SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended: May 31, 1998
[ ] 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 Registrant as specified in its charter)
DELAWARE 02-0401674
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
163-03 HORACE HARDING EXPRESSWAY
FLUSHING, NEW YORK 11365
(718) 460-8400
(Address, including zip code, and telephone number,
including area code, of Registrant's principal
executive offices)
Securities registered pursuant to Section 12(b) of
the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
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Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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: |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
The Registrant's revenues for its most recent fiscal year: $2,258,186.
The number of shares of Common Stock, par value $0.01 per share, outstanding as
of August 26, 1998: 5,152,859.
The aggregate market value of voting and non-voting Common Stock (4,469,484
shares) held by non-affiliates computed by reference to the closing price of the
Common Stock as of August 26, 1998: $11,313,381.
Transactional Small Business Disclosure Format: Yes: |_| No: |X|
<PAGE>
PART I
ITEM 1. BUSINESS
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 August 1994. Since January 1995, the Company has been
engaged in the business of operating and managing physical therapy care centers
and related medical practices. Currently, the Company, through its subsidiary
Oak Tree Medical Management, Inc., operates two New York City based physical
therapy care centers. Prior to April 1997, the Company also had operations in
Florida. Unless otherwise indicated by the text, reference herein to the term
"Company" will be deemed to refer to Oak Tree Medical Systems, Inc. and all its
subsidiaries.
Medical Business
The primary focus of the Company to date has been the provision of
physical therapy and related rehabilitative services. Physical therapy aids in
the restoration of patients who have been disabled by injury or disease or are
recovering from surgery. The Company's physical therapy care centers offer
preventive, rehabilitative and pre- and post-operative care for neuromuscular
and musculoskeletal injury. These may include a variety of orthopedic-related
disorders, sports- related injuries, neurologically related injuries, motor
vehicle injuries and work-related injuries.
Patients are primarily referred to 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.
The Company's clinics offer specific programs for injured workers
compensation patients. Each clinic first evaluates the worker's physical
condition and capacity to perform the requirements of his or her 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.
The Company believes that purchasers and providers of health care
services such as employers, insurance companies and health maintenance
organizations who are seeking to save on traditional health care services view
physical therapy and rehabilitation services as cost-effective in that they may
prevent short-term disabilities from becoming chronic conditions, and may
accelerate recovery from surgery and neuromuscular and musculoskeletal injuries.
In addition, changes in both public and private health insurance reimbursement
have encouraged early hospital discharge, another trend which promotes the need
for outpatient physical therapy
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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 has been to take advantage of these trends by
acquiring and integrating a network of health care practices, particularly in
the greater New York metropolitan area. The Company believes that attractive
acquisition opportunities exist in its industry because of health care's current
cost containment economics, laws that bar health care practitioners from
referring to entities in which they have an ownership interest and the general
sense of insecurity among health care practitioners resulting from the great
amount of change being experienced by the profession. 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
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.
Existing Facilities
In October 1996, the Company acquired the management and assets of
three New York City based physical therapy care centers for an aggregate
purchase price of $900,000 (in cash and assumed debt) and 10,000 shares of
Common Stock (with a guaranteed value of not less than $100,000 and issuable in
October 1998). 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 served as the director of operations of the New York City clinics
and Chief Operating Officer of the Company until February 1998. The Company also
assumed three leases for the physical therapy care centers. In July 1998, the
Company sold substantially all of the equipment and operations of two of the
three facilities it acquired in 1996 to a subsidiary of SMR Management Corp.,
Nesconset Sports, Inc. ("Nesconset Sports"), because the cash flows from these
facilities were insufficient to support their operations. The aggregate sales
price was $375,000 in cash, of which $365,000 was used to repay certain of the
Company's lease obligations. The purchaser assumed the outstanding leases.
