SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 0-16206
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OAK TREE MEDICAL SYSTEMS, INC.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 02-0401674
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2 GANNETT DRIVE, SUITE 215
WHITE PLAINS, NEW YORK 10604
(Address of principal executive offices)
(914) 694-2500
(Issuer's telephone number, including area code)
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Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
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Indicate number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date:
Common Stock, $.01 par value 2,734,383 shares
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Class Outstanding at January 6, 1997
Transitional Small Business Disclosure Format (check one):
YES NO X
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<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
INDEX
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of November 30, 1996
and May 31, 1996
Consolidated Statement of Income for the three and
six months ended November 30, 1996 and 1995
Consolidated Statement of Stockholders' Equity
for the six months ended November 30, 1996
Consolidated Statement of Cash Flows for the
six months ended November 30, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II OTHER INFORMATION
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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<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
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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
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TOTAL ASSETS $12,801,535 $10,224,206
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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
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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
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Total Liabilities 4,269,465 2,577,860
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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)
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Total Stockholders' Equity 8,532,070 7,646,346
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,801,535 $10,224,206
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</TABLE>
See notes to consolidated financial statements.
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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
<S> <C> <C> <C> <C>
REVENUE
Net patient services $1,236,682 $ 932,657 $2,239,145 $2,003,592
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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
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TOTAL EXPENSES 732,581 561,191 1,492,232 1,299,615
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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
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NET INCOME $ 334,101 $ 235,366 $ 485,724 $ 445,877
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NET INCOME PER COMMON SHARE $.12 $.09 $.18 $.17
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Weighted average number of common and
common equivalent shares outstanding 2,710,526 2,586,440 2,692,347 2,592,308
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</TABLE>
See notes to consolidated financial statements.
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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
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<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
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Balance November 30, 1996 2,583,406 $ 25,834 $9,908,007 $ (1,401,771) $8,532,070
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</TABLE>
See notes to consolidated financial statements.
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OAK TREE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended November 30,
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES
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)
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NET CASH USED IN OPERATING ACTIVITIES (469,541) (191,260)
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INVESTING ACTIVITIES
Payments on acquisition (455,000) 0
Increase in note receivable (50,000) 0
Purchases of property and equipment (92,410) 0
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NET CASH USED IN INVESTING ACTIVITIES (597,410) 0
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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)
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NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,435,706 69,580
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NET INCREASE (DECREASE) IN CASH 368,755 (121,680)
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CASH - Beginning of Period 292,315 138,196
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CASH - End of Period $661,070 $ 16,516
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Supplemental Disclosure of Cash Flow Information:
Interest Expense Paid $ 87,349 $ 5,000
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</TABLE>
See notes to consolidated financial statements
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<PAGE>
OAK TREE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
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 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.
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<PAGE>
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
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$1,020,000
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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).
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<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
The Company is engaged in the business of owning, operating and managing
physical therapy clinics, comprehensive outpatient rehabilitation facilities
(CORF) and related rehabilitative medicine practices. As of November 30, 1996,
the Company has operations in Jacksonville, Florida and New York City. The
Company operates its various facilities and practices through its various
subsidiaries as required or practical for licensing, operating and managing the
various aspects of its business.
In December 1996, the Company completed its acquisition of four Long Island, New
York, based physical therapy centers, located in Brooklyn, Syosset, Lawrence and
Rockville Centre. The centers had profits of approximately $450,000 in the most
recent fiscal year. The acquisition also included a medical billing company with
gross billing of approximately $3 million. The clinic assets and related
management contracts were acquired for approximately $1.5 million in stock and
cash.
Results of Operations
Six and Three Months Ended November 30, 1996 Compared to the Six and Three
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"). Revenues increased by 32.6% to $1,236,682 from $932,657 in the three
months ended November 30, 1996 (the "Fiscal 1997 Quarter") compared with the
three months ended November 30, 1995 (the "Fiscal 1996 Quarter"). 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 Fiscal 1997 Quarter, 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. Total expenses were $732,581 or 59.2% of revenues
for the Fiscal 1997 Quarter, compared with expenses of $561,191 or 60.1% of
revenues for the Fiscal 1996 Quarter. 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 Fiscal 1997 Quarter,
and increased interest expense associated with 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.
Expenses decreased as a percentage of revenues for the Fiscal 1997 Quarter as
compared to the Fiscal 1996 Quarter, primarily as a result of the adjustment in
the allowance for doubtful accounts offset in part by increased depreciation and
amortization and higher interest expenses as described above.
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. Income from continuing operations increased by 35.7% to
$504,101 in the Fiscal 1997 Quarter from $371,466 in the Fiscal 1996
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<PAGE>
Quarter. 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. Net income increased
by 41.9% to $334,101 in the Fiscal 1997 Quarter from $235,366 in the Fiscal 1996
Quarter.
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 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
the 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
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<PAGE>
to 160,287 shares if the price per share of Common 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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<PAGE>
PART II OTHER INFORMATION
Item 2. Changes in Securities
In November 1996, the Company issued 54,237 shares of the Company's common stock
as part of its satisfaction of debt in the aggregate amount of $400,000 incurred
by the Company in its acquisition of three New York City based physical therapy
centers on October 1, 1996. The shares were issued in reliance upon Section 4(2)
of the Securities Act of 1933 for transactions not involving a public offering.
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated October 1,
1996, reporting the acquisition of three New York City based
physical therapy centers.
(b) Exhibits
The following exhibits are filed as part of this report:
10.1 Executive Employment Agreement dated December 3, 1996 between Oak
Tree Medical Systems, Inc. and William Kedersha
10.2 Stock Option Agreement dated December 3, 1996 between Oak Tree
Medical Systems, Inc. and Burton Dubbin
10.3 Public Relations Consulting Letter Agreement dated December 20,
1996 between Oak Tree Medical Systems, Inc. and Gotham City
Corporate Relations Group, Inc.
10.4 Financial Advisor Consulting Letter Agreement dated December 20,
1996 between Oak Tree Medical Systems, Inc. and Anthony
Palmigiano
10.5 Letter, dated January 14, 1997, in respect of modification of
Agreement of Sale, dated December 11, 1996, 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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
OAK TREE MEDICAL SYSTEMS, INC.
By: /s/ WILLIAM KEDERSHA
--------------------
William Kedersha
Chief Executive Officer
Dated: January 21, 1997
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EXECUTIVE EMPLOYMENT AGREEMENT
This EXECUTIVE EMPLOYMENT AGREEMENT, dated as of December 3, 1996 (the
"Agreement"), by and between Oak Tree Medical Systems, Inc., a Delaware
corporation (the "Company"), with executive offices at 2 Gannett Drive, Suite
215, White Plains, New York 10604, and William Kedersha (the "Executive").
WHEREAS, the Company believes that it is in the Company's best
interests to assure the continued services of the Executive on the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth and other good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties intending to be legally
bound hereby agree as follows:
1. DEFINITIONS.
1.1 "Affiliate" of a person or other entity shall mean a person or other
entity that directly or indirectly controls, is controlled by, or is under
common control with the person or other entity specified (including without
limitation any investment entity managed by the person or other entity specified
or a person or entity that directly or indirectly controls, is controlled by, or
is under common control with the person or other entity specified).
