad and may include financial transactions resulting from a
clinic acquisition. The law also prohibits billing for services rendered
pursuant to prohibited referrals. Penalties for violation include denial of
payment for the services, significant civil monetary penalties, and exclusion
from Medicare and Medicaid. Several states have enacted laws similar to the
Stark law, but which are not restricted to Medicare and Medicaid patients,
including Florida's Patient Referral Act of 1992 and provisions of New York's
Public Health Law. The Company believes that its operations and acquisitions
have been and will continue to be in compliance with the Stark law and related
state statutes. However, because of the breadth and ambiguity of these statutes,
the Company could in the future be required to modify its relationships with
referring physicians.
There also exist federal and state statutes that impose civil sanctions
and substantial criminal penalties on health care providers that fraudulently or
wrongfully bill governmental and other third-party payors for health care
services. The federal statute prohibiting false billing permits private persons
to bring a civil action in the name of the United States to remedy violations of
the statute. The Company believes that it is in compliance with the fraudulent
billing statutes. However, billing for health care services is technical and
complex, and there can be no assurance that the Company's billing practices will
not be challenged or scrutinized by government authorities.
[In 1992, the State of Florida passed a law imposing a fee schedule
limitation on all providers of "designated health services," which is defined to
include physical therapy services and comprehensive rehabilitative services.
According to the law, which was effective July 1, 1992, payment for such
services are limited to no more than 115% of the Medicare limiting charge.
Following a challenge by affected parties in the health care industry, the law
was overturned by a state trial court. It is not presently known whether the
State of Florida or the Florida legislature intends to seek to reinstate the law
or to modify the statue to survive judicial challenge. The Company owns and
operates three clinics and related medical practices in Florida.]
CORF Licenses
CORF ("Comprehensive Outpatient Rehabilitation Facility") licenses
permit a licensed entity to provide specific comprehensive rehabilitative
services on an outpatient basis for Medicare patients and seek reimbursement on
the basis of reasonable cost under Medicare Part A. (In contrast, certified
providers of rehabilitative services that do not have a CORF license are
reimbursed under Medicare Part B according to a prescribed fee schedule.) CORF
licenses and certifications are granted by the United States Department of
Health and Human Services ("HHS") in conjunction with related state agencies,
such as the Florida Department of Health and Rehabilitative Services and the New
York State Department of Health. Licenses are granted following an application
and review procedures. These procedures require compliance with various federal
and state statutes and regulations relating to the provision of health care
services,
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including facility operations and patient care procedures. Once issued, a CORF
license is a tangible asset of the licensed facility. It may be transferred for
value, upon application by and review of the transferee by HHS and the relevant
state agencies.
In 1995, the Company purchased two CORF licenses. These licenses were
granted for physical and medical rehabilitation in the State of Florida and
presently are applicable to the Company's Jacksonville and St. Augustine
facilities.
Investment in Accord Futronics Corp.
In May 1993, the Company acquired 50,000 tons of gold ore from Nevada
Minerals Corporation in exchange for the issuance of 1,350,000 shares of common
stock. The ore was appraised as having a $5,000,000 value. The Company
subsequently formed a wholly owned subsidiary, Aurum Mining Corporation
("Aurum"), with the gold ore as its only asset. In June 1995, the Company
exchanged the stock of Aurum for 6,000,000 shares of Accord Futronics Corp.
("Accord"), an unaffiliated privately-held company with other mining related
assets. The Company has the right to receive a royalty of 12 1/2% of the net
mining income from processing of the gold ore transferred to Accord. However,
Accord is not currently mining the gold ore, and the Company cannot predict
when, if ever, such mining will occur. In connection with the exchange of Arum
stock for Accord stock, the Company granted to Accord an option, expiring on
June 21, 1997, to purchase up to 50,000 shares of Common Stock at an exercise
price of the lesser of $2.00 per share or 50% of the quoted market price for the
shares.
COMPETITION
The health care industry generally and the physical therapy business in
particular are highly competitive. In addition to corporate-owned,
physician-owned and other private physical therapy clinics, the Company competes
with the physical therapy departments of hospitals and area chiropractic
practices. The competitive factors in the physical therapy business are quality
of care, cost, treatment outcomes, convenience of location and ability to meet
the needs of referral and payor sources. Certain of the Company's competitors
may have substantially greater financial, marketing, development and other
resources than the Company. Both larger and smaller competitors may have
individual facilities with greater treatment resources than individual,
competing facilities operated by the Company. Also, the industry is subject to
continuous changes regarding the provision of services and the selection of care
providers, and certain competitors may be more successful than the Company in
adapting to these changes in a timely and effective manner.
EMPLOYEES
As of December 31, 1996, the Company has 57 full-time employees and 59
part-time employees. The Company also hires independent consultants for its
medical service operations from time to time.
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PROPERTIES
The Company's headquarters office is located at 2 Gannett Drive, Suite
215, White Plains, New York 10604. This office contains approximately 2,400
square feet of space subleased by the Company at a monthly rental of $5,000. The
terms of the sublease are flexible to allow the Company to relocate with minimal
notice. The Company believes this office is adequate for its current operations.
In addition, the Company rents space for its rehabilitative and medical
service operations. Set forth below is certain information concerning the
Company's leased facilities as of December 31, 1996. The Company believes these
facilities are adequate for its operations.
Square Monthly Expiration
Location Footage Rent of Lease
- -------- ------- ---- --------
1725 Tenbroek Avenue 2,200 $2,000.00 11/30/01
Bronx, New York
163-03 Horace Harding Expressway 7,200 $16,050.00 11/30/97
Queens, New York
250 West 100th Street 2,200 $4,012.50 11/30/03
New York, New York
10 Gordon Drive 1,600 $4,000.00 2/28/01
Syosset, New York
70 Maple Avenue 4,200 $12,000.00 11/30/99
Rockville Centre, New York
1500 Paerdegat Avenue 1,800 $4,000.00 12/31/99
Brooklyn, New York
235 Mill Street 2,400 $3,500.00 12/31/00
Lawrence, New York
1950 Miller Street 2,200 $1,900.00 Month to Month
Orange Park, Florida
1100 S. Ponce De Leon 2,250 $3,286.00 10/31/97
St. Augustine, Florida
9453 Phillips Avenue 12,000 $12,400.00 3/31/03
Jacksonville, Florida
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LEGAL PROCEEDINGS
Medbrook Corporation v. Dennie, Case No. 95-4534 CA (4th Judicial
Circuit, Duval County, Florida). Plaintiffs in this action have sued the
Company's 1st Coast subsidiary and Dr. Ronald R. Dennie, the medical manager of
1st Coast's operations, alleging that Dr. Dennie is in violation of a covenant
not to compete with Medbrook Corporation ("Medbrook"). Medbrook had managed the
1st Coast operations prior to their sale to the Company by Dr. Dennie. Plaintiff
seeks damages and injunctive relief. The defendants have denied liability and
intend to vigorously contest the action.
Ludwig v. 1st Coast Rehabilitation, Inc., Case. No. 96-845-CIV-J-20A
(U.S.D.C. Middle District of Florida). Plaintiff in this action has alleged
sexual harassment by the former operations manager of the Company's
Jacksonville, Florida facility and is seeking unspecified damages. The
defendants have denied liability. The Company believes that any liability in
this action will be covered by insurance.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth the names and ages of the members of the
Company's Board of Directors and its executive officers and key employees and
the positions with the Company held by each.
Name Age Position
---- --- --------
William Kedersha 52 Chief Executive Officer and Director
Michael J. Gerber 53 President, Secretary and Director
Henry Dubbin 82 Vice Chairman, Vice President and
Director
Gary Danziger 57 Director of Physical Medicine and
Rehabilitative Services
Dr. Ronald R. Dennie 54 Medical Director
WILLIAM KEDERSHA has been Chief Executive Officer and a director of the
Company since September 1996. Previously, he served as a consultant to the
Company since March 1996. Prior to that, from 1988, Mr. Kedersha was chairman
and founding principal of Corporate Planning Services, Inc., an employee medical
benefit consulting company.
MICHAEL J. GERBER has been President and a director of the Company
since September 1995, and was appointed Secretary of the Company in August 1996.
From February 1990 to September 1995, Mr. Gerber was the president of Medical
Development Services, Inc., a subsidiary of Medcorp Consulting and Brokerage
Services, Inc. and a developer of specialty outpatient facilities. From November
1990 to September 1993, Mr. Gerber was also Chief Executive Officer of
Westchester Healthcare Network, a health care network comprised of a health
maintenance organization, four primary care centers, a teaching hospital and a
psychiatric hospital.
HENRY DUBBIN has been Vice Chairman of the Board, Vice President and a
director of the Company since May 1993. Mr. Dubbin currently is the President of
Nevada Minerals Corporation, Inc. From 1955 to 1992, Mr. Dubbin was associated
with Canaveral International, Inc., a diversified public company, most recently
as Chairman of the Board.
27
<PAGE>
GARY DANZIGER has been Director of Physical Medicine and Rehabilitative
Services of the Company since October 1996. Prior to that, from October 1994,
Mr. Danziger was owner-manager of the Company's New York City clinics. He has
over thirty years experience as a registered physical therapist.