In July 1997, the Company acquired the management and assets of an
additional center in New York City for a purchase price of $400,000. The
purchase price may be reduced by $100,000 if the final audit of the acquired
center shows that it did not attain a certain level of billings as of the end of
July 1998, which
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the Company expects was not attained. In connection with the acquisition, the
Company entered into a lease for the acquired center through August 2003, and
the seller entered into a four-year noncompetition agreement. In addition, the
seller entered into a six-month consulting agreement with the Company continuing
thereafter on a month-to-month basis, at $150,000 per annum. The Company also
entered into a six-month consulting agreement with the physical therapy care
center administrator, a relative of the seller, continuing thereafter on a
month-to-month basis, at $50,000 per annum.
In compliance with the laws of the State of New York, all treatment
related activities at the Company's New York City 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 with respect to patient treatment), the financial
results of Oak Tree P.C. are consolidated with those of the Company.
Acquisition and Rescission
In December 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, plus other consideration.
Effective February 28, 1997, the Company rescinded the acquisition and
the former sellers returned all stock and notes issued to them in the original
transaction. In addition, the former sellers agreed to pay the Company $448,935,
representing the cash purchase price of the original transaction, the net amount
expended by the Company on the facilities for the period from December 1996 to
February 1997, and the purchase price of 12,000 shares of Common Stock acquired
by the former sellers for $15,000. Of this amount, $50,000 was paid at the
closing, $25,000 was paid in May 1997 and the balance was to be paid over an
18-month period. In December 1997, the Company agreed to the early
extinguishment of the remaining amount owed by the former sellers and received
$325,000 in full settlement. The Company remained obligated to issue 14,286
shares of Common Stock to the landlord of one of the acquired facilities in
satisfaction of certain pre-existing obligations. Although the original
acquisition of the Long Island clinics was consistent with the Company's
strategy of focusing its operations in the New York area, the cash flows from
these facilities to the Company were insufficient to support the operations of
these facilities by the Company.
Sales of Florida Centers
Following the Company's October 1996 acquisition of three New York City
based physical therapy care centers and the hospital service contract, the
Company determined to shift its geographic focus from North Florida to the New
York City area. Consistent with this approach, in February 1997 the Company sold
substantially all of the assets and operations of its clinics in Jacksonville
and Orange Park, Florida. The Jacksonville assets were held by the
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Company's Acorn CORF I, Inc. subsidiary and the Orange Park assets were held by
the Company's Riverside CORF, Inc. subsidiary. In addition, the Company sold all
the shares of Oak Tree Receivables, Inc. ("OT Receivables"), a wholly-owned
subsidiary of the Company, which helped finance the operations of the two
facilities by buying certain of their receivables and financing the purchase
through a receivables funding facility which used the receivables as collateral.
The aggregate sales price was $200,000, consisting of $100,000 in cash paid at
closing and a note in the amount of $100,000 payable in two installments in
April and May 1997. Neither installment has been paid and, as collection is not
probable, the Company has established a reserve in the amount of the note. In
connection with the sale of the North Florida centers, the purchaser assumed
$86,150 of accounts payable and the balance of the obligation of the receivables
funding facility in the amount of $1,812,500. In exchange for the consent of the
lender of the patient care receivables funding facility, the Company pledged as
collateral to the lender additional accounts receivable in the amount of
$700,000. The Company also terminated the employment agreement with the
facilities' medical director, was given back 400,000 shares of Common Stock
which had been issued in connection with the Company's acquisition of the
facilities in 1995 and was relieved from its obligation to issue an additional
145,000 shares of Common Stock.
Continuing the divestiture of its Florida operations, the Company
disposed of its remaining North Florida facility, located in St. Augustine,
Florida, in April 1997. The sales price was $25,000 in cash, with $15,000 paid
at closing and $10,000 paid in April and May 1997.
Proposed Acquisition
In September 1997, the Company entered into a letter of intent,
subsequently amended in December 1997, for the acquisition of the management and
assets of approximately 30 medical practices and MRI facilities located in the
greater New York metropolitan area. Collectively, the centers had revenues of
approximately $70 million and estimated earnings before interest, taxes,
depreciation and amortization of approximately $23 million in calendar year
1997. The Company intends to finance the proposed acquisition through issuance
of debt and equity securities of the Company, which, if consummated, will result
in a substantial change to the Company's current debt and equity structure.