1.2 "Board" shall mean the Board of Directors of the Company.
1.3 "Cause" shall mean:
(a) The Executive is convicted of a felony involving moral turpitude;
or
(b) The Executive is guilty of willful gross neglect or willful gross
misconduct in carrying out his duties under this Agreement,
resulting, in either case, in material economic harm to the
Company, unless the Executive believed in good faith that such
act or nonact was in the best interests of the Company.
1.4 "Change in Control" shall mean the occurrence of any one of the
following events:
(a) Any "person," as such term is used in Sections 3(a)(9) and 13(d)
of the Securities Exchange Act of 1934 (including any group),
other than Henry Dubbin, becomes a "beneficial owner," as such
term is used in Rule 13d-3 promulgated under such Act, of 35% or
more of the Voting Stock of the Company or any "person" who
currently owns 35% or
<PAGE>
more of the Voting Stock of the Company acquires an additional 3%
or more of the Voting Stock of the Company;
(b) The majority of the Board consists of individuals other than
Incumbent Directors, which term means the members of the Board on
the date of this Agreement; provided that any person becoming a
director subsequent to such date whose election or nomination for
election was supported by two-thirds of the directors who then
comprised the Incumbent Directors shall be considered to be an
Incumbent Director;
(c) The Company adopts any plan of liquidation providing for the
distribution of all or substantially all of the assets of the
Company on a consolidated basis;
(d) All or substantially all of the assets or business of the Company
is disposed of pursuant to a merger, consolidation or other
transaction (unless the shareholders of the Company immediately
prior to such merger, consolidation or other transaction
beneficially own, directly or indirectly, in substantially the
same proportion as they owned the Voting Stock of the Company,
all of the Voting Stock or other ownership interests of the
entity or entities, if any, that succeed to the business of the
Company); or
(e) The Company merges or combines with another company and,
immediately after the merger or combination, the stockholders of
the Company immediately prior to the combination hold, directly
or indirectly, (i) in the event the Company is the surviving
corporation, 50% or less of the Voting Stock of the combined
company, or (ii) in the event the Company is not the surviving
corporation, 50% or less of the Voting Stock or other ownership
interests of the entity or entities, if any, that succeed to the
business of the Company.
1.5 "Disability" shall mean the Executive's inability to substantially
perform the Executive's duties and responsibilities as contemplated under this
Agreement for a period of more than six (6) months, whether or not continuous,
during any 365-day period, due to physical or mental incapacity or impairment.
1.6 "Good Reason" shall mean the Executive's termination of his employment
upon notice to the Company following assignment to the Executive duties
materially inconsistent with the Executive's position as described in Section
2.1 or the Executive's being removed from such position, in either case without
the Executive's consent, provided such termination shall only be effective
thirty (30) days after prompt notice of such circumstances by the Executive to
the Company, if such circumstances have not been cured prior to such date.
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<PAGE>
1.7 "Specified Multiple" shall mean a multiple of two and one-half for any
termination occurring prior to the second anniversary of the Effective Date and
one for any termination occurring thereafter.
1.8 "Subsidiary" of the Company shall mean any corporation of which the
Company owns, directly or indirectly, more than 50% of the Voting Stock.
1.9 "Voting Stock" shall mean capital stock of any class or classes having
general voting power under ordinary circumstances, in the absence of
contingencies, to elect the directors of a corporation.
2. EMPLOYMENT TERM
2.1 Employment. Upon the terms and conditions hereinafter set forth, the
Company hereby employs the Executive, and the Executive hereby accepts
employment with the Company. The Executive's principal office and
responsibilities shall be that of Chief Executive Officer of the Company and
shall be responsible for the general management of the affairs of the Company
and its Subsidiaries. The Executive, in carrying out his duties under this
Agreement, shall report to the Board.
2.2 Term. Unless sooner terminated as hereinafter provided, the Executive's
employment hereunder shall be for a term of three (3) years commencing on
December 3, 1996 (the "Effective Date") and terminating on December 2, 1999. At
the end of such three-year period, this Agreement shall be automatically renewed
upon the same terms and conditions hereof for successive one-year periods (as so
extended, the "Term"), unless either party gives ninety (90) days' prior written
notice that such party does not wish to renew for another one-year period,
whereupon this Agreement shall expire on the scheduled termination date.
2.3 Duties. During the Term, the Executive shall perform such duties for
the Company and its Subsidiaries, consistent with his position and title
hereunder, and as may be assigned to him, consistent with his position
hereunder, from time to time by the Board. The Executive agrees to (i) devote
his full time and best efforts, attention and energies to the business and
affairs of the Company and to faithfully and diligently perform, to the best of
his ability, all of his duties and responsibilities; (ii) abide by all
applicable policies of the Company from time to time in effect provided that
such policies comply with applicable law; and (iii) not take any action or
conduct himself in any manner which would be reasonably likely to harm the
reputation or goodwill of the Company.
2.4 Exclusive Agreement. The Executive represents and warrants to the
Company that there are no agreements or arrangements, whether written or oral,
in effect which would prevent the Executive from rendering service to the
Company during the Term as provided herein. During the Term, the Executive shall
not (i) engage in any activity which conflicts or interferes with or derogates
from the performance of the Executive's duties hereunder nor shall the Executive
engage in any other business activity, whether or not such business
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activity is pursued for gain or profit, except as approved in advance in writing
by the Board; or (ii) accept any other full-time or substantially full-time
employment, whether as an executive or consultant or in any other capacity, and
whether or not compensated therefor.
Anything herein to the contrary notwithstanding, nothing shall preclude
the Executive from (i) serving on the boards of directors of a reasonable number
of other corporations or the boards of a reasonable number of trade associations
and/or charitable organizations, (ii) engaging in charitable activities and
community affairs, and (iii) managing his personal investments and affairs,
provided that such activities do not materially interfere with the proper
performance of his duties and responsibilities as the Company's Chief Executive
Officer.
3. COMPENSATION
3.1 Base Salary. As partial compensation for all services rendered by the
Executive hereunder and all covenants and conditions undertaken by him pursuant
to this Agreement, the Company shall pay the Executive, in accordance with the
regular payroll practices of the Company, an annual base salary ("Base Salary")
of $150,000. Of such Base Salary, a salary ("Deferred Salary") of $50,000 shall
be payable on a deferred basis as follows: If the Company shall have net income
of at least $1,000,000 for the fiscal year in which the Deferred Salary was
earned (the "Year Earned"), the Deferred Salary shall be paid following such
fiscal year. If the Company shall not have net income of at least $1,000,000 in
the Year Earned, the Deferred Salary shall be paid following the next fiscal
year for which the net income of the Company is at least equal to $1,000,000
multiplied by the sum of number of fiscal years prior to the Year Earned for
which the Deferred Salary has been deferred and not theretofore paid plus two.
Notwithstanding the foregoing, all Deferred Salary not theretofore paid (pro
rated for any partial fiscal year) shall become immediately due and payable upon
termination of the Executive without Cause or termination by the Executive for
Good Reason. Any Deferred Salary due and payable on the basis of the net income
achieved for any fiscal year shall be paid within forty-five (45) days after the
end of such fiscal year.