DR. RONALD R. DENNIE has been Medical Director of the Company since
January 1995. Prior to that, Dr. Dennie was founder and medical director of the
predecessor to the Company's 1st Coast subsidiary. He has also served as Medical
Director of several organizations: Memorial Regional Rehabilitation Center, Pain
Management Center, Healthcare Rehabilitation Center, and Rehabilitation
Institute of West Florida, Inc.
Mr. Irwin Bosh Stack was Chairman of the Board, Secretary and a
director of the Company from its incorporation in May 1986 until August 1996,
and Chief Operating Officer of the Company from May 1993 until August 1996. He
resigned all of his positions with the Company in August 1996.
The Company's officers are elected annually by the Board of Directors
and serve at the discretion of the Board. The Company's directors hold office
until the next annual meeting of stockholders or until their successors have
been duly elected and qualified.
EXECUTIVE COMPENSATION
The following is a summary of compensation paid to the executive
officers of the Company during the last three fiscal years.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------
Annual
Compensation Long Term Compensation
- ----------------------------------------------------------------------------------------------------------------------------
Name and Principal Position Year
- ----------------------------------------------------------------------------------------------------------------------------
Securities
Restricted Stock Underlying
Salary Awards Options
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Irwin Bosh Stack 1994 $85,000 -0- -0-
Chairman of the Board, Chief 1995 $35,000 -0- 250,000
Operating Officer and Secretary(1) 1996 -0- -0- -0-
- ----------------------------------------------------------------------------------------------------------------------------
Michael Gerber 1994 -0- -0- -0-
President and Secretary 1995 -0- -0- -0-
1996 -0- -0- 55,000
- ----------------------------------------------------------------------------------------------------------------------------
Henry Dubbin 1994 $72,500 -0- -0-
Vice Chairman and Vice President(1) 1995 -0- -0- 250,000
1996 -0- -0- -0-
============================================================================================================================
</TABLE>
28
<PAGE>
(1) Salaries for the fiscal year ended May 31, 1994, were accrued. Of the
amounts due, $63,500 and $54,372 were not paid and were converted into
notes payable to Messrs. Stack and Dubbin, respectively. The notes were
subsequently canceled by the note holders.
The following tables set forth the individual option grants during the
last fiscal year to the named executive officers and the fiscal year end value
of such options.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise Expiration Date
Name Options Employees Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael J. Gerber 5,000 25% $1.66 September 7, 1997
50,000 $2.00 November 6, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL
AND FISCAL YEAR-END OPTIONS/SAR VALUES
- ---------------------------------------------------------------------------------------------------------------------------------
# of Unexercised Options/SARs at Value of
Fiscal Year-End Unexercised In-
the-Money
Options/SARs at
Shares Acquired on Value Fiscal Year-
Name Exercise Realized Exercisable Unexercisable End(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Irwin Bosh Stack 0 $0 250,000 0 $375,000
- ---------------------------------------------------------------------------------------------------------------------------------
Henry Dubbin 0 $0 250,000 0 $375,000
- ---------------------------------------------------------------------------------------------------------------------------------
Michael J. Gerber 0 $0 5,000 50,000 $27,500
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Value is calculated on the basis of the difference between the option
exercise price and the average of the bid and asked prices for the Common
Stock at May 31, 1996, as quoted on the over-the-counter market, multiplied
by the number of shares underlying the option.
Employment Agreements
The Company has an employment agreement with William Kedersha,
effective as of December 3, 1996, pursuant to which Mr. Kedersha serves as Chief
Executive Officer of the Company. The agreement has a three-year term (and is
subject to automatic renewal for successive one-year periods unless terminated
in advance by either party). Under the agreement, Mr. Kedersha receives an
annual salary of $150,000 (of which $50,000 is deferred) and an annual bonus of
5% of the first $2,000,000 of the annual net income of the Company, 2 1/2% of
the next $10,000,000 of net income and 1% of all net income thereafter, provided
the Company has annual net income of at least $500,000. In addition, the
agreement grants Mr. Kedersha ten year options to purchase
29
<PAGE>
375,000 shares of Common Stock at a per share exercise price equal to $1 11/16.
These options become exercisable on the earlier to occur of (i) a fiscal year in
which the Company has (x) $10,000,000 in gross revenue and (y) either $750,000
in pre-tax income (including extraordinary gains) or $500,000 in pre-tax income
(excluding extraordinary gains); (ii) a fiscal year in which the Company has
$15,000,000 in gross revenue; (iii) the fifth anniversary of grant; or (iv) the
occurrence of a Change of Control (as defined).
Upon a Change of Control, Mr. Kedersha is entitled to a lump sum
payment of $1,000,000, reduced by an amount equal to (I) the number of options
granted to Mr. Kedersha under the employment agreement, multiplied by (II) the
positive difference, if any, between (x) the per share market value of the
Common Stock on the date of the Change of Control, in the case of previously
unexercised options, or the date of exercise, in the case of previously
exercised options, and (y) the exercise price of the options. If Mr. Kedersha's
employment is terminated for any reason, he is entitled to receive a severance
payment of up to $400,000, depending on the Company's gross revenues in the year
prior to termination. If Mr. Kedersha's employment is terminated without Cause
(as defined) or Mr. Kedersha terminates his employment for Good Reason (as
defined), he is entitled to receive an additional amount equal to
two-and-one-half times his base salary and bonus, if the termination occurs in
the first two years of his employment, or one times his base salary and bonus,
if the termination occurs in any year thereafter.
The Company has an employment agreement with Henry Dubbin expiring June
1998, providing for a salary of $72,500 per year. For fiscal 1994, salary due
Mr. Dubbin in the amount of $54,375 was converted into a note, which was
subsequently cancelled by Mr. Dubbin. Mr. Dubbin waived his salary for the 1995
and 1996 fiscal years.
The Company had an employment agreement with Irwin Bosh Stack, the
Company's former Chief Executive Officer, providing for a salary of $85,000 per
year. For fiscal 1994, salary due Mr. Stack in the amount of $63,500 was
converted into a note, which was subsequently cancelled by Mr. Stack. Mr. Stack
took a reduced salary of $35,000 for the 1995 fiscal year and waived his salary
for the 1996 fiscal year. Mr. Stack resigned all positions with the Company on
August 29, 1996.
In January 1995, in consideration of past services, the Company granted
to each of Messrs. Stack and Dubbin options to acquire 250,000 shares of Common
Stock, exercisable at $2.00 per share until January 1, 1999.
A subsidiary of the Company has entered into an employment agreement
with Dr. Ronald R. Dennie in connection with its acquisition of 1st Coast. The
agreement is for a period of three years expiring in 1998, and provides for
salary payments of $370,000 per year. In addition, Dr. Dennie may be entitled to
stock options and bonuses, as determined by the Board of Directors, depending on
his personal productivity levels. The Company and Dr. Dennie are presently in
negotiation concerning modifications to his employment arrangements.
30
<PAGE>
Gary Danziger has a three-year employment agreement with the Company
expiring in October 1999 which provides for an annual salary of $175,000 and
incentive bonuses.
1994 Performance Equity Plan
In February 1994, the Company adopted the 1994 Performance Equity Plan
("1994 Plan") covering 600,000 shares of the Company's Common Stock pursuant to
which officers, directors, key employees and consultants of the Company are
eligible to receive incentive or non-qualified stock options, stock appreciation
rights, restricted stock awards, deferred stock, stock reload options and other
stock based awards. The 1994 Plan will terminate at such time no further awards
may be granted and awards granted are no longer outstanding, provided that
incentive options may only be granted until February 16, 2004. The 1994 Plan is
administered by the Board of Directors, which determines the selection of
participants, allotment of shares, price, and other conditions of purchase of
awards and administration of the 1994 Plan.
As of September 1, 1995 no options under the 1994 Plan were
outstanding.
Non-Plan Options
The Company has granted various non-plan options to purchase an
aggregate of approximately [930,000] shares of Common Stock. The options granted
to current and formers officers and directors of the Company are as set forth
below.
Name Number of Shares Exercise Price Expiration Date
- ---- ---------------- -------------- ---------------
Michael J. Gerber 5,000 $1.66 September 7, 1997
50,000 $2.00 November 6, 2002
Henry Dubbin 250,000 $2.00 January 1, 1999
Irwin Bosh Stack 250,000 $2.00 January 1, 1999
William Kedersha 375,000 $1.6875 December 3, 2006
The Company has granted to Dr. Ronald R. Dennie, medical director of
the Company's Acorn CORF subsidiary, an option to purchase up to 160,000 shares
of Common Stock at exercise prices ranging from $2.50 to $4.50 per share. The
option vests in four equal amounts of 40,000 shares of Common Stock on August
28, 1996, 1997, 1998 and 1999, provided that Acorn CORF has $850,000 in pre-tax
earnings related to Dr. Dennie's efforts in the respective year. A portion of
the option, once vested, is exercisable for only one year. The option expires in
its entirety upon the termination of Dr. Dennie's employment.
31
<PAGE>
Expenses and Meetings
All officers and directors will be reimbursed for any expenses incurred
on behalf of the Company. Directors, other than Company officers, will be
reimbursed for expenses pertaining to attendance at meetings of the Company's
Board of Directors, including travel, lodging and meals.