There can be no assurance, however, that the Company will successfully negotiate
a definitive written agreement or meet its obligations of raising capital to
complete the acquisition or that all the other conditions to the closing of the
transaction will be met.
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.
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Government Regulation
The health care industry is subject to extensive and increasing
federal, state and local regulation. 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 to 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 the Company's
clinics are located, prohibit a corporation from engaging in the provision of
health care, including physical therapy, or from exercising direct control over
professionals engaged in the health care field. The Company believes that its
ownership of physical therapy care centers 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.
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 these 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.
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, developmental 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
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certain competitors may be more successful than the Company in adapting to these
changes in a timely and effective manner.
Investment in Gold Ore
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 common stock of Accord
Futronics Corp. ("Accord"), an unaffiliated privately-held company with other
mining related assets. The Company had the right to receive a royalty of 12.5%
of the net mining income from processing of the gold ore transferred to Accord.
In November 1997, the Company returned the 6,000,000 shares of common
stock of Accord in exchange for 100% of the common stock of Aurum. At the time
of the return of the Accord stock, Accord had neither commenced nor anticipated
commencing mining operations, and the Company desired to take action to realize
the value of the gold ore. Due to (i) the absence of current financial and other
information for Accord, as to both the subsidiary and the underlying gold ore,
(ii) the Company's lack of resources to commence mining, and (iii) the Company's
inability to sell the ore, the Company wrote down its investment in the ore by
$3,000,000, based on its experience marketing the ore, as of May 31, 1998. The
Company intends to continue its attempt to sell the gold ore and anticipates a
sale in the near future, although there can be no assurance that it will be
successful in doing so.
Employees
As of May 31, 1998, the Company had 30 full-time employees and 13
part-time employees. The Company also hires independent consultants for its
medical service operations from time to time and at May 31, 1998, employed three
persons under consulting arrangements.
ITEM 2. PROPERTIES
The Company's headquarters office is temporarily located in one of its
formerly-owned physical therapy care centers located at 163-03 Horace Harding
Expressway, Flushing, New York 11365. The Company is currently searching for a
more permanent office space.
Set forth below is certain information concerning the Company's leased
facilities for its rehabilitative and medical service operations, as of July 31,
1998. The Company believes these facilities are adequate for its operations.
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SQUARE MONTHLY EXPIRATION
LOCATION FOOTAGE RENT OF LEASE
1725 Tenbroeck Avenue 2,200 $2,480 11/30/01
Bronx, New York
130 William Street 2,850 $3,978 8/31/03
New York, New York
ITEM 3. LEGAL PROCEEDINGS
Medbrook Corporation v. Ronald W. Dennie, M.D. and 1st Coast Physical
Medicine Associates, Inc., Case No. 95-4524-CA (4th Judicial Circuit, Duval
County, Florida). Plaintiffs in this action sued 1st Coast Physical Medicine
Associates, Inc., the former owner of the Jacksonville, Florida physical therapy
care centers, and Dr. Ronald W. Dennie, the medical manager of the Jacksonville
operations, alleging that Dr. Dennie was in violation of a covenant not to
compete with Medbrook Corporation ("Medbrook"). Medbrook had managed the
Jacksonville operations prior to their sale to the Company by Dr. Dennie.
Plaintiff sought damages and injunctive relief. The matter was settled in
December 1997 without material effect on the Company.
Westcap Corporation v. Oak Tree Medical Systems, Inc., Index No.
604059/97 (Supreme Court of the State of New York, County of New York, New
York). A former consultant of the Company filed an action against the Company
alleging breach of contract and other claims. The plaintiff sought $50,000 in
monetary damages and warrants to acquire 250,000 shares of Common Stock. In
December 1997, the Company settled the matter by agreeing to issue 23,000 shares
of Common Stock to the plaintiff (and, if a certain stock value is not met, an
additional 2,500 shares of Common Stock) and a cash payment of $3,000.