3.2 Bonus. For each fiscal year (pro rated for any partial fiscal year)
during the Term, provided the Company shall have annual net income of at least
$500,000, as reflected on the Company's audited financial statements for such
fiscal year, in addition to the Base Salary, the Executive shall receive 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. Any bonus earned during any fiscal year shall be paid within
forty-five (45) days after the end of such fiscal year.
3.3 Stock Options.
(a) As further consideration of the services to be rendered by the
Executive, the Company hereby grants to the Executive, effective upon the
Effective Date, options (the "Options") to purchase 375,000 shares of common
stock, par value $0.01 per
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share (the "Common Stock"), of the Company at an exercise price (the "Exercise
Price") equal to $1-11/16 per share. The number and kind of shares issuable upon
exercise of the Options and the Exercise Price shall be appropriately adjusted
upon the occurrence of any stock split, reverse stock split, stock dividend,
recapitalization, reorganization or similar transaction.
(b) The Options shall vest and become exercisable upon the earliest to
occur of the following: (i) a fiscal year in which the Company has (y)
$10,000,000 in gross revenue and (z) either $750,000 in pre-tax income
(including extraordinary gains) or $500,000 in pre-tax income (excluding
extraordinary gains), as reflected on the Company's audited financial statements
for such fiscal year; (ii) a fiscal year in which the Company has $15,000,000 in
gross revenue, as reflected on the Company's audited financial statements for
such fiscal year; and (iii) the fifth anniversary of the Effective Date.
Notwithstanding the foregoing, the Options shall immediately vest and become
exercisable upon the occurrence of a Change of Control, the Executive is
terminated by the Company other than for Cause or the Executive terminates his
employment for Good Reason.
(c) Except as provided below, the Options granted hereby shall expire
on the tenth anniversary of the Effective Date. Upon termination of the
Executive's employment, the Options shall expire as follows: If the Company
terminates the Executive for Cause, the Options shall expire immediately upon
termination. If the Executive terminates his employment without Good Reason, the
Options shall expire three months following such termination. If the Executive's
employment shall terminate upon the expiration of the Term or upon the death or
Disability of the Executive or if the Company shall terminate the Executive
without Cause or if the Executive shall terminate his employment for Good
Reason, the Options shall expire one year from the date of such termination.
(d) The Company shall promptly file with the Securities and Exchange
Commission a registration statement on Form S-8 registering the shares of Common
Stock issuable upon the exercise of the Options by the Executive and shall keep
such registration statement effective for as long as any of the Options are
outstanding.
3.4 Method of Exercise. The Options or any part thereof may be exercised
only by the giving of written notice to the Company on such form and in such
manner as the Board shall prescribe. Such written notice of exercise shall be
accompanied by payment of the full purchase price of the number of shares being
purchased. Such payment may be made by cash, certified check or check acceptable
to the Company. The date of exercise (the "Exercise Date") of the Options shall
be the date on which written notice of exercise is received by the Company,
during normal business hours, at its address as provided in Section 7.1 of this
Agreement. On the Exercise Date, the Executive shall be deemed to be the holder
of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the transfer books of the Company shall then be closed or
certificates representing such shares shall not then have been actually
delivered to the Executive. As soon as practicable after the Exercise Date, the
Company shall issue and deliver to the
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Executive a certificate or certificates for the number of shares issuable upon
such exercise, registered in the name of the Executive.
3.5 Nonassignability. No options granted to the Executive under this
Agreement shall be assignable or transferable other than by will or by the laws
of descent and distribution or by qualified domestic relations orders (as
defined in the Internal Revenue Code).
4. BENEFITS
4.1 Benefits. The Executive shall be entitled to participate, to the extent
the Executive is otherwise eligible under the terms thereof, in all plans now
existing or hereafter adopted for the general benefit of the Company's
employees, such as stock option or other incentive compensation plans, profit
sharing plans, retirement plans, health insurance plans, or other insurance
plans and benefits (not including, however, bonus, severance or cash incentive
arrangements other than those specified in this Agreement), subject to the
provisions of such plans as may be in effect from time to time.
4.2 Expense Reimbursement. The Executive is authorized to incur reasonable
expenses in carrying out his duties and responsibilities under this Agreement
and the Company shall promptly reimburse him for all business expenses incurred
in connection with carrying out the business of the Company, in accordance with
its standard policies from time to time in effect.
4.3 Vacation. The Executive shall be entitled to six (6) weeks annual paid
vacation for each year during the Term. Any vacation days not used by the
Executive during any calendar year shall be paid to the Executive in the form of
a bonus at the end of such calendar year. The Executive shall also be entitled
to sick leave and holidays in accordance with the Company's policies for senior
executive employees.
4.4 Automobile Allowance. The Company shall provide the Executive with the
full use of a leased automobile of the Executive's choice at a cost to the
Company not to exceed $1,000 per month and shall further reimburse the Executive
for all reasonable expenses incurred in connection with the Executive's use of
such automobile.
4.5 Life Insurance. The Company shall provide to the Executive a life
insurance policy, providing death benefits in the amount of $1,000,000, payable
to any beneficiary to be designated by the Executive.
4.6 Indemnification. The Company agrees that if the Executive is made a
party, or is threatened to be made a party, to any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "Proceeding"), by
reason of the fact that he is or was a director, officer or employee of the
Company or is or was serving at the request of the Company as director, officer,
member, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, including service with respect to
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<PAGE>
employee benefit plans, whether or not the basis of such Proceeding is the
Executive's alleged action in an official capacity while serving as a director,
officer, member, employee or agent, the Executive shall be indemnified and held
harmless by the Company to the fullest extent permitted or authorized by the
Company's certificate of incorporation or bylaws, or, if greater, by the laws of
the State of Delaware, against all cost, expense, liability and loss (including,
without limitation, attorney's fees, judgments, fines, ERISA exercise taxes or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by the Executive in connection therewith, and such indemnification
shall continue as to the Executive even if he has ceased to be a director,
member, employee or agent of the Company or other entity and shall inure to the
benefit of the Executive's heirs, executors and administrators. The Company
shall advance to the Executive all reasonable costs and expenses incurred by him
in connection with a Proceeding within twenty (20) days after receipt by the
Company of a written request for such advance. Such request shall include an
undertaking by the Executive to repay the amount of such advance if it shall
ultimately be determined that he is not entitled to be indemnified against such
costs and expenses. Notwithstanding the foregoing, such indemnification shall
include, without limitation, consultation services provided by the Executive to
the Company as of March 1, 1996.
5. TERMINATION
5.1 Termination Generally. The Term may be terminated at any time by the
Company immediately upon notice from the Company to the Executive. The Executive
may terminate his employment hereunder at any time by giving the Company ninety
(90) days' prior written notice.
5.2 Termination for Cause. In the event that the Term is terminated by the
Company for Cause, or if the Executive terminates his employment hereunder
without Good Reason, the Company shall pay to the Executive an amount equal to
the Executive's accrued but unpaid Base Salary through the date of such
termination (including any Deferred Salary, payable at the same time as such
Deferred Salary would be paid as provided in Section 3.1 of this Agreement),
accrued but unpaid bonus for any completed fiscal year, additional salary
payments in lieu of Executive's accrued and unused vacation for the current
calendar year (on a pro rata basis), unreimbursed business expenses, and
unreimbursed medical, dental and other employee benefit expenses incurred in
accordance with the applicable plans (the "Standard Termination Payments").