Indemnification of Officers and Directors
Under the Bylaws of the Company, officers and directors of the Company
and former officers and directors are entitled to indemnification from the
Company to the full extent permitted by law. The Company's Bylaws and the
Delaware General Corporation Act generally provide for such indemnification for
claims arising out of the acts or omissions of Company directors and officers
(and certain other persons) in their capacity as such, undertaken in good faith
and in a manner reasonably believed to be in, or not opposed to, the best
interests of the Company and, with respect to any criminal action or
proceedings, had no reasonable cause to believe that his conduct was unlawful.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1993, the Company acquired 50,000 tons of gold ore from Nevada
Minerals Corporation, Inc. ("Nevada Minerals") in exchange for the issuance of
1,350,000 shares of restricted common stock of the Company. Nevada Minerals is
majority-owned and controlled by Henry Dubbin. The ore was appraised as having a
$5,000,000 value. In June 1994, the Company formed a wholly owned subsidiary,
Aurum Mining Corporation ("Aurum"), with the gold ore as its only asset. In June
1995, the Company exchanged the stock of Aurum for 6,000,000 shares of Accord
Futronics Corp., an unaffiliated privately-held company with other mining
related assets. See "Business -- Business Description -- Investment in Accord
Futronics Corp."
In May 1993, Nevada Minerals granted Irwin Bosh Stack a transferable
option to acquire 515,625 shares of Common Stock at an aggregate purchase price
of $25,000, exercisable until May 28, 1996. Mr. Stack transferred the option to
FYM, Inc., which exercised the option on March 27, 1995. The exercise
consideration was not paid at the date of transfer or thereafter and certain
obligations under the terms of the option have not been fulfilled. FYM, Inc. is
a wholly-owned corporation of Mrs. Irene Stack, the wife of Mr. Stack. Nevada
Minerals has sued FYM, Inc. for a declaration that the option exercise failed
for lack of consideration and is seeking the return of the shares subject to the
option.
In May 1994, Messrs. Stack and Dubbin converted $63,500 and $54,375,
respectively, of their accrued but unpaid salary for the fiscal year ended May
31, 1994 into promissory notes of the Company due May 31, 1995, bearing interest
at 10% per annum. The principal and interest due on these notes were canceled by
the noteholders.
32
<PAGE>
American Health Resources, LLC, a Florida limited liability company
("AHR"), served as broker for the acquisition by the Company of its New York
City and Long Island, New York clinics and related assets in October and
December 1996. See "Business -- Description of Business --Existing Facilities --
New York Clinics." The wife of the Company's Chief Executive Officer is an
officer of AHR. The brokerage arrangements with AHR were concluded prior to Mr.
Kedersha's employment with the Company. Under the brokerage arrangement, Oak
Tree Medical Management, Inc., a wholly owned subsidiary of the Company, has
agreed to compensate AHR's fees of 10% of the purchase price of the acquisitions
($240,000). $25,000 of the fees was paid to a third party broker and the balance
of $215,000 was converted by AHR into a loan to the Company bearing interest at
10% and maturing on January 15, 1998.
The Company has agreed with the sellers of the Long Island, New York
clinics that, in the event of a change of control (as defined) occurring within
two years of the date of acquisition, the sellers will have the right to
reacquire such clinics and related assets from the Company, subject to certain
conditions. The reacquisition price will be equal to the consideration paid by
the Company for the clinics and related assets, except that if the then fair
market value of the clinics and assets differs from such consideration by more
than 30%, then the reacquisition price will be equal to such fair market value.
In the event that the sellers exercise their option to reacquire, AHR will have
an option to purchase the clinics and related assets from the sellers at a price
equal to 102% of the reacquisition price paid by the sellers to the Company.
The Company subleases its headquarters office on a month to month basis
from Profit Enhancement Group, Inc., a company owned by Mr. Kedersha, certain
members of his family and others. The monthly rental is $5,100. The Company
believes that the terms of this sublease are substantially the same as would
have been obtained arms' length from an unaffiliated third party.
In December 1996, the Company entered into a stock option agreement
with Burton Dubbin, the son of Henry Dubbin. Pursuant to the agreement, Burton
Dubbin received options to acquire 375,000 shares of Common Stock on the same
terms as the options granted to Mr. Kedersha pursuant to his employment
agreement (see "Executive Compensation--Employment Agreements"). The options are
conditioned upon his entering into an employment agreement with the Company
prior to June 3, 1997.
33
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of December 31,
1996 with respect to (i) those persons known to the Company to beneficially own
more than five percent (5%) of the Company's Common Stock, (ii) each director of
the Company, (iii) each executive officer whose compensation exceeded $100,000
in the fiscal year ended May 31, 1996, and (iv) all directors and executive
officers of the Company as a group. Except as indicated below, the stockholders
listed possess sole voting and investment power with respect to their shares.
Number Percentage of
Name and Address of of Outstanding
Beneficial Owner Shares Held Shares Owned
- ---------------- ----------- ------------
William Kedersha(1) -- --
2 Gannett Drive, Suite 215
White Plains, New York 10604
Michael J. Gerber(2) 17,500 0.6%
1544 Plasentia Avenue
Coral Gables, FL 33134
Henry Dubbin(3) 984,391 36%
10155 Collins Avenue, Suite 607
Bar Harbor, FL 33154
Irene Stack(4) 734,391 27%
P.O. Box 4851
Hialeah, FL 33014
Nevada Minerals Corporation 734,391 27%
10155 Collins Avenue, Suite 607
Bar Harbor, FL 33154
All officers and directors as a 1,001,891 37%
Group (3 persons)(5)
(1) Does not include 125,000 shares issuable upon exercise of options acquired
by Mr. Kedersha from Mr. Dubbin after December 31, 1996.
(2) Consist of 17,500 shares of Common Stock subject to currently exercisable
options.
(3) Consist of 734,391 shares of Common Stock owned by Nevada Minerals, a
corporation of which Mr. Dubbin is the majority stockholder and president
and 250,000 shares of Common Stock subject to currently exercisable
options. Subsequent to December 31, 1996, Mr. Dubbin disposed of the
options, including options to acquire 125,000 shares sold to Mr. Kedersha.
34
<PAGE>
(4) Includes 515,625 shares of Common Stock that Mrs. Stack beneficially owns
through her wholly owned corporation, FYM, Inc. These shares were acquired
pursuant to the exercise of an option granted by Nevada Minerals. Nevada
Minerals has sued FYM, Inc. for a declaration that the option exercise
failed for lack of consideration and is seeking the return of the shares.
(5) Includes 262,500 shares of Common Stock subject to currently exercisable
options.
DESCRIPTION OF SECURITIES
The following statements do not purport to be complete and are
qualified in their entirety by reference to the detailed provisions of the
Company's Certificate of Incorporation, as amended, and Bylaws, more
particularly described below, copies of which have been filed with the
Registration Statement of which this Prospectus forms a part.
The authorized Common Stock of the Company consists of 25,000,000
shares of common stock, par value $.01 per share, and 10,000,000 shares of
preferred stock, $.01 per share ("Preferred Stock"). As of January 6, 1997,
there were 2,734,383 shares of Common Stock are outstanding and no shares of
Preferred Stock outstanding.
The holders of the shares of Common Stock have equal ratable rights to
dividends from funds legally available therefor, when, as and if declared by the
Board of Directors of the Company and are entitled to share ratably in all of
the assets of the Company available for distribution to holders of Common Stock
upon the liquidation, dissolution or winding up of the affairs of the Company.
Common stockholders do not have pre-emptive, subscription or conversion rights.
There are no redemption or sinking fund provisions applicable to the Common
Stock. Common stockholders are entitled to one vote per share on all matters to
be voted upon by stockholders. The holders of shares of Common Stock do not have
cumulative voting rights. This means that the holders of more than 50% of all
voting shares voting for the election of directors can elect all of the
directors and, in such event, the holders of the remaining shares voting in such
election may not be able to elect any person to the Board of Directors of the
Company. All of the outstanding shares of Common Stock are, and the shares of
Common Stock offered hereby when issued against the consideration therefor will
be, validly issued, fully paid and non-assessable.
The Company is authorized to issue preferred stock with such
designation, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Company's Common Stock. In
the event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. The Company has no present intention to issue any shares
of its Preferred Stock.
The transfer agent for the Common Stock is Continental Stock Transfer
and Trust Co., Inc.
35
<PAGE>
SELLING STOCKHOLDERS
An aggregate of 347,200 shares of Common Stock, including 205,000
issuable upon exercise of Rights, are being offered hereby. The Company will
receive none of the proceeds of the sale of shares of Common Stock by the
Selling Stockholders.
The following table sets forth the number of shares of Common Stock
beneficially owned by the Selling Stockholders, directly or upon exercise of the
Rights. All such shares are being offered hereby, such that, assuming all shares
offered hereby are sold by the Selling Stockholders, the Selling Stockholders
will not beneficially own any shares following Offering.