Irwin Bosh Stack and Irene Stack v. Oak Tree Medical Systems, Inc. and
Henry Dubbin, Case No. 97-17996 CA 13 (11th Judicial Circuit, Dade County,
Florida). In August 1997, a stockholder, the wife of the Company's former
Chairman of the Board of Directors, filed a lawsuit against the Company,
alleging unreasonable restraint on the alienability of her shares of Common
Stock of the Company and breach of fiduciary duty on the part of Mr. Henry
Dubbin. The plaintiff is seeking unspecified compensatory and punitive damages
and injunctive relief.
U.S. Consultancy, Inc. and FYM, Inc. v. Henry Dubbin, Burton Dubbin,
Fred Singer, William Kedersha, Michael Gerber, Ellis Group, Inc., Liberty
International, Inc., NFC (Service) Ltd. and Oak Tree Medical Systems, Inc., C.A.
No. 15994 (Court of Chancery of the State of Delaware, New Castle County,
Delaware). Plaintiffs filed an action on October 20, 1997, alleging, among other
things, (i) the Company's failure to hold an annual meeting of stockholders
within the time prescribed by Section 211 of Delaware General Corporation Law
(the "DGCL") and (ii) breach of fiduciary duties by current and former officers
and directors of the Company in (a) issuing shares of Common Stock for the
purpose of entrenchment, (b) rejecting potential investment and acquisition
opportunities for personal reasons, (c) engaging
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in self-dealing and wasteful transactions, (d) failing to file annual and
quarterly reports with the Securities and Exchange Commission, and (e) issuing
unregistered stock of the Company. Plaintiffs sought, among other things, an
order compelling the Company to hold an annual meeting of stockholders,
rescission of all issuances of shares of Common Stock and options to certain
individuals pursuant to Form S-8 registration statements filed in June 1997, and
unspecified damages. Plaintiffs also sought to inspect certain books and records
of the company pursuant to Section 220 of the DGCL.
In May 1998, these two related matters were settled, subject to court
approval, requiring the Company to pay $170,000, with $120,000 in cash payable
immediately and $25,000 in cash payable on each of August 1, 1998 and September
1, 1999. In addition, the Company issued a two-year option to acquire 60,000
shares of Common Stock at $1.59 per share in exchange for consulting services.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on March 9, 1998.
The matter submitted to a vote of the Company's stockholders was the election of
two directors of the Company's Board of Directors.
The Company's stockholders elected Messrs. Henry Dubbin and Fred L.
Singer to the Company's Board of Directors, to hold office until the next annual
meeting of stockholders and until their respective successors are duly elected
and qualified. The results of the voting were as follows:
Mr. Henry Dubbin
Voted for..............................................2,659,449
Voted against.......................................... 2,250
Authority withheld..................................... 38
Abstained.............................................. 0
Broker non-votes....................................... 0
Mr. Fred L. Singer
Voted for..............................................2,659,699
Voted against.......................................... 2,000
Authority withheld..................................... 38
Abstained.............................................. 0
Broker non-votes....................................... 0
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded in the over-the-counter
market on the OTC Electronic Bulletin Board of the National Association of
Securities Dealers (the "NASD"). The following table sets forth, for the fiscal
quarters 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.
<TABLE>
<CAPTION>
Low Bid High Bid
<S> <C> <C>
Fiscal Quarter Ended May 31, 1997:
First Quarter................................ $4.625 $7.750
Second Quarter............................... 4.000 7.875
Third Quarter................................ 3.000 5.500
Fourth Quarter............................... 0.875 2.563
Fiscal Quarter Ended May 31, 1998:
First Quarter................................ $2.125 $4.469
Second Quarter............................... 1.875 4.641
Third Quarter................................ 1.750 2.938
Fourth Quarter............................... 1.063 2.406
</TABLE>
As of August 26, 1998, there were approximately 133 holders of record of
the Company's Common Stock. The closing bid and asked prices for the Company's
Common Stock on August 26, 1998, was $2.531 and $2.563, respectively.