5.3 Death; Disability. The Term will terminate forthwith upon the
Executive's death or, upon notice by the Company or the Executive, upon the
Executive's Disability.
Upon the Executive's death, the Company shall pay the Standard
Termination Payments to the Executive's estate, and any and all death benefits
under the Company's benefit plans shall be paid to the Executive's beneficiary
or beneficiaries as duly designated in writing by the Executive. Upon
termination of the Term for Disability, the Company shall pay to the Executive
the Standard Termination Payments and any and all other employee benefits as may
be provided under the terms of the applicable benefit plans. In
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addition, upon termination of the Executive for death or Disability, the
Executive or the Executive's designated beneficiary or beneficiaries shall be
entitled to receive salary payments, at the annual rate of the Base Salary
(excluding the Deferred Salary), for a period of six (6) months following such
termination and, in the event of termination for Disability, the Executive shall
be entitled to participate in medical, dental, hospitalization and life
insurance coverage and in all other employee plans and programs in which he was
participating on the date of such termination for a period of six (6) months
following such termination.
5.4 Termination Without Cause. In the event that the Company terminates the
Executive's employment under this Agreement without Cause and other than by
reason of his death or Disability or the Executive terminates his employment
hereunder for Good Reason, the Company shall make the Standard Termination
Payments and, so long as the Executive shall not have breached the Executive's
obligations to the Company under Article 6 hereof (without limitation to any
other remedy available to the Company), the Company shall pay the Executive a
severance payment equal to the Specified Multiple times the sum of his Base
Salary and the greater of $25,000 or the Executive's bonus for the immediately
preceding fiscal year. In addition, the Executive shall be entitled to receive
salary payments, at the annual rate of the Base Salary (excluding the Deferred
Salary), and to participate in medical, dental, hospitalization and life
insurance coverage and in all other employee plans and programs in which he was
participating on the date of such termination for a period of twelve (12) months
following such termination.
5.5 Change of Control. In the event of a Change in Control, the Executive
shall be entitled to a lump sum payment of $1,000,000 (in cash or by certified
check), payable within ten (10) days of such Change of Control; provided,
however, such payment shall be reduced by an amount equal to the sum of (A) the
number of shares issuable upon exercise of any then-unexercised Options
multiplied by the positive difference, if any, between (w) the market value of
one share of Common Stock on the date of such Change of Control and (x) the
Exercise Price and (B) the number of shares issued upon exercise of any
previously exercised options multiplied, in each case, by the difference between
(y) the market value of one share of Common Stock on the date of exercise and
(z) the Exercise Price. Market value for these purposes shall be the closing
price on the average of the closing bid and ask prices on the last trading day
prior to the Change of Control or exercise, as the case may be, for which such
prices are available, on the principal national securities exchange or
inter-dealer quotation system on which the Common Stock is then quoted, or if
the Common Stock is not then so quoted, as determined in good faith by the
Board.
5.6 Severance Payment. In the event that the employment of the Executive is
terminated for any reason, the Company shall make a severance payment to the
Executive in an amount based on the gross revenues of the Company in the
immediately preceding fiscal year, stated on the Company's audited financial
statements, as set forth in the following table:
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Amount of Gross Revenues Aggregate Amount
per Fiscal Year of Severance
Less than $7,500,000 -0-
$7,500,001 - $8,000,000 $80,000
$8,000,001 - $8,500,000 $160,000
$8,500,001 - $9,000,000 $240,000
$9,000,001 - $9,500,000 $320,000
$9,500,001 - $10,000,000 $400,000
Such severance payments (together with any payments provided in this
Article 5) shall constitute complete satisfaction of all obligations of the
Company to the Executive pursuant to the Agreement. Upon termination for any
reason, the Executive shall cease to be an employee of the Company for all
purposes, and the Company shall have no obligation to provide the Executive with
any employee benefits or perquisites hereunder (except as provided in this
Article 5). The Executive's rights set out in this Article 5 shall constitute
the Executive's sole and exclusive rights and remedies as a result of the
Executive's actual or constructive termination of employment without Cause.
6. CONFIDENTIALITY AND NON-COMPETE
6.1 Confidentiality. The Executive acknowledges that the Company, its
Subsidiaries, affiliated companies and ventures from time to time (collectively,
including the Company, the "Company Affiliates") own and have developed and
compiled, and will own, develop and compile, certain proprietary techniques and
confidential information which have great value to their business ("Confidential
Information"). Confidential Information includes not only information disclosed
by the Company Affiliates to the Executive, but also information developed or
learned by the Executive during the course or as a result of employment
hereunder, which information the Executive acknowledges is and shall be the sole
and exclusive property of the Company Affiliates. Confidential Information
includes all proprietary information that has or could have commercial value or
other utility in the business in which the Company Affiliates are engaged or
contemplate engaging, and all proprietary information of which the unauthorized
disclosure could be detrimental to the interests of any of the Company
Affiliates, whether or not such information is specifically labelled as
Confidential Information by a Company Affiliate.
The Executive agrees that he shall not, directly or indirectly, use,
make available, sell, disclose or otherwise communicate to any corporation,
partnership, individual or other third party, other than in the course of his
assigned duties and for the benefit of the Company Affiliates, any Confidential
Information, either during the Term or thereafter.
In the event of the Executive's employment with the Company ceases for
any reason, the Executive will not remove from the premises of any of the
Company Affiliates without their prior written consent any records, files,
drawings, documents, equipment, materials or writings received from, created for
or belonging to the Company Affiliates, including those which relate to or
contain Confidential Information, or any copies thereof.
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<PAGE>
Upon request or when the Executive's employment with the Company terminates, the
Executive will immediately deliver the same to the Company.
The Executive's obligations under this Section 6.1 shall survive the
termination of this Agreement and the Executive's employment hereunder.
6.2 Proprietary Information. During the Term, the Executive will disclose
to the Company all designs, inventions and business strategies or plans
developed by the Executive during such period which relate directly or
indirectly to the business of the Company Affiliates, including without
limitation any process, operation, product or improvement. The Executive agree
that all of the foregoing are and will be the sole and exclusive property of the
Company and that the Executive will at the request and cost of the Company do
whatever is necessary to secure the rights thereto, by patent, copyright or
otherwise, to the Company.
6.3 Non-Competition. The Executive agrees that, during his employment with
the Company and for a period of twelve (12) months thereafter, the Executive
shall not, directly or indirectly, own, manage, operate, join, control,
participate in, invest in or otherwise be connected or associated with, in any
manner, including as an officer, director, employee, independent contractor,
partner, consultant, advisor, agent, proprietor, trustee or investor, any
Competing Business in the Territory; provided, however, that nothing contained
in this Section 6.3 shall prevent the Executive from owning less than 5% of the
voting stock of a publicly held corporation for investment purposes. For
purposes of this Section 6.3, the term "Competing Business" shall mean a
business engaged in providing health care services or which competes with any
business then being operated by any Company Affiliate. For purposes of this
Section 6.3, the term "Territory" means any fifteen (15) mile radius in which
any Company Affiliate then operates or in which, at the date of termination of
Executive's employment hereunder, any Company Affiliate has taken substantial
steps toward establishing operations. The Executive's obligations under this
Section 6.3 shall survive the termination of this Agreement and the Executive's
employment hereunder.