Shares of Shares of
Common Common Stock
Name Stock Underlying Rights
- ---- ----- -----------------
I. Joseph Aprile 5,000
Bruce Brantman 2,000
Kenneth L. Farabaugh 2,000
Joe D. Ferguson 1,000
Cory A. Fuller 2,000
Michael J. Gerber 5,000
Gotham City Corporate Relations Group, Inc. 200,000
Jon Herbitter 10,000
Douglas L. Hattox 4,000
Morris Horvitz 3,000
Ronald E. Jorgensen 2,000
Michael Kedersha 5,200
Tom L. Kemph 4,000
M.S. Laidlow 1,000
Harry Mittleman 10,000
Anthony Palmigiano 10,000
Clara Reiss 10,000
Steven M. Rutledge 1,000
William H. Sawyer 1,000
Samuel Smith 10,000
L.M. Spencer & Associates 50,000
Charles L. Starke 7,000
Charles Townsend 1,000
Brian Walker 1,000
-------- -------
Total 142,200 205,000
Michael J. Gerber is the President of the Company. Gotham City
Corporate Relations Group, Inc. ("Gotham City") has entered into a public
relations consulting agreement with the Company, pursuant to which Gotham City
received 10,000 shares of Common Stock and warrants to acquire 200,000 shares of
Common Stock, as reflected in the table. Michael Kedersha is the son of William
Kedersha, the Company's Chief Executive Officer. The Company subleases its
36
<PAGE>
headquarters officer from a company owned, in part, by Michael Kedersha. Anthony
Palmigiano has entered into a financial consulting agreement with the Company,
pursuant to which he received 10,000 shares of Common Stock, subject to certain
conditions.
PLAN OF DISTRIBUTION
The Common Stock held by the Selling Stockholders and the Common Stock
issuable to the Selling Stockholders upon exercise of the Rights may be offered
and sold from time to time as market conditions permit in the over-the-counter
market, or otherwise, at prices and terms then prevailing or at prices related
to the then-current market price, or in negotiated transactions. The shares
offered hereby may be sold by one or more of the following methods, without
limitation: (a) a block trade in which a broker or dealer so engaged will
attempt to sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction; (b) purchases by a broker or
dealer or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; and (d) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Stockholders may
arrange for other brokers or dealers to participate. Such broker or dealers may
receive commissions or discounts from Selling Stockholders in amounts to be
negotiated. Such brokers and dealers and any other participating brokers or
dealers may be deemed to be "underwriters" within the meaning of the Securities
Act, in connection with such sales.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Puritz & Weintraub served as the independent auditors of the Company
for the fiscal years ended May 31, 1993 and 1994 and until September 6, 1995. On
September 6, 1995, Puritz & Weintraub resigned their engagement upon
consultation with the Company because it was determined that the best interest
of the Company would be served by retaining BDO Seidman, LLP. The decision to
change auditors was approved by the Company's Board of Directors. There were no
disagreements between the Company and Puritz & Weintraub on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope of procedures.
BDO Seidman, LLP ("BDO") served as the independent auditors of the
Company for the period September 6, 1995 until January 4, 1996. During its term
of engagement, BDO advised the Company of its need to significantly expand its
audit of the cost and carrying values of certain gold ore property, which had
been acquired by the Company in May 1993 in exchange for a controlling interest
in the Company, a portion of which shares were subject to an immediately
exercisable option by another stockholder of the Company. Specifically, BDO
requested a current, independent appraisal of the gold ore property and
documentary evidence of the cost of the property to its prior owner. The Company
terminated BDO because, although an appraisal from a qualified, licensed
appraiser and other information provided, the Company was unable to provide the
type of and level of appraisal or the documentary evidence demanded by BDO. The
gold ore property had been transferred to Accord Futronics Corporation
("Accord") on June 21, 1995
37
<PAGE>
for 6,000,000 shares of its common stock, representing approximately 30% of the
outstanding common stock of Accord. Additionally, Accord lent the Company
$100,000, which was collateralized and guaranteed by a principal stockholder of
the Company. Because BDO was terminated as auditors of the Company, it did not
complete certain procedures related to the gold ore property, the result of
which could have materially impacted the fairness or reliability of the
financial statements for the year ended May 31, 1996 (the period covered by
BDO's incomplete engagement) and for the years ended May 31, 1994 and 1993 (with
which BDO has no association). The Company has permitted BDO to respond to the
inquiries of Simon Krowitz Bolin & Associates, P.A., concerning the gold ore
property. The decision to change auditors was approved by the Company's Board of
Directors.
Simon Krowitz Bolin & Associates, P.A., has been engaged by the Company
as its principal independent auditors since January 4, 1996 and has served as
the independent auditors of the Company for the fiscal year ended May 31, 1996.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for
the Company by _____________________________.
EXPERTS
The financial statements of the Company appearing in this Prospectus
and in the Registration Statement have been audited by Simon Krowitz Bolin &
Associates, P.A., certified public accountants, as set forth in the report
appearing elsewhere herein, and are included in reliance upon such report and
upon the authority of such firm as experts in auditing and accounting.
38
<PAGE>
FINANCIAL STATEMENTS
Index To Financial Statements
Oak Tree Medical Systems, Inc. and Subsidiaries
Audited Financial Statements:
Auditors' Report F-2
Consolidated statements and notes as of May 31, 1996 and 1995:
Consolidated Balance Sheet F-3
Consolidated Statement of Operations F-4
Consolidated Statement of Stockholders Equity F-5
Consolidated Statement of Cash Flows F-6
Summary of Significant Accounting Policies F-7
Notes to Consolidated Financial Statements F-9
Unaudited Financial Statements:
Consolidated Balance Sheet as of November 30, 1996 F-17
and May 31, 1996
Consolidated Statement of Operations for the
Three and Six Months ended November 30, 1996
and 1995 F-18
Consolidated Statement of Stockholders' Equity
for the Six Months ended November 30, 1996 F-19
Condensed Consolidated Statement of Cash Flows for the
Six Months ended November 30, 1996 and 1995 F-20
Notes to Consolidated Financial Statements F-21
F-1
<PAGE>
Report of Independent Certified Public Accountants'
Oak Tree Medical Systems, Inc.
Hialeah, Florida
We have audited the accompanying consolidated balance sheet of Oak Tree Medical
Systems Inc. as of May 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles use 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.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Oak Tree Medical
Systems, Inc. as of May 31, 1995, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
Simon, Krowitz, Bolin and Associates, P.A.
August 13, 1996
August 29, 1996 as to Note 12
Rockville, Maryland
F-2
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Consolidated Balance Sheet
May 31,
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
<S> <C> <C>
Current Assets
Cash $ 292,315 $ 138,196
Patient care receivables, less allowance for possible losses of $1,486,270 (Note 2) 3,158,325 1,758,275
Prepaids and other 68,621 77,518
- -----------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 3,519,261 1,973,989
- -----------------------------------------------------------------------------------------------------------------------------------
Other Assets
Investment (Note 4) 5,000,000 5,000,000
Property and equipment, net (Note 3) 394,145 333,735
Deposits and other 18,657 50,808
CORF licenses 40,000 0
Excess of cost over fair value of net assets acquired,
Less accumulated amortization of $90,071 (Note 1) 1,252,143 1,362,755
- -----------------------------------------------------------------------------------------------------------------------------------
Total Other Assets 6,704,945 6,747,298
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,224,206 $ 8,721,287
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 920,363 $1,358,715
Loan payable - other (Note 6) 310,623 0
Current maturities of debt (Note 5) 147,846 354,533
Income taxes payable (Note 8) 0 280,338
- -----------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,378,832 1,993,586
- -----------------------------------------------------------------------------------------------------------------------------------
Other Liabilities
Deferred income tax (Note 8) 720,782 22,662
Long-term debt, less current maturities (Note 5) 128,481 169,924
Obligation to issue shares of common stock (Note 1) 349,765 1,406,765
- -----------------------------------------------------------------------------------------------------------------------------------
Total Other Liabilities 1,199,028 1,599,351
- -----------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 9)
Stockholders' Equity (Note 7)
Common stock, $.01 par value, 25,000,000 shares
authorized, 2,529,169 shares issued and outstanding 25,292 20,470
Additional paid-in capital 9,508,549 8,035,371
Deficit (1,887,495) (2,927,491)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 7,646,346 5,128,350
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,224,206 $ 8,721,287
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-3
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Consolidated Statement of Operations
For The Years Ended May 31,
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995
REVENUE
<S> <C> <C>
Net patient services (Note 2) $4,663,792 $2,652,889
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Personnel leasing, subcontract labor and related costs 1,910,452 797,356
Selling, general and administrative 1,197,027 1,363,525
Interest 130,928 38,600
Depreciation and Amortization 180,777 65,451
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 3,419,184 2,264,932
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 1,244,608 387,957
PROVISION FOR INCOME TAXES (NOTE 8) 374,918 127,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME FROM OPERATIONS 869,690 260,957
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Interest 8 0
Cancellation of Debts 281,488 0
Less related income taxes (111,190) 0
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME 170,306 0
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $1,039,996 $ 260,957
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME PER COMMON SHARE $ .39 $ .11
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average number of common and common equivalent
shares outstanding 2,679,375 2,460,000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-4
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Consolidated Statement of Stockholders' Equity
For The Years Ended May 31, 1996 and 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Total
Common Stock Paid-in Stockholders'
Shares Amount Capital Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance May 31, 1994 1,248,469 $ 12,485 $7,920,443 $(3,188,448) $4,744,480
Shares issued in completion of acquisitions
of gold ore (Note 4) 693,750 6,938 (6,938) 0 0
Issuance of shares of common stock (Note 6) 104,750 1,047 121,866 0 122,913
Net income 0 0 0 260,957 260,957
- ------------------------------------------------------------------------------------------------------------------------------------
Balance May 31, 1995 2,046,969 20,470 8,035,371 (2,927,491) 5,128,350
Issuance of shares of common
stock (Notes 1 & 7) 482,200 4,822 1,473,178 0 1,478,000
Net Income 0 0 0 1,039,996 1,039,996
- ------------------------------------------------------------------------------------------------------------------------------------
Balance May 31, 1996 2,529,169 $ 25,292 $ 9,508,549 $ (1,887,495) $7,646,346
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-5
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Consolidated Statement of Cash Flows
For The Years Ended May 31,
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES $1,039,996 $ 260,957
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 180,777 65,451
Expenses paid in shares of stock 0 35,038
Bad debts expense 0 98,000
Change in assets and liabilities:
Increase in patient receivables (1,400,050) (1,856,275)
Decrease (Increase) in prepaids and other 8,897 (21,484)
Decrease (Increase) in deposits and other 32,151 (5,670)
(Decrease) Increase in accounts payable and accrued expenses (438,352) 1,138,162
(Decrease) Increase in income tax payable (280,338) 280,338
Increase (Decrease) in deferred income tax 698,120 (153,338)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (158,799) (158,821)
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Issuance of common stock 421,000 0
Increase in leasehold improvements (50,923) 0
Purchase of property and equipment (210,970) (5,966)
Purchase of CORF licenses (40,000) 0
Increase in excess of cost over fair value of assets acquired 37,761 0
Book value of leasehold improvements abandoned 93,557 0
Cash acquired in purchase of business, including collection
of purchased receivables 0 309,577
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 250,425 303,611
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Principal payments on borrowings (283,105) (43,547)
Increase in borrowings 345,598 25,500
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 62,493 (18,047)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 154,119 126,743
CASH - Beginning of Year 138,196 11,453
- -----------------------------------------------------------------------------------------------------------------------------------
CASH - End of Year $ 292,315 $ 138,196
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-6
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Summary of Significant Accounting Policies
May 31, 1996 and 1995
- --------------------------------------------------------------------------------
Description of
Operations
Oak Tree Medical Systems, Inc, and subsidiaries (the Company) is principally
engaged in providing medical and physical therapy care to patients under the
direction of licensed physicians. Substantially all of the Company's operations
are conducted in northeastern Florida.