The Company has not paid any cash dividends on its Common Stock to date,
and the payment of cash dividends in the foreseeable future is not contemplated
by the Company. The future dividend policy will depend on the Company's
earnings, capital requirements, financial condition, and other factors
considered relevant to the Company's ability to pay dividends.
Recent Sales of Unregistered Securities
A. In December 1996, the Company issued ten year options to acquire
375,000 shares of Common Stock to William Kedersha, the Company's former Chief
Executive Officer. These options had an exercise price of $1.6875 per share and
were to vest upon the earliest 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). In September 1997, the Company entered into
a settlement agreement with Mr. Kedersha, whereby the Company terminated his
employment, cancelled such options and issued to Mr. Kedersha 22,500 shares of
Common Stock.
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B. In December 1996, the Company granted ten year options to acquire
375,000 shares of Common Stock to Burton Dubbin, the son of Mr. Henry Dubbin, in
exchange for consulting services. These options had an exercise price of $1.6875
per share and were to vest upon the earlier to occur of (i) the Company's
achievement of certain financial benchmarks, (ii) the five year anniversary of
the issuance of the options and Mr. Burton Dubbin being an employee with the
Company or (iii) a change of control (as defined). Mr. Burton Dubbin became an
employee of the Company in April 1997. In August 1997, Mr. Burton Dubbin
terminated his employment with the Company and entered into a two-year
consulting agreement at a fee of $150,000 per annum, plus 125,000 shares of
Common Stock, of which 25,000 shares were immediately issuable and 5,000 shares
are issuable monthly (in an aggregate amount not to exceed 100,000 shares) for
the duration of Mr. Burton Dubbin's service with the Company. In addition, the
Company amended the terms of the options, making such options immediately
exercisable and extending the expiration date until August 2007. As of May 31,
1998, 125,000 shares of Common Stock have been issued to Mr. Burton Dubbin,
which shares are being held in escrow.
C. In April 1997, the Company issued options to acquire 20,000 shares
of Common Stock to Fred L. Singer, a director and Vice President of the Company.
The options are immediately exercisable and have an exercise price of $1.00 per
share. In January 1998, Mr. Singer exercised options to acquire 5,000 shares of
Common Stock. The remaining options expire on April 16, 1999.
D. In April and May 1997, the Company entered into three agreements for
financial consulting services. Under the first of these agreements, the Company
agreed to issue to a consultant 50,000 shares of Common Stock and options to
acquire an additional 200,000 shares at exercise prices of between $2.50 and
$4.25. The second agreement provides for the issuance to a consultant of 75,000
shares of Common Stock and options to acquire an additional 75,000 shares at
exercise prices of between $4.50 and $5.00. Under the third agreement, the
Company agreed to issue to a consultant 50,000 shares of Common Stock and
options to acquire an additional 250,000 shares at prices of between $2.00 and
$4.75. During the fiscal year ended May 31, 1998, options for 110,250 shares
were at prices ranging from $2.00 to $3.00 per share, and options to acquire
143,750 and 75,000 shares were extended to December 31, 1998 and February 29,
1999, respectively, in exchange for consulting services valued at $10,000.
E. In May 1997, the Company issued options to acquire 350,000 shares of
Common Stock to Gary Danziger, the former Chief Operating Officer of the
Company. The options had an exercise price of $1.00 per share and were to expire
on October 1, 1998. In February 1998, Mr. Danziger terminated his employment
with the Company and agreed to terminate these options and his right to receive
50,000 shares of Common Stock in exchange for $60,000 in cash. In addition, the
Company forgave outstanding net loans owed by Mr. Danziger in the amount of
$34,924.
F. During the fiscal year ended May 31, 1998, the Company issued 6,539
shares of Common Stock to Kramer, Levin, Naftalis & Frankel, counsel of the
Company, in consideration of legal services. These shares were valued at an
average price of $2.50 per share.