6.4 No Solicitation. The Executive agrees that, during his employment with
the Company and within twelve (12) months thereafter, the Executive shall not,
directly or indirectly, seek to employ or engage, or assist anyone else to seek
to employ or engage, any person who at any time during the year preceding the
termination of the Executive's employment hereunder was in the employ of any of
the Company Affiliates or was an independent contractor providing material
merchandising, marketing, sales, financial or management consulting services in
connection with the business of any of the Company Affiliates and with whom the
Executive had regular contact; or interfere in any manner in the relationship of
any Company Affiliate with any of its suppliers or independent contractors,
whether or not the relationship between such Company Affiliate and such supplier
or independent contractor was originally established in whole or in part by the
Executive's efforts. The Executive's obligations under this Section 6.4 shall
survive the termination of this Agreement and the Executive's employment
hereunder.
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<PAGE>
7. MISCELLANEOUS
7.1 Notices. Any and all notices or other communications required or
permitted to be given under any of the provisions of this Agreement shall be in
writing and shall be deemed to have been duly given and received when delivered
personally or three (3) days after mailing, if mailed by registered or certified
mail, return receipt requested; as to the Executive, at his address as set forth
beneath his signature hereto, and as to the Company, at its principal office at
that time. The Executive may change his mailing address for the purposes of this
Agreement by written notice to the Company as herein provided.
7.2 Authority. This Agreement has been duly authorized on behalf of the
Company by the Board. The Executive represents that he is free to enter into
this Agreement and that his entering into this Agreement does not violate any
obligation that he has to any other person or legal entity.
7.3 Severability. In the event that any provision of this Agreement would
be held to be invalid or unenforceable for any reason unless narrowed by
construction, this Agreement shall be construed as if such invalid or
unenforceable provision had been more narrowly drawn so as not to be invalid or
unenforceable. If, notwithstanding the foregoing, any provision of this
Agreement shall be held to be invalid or unenforceable for any reason, such
invalidity or unenforceability shall attach only to such provision and shall not
affect or render invalid or unenforceable any other provision of this Agreement.
7.4 Entire Agreement. This Agreement sets forth the entire understanding of
the Company and the Executive with respect to the subject matter hereof and
cannot be amended or modified except by a writing signed by both parties.
7.5 Binding Effect. Except as otherwise expressly provided herein, this
Agreement shall be binding upon and inure to the benefit of the parties hereto,
and their respective successors and assigns, heirs and personal representatives.
7.6 Governing Law. This Agreement shall be governed by the laws of the
State of New York without regard to its conflict of laws provisions.
7.7 Arbitration. With respect to any suit, action or proceeding initiated
by a party to this Agreement arising out of, under or in connection with this
Agreement, the parties hereto each hereby submits to the exclusive, final and
binding arbitration of the before the American Arbitration Association of New
York City in accordance with their Commercial Arbitration Rules. Judgment upon
the award rendered by the arbitrator may be entered in
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<PAGE>
any court of record of competent jurisdiction in any country, or application may
be made to such court for a judicial acceptance of the award and an order of
enforcement, as the law of such jurisdiction may require or allow. In the event
the Executive is successful in pursuing any claim arising out of this Agreement,
the Company shall pay all of the Executive's attorneys' fees and costs,
including the compensation and expense of the Arbitrator. In all other cases,
the expenses of arbitration will be borne among the parties as determined by the
arbitrator.
7.8 Counterparts. This Agreement may be executed in counterparts which,
taken together, shall constitute a single original document.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
OAK TREE MEDICAL SYSTEMS, INC.
By:___________________________
Name:
Title:
------------------------------
WILLIAM KEDERSHA
Address:
------------------------------
------------------------------
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STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT, dated as of December 3, 1996 (the
"Agreement"), by and between Oak Tree Medical Systems, Inc., a Delaware
corporation (the "Company"), and Burton Dubbin (the "Optionee").
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that it is in the Company's best interests to grant the Optionee
options to purchase common stock of the Company.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth and other good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties intending to be legally
bound hereby agree as follows:
1. DEFINITIONS.
1.1 "Affiliate" of a person or other entity shall mean a person or other
entity that directly or indirectly controls, is controlled by, or is under
common control with the person or other entity specified (including without
limitation any investment entity managed by the person or other entity specified
or a person or entity that directly or indirectly controls, is controlled by, or
is under common control with the person or other entity specified).
1.2 "Cause" shall mean:
(a) The Optionee is convicted of a felony involving moral turpitude;
or
(b) The Optionee is guilty of willful gross neglect or willful gross
misconduct in carrying out his duties under a written employment
agreement between the Company and the Optionee (the "Optionee
Employment Agreement"), resulting, in either case, in material
economic harm to the Company, unless the Optionee believed in
good faith that such act or nonact was in the best interests of
the Company.
1.3 "Change in Control" shall mean the occurrence of any one of the
following events:
(a) Any "person," as such term is used in Sections 3(a)(9) and 13(d)
of the Securities Exchange Act of 1934 (including any group),
other than Henry Dubbin, becomes a "beneficial owner," as such
term is used in Rule 13d-3 promulgated under such Act, of 35% or
more of the Voting Stock of the Company or any "person" who
currently owns 35% or more of the Voting Stock of the Company
acquires an additional 3% or more of the Voting Stock of the
Company;
<PAGE>
(b) The majority of the Board consists of individuals other than
Incumbent Directors, which term means the members of the Board on
the date of this Agreement; provided that any person becoming a
director subsequent to such date whose election or nomination for
election was supported by two-thirds of the directors who then
comprised the Incumbent Directors shall be considered to be an
Incumbent Director;
(c) The Company adopts any plan of liquidation providing for the
distribution of all or substantially all of the assets of the
Company on a consolidated basis;
(d) All or substantially all of the assets or business of the Company
is disposed of pursuant to a merger, consolidation or other
transaction (unless the shareholders of the Company immediately
prior to such merger, consolidation or other transaction
beneficially own, directly or indirectly, in substantially the
same proportion as they owned the Voting Stock of the Company,
all of the Voting Stock or other ownership interests of the
entity or entities, if any, that succeed to the business of the
Company); or
(e) The Company merges or combines with another company and,
immediately after the merger or combination, the stockholders of
the Company immediately prior to the combination hold, directly
or indirectly, (1) in the event the Company is the surviving
corporation, 50% or less of the Voting Stock of the combined
company, or (2) in the event the Company is not the surviving
corporation, 50% or less of the Voting Stock or other ownership
interests of the entity or entities, if any, that succeed to the
business of the Company.
1.4 "Disability" shall mean the Optionee's inability to substantially
perform the Optionee's duties and responsibilities as contemplated under the
Optionee Employment Agreement for a period of more than six (6) months, whether
or not continuous, during any 365-day period, due to physical or mental
incapacity or impairment.