Principles of
Consolidation
The consolidated financial statements include the accounts of Oak Tree Medical
Systems, Inc. and its wholly owned subsidiaries. All material intercompany
balances and transactions have been eliminated.
Excess of Cost Over
Fair Value of Net
Assets Acquired
The excess of cost over fair value of net assets acquired is being amortized
over 20 years on a straight-line basis and is evaluated for potential impairment
on an ongoing basis. Potential impairment is checked annually by a comparison of
actual operating results against the projected results on which part of the
valuation was based. Contingent payments required under the earn-out provision
of the acquisition agreement are recorded, when earned, as "excess of cost over
fair value of net assets acquired."
Property and
Equipment
Property, leasehold improvements and equipment are recorded at cost.
Depreciation is computed using the MACRS method over the three to five year
estimated lives of the assets. Amortization is computed using a twenty year
life.
Revenue Recognition
Net patient services revenue is recorded at the estimated net realizable amounts
from patients, third-party payers and others for services rendered. A
significant portion of the period's revenues were derived under a Medicare
reimbursement program. These revenues are based, in part, on cost reimbursement
principles and are subject to audit and retroactive adjustment by the
third-party intermediaries. Settlements based on audit of such amounts, if any,
are recorded in the year they become known.
Stock Options
To the extent that options to acquire shares of the Company's common stock are
exercisable based upon future events or criteria, the Company will measure and
record compensation expense based upon the fair market value of the underlying
securities until such time as the events or criteria are met.
Taxes on Income
The Company accounts for income taxes pursuant to the provisions of the
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes," which requires, among other things, the asset and liability approach to
calculating deferred income taxes. The asset and liability approach requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities.
F-7
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Summary of Significant Accounting Policies
May 31, 1996 and 1995
- --------------------------------------------------------------------------------
Net Income Per
Common Share
Net income per common share is computed based on the weighted average number of
shares of common stock outstanding each year, including the weighted average
effect of the 145,000 shares to be issued in connection with the acquisition of
1st Coast for 1995, after giving effect to stock options and warrants considered
to be diluted common stock equivalents.
Statements of Cash
Flows
The Company considers short-term investments with an original maturity of three
months or less to be cash equivalents.
Concentration of
Credit Risk
The Company maintains its cash in bank deposit accounts at high credit financial
institutions. The balances may, at times, exceed the FDIC insured limits.
F-8
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Notes to Consolidated Financial Statements
May 31, 1996 and 1995
- --------------------------------------------------------------------------------
1. Acquisition
On January 1, 1995, the Company purchased all of the assets (including patient
care receivables of $318,487, net of allowances) and assumed certain liabilities
of 1st Coast. Consideration for the transaction, as amended, included issuing
400,000 shares of the Company's common stock (valued at $962,000). In the event
that the fair market value of the 400,000 shares of the Company's common stock
issued in connection with the acquisition is less than $1,000,000 within 30 days
of January 16, 1997, the Company has agreed to issue additional shares of common
stock for the amount of shortfall.
The acquisition agreement, as amended, also provides for the Company to pay
additional consideration (in shares of common stock) equal to the pre-tax
earnings of the acquired business at the annual anniversary date for the
subsequent four years, price of the stock will be computed based on the average
market price of the previous fifteen (15) days of each anniversary date. As of
May 31, 1996 and 1995, the Company is obligated to issue additional shares of
common stock valued at $349,765, approximately 145,000 shares.
The excess of cost over fair value of net assets acquired aggregated
$1,407,013, including $219,540 of payments on liabilities of the acquired
business by the Company subsequent to the date of acquisition. This
amount is being amortized over twenty (20) years.
The following table summarizes pro forma consolidated results of operations
(unaudited) of the Company and 1st Coast as though the acquisition was made at
the beginning of the period presented. The proforma amounts give effect to
appropriate adjustments for amortization of excess of cost over fair value of
net assets acquired and depreciation expense.
Year ended May 31, 1995
- --------------------------------------------------------------------------------
Revenues $4,059,981
Net income (loss) $ 273,045
Net income (loss) per common share $ .10
F-9
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Notes to Consolidated Financial Statements
May 31, 1996 and 1995
- --------------------------------------------------------------------------------
2. Medicare
Receivables
Patient care revenues and receivables at May 31, 1996 and 1995, includes
approximately $1,703,292 and $1,420,000 due from Medicare for services rendered
to patients by the Company's licensed Comprehensive Outpatient Rehabilitation
Facilities (CORF) which are subject to approval by Medicare under cost
limitation guidelines. In the opinion of management, any difference between the
amounts recorded and final determination by Medicare will not materially affect
the consolidated financial statements.
3. Property and
Equipment
Property and equipment consists of the following:
- ------------------------------------------------------------------------------
1996 1995
Office furniture and equipment $166,870 $ 42,114
Physical therapy and rehabilitation equipment 334,435 246,295
Leasehold improvements and signage 50,923 93,557
- ------------------------------------------------------------------------------
Total 552,228 381,966
Less accumulated depreciation and amortization 158,083 48,231
- ------------------------------------------------------------------------------
$394,145 $333,735
- ------------------------------------------------------------------------------
4. Investment
In June, 1995, the Company exchanged its interest in gold ore for 6,000,000
shares of common stock of Accord Futronics Corporation (Accord). Additionally,
Accord agreed to lend the Company $100,000 for 120 days at 12% interest per
annum, collateralized by 200,000 shares of common stock held by the Company's
principal stockholder and guaranteed by the stockholder, and to pay the Company
a royalty of 12.5% of net production income from processing the ore. The loan
was repaid on December 9, 1995. The Company granted to Accord options to acquire
50,000 shares of the Company's common stock, exercisable at the lower of $2 per
share or 50% of quoted market price of the shares, for the later of two years or
the period ending six months subsequent to the Company registering the options.
Following the exchange, the Company held approximately 30% of the outstanding
shares of common stock of Accord. No gain or loss was recognized on the
exchange. As of May 31, 1996 and 1995, no current financial information is
available on Accord. This investment constitutes almost 50% of the Company's
assets.
F-10
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Notes to Consolidated Financial Statements
May 31, 1996 and 1995
- --------------------------------------------------------------------------------
5. Long-term Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following: 1996 1995
<S> <C> <C>
Bank notes, interest at prime rate
plus 1% principal and interest payable
monthly through 1999, collateralized by
substantially all assets other than the investment $155,579 $232,549
Note payable - note dated March, 1996,
for $44,975, no interest, payable eight
monthly payments of $5,000 and one of $,975 34,975 0
Unsecured demand notes payable to officers
stockholders, bearing interest at
10%, $193,125 representing 1994 officers'
compensation is due May 1996. 0 268,238
Obligations under capital leases,
interest at 16.5% to 18%, principal and
interest payable monthly through 1996,
collateralized by equipment. 85,773 23,670
- ------------------------------------------------------------------------------------------
276,327 524,457
Less current maturities 147,846 354,533
- ------------------------------------------------------------------------------------------
Total $128,481 $169,924
- ------------------------------------------------------------------------------------------
</TABLE>
Future maturities are as follows for years staring June 1:
1996 $147,846
1997 85,082
1998 34,181
1999 9,218
- -----------------------------------------------------
$276,327
6. Loan Payable -
Other
In December, 1995, the Company entered into an agreement for the
collateralization of its patient receivables in return for funds. The advances
are repaid as the receivables are collected. All collections are sent to the
funding company. Fees charged are a loan discount of 1.5% per advance, interest
of 1.5% on monthly outstanding balance and a broker fee of 2% per advance.