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G. In July 1998, the Company agreed to issue 400,000 shares of Common
Stock in a private placement to "accredited investors" at an offering price of
$2.30 per share, with net proceeds to the Company of $1.09 per share. The shares
are currently being held in escrow. Signature Equities Agency, G.m.b.H served as
placement agent in connection with the offering.
The issuance set forth above were issued pursuant to Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act"), as transactions
by an issuer not involving any public offering, and, alternatively, in the case
of employee options, on a no-sale theory.
Sales of Equity Securities Pursuant to Regulation S
On January 29, 1998, the Company closed an offshore placement of
1,500,000 shares of Common Stock for an aggregate purchase price of $3,324,025.
The Company incurred expenses of $1,600,868 and received net proceeds of
$1,723,157. Signature Equities Agency, G.m.b.H, served as placement agent in
connection with the offering.
The placement was a private transaction not involving a public offering
and was exempt from the registration provisions of the Securities Act, pursuant
to Section 4(2) thereof, and pursuant to Regulation S promulgated under the
Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company is engaged in the business of operating and managing
physical therapy care centers. The Company currently operates two facilities in
New York City.
In December 1996, the Company acquired four Long Island, New York based
physical therapy care centers. This acquisition was rescinded in March 1997.
In February 1997, the Company sold the assets and certain liabilities
of two physical therapy care facilities and related rehabilitative medicine
practices located in Jacksonville and Orange Park, Florida, together with a
related comprehensive outpatient rehabilitation facility (CORF) license. In
connection with the sale of these facilities, the Company also sold a
wholly-owned financing subsidiary, effectively terminating its obligations under
a receivables funding facility. In April 1997, the Company disposed of its
physical therapy care center in St. Augustine, Florida, completing its exit from
the North Florida area in order to focus its operations in the Northeast.
In July 1998, the Company sold substantially all of the assets and
operations of its facilities located in Flushing and Upper Manhattan, New York,
due to insufficient cash flows from such facilities.
In September 1997, the Company entered into a letter of intent,
subsequently amended in December 1997, to acquire approximately 30 medical
practices and MRI facilities in the greater New York metropolitan area, subject
to raising the capital necessary for the acquisitions and other conditions.
- 12 -
<PAGE>
Results of Operations
1998 Fiscal Year Compared to 1997 Fiscal Year
Patient revenues decreased by 32.5% from $3,344,559 to $2,258,186 in
the fiscal year ended May 31, 1998 ("Fiscal 1998") compared with the fiscal year
ended May 31, 1997 ("Fiscal 1997"). The decrease in revenues was primarily
attributable to the sale of the Company's North Florida facilities in Fiscal
1997, offset in part by a full year of revenues from the Company's New York City
clinics acquired in Fiscal 1997. Revenues from the four Long Island, New York
clinics acquired in December 1996, whose purchase was rescinded by the Company
effective February 28, 1997, were not included in the Company's revenues for
Fiscal 1997.
Total expenses increased by 12.4% to $7,315,751 for Fiscal 1998 from
$6,510,448 for Fiscal 1997, primarily due to the $3,000,000 write-down of the
gold ore, from $4,994,213 to $1,994,213. On the other hand, costs of patient
services, selling, general and administrative expenses, depreciation and
amortization and interest expense (recurring operating expenses) decreased by
21.1% from $5,733,391 to $4,524,335. Costs of patient services, as a percentage
of patient revenues, decreased from 56.1% in Fiscal 1997 to 52.1% in Fiscal 1998
primarily because of a decrease in the provision for contractual allowances.