1.5 "Good Reason" shall mean the Optionee's termination of his employment
upon notice to the Company following assignment to the Optionee duties
materially inconsistent with the Optionee's position as described in the
Optionee Employment Agreement or the Optionee's being removed from such
position, in either case without the Optionee's consent, provided such
termination shall only be effective thirty (30) days after prompt notice of such
circumstances by the Optionee to the Company, if such circumstances have not
been cured prior to such date.
1.6 "Voting Stock" shall mean capital stock of any class or classes having
general voting power under ordinary circumstances, in the absence of
contingencies, to elect the directors of a corporation.
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<PAGE>
2. Grant of Options.
2.1 The Company hereby grants to the Optionee options (the "Options") to
purchase 375,000 shares of common stock, par value $0.01 per share, of the
Company ("Common Stock") at an exercise price (the "Exercise Price") of $1-11/16
per share. The number and kind of shares issuable upon exercise of the Options
and the Exercise Price shall be appropriately adjusted upon the occurrence of
any stock split, reverse stock split, stock dividend, recapitalization,
reorganization or similar transaction.
2.2 The Options shall vest and become exercisable upon the earliest to
occur of the following: (i) a fiscal year in which the Company has (y)
$10,000,000 in gross revenue and (z) either $750,000 in pre-tax income
(including extraordinary gains) or $500,000 in pre-tax income (excluding
extraordinary gains), as reflected on the Company's audited financial statements
for such fiscal year; (ii) a fiscal year in which the Company has $15,000,000 in
gross revenue, as reflected on the Company's audited financial statements for
such fiscal year; and (iii) the fifth anniversary of the date hereof; provided,
however, that the Options shall not be exercisable at any time unless the
Optionee becomes an employee of the Company within six (6) months of the date of
this Agreement. Notwithstanding the foregoing, the Options shall immediately
vest and become exercisable upon the occurrence of a Change of Control, if the
Optionee, after becoming an employee within the aforesaid six month period, is
terminated by the Company other than for Cause or terminates his employment for
Good Reason.
2.3 Except as provided below, the Options granted hereby shall expire on
the tenth anniversary of the date of this Agreement. Upon termination of the
Optionee's employment, the Options shall expire as follows: If the Company
terminates the employment of the Optionee for Cause, the Options shall expire
immediately upon termination. If the Optionee terminates his employment without
Good Reason, the Options shall expire three (3) months following such
termination. If the Optionee's employment shall terminate upon the expiration of
the term of his employment with the Company (as provided in the Optionee
Employment Agreement) or upon the death or Disability of the Optionee or if the
Company shall terminate the Optionee without Cause or if the Optionee shall
terminate his employment for Good Reason, the Options shall expire one year from
the date of such termination.
2.4 The Company shall promptly file with the Securities and Exchange
Commission a registration statement on Form S-8 registering the shares of Common
Stock issuable upon the exercise of the Options by the Optionee and shall keep
such registration statement effective for as long as any of the Options are
outstanding.
3. Method of Exercise.
The Options or any part thereof may be exercised only by the giving of
written notice to the Company on such form and in such manner as the Board shall
prescribe. Such written notice of exercise shall be accompanied by payment of
the full purchase price of the number of shares being purchased. Such payment
may be made by cash, certified check or check acceptable to the Company. The
date of exercise (the "Exercise Date") of the Options
- 3 -
<PAGE>
shall be the date on which written notice of exercise is received by the
Company, during normal business hours, at its address as provided in Article 5
of this Agreement. On the Exercise Date, the Optionee shall be deemed to be the
holder of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the transfer books of the Company shall then be closed or
certificates representing such shares shall not then have been actually
delivered to the Optionee. As soon as practicable after the Exercise Date, the
Company shall issue and deliver to the Optionee a certificate or certificates
for the number of shares issuable upon such exercise, registered in the name of
the Optionee.
4. Nonassignability.
No options granted to the Optionee under this Agreement shall be
assignable or transferable other than by will or by the laws of descent and
distribution or by qualified domestic relations orders (as defined in the
Internal Revenue Code).
5. Notices.
Any and all notices or other communications required or permitted to be
given under any of the provisions of this Agreement shall be in writing and
shall be deemed to have been duly given and received when delivered personally
or three (3) days after mailing, if mailed by registered or certified mail,
return receipt requested; as to the Optionee, at the address set forth beneath
his signature hereto, or at such other address as the Optionee may hereafter
designate to the Company by notice as provided herein, and as to the Company,
addressed to the Chief Executive Officer of the Company at Oak Tree Medical
Systems, Inc., 2 Gannett Drive, Suite 215, White Plains, New York 10604, or at
such other address as the Company may hereafter designate to the Optionee by
notice as herein provided.
6. Miscellaneous.
6.1 Authority. This Agreement has been duly authorized on behalf of the
Company by the Board. The Optionee represents that he is free to enter into this
Agreement and that his entering into this Agreement does not violate any
obligation that he has to any other person or legal entity.
6.2 Severability. In the event that any provision of this Agreement would
be held to be invalid or unenforceable for any reason unless narrowed by
construction, this Agreement shall be construed as if such invalid or
unenforceable provision had been more narrowly drawn so as not to be invalid or
unenforceable. If, notwithstanding the foregoing, any provision of this
Agreement shall be held to be invalid or unenforceable for any reason, such
invalidity or unenforceability shall attach only to such provision and shall not
affect or render invalid or unenforceable any other provision of this Agreement.
6.3 Entire Agreement. This Agreement sets forth the entire understanding of
the Company and the Optionee with respect to the subject matter hereof and
cannot be amended or modified except by a writing signed by both parties.
- 4 -
<PAGE>
6.4 Successors and Assigns. Except as otherwise expressly provided herein,
this Agreement shall be binding upon and inure to the benefit of the parties
hereto, and their respective successors and assigns, heirs and personal
representatives.
6.5 Governing Law. This Agreement shall be interpreted, construed and
administered in accordance with the laws of the State of New York without regard
to choice of law provisions.
6.6 Arbitration. With respect to any suit, action or proceeding initiated
by a party to this Agreement arising out of, under or in connection with this
Agreement, the parties hereto each hereby submits to the exclusive, final and
binding arbitration of the before the American Arbitration Association of New
York City in accordance with their Commercial Arbitration Rules. Judgment upon
the award rendered by the arbitrator may be entered in any court of record of
competent jurisdiction in any country, or application may be made to such court
for a judicial acceptance of the award and an order of enforcement, as the law
of such jurisdiction may require or allow. In the event the Optionee is
successful in pursuing any claim arising out of this Agreement, the Company
shall pay all of the Optionee's attorneys' fees and costs, including the
compensation and expense of the Arbitrator. In all other cases, the expenses of
arbitration will be borne among the parties as determined by the arbitrator.
6.7 Counterparts. This Agreement may be executed in counterparts which,
taken together, shall constitute a single original document.
- 5 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first written above.
OAK TREE MEDICAL SYSTEMS, INC.
By:
---------------------------------
Name:
Title:
OPTIONEE
---------------------------------
Name: Burton Dubbin
Address:
---------------------------------
Social Security Number
- 6 -
Oak Tree Medical Systems, Inc.