F-11
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Notes to Consolidated Financial Statements
May 31, 1996 and 1995
- --------------------------------------------------------------------------------
7. Stockholders'
Equity
During the year ended May 31, 1995, the Company issued 25,000 unregistered
shares of common stock in exchange for two Comprehensive Outpatient
Rehabilitation Facility licenses valued at licenses' estimated fair market value
of $40,000 and 25,500 unregistered shares of common stock in prepayment of
certain advertising and legal services valued at the services' estimated fair
market value of $47,875. Also during the year ended May 31, 1995, the Company
issued 54,250 unregistered shares of common stock in payment of services to
unrelated parties and recorded expenses of $35,038 to value the services at
estimated fair market value.
In connection with the acquisition of 1st Coast, the Company granted the seller
options to acquire an aggregate of 160,00 shares of the Company's common stock
that vest 40,000 shares per year upon the achievement for that year of pretax
income in excess of $850,000 due solely to the efforts of Dr. Ronald Dennie
(seller) as follows:
Year ended May 31, 1996 and 1995 Exercise
Price
- --------------------------------------------------------------------------------
1996 $2.50
1997 $2.50
1998 $3.50
1999 $4.50
- --------------------------------------------------------------------------------
The options expire one year subsequent to vesting or upon the seller no longer
being employed by the Company.
In May, 1995, in connection with a $5,250 loan to the Company, the Company
granted a stockholder options to acquire 7,500 shares of common stock
exercisable at approximate fair market value of $2.00 per share through April 1,
2000.
In June, 1993, the Company, in connection with the employment agreements of two
executives, granted options to each executive to acquire 250,000 of the
Company's common stock exercisable at $.03 per share, increased to approximate
fair market value of $2.00 per share in May, 1995, through January 1, 1999.
F-12
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Notes to Consolidated Financial Statements
May 31, 1996 and 1995
- --------------------------------------------------------------------------------
7. Stockholders'
Equity
(continued)
The Company's 1986 Stock Option Plan (the Plan) provides for the issuance of
both incentive stock options and non-qualified stock options. The Plan is
administered by the Board of Directors. The Company has reserved up to 400,000
shares of its common stock for issuance under the Plan to employees,
consultants, or others at exercise prices not less than fair market value at the
date of grant. No options have been granted under the Plan.
The Plan terminated as of May 31, 1996 and 1995.
In February, 1994, the Company adopted the 1994 Performance Equity Plan ("1994
Plan") covering 600,000 shares of common stock pursuant to which officers,
directors, key employees and consultants are eligible to receive incentive or
non-qualified stock options, stock appreciation rights, restricted stock awards,
deferred stock, stock reload options and other stock based awards. No options
have been granted under the 1994 Plan.
8. Income Taxes
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
May 31, 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current:
Federal $(255,454) $(240,338)
State (44,019) (40,000)
- -------------------------------------------------------------------------------------------------------------------
Total current income taxes payable (299,473) (288,338)
- -------------------------------------------------------------------------------------------------------------------
Deferred:
Federal 570,770 131,338
State 97,413 22,000
- ------------------------------------------------------------------------------------------------------------------
Total deferred 668,183 153,338
- ------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 368,710 $ 127,000
- ------------------------------------------------------------------------------------------------------------------
The following is a reconciliation of income taxes computed at the 34% statutory
rate to the provision for income taxes:
Tax at statutory rate $ 365,523 $ 132,000
State tax, net of federal effect 67,497 13,000
Benefit of net operating loss carryforward (643,310) (23,000)
Other 0 5,000
- ------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 368,710 $ 127,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
F-13
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Notes to Consolidated Financial Statements
May 31, 1996 and 1995
- -------------------------------------------------------------------------------
8. Income Taxes
(continued)
The Company's deferred income tax liability at May 31, 1996 and 1995, represents
the income tax effect, computed at the statutory rate in the accounting for
income and expenses for financial purposes (accrual method) and for income tax
purposes (cash basis).
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial reporting and tax bases of assets and
liabilities given the provisions of the enacted tax laws. The net deferred tax
asset (liability) is comprised of the following:
May 31, 1996 1995
- --------------------------------------------------------------------------------
Noncurrent deferred tax liability:
Gross assets 0 9,822
Gross liabilities (668,182) (268,198)
- --------------------------------------------------------------------------------
Net noncurrent deferred tax liability (668,182) 258,376
- --------------------------------------------------------------------------------
The tax effects of significant temporary
differences representing deferred tax
assets and liabilities are as follows:
Computed income tax-cash basis $ (651,001) $ (22,662)
Other (17,182) 0
- --------------------------------------------------------------------------------
Net deferred tax asset (liability) $ (668,183) $ 22,662
================================================================================
As of May 31, 1996 and 1995, the Company has net operating loss carryforwards of
approximately $862,272 for income tax purposes which expire through May 31,
2011. As a result of the change in control in ownership of the Company's common
stock which occurred in May 1993, utilization of the net operating loss
carryforward for years prior to May 31, 1993, is limited to approximately
$26,000 per year (an aggregate of $313,877 through 2006). The remaining
carryforward of $548,395 may be used without restriction. Realization of any
portion of the Company's deferred tax asset at May 31, 1996 and 1995, resulting
from the net operating loss carryforwards is not considered more likely than not
and accordingly, a $340,597 valuation allowance has been established for the
full amount of the deferred tax asset.
F-14
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Notes to Consolidated Financial Statements
May 31, 1996 and 1995
- -------------------------------------------------------------------------------
9. Commitments
and
Contingencies
The Company leases its office facilities and certain equipment under operating
leases which expire through 1999. Approximate future annual minimum rental
payments under agreements with initial or remaining non-cancelable terms in
excess of one year are as follows:
- --------------------------------------------------------------------------------
1996 $ 188,993
1997 174,689
1998 149,561
1999 149,561
- -------------------------------------------------------------------------------
$ 662,804
================================================================================
Rent expense for the year ended May 31, 1996 and 1995, aggregated
approximately $159,303. (See also Note 11)
The Company's principal executive officers are employed under the terms of
agreements which expire in 1998. As a result of changes in the responsibilities
of two officers during the year ended May 31, 1996 and 1995, their compensation
was modified from an aggregate of $172,500 to $35,000 for the year. The
agreements provide for an aggregate base compensation of approximately $560,000
for the year ending May 31, 1996 and 1995, escalating approximately $15,000 per
year thereafter, plus bonuses based upon revenues and earnings. Any compensation
due under these agreements has been rescinded.
On September 1, 1995, Medbrook Corporation (Medbrook) filed a lawsuit against
1st Coast asserting: (1) breach of contract for failure to pay amounts due under
management service contracts (2) breach of contract by improper termination of
those contracts and (3) breach of a non-compete agreement by the physician who
was the former sole stockholder of 1st Coast and its the Company's chief medical
officer. Commencing April 30, 1994, Medbrook provided management services to
certain of 1st Coast's operations under the terms of contracts and provided for
Medbrook to receive one-half of the net profits of those operations. The
contracts with Medbrook were terminated in May, 1995.
In the opinion of management, the ultimate outcome of this matter will not have
a material adverse effect on the Company's financial condition or results of
operations. A reserve of $100,000 was established for legal costs and of any
settlement. As of May 31, 1996 and 1995, approximately $36,000 of costs had been
incurred.
F-15
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Notes to Consolidated Financial Statements
May 31, 1996 and 1995
- -------------------------------------------------------------------------------
9. Commitments
and
Contingencies
(continued)
A company subsidiary, Acorn CORF I, d/b/a 1st Coast Rehabilitation, has filed
suit against a former physician-employee to recover damages relating to the
former employee's conduct in attempting to wrongfully bill and collect, in his
individual capacity, for medical services which he rendered while employed with
Acorn. Trial is scheduled for December, 1996, but management feels this case
will be settled without substantial cost to Acorn.*
A former employee has filed a complaint with EEOC alleging sexual harassment.
1st Coast has filed a written response denying the alleged acts. This complaint
is presently under review by the Jacksonville Equal Opportunity Commission. No
civil action has been filed against 1st Coast Rehabilitation. It is premature to
evaluate the outcome of this action.
10. Supplemental
Cash Flow
Information
During the year ended May 31, 1996 and 1995, cash payments for interest were
approximately $130,928.
11. Other
In March, 1996, Oak Tree Riverside's CORF, Inc. moved to a new and
larger facility significantly increasing its ability to provide physical therapy
and rehabilitative services.
In the new facility and in the St. Augustine facility, Riverside CORF has
established one of the few programs in its service area for patients suffering
from Chronic Obstructive Pulmonary Disease (C.O.P.D.). In this program patients
learn how to utilize many different resources to achieve their functional
respiratory goals.