Selling, general and administrative expenses decreased 11.6% from $3,283,010 in
Fiscal 1997 to $2,903,263 in Fiscal 1998, primarily due to decreases in the
provision for bad debts, the compensation of executive officers and the travel
expenses of executives between the Company's New York and Florida facilities in
Fiscal 1998. The decrease was partially offset by increased legal and accounting
expenses during Fiscal 1998 due to the settlement of certain litigation matters
and the preparation of reports filed with the Securities and Exchange
Commission. Interest expense decreased 57.7% from $403,724 in Fiscal 1997 to
$170,700 in Fiscal 1998 due to a refinancing and lower interest rates. During
Fiscal 1997, the Company also recognized a loss in connection with the sale of
the North Florida facilities and the rescission of the Long Island, New York
facilities, of $777,054, while recognizing a gain of $208,584 on similar items
in Fiscal 1998. Total expenses as a percentage of revenues increased to 324.0%
for Fiscal 1998 from 194.7% for Fiscal 1997 as a result of these factors and the
decrease in revenues for these periods.
Income taxes for Fiscal 1998 and 1997 are not representative of an
effective tax rate. For Fiscal 1998 and 1997, deferred income tax benefits have
been reduced by increases in the allowance for the realization of deferred
income tax assets of $2,000,000 and $610,000, respectively, because, as of both
May 31, 1998 and 1997, it was more likely than not that the deferred tax assets
would not be realized. The deferred tax assets result primarily from impairment
of the gold ore and net operating loss carryforwards and the Company may not
generate sufficient future taxable income for their utilization. As of May 31,
1998 and 1997, net operating loss carryforwards of $3,500,000 and $1,800,000,
respectively, increased due to the increases in taxable losses for each year.
The above factors contributed to a net loss of $5,057,565 ($1.49 per
share) for Fiscal 1998 compared with a net loss of $2,554,212 ($0.99 per share)
for Fiscal 1997.
- 13 -
<PAGE>
1997 Fiscal Year Compared to 1996 Fiscal Year
Patient revenues for Fiscal 1997 decreased by 28.3% to $3,344,559 from
$4,663,792 for the fiscal year ended May 31, 1996 ("Fiscal 1996"). The decrease
in revenues was attributable to the disposition in Fiscal 1997 of the Company's
North Florida facilities, as well as a fall off in revenues at these facilities
during that year, offset in part by revenues from the Company's New York City
clinics acquired in October 1996. Revenues from the four Long Island, New York
clinics acquired in December 1996, whose purchase was rescinded by the Company
effective February 28, 1997, are not included in the Company's revenues for
Fiscal 1997.
Total expenses increased by 99.8% from $3,257,931 for Fiscal 1996 to
$6,510,448 for Fiscal 1997. The increase in expenses was due to higher operation
expenses incurred in the New York City facilities and costs incurred in
connection with the disposition of the North Florida facilities. Total expenses
include costs of patient services, selling, general and administrative expenses,
losses on sales and rescission, interest expenses and depreciation and
amortization expenses. Costs of patient services as a percentage of patient
revenues increased from 41% in Fiscal 1996 to 56.1% in Fiscal 1997 because of
the Company's discontinuation of operations in North Florida and the higher
costs of doing business in New York. Selling, general and administrative
expenses increased to $3,283,010 in Fiscal 1997 from $1,035,782 in Fiscal 1996.
Selling, general and administrative expenses for Fiscal 1997 included allowances
and write-offs of uncollectible accounts receivable, compensation of executive
officers and travel expenses of executives between the Company's New York and
Florida facilities. The increase was also attributable to expenses related to
the improvement of the Company's financial controls and accounting system, and
increased legal and accounting expenses during Fiscal 1997 primarily due to the
transactional activities of the Company during the fiscal year, the settlement
of certain litigation matters and preparation of reports filed with the SEC. The
Company recognized interest costs of $403,724 in Fiscal 1997 as compared to
$130,920 in Fiscal 1996. Interest increased during Fiscal 1997 as a result of
higher interest rates on the Company's bank borrowings and increased financing
expenses associated with the receivables funding facility. During Fiscal 1997,
the Company also recognized a loss in connection with the sale of the North
Florida facilities and the rescission of the Long Island, New York facilities,
of $777,054. Total expenses as a percentage of revenues increased from 69.9% for
Fiscal 1996 to 194.7% for Fiscal 1997 as a result of these factors and the
decrease in revenues for these periods.