2 Gannett Drive
Suite 215
White Plains, NY 10604
December 20, 1996
Mr. Michael S. Neufeld
Gotham City Corporate Relations Group, Inc.
2228 128th Street
College Point, NY 11356-2722
Dear Mr. Neufeld:
This letter sets forth the terms and conditions upon which Gotham City Corporate
Relations Group, Inc. (the "Consultant") will act as a public relations
consultant to Oak Tree Medical Systems,Inc.
(the "Company").
1. Scope of Engagement. Consultant will act a public relations
advisor and consultant to the Company and, in such capacity,
will perform such public relations services as shall be
appropriate to acquaint the financial community with the
Company, its business and prospects.
2. Responsibilities and Services Provided. With respect
to the scope of assignment and at all times subject to
Section 7 hereof, Consultant will:
a. Familiarize itself with the business, operations,
management, financial condition, and future
prospects of the Company;
b. Meet and communicate concerning the Company with
brokers, dealers, financial advisors, publicists,
investors and other members of the financial
community;
c. Arrange meetings and other avenues of communica-
tion between the Company's executives and members
of the financial community; and
d. Advise the Company on the formulation, preparation
and delivery of its presentations to the financial
community.
3. Compensation to Consultant.
a. As compensation for Consultant's services not
later than sixty (60) business days following
execution of this Letter Agreement, the Company
<PAGE>
will issue ten thousand (10,000) shares of its common
stock, par value $.01 (the "Stock"), to Consultant,
against the payment therefor of $100 in cash. Prior
to issuance the company will file a registration
statement of Form S-8 under the Securities Act of
1933, as amended with respect to the Stock.
Consultant represents and warrants that it will be
providing bona fide services, not in connection with
the offer or sale of securities in a capital raising
transaction, within the meaning of Rule 401 under the
Securities Act, as compensation for which the Stock
will be issued.
b. As additional compensation for Consultant's
services hereunder, not later than twenty (20)
business days following the date of execution of
this Letter Agreement by the Company, the Company
will issue 200,000 warrants (the "Warrants") to
Consultant exercisable for the purchase of up to
200,000 shares of the Company's common stock, par
value $.01 ("Common Stock"), in three (3)
tranches, upon the following terms:
(i) 66,667 of the Warrants shall be immediately
exercisable for one share of Common Stock at
an exercise price per share equal to $5.00;
these Warrants shall be exercisable until
January 1, 1998;
(ii) 66,667 of the Warrants shall be immediately
exercisable for one share of Common Stock at
an exercise price per share equal to $6.00;
these Warrants shall be exercisable until
January 1, 1998;
(iii) 66,667 of the Warrants shall be immediately
exercisable for one share of Common Stock at
an exercise price per share equal to $7.00;
these Warrants shall be exercisable until
January 1, 1998;
c. The Company agrees to include the shares of Common
Stock underlying the Warrants in its Registration
Statement on Form SB-2, which has heretofore been
filed with the Securities and Exchange Commission but
has not yet been declared effective.
4. Reimbursement of Expenses. The Company agrees to
reimburse Consultant on a monthly basis for all
reasonable out-of-pocket expenses which have been pre-
approved.
5. Terms of Engagement. The engagement of Consultant
pursuant to the terms of this Letter Agreement shall be
- 2 -
<PAGE>
effective commencing on the date hereof and shall continue
until December 31, 1997; provided, however, that the Company
may terminate this Letter Agreement at any time, for any
reason, by giving 15 days, prior written notice of such
termination to Consultant.
6. Confidentiality. Each of the parties agrees to keep
any information with respect to each other and this
agreement confidential and not make use thereof except
as may be required by applicable law or judicial
process. Each party will not be identified or referred
to in any public release or communication prepared by
either party or any of their affiliates or associates
without the other party's prior written consent.
7. Company's Obligations. The Company will continuously
and timely apprise Consultant of material matters
relevant to the Company's business.
The company recognizes, agrees and confirms that Consultant
(i) will be using and relying on information available from
the Company and generally recognized public sources (the
"information"), without having independently verified the
same, and; (ii) does not assume responsibility for the
accuracy of completeness of the information. The Company will,
in addition to any other duties of indemnification set forth
in this Letter Agreement, indemnify and hold Consultant
harmless for any claim, suit or judgment arising out of
Consultant's use of any information concerning the Company
furnished by the Company to the Consultant.
8. Limitation of Liability; indemnification. In performing its
services under this Agreement, neither Consultant nor any
officer, director, employee, shareholder, attorney, or agent
of Consultant will be liable to the Company or its creditors
for errors or judgment or for any other acts, except for acts
of negligence of Consultant.
Notwithstanding anything contained in this Letter Agreement,
in the event that Consultant incurs any liability or
obligations in connection with the performance of its services
under this Letter Agreement, the Company shall indemnify
Consultant for all of such liabilities, obligations, expenses,
or costs arising therefrom, including reasonable legal fees
incurred by Consultant, except for (i) actions of Consultant
which have not been authorized by the Company and (ii) acts of
negligence of Consultant.
9. Relationship of the Parties. Nothing in this Letter
Agreement shall be construed to place Consultant and
the Company in the relationship of partners or joint
- 3 -
<PAGE>
venturers. Neither Consultant nor the Company shall represent
itself as the agent or legal representative of the other for
any purpose whatsoever. Consultant, in performing its service
hereunder, shall at all times be an independent contractor.
10. Miscellaneous. Notwithstanding anything to the
contrary contained herein, the provisions concerning
confidentiality, indemnification and the Company's
obligations to reimburse expenses obtained herein shall
survive any expiration or termination of Letter
Agreement. The Letter Agreement may not be amended or
modified except in writing and shall be governed by and
construed in accordance with the laws of the State of
New York without reference to principles of conflicts
of law thereof.
If the foregoing conforms to your understanding, please sign, and date and
return to us the enclosed copy of this letter.
Very truly yours
OAK TREE MEDICAL SYSTEMS, INC.
- ---------------------------
William Kedersha
Chief Executive Officer
The foregoing is in conformity with our understanding:
- ---------------------------
Print Name:
Title:
- 4 -
Oak Tree Medical Systems, Inc.
2 Gannett Drive
Suite 215
White Plains, NY 10604
December 20, 1996
Mr. Anthony Palmigiano
88-51 Aubrey Avenue
Glendale, NY 11385
Dear Mr. Palmigiano:
This letter sets forth the terms and conditions upon which Anthony Palmigiano
(the "Consultant") will act as financial advisor to Oak Tree Medical
Systems,Inc. (the "Company").
1. Scope of Engagement. Consultant will act as financial advisor
and Consultant to the Company and, in such capacity, will advise
the Company with respect to structuring, financing, acquisitions
and such other matters within its areas of expertise, as the
Company may request.
2. Responsibilities and Service Provided. With respect to
the scope of assignment and at all times subject to
Section 7 hereof, Consultant will:
a. Familiarize itself with the business, operations,
management, financial condition, and future
prospects of the Company and new business
opportunities;
b. Evaluate potential acquisitions including their
associated costs and benefits;
c. Identify potential sources of capital investment;
and
d. Assist the Company in arranging and structuring
capital transactions.