12. Subsequent
Events
On July 29, 1996, the Company entered into a one year lease for executive office
space. The annual rent is $25,128.
On August 29, 1996, Irwin Bosh Stack resigned as Chairman and CEO of the
Company.
- ----------
* This lawsuit was settled on December 31, 1996, with a payment being made to
the Company.
F-16
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
ASSETS November 30, May 31,
1996 1996
<S> <C> <C>
Current Assets
Cash $ 661,070 $ 292,315
Patient care receivables, less allowance for doubtful accounts of
$1,650,000 and $1,486,270 as of November 30, 1996 and
May 31, 1996, respectively 5,028,691 3,158,325
Prepaids and other current assets 77,542 68,621
- -----------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 5,767,303 3,519,261
Other Assets
Investment 5,000,000 5,000,000
Property and equipment, net 658,661 394,145
Other assets 153,421 58,657
Excess of cost over fair value of net assets acquired, Less accumulated
amortization of $107,732 and $90,071
as of November 30, 1996 and May 31, 1996, respectively 1,222,150 1,252,143
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $12,801,535 $10,224,206
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 760,469 $ 920,363
Notes payable 1,627,878 310,623
Current maturities of long-term debt 329,234 147,846
Deferred income taxes payable 971,575 720,782
- -----------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 3,689,156 2,099,614
Other Liabilities
Long-term debt, less current maturities 230,544 128,481
Obligation to issue shares of common stock 349,765 349,765
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 4,269,465 2,577,860
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $.01 par value, 25,000,000 shares authorized, 2,583,406 and
2,529,169 shares issued and outstanding
as of November 30, 1996 and May 31, 1996, respectively 25,834 25,292
Additional paid-in capital 9,908,007 9,508,549
Deficit (1,401,771) (1,887,495)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 8,532,070 7,646,346
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,801,535 $10,224,206
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended November 30, Ended November 30,
1996 1995 1996 1995
REVENUE
<S> <C> <C> <C> <C>
Net patient services $1,236,682 $ 932,657 $2,239,145 $2,003,592
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative 630,687 511,941 1,302,626 1,202,115
Interest 38,729 3,000 81,801 5,000
Depreciation and Amortization 63,165 46,250 107,805 92,500
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 732,581 561,191 1,492,232 1,299,615
- ---------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 504,101 371,466 746,913 703,977
PROVISION FOR INCOME TAXES 170,000 136,100 261,189 258,100
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 334,101 $ 235,366 $ 485,724 $ 445,877
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $.12 $.09 $.18 $.17
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average number of common and
common equivalent shares outstanding 2,710,526 2,586,440 2,692,347 2,592,308
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
for the six months ended November 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Stockholders'
Shares Amount Capital Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance May 31, 1996 2,529,169 $ 25,292 $9,508,549 $ (1,887,495) $7,646,346
Issuance of shares of common
stock upon acquisition 54,237 542 399,458 0 400,000
Net Income 0 0 0 485,724 485,724
- ------------------------------------------------------------------------------------------------------------------------------------
Balance November 30, 1996 2,583,406 $ 25,834 $9,908,007 $ (1,401,771) $8,532,070
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended November 30,
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $485,724 $445,877
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 107,805 92,500
Reduction of allowance for doubtful accounts (500,000) 0
Deferred income taxes 261,188 258,100
Change in assets and liabilities:
(Increase) in patient care receivables (620,366) (155,837)
(Increase) in prepaids and other current
assets (3,921) (532)
(Increase) in other assets (41,453) 0
(Decrease) in accounts payable
and accrued expenses (158,518) (831,368)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (469,541) (191,260)
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments on acquisition (455,000) 0
Increase in note receivable (50,000) 0
Purchases of property and equipment (92,410) 0
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (597,410) 0
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds of notes payable and long-term debt 1,772,255 118,750
Payments of notes payable and long-term debt (336,549) (49,170)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,435,706 69,580
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 368,755 (121,680)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH - Beginning of Period 292,315 138,196
- ----------------------------------------------------------------------------------------------------------------------------------
CASH - End of Period $661,070 $ 16,516
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Interest Expense Paid $ 87,349 $ 5,000
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. OPERATIONS
Oak Tree Medical Systems, Inc., a Delaware corporation, and its
subsidiaries (the "Company") operate physical therapy and rehabilitation care
clinics and related medical practices in Jacksonville, Florida and New York
City.
2. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Oak Tree
Medical Systems, Inc. and its wholly-owned subsidiaries and Oak Tree Medical
Practice, P.C., a professional practice entity over which the Company exercises
significant influence and control. All material intercompany balances and
transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all the information and footnotes required by generally accepted accounting
principles for financial statements. For further information, refer to the
audited consolidated financial statements and notes thereto for the fiscal year
ended May 31, 1996, included in the Company's Form 10-KSB filed with the
Securities and Exchange Commission on September 12, 1996.
In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary for a fair statement of: (a) financial
position as of November 30, 1996 and 1995, (b) results of operations for the
three months and six months ended November 30, 1996 and 1995, (c) cash flows for
the six months ended November 30, 1996 and 1995 and (d) changes in stockholders'
equity for the six months ended November 30, 1996, have been made.
The results for the three months and six months ended November 30, 1996
are not necessarily indicative of the results to be expected for the entire
fiscal year ending May 31, 1997.
3. ACQUISITION
On October 1, 1996, the Company acquired the operations of three
physical therapy care centers and a hospital service contract located primarily
in New York City for $900,000, payable: (a) $400,000 in cash, (b) $100,000 by
the assumption of a note payable and (c) the issuance of 54,237 shares of common
stock to a creditor of the seller. The note payable is due in four installments
of $25,000 through May 19, 1997, with interest at 6.07% per annum.
In connection with the acquisition, the Company incurred expenses of
$120,000, including a finder's fee of $90,000 to a company in which the wife of
the chief executive officer of the Company is
F-21
<PAGE>
an owner and which was agreed to prior to employment of the chief executive
officer by the Company. The finder's fee was paid $25,000 in cash and the
balance in a note payable due on January 15, 1998, with interest at 10% per
annum.
The acquisition was recorded on the purchase method and the purchase
price and related expenses have been allocated as follows:
Accounts receivable $ 750,000
Equipment 261,689
Supplies 5,000
Deposits 3,311
----------
$1,020,000
==========
The consolidated financial statements included the acquired operations
as of October 1, 1996.
4. NOTE PAYABLE
On September 30, 1996, a subsidiary of the company entered into a loan
agreement with a bank for a term loan of $400,000 and a line of credit of
$200,000. The proceeds of the loan were used in connection with the acquisition
(Note 3) and is payable in equal monthly installments of $22,222 through March
31, 1998, plus interest at 1% above the prime rate, per annum.
The term loan and line of credit loans are collateralized by the
accounts receivable, fixed assets, etc. of the subsidiary and are guaranteed by
Oak Tree Medical Systems, Inc.
5. SUBSEQUENT EVENT
On December 11, 1996, the Company acquired certain assets of four
physical therapy care centers and a management company located in Long Island,
New York for an aggregate purchase price of $650,000 and 132,190 shares of
common stock of the Company, of which 126,190 shares are issuable in 18 months.
The $650,000 was payable: (a) $250,000 in cash and (b) $400,000 in a note
payable due in 32 monthly installments of $14,763, including interest. If a
certain market price is not achieved, an additional 34,097 shares will be
issued. In addition, if certain performance levels are achieved, contingent cash
payments will be required.
In connection with the acquisition, the Company incurred a finder's fee
equal to 10% of the purchase price to a related company (Note 3).
F-22
<PAGE>
Table of Contents
Available Information...........................
Prospectus Summary .............................
The Offering....................................
Risk Factors....................................
Use of Proceeds.................................
Dividend Policy.................................
Price Range of Common Stock
Management's Discussion and
Analysis of Financial Conditions
and Results of Operation......................
Business
Management......................................
Certain Relationships and Related Transactions..
Principal Stockholders..........................
Description of Securities.......................
Selling Stockholders............................
Plan of Distribution............................
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..........
Legal Matters...................................
Experts
Financial Statements ....................... F-1
================
OAK TREE MEDICAL
SYSTEMS, INC.
================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Article XVIII of the Company's By-Laws provides as follows:
"All persons who the Corporation is empowered to indemnify pursuant to
the provisions of Section 145 of the General Corporation Law of the State of
Delaware (or any similar provision or provisions of applicable law at the time
in effect) shall be indemnified by the Corporation to the full extent permitted
thereby. The foregoing right of indemnification shall not be deemed to be
exclusive of any other such rights to which those seeking indemnification from
the Corporation may be entitled, including, but not limited to, any rights of
indemnification to which they may be entitled pursuant to any agreement,
insurance policy, other by-law or charter provision, vote of stockholders or
directors, or otherwise."
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers or
persons controlling the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is therefor unenforceable.
Item 25. Other Expenses of Issuance and Distribution
SEC Registration Fee.........................................
NASD Filing Fee..............................................
Transfer Agent Fees*.........................................
Printing Costs*..............................................
Legal Fees*..................................................
Accounting Fees and Expenses*................................
Total........................................................
- -----------
* Indicates expenses that have been estimated for the purpose of filing.
Item 26. Recent Sales of Unregistered Securities
A. In each of December 1994 and February 1995, the Company acquired a
CORF license in consideration of 12,500 shares of Common Stock per license.
B. In January 1995, the Company issued 400,000 shares of Common Stock
to Dr. Ronald R. Dennie in consideration for the acquisition of five physical
therapy clinics and related assets in the Jacksonville, Florida area. The
Company also issued to Dr. Dennie options to acquire 160,000 shares, vesting in
40,000 increments in each of 1996 (at an exercise price of $2.50), 1997 (at an
exercise price of $2.50), 1998 (at an exercise price of $3.50) and 1999 (at an
exercise price of $4.50), provided the acquired clinics have achieved certain
pre-tax earnings in the year of vesting. In each case, the options expire one
year after vesting.
II-1
<PAGE>
C. In January 1995, the Company issued options to acquire 250,000
shares to each of Irwin Bosh Stack and Henry Dubbin, both of whom were executive
officers of the Company, in consideration of past services. The options have an
exercise price of $2.00 per share and expire on January 1, 1999.
D. In September and November 1995, the Company issued Michael J.
Gerber, president of the Company options to acquire 55,000 shares of Common
Stock. Options to acquire 5,000 shares are exercisable at a price of $1.66 per
share and expire in September 1997. Options to acquire 50,000 shares are
exercisable at a price of $2.00 per share and expire in November 2002.
E. In connection with the Company's acquisition of three physical
therapy clinics in October 1996, the Company issued 54,237 shares of Common
Stock. These shares were issued in partial settlement of indebtedness in the
amount of $400,000 owed by the seller of the clinics and assumed by the Company.
F. In connection with the Company's acquisition of four physical
therapy centers and related assets in December 1996, and in partial
consideration for such acquisition, the Company issued to the sellers 6,000
shares of Common Stock. The Company agreed to issue to the sellers an additional
111,904 shares of Common Stock on the eighteen month anniversary of the
acquisition (increasing to 142,105 shares if the price per share of Common Stock
does not equal or exceed $7.00 at any time prior to such eighteen month
anniversary). The Company also agreed to issue on the eighteen month anniversary
of the acquisition 14,286 shares of Common Stock to the landlord of one of the
acquired centers in satisfaction of certain pre-existing obligations.
G. In December 1996, the Company issued ten year options to acquire
375,000 shares to William Kedersha, the Company's Chief Executive Officer. The
options have an exercise price of $1 11/16 per share and vest upon the earlier
to occur of the Company's achievement of certain financial benchmarks, the five
year anniversary of the issuance of the options or a change of control (as
defined).
H. In January 1997, the Company issued warrants to acquire 200,000 of
Common Stock to Gotham City Corporate Relations Group, Inc. ("Gotham City") in
consideration of public relations consulting services to be rendered to the
Company by Gotham City. Warrants to acquire 66,667 shares are exercisable at
$5.00 per share, warrants to acquire 66,667 shares are exercisable at $6.00 per
share, and warrants to acquire 66,667 shares are exercisable at $7.00 per share.
All such warrants expire on January 1, 1998. In addition, the Company has agreed
to issue Gotham City 10,000 shares of Common Stock. Also, in January 1997, the
Company agreed to issue to Anthony Palmigiano 10,000 shares of Common Stock,
subject to certain conditions, in consideration of financial consulting services
to be rendered to the Company by Mr. Palmigiano.
The issuance set forth above were issued pursuant to Section 4(2) of
the Securities Act of 1933, as transactions by an issuer not involving any
public offering, and, alternatively, in the case of employee options, on a
no-sale theory.
II-2
<PAGE>
Item 27. List of Exhibits
Exhibit Description of Exhibit Page No.
- -------------------------------------------------------------------------
3-A2 Certificate of Incorporation .................................
3-B2 Amendment to Certificate of Incorporation ....................
3-C2 By-Laws ......................................................
4-A3 Term Loan Agreement between First Union National Bank and
Oak Tree Medical Management, Inc., dated September 30, 1996
4-B3 Security Agreement between First Union National Bank and
Oak Tree Medical Management, Inc., dated September 30, 1996
4-C3 Promissory Note and Promissory Note between First Union
National Bank and Oak Tree Medical Management, Inc.,
dated September 30, 1996......................................
4-D3 Unconditional Guaranty between First Union National Bank,
Oak Tree Medical Management, Inc. and Oak Tree Medical
Systems, Inc., dated September 30, 1996.......................
4-E3 Health Care Receivables Loan and Security Agreement between
Sam Fund I, L.P. and Oak Tree Receivables, Inc., dated
September 16, 1996............................................
4-F4 Promissory Note between Oak Tree Medical Management, Inc. and
Maple Health, Inc., Northern Professional, Inc., Southern
Professional, Inc., Mark A. Gentile, James O'Neill, Robert
Einemann and Bernard Posner and Oak Tree Medical
Management, Inc., dated December 11, 1996.....................
4-G4 Security Agreement between Oak Tree Medical Management, Inc. and
Maple Health, Inc., Northern Professional, Inc., Southern
Professional, Inc., Mark A. Gentile, James O'Neill, Robert
Einemann and Bernard Posner and Oak Tree Medical
Management, Inc., dated December 11, 1996.....................
51 Opinion of Registrant's Counsel ..............................
10-A2 Lease Agreement between CSL Exchange South Associates and
Riverside CORF, Inc., dated January 28, 1996 .................
10-B2 Lease Agreement between N. Patrick Hale, M.D. and Sue S. Hale
and First Coast Physical Medicine Assoc., dated November 1, 1994
10-C2 Lease Agreement between Leon Maron and Soleil, Inc.,
dated July 10, 1992 ..........................................
10-D3 Agreement of Sale between Orthopedic & Sports Therapy Services
of Queens, L.P., Parkside of Queens, Inc. and Oak Tree
Medical Management, Inc., dated October 1, 1996...............
II-3
<PAGE>
10-E3 Agreement of Sale between Parkside Physical Therapy Services, P.C.
and New Media Practice, P.C., dated October 1, 1996
10-F3 Agreement of Sale between Gary Danziger, PTSR, Inc. and
Oak Tree Medical Management, Inc., dated October 1, 1996
10-G4 Agreement of Sale between Maple Health, Inc., Northern Professional,
Inc., Southern Professional, Inc., Mark A. Gentile, James O'Neill,
Robert Einemann and Bernard Posner and Oak Tree Medical
Management, Inc., dated December 11, 1996 ("Agreement of
Sale of Long Island Practices")......................................
10-H4 Agreement of Sale between Steven Rotwein, P.T., P.C. and New
Medical Practice, P.C. dated December 11, 1996.......................
10-I4 Letter, dated December 26, 1996, in respect of modification of
Agreement of Sale of Long Island Practices...........................
10-J4 Letter, dated January 14, 1997, in respect of modification of
Agreement of Sale of Long Island Practices...........................
10-K5 Executive Employment Agreement of William Kedersha and Oak Tree
Medical Systems, Inc., dated December 3, 1996........................
10-L5 Stock Option Agreement between Burton Dubbin and Oak Tree
Medical Systems, Inc., dated December 3, 1996........................
10-M5 Public Relations Consulting Letter Agreement between Gotham City
Corporate Relations Group, Inc. and Oak Tree Medical Systems, Inc.,
dated December 20, 1996..............................................
10-N5 Financial Advisor Consulting Letter Agreement between Anthony
Palmigiano and Oak Tree Medical Systems, Inc., dated
December 20, 1996....................................................
23-A1 Consent of , Registrant's Counsel
23-B Consent of Simon Krowitz Bolin & Associates, P.A.
Registrant's Accountant..............................................
- -------------
(1) To be filed by amendment.
(2) Previously field.
(3) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended August 31, 1996.
(4) Incorporated by reference to the Company's Current Report on Form 8-K
dated December 11, 1996.
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended November 30, 1996.
II-4
<PAGE>
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in such prospectus any facts or events arising after the effective date
of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement; (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement.
(2) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
registered therein.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer, or controlling person of the small business issuer
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this Amendment
Number Two to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 21st day of January, 1997.
OAK TREE MEDICAL SYSTEMS, INC.
By: /s/ WILLIAM KEDERSHA
--------------------
William Kedersha, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment Number Two to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ WILLIAM KEDERSHA Chief Executive Officer January 21, 1997
- --------------------
William Kedersha and Director (Chief Financial
and Accounting Officer)
/s/ MICHAEL J. GERBER President, Secretary and January 21, 1997
- ---------------------
Michael J. Gerber Director
/s/ HENRY DUBBIN Vice Chairman of the Board, January 21, 1997
- ----------------
Henry Dubbin Vice President and Director
EXHIBIT 23-B
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation in the Registration Statement on Form SB-2 of Oak Tree Medical
Systems, Inc. of our report dated August 13, 1996 (August 29, 1996 as to Note
12), included in Oak Tree Medical Systems, Inc.'s Annual Report on Form 10-KSB
previously filed with the Securities and Exchange Commission and to all
references to our firm included in this Registration Statement.
/s/ SIMON, KROWITZ, BOLIN & ASSOCIATES, P.A.
- --------------------------------------------
SIMON, KROWITZ, BOLIN & ASSOCIATES, P.A.
Rockville, Maryland
January 21, 1997