3. Compensation to Consultant.
a. As compensation for Consultant's services hereunder,
not later than twenty (20) business days following
the receipt by the Company of at least $400,000 in
capital investments to be arranged by the Consultant
pursuant to this Letter
<PAGE>
Agreement, the Company will issue ten thousand
(10,000) shares of its Common Stock (the "Stock") to
Consultant.
b. The Company agrees to include the Stock in its
Registration Statement on Form SB-2, which has
heretofore been filed with the Securities and
Exchange Commission but has not yet been declared
effective.
4. Reimbursement of Expenses. The Company agrees to
reimburse Consultant on a monthly basis for all
reasonable out-of-pocket expenses which have been pre-
approved.
5. Terms of Engagement. The engagement of Consultant
pursuant to the terms of this Letter Agreement shall be
effective commencing on the date hereof and shall
continue until December 20, 1997; provided, however,
that the Company may terminate this Letter Agreement at
any time, for any reason, by giving 45 days, prior
written notice of such termination to Consultant. If
this Letter Agreement is terminated, the Warrants in
each tranche shall be canceled (except to the extent
therefore exercised) in the same proportion as the
remaining term of this Letter Agreement bears to the
full term hereof.
6. Confidentiality. Each of the parties agrees to keep any
information with respect to each other and this
agreement confidential and not make use thereof except
as may be required by applicable law or judicial
process. Each party will not be identified or referred
to in any public release or communication prepared by
either party or any of their affiliates or associates
without the other party's prior written consent.
7. Company's Obligations. The Company will continuously
and timely apprise Consultant of material matters
relevant to the Company's business.
The company recognizes, agrees and confirms that Consultant (i)
will be using and relying on information available from the
Company and generally recognized public sources (the
"information"), without having independently verified the same,
and; (ii) does not assume responsibility for the accuracy of
completeness of the information. The Company will, in addition
to any other duties of indemnification set forth in this Letter
Agreement, indemnify and hold Consultant harmless for any claim,
suit or judgment arising out of Consultant's use of any
information concerning the Company furnished by the Company to
Consultant.
- 2 -
<PAGE>
8. Limitation of Liability; indemnification. In performing its
services under this Agreement, neither Consultant nor any
officer, director, employee, shareholder, attorney, or agent of
Consultant will be liable to the Company or its creditors for
errors or judgment or for any other acts, except for acts of
negligence of Consultant.
Notwithstanding anything contained in this Letter Agreement, in
the event that Consultant incurs any liability or obligations in
connection with the performance of its services under this
Letter Agreement, the Company shall indemnify Consultant for all
of such liabilities, obligations, expenses, or costs arising
therefrom, including reasonable legal fees incurred by
Consultant, except for (i) actions of Consultant which have not
been authorized by the Company and (ii) acts of negligence of
Consultant.
9. Relationship of the Parties. Nothing in this Letter
Agreement shall be construed to place Consultant and the
Company in the relationship of partners or joint
venturers. Neither Consultant nor the Company shall
represent itself as the agent or legal representative of
the other for any purpose whatsoever. Consultant, in
performing its service hereunder, shall at all times be
an independent contractor.
10. Miscellaneous. Notwithstanding anything to the contrary
contained herein, the provisions concerning
confidentiality, indemnification and the Company's
obligations to pay fees and reimburse expenses obtained
herein shall survive any expiration or termination of
Letter Agreement. The Letter Agreement may not be
amended or modified except in writing and shall be
governed by and construed in accordance with the laws of
the State of New York without reference to principles of
conflicts of law thereof.
- 3 -
<PAGE>
If the foregoing conforms to your understanding, please sign, and date and
return to us the enclosed copy of this letter.
Very truly yours
OAK TREE MEDICAL SYSTEMS, INC.
- ---------------------------
William Kedersha
Chief Executive Officer
The foregoing is in conformity with our understanding:
- ---------------------------
Print Name:
Title:
- 4 -
January 14,1997
John Matthews, Esq.
Gallagher & Matthews
11 Clinton Avenue
Rockville Centre, NY 11570
Re: Modification of Agreement of Sale dated December 11,
1996, between Sellers Southern Professional Associates,
Inc., Northern Professional Associates, Inc., Maple
Health, Inc., Shareholders Gentile, O'Neill, Einemann
and Posner and Oak Tree Medical Management, Inc.,
Purchaser.
Dear Mr. Matthews:
Pursuant to our clients' agreement to modify the terms of the above
noted Agreement of Sale, I have enclosed a new Promissory Note and four (4)
original copies of the Security Agreement. These new documents have again been
modified since my 12/26/96 letter to you. The terms of the original Promissory
Note have changed such that instead of borrowing $500,000.00 Oak Tree Medical
Management is borrowing $400,000.00 with the balance of $100,000,00 being paid
to Sellers in the form of Oak Tree Medical Systems, Inc. stock. The additional
$100,000 payable over nine (9) months according to the terms of the original
Agreement, will also be satisfied by issuing Oak Tree Medical Systems, Inc.
stock. Also, Oak Tree Medical Management, Inc. will be paying $14,763.26 per
month for thirty two (32) months in order to retire the Note. You should hold
the new Promissory Note in escrow until the original Note ($500,000) is returned
to me.
Please have your clients sign all four originals of the Security
Agreement and return two (2) fully executed originals to me. You should also
hold these Security Agreements in escrow until the former originals are returned
to me.
As concerns the stock, Oak Tree Medical Systems, Inc. will issue 33,333
shares of its common stock to Sellers in satisfaction of Oak Tree Medical
Management's remaining $200,000.00 obligation to Sellers. If during the next
eighteen (18) months from December 11, 1996, the common stock reaches a
<PAGE>
trading price of seven ($7.00) dollars per share or more, and remains at that
level for at least one full business week (M-F) during the eighteen month term,
then the 33,333 shares of the common stock issued will have satisfied the
$200,000.00 balance due, under the terms of the Agreement of Sale.
If, during the eighteen (18) month term, the common stock never reaches
the seven ($7,00) dollar per share threshold for one week, then an additional
8,772 shares of Oak Tree Medical Systems, Inc. common stock will be issued to
Sellers in satisfaction of the purchase price balance of $200,000.00.
Please acknowledge, on behalf of your clients, your agreement with this
modification of the Agreement of Sale terms, as contained herein.
Most Sincerely,
Frederick C. Veit ----------------------
John Matthews, Esq.
- 2 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 661,070
<SECURITIES> 0
<RECEIVABLES> 6,678,691
<ALLOWANCES> 1,650,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,767,303
<PP&E> 906,327
<DEPRECIATION> 247,666
<TOTAL-ASSETS> 12,801,535
<CURRENT-LIABILITIES> 3,689,156
<BONDS> 0
0
0
<COMMON> 25,834
<OTHER-SE> 8,506,236
<TOTAL-LIABILITY-AND-EQUITY> 12,801,535
<SALES> 2,239,145
<TOTAL-REVENUES> 2,239,145
<CGS> 0
<TOTAL-COSTS> 1,410,431
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,801
<INCOME-PRETAX> 746,913
<INCOME-TAX> 261,189
<INCOME-CONTINUING> 485,724
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 485,724
<EPS-PRIMARY> .18
<EPS-DILUTED> .16
</TABLE>