Income tax (benefit) expenses for Fiscal 1997 and Fiscal 1996 of
($546,677) and $346,770, respectively, are not representative of an effective
tax rate. For Fiscal 1997, the deferred income tax benefit has been reduced by
an increase in the allowance for the realization of deferred income tax assets
of $610,000, because, as of May 31, 1997, it is more likely than not that the
deferred tax assets would not be realized as they relate primarily to net
operating loss carryforwards and the Company may not generate sufficient future
taxable income for their utilization. As of May 31, 1996, there were less net
operating loss carryforwards as compared to Fiscal 1997, and the Company
utilized these net operating losses as a reduction of deferred income tax
payable. For Fiscal 1996, the income tax expense has been reduced by the
reversal of an overaccrual of prior year's taxes of $230,655.
- 14 -
<PAGE>
The above factors contributed to a net loss of $2,554,212 for Fiscal
1997, compared with net income of $1,059,091 for the Fiscal 1996.
Liquidity and Capital Resources
In the past, the Company has funded its capital requirements from
operating cash flow, loans against its accounts receivable, sales of equity
securities and the issuance of equity securities in exchange for assets acquired
and services rendered. During Fiscal 1997, the Company undertook a number of
actions to consolidate its geographic focus, and with other actions undertaken
during Fiscal 1998, the Company hopes to attract new investment capital, which
the Company believes will be necessary to sustain its ongoing operations and to
facilitate growth. The Company continues to explore opportunities to raise
private equity capital and, in conjunction therewith, to provide credit support
for the Company's operations and potential acquisitions. Although the Company
has in the past been and continues to be in discussions with potential
investors, there can be no assurance that its efforts to raise any substantial
amount of private capital will be successful. Any substantial private equity
investment in the Company will result in voting dilution of the Company's
existing stockholders and could also result in economic dilution. If the Company
is unable to obtain new capital, the Company will be unable to carry out its
strategy of growth through acquisitions and the long-term ability of the Company
to continue its operations may be in doubt.
Following the Company's acquisition of three New York City based
physical therapy care centers, together with a hospital contract for the
provision of physical therapy services, in October 1996, the Company shifted its
geographic focus from North Florida to the New York City area. Consistent with
this approach, in February 1997, the Company sold substantially all of the
assets and assigned certain liabilities of the physical therapy and
rehabilitation care centers and related medical practices in Jacksonville and
Orange Park, Florida, together with all of the shares of OT Receivables. (See
Item 1. Business. Sales of Florida Centers.) The purchase price consisted of
$200,000 in cash, with $100,000 paid at closing and a note in the amount of
$100,000 payable in two installments in April and May 1997. As collection of the
note is not probable, the Company has provided a reserve against the amount
owed. In connection with the sale of OT Receivables, the Company pledged as
collateral to the lender under the receivables funding facility additional
accounts receivable in the amount of $700,000. The Company will be entitled to
receive 40% of any collections on the receivables transferred to the lender in
excess of the amount owed under the receivables funding facility. The Company
currently does not anticipate any such excess. In connection with the sale of
the two North Florida facilities, the Company terminated the employment
agreement with the facilities' medical director, received a return of 400,000
shares of the Company's Common Stock that had been issued in connection with the
acquisition of the Company's North Florida facilities in 1995 and was relieved
of its obligation to issue an additional 145,000 shares of common stock incurred
in connection with such acquisition.
Continuing the divestiture of its Florida operations, the Company sold
its remaining North Florida facility located in St. Augustine, Florida in April
1997. The sale price for this facility was $25,000 in cash, with $15,000 paid at
the closing, $5,000 paid on April 26, 1997 and $5,000 paid on May 29, 1997.
- 15 -
<PAGE>
Effective February 28, 1997, the Company rescinded its acquisition of
four Long Island, New York based physical therapy care centers, together with a
related management company. (See Item 1. Business. Acquisition and Recision.)
The acquisition of these businesses had been made in December 1996. In unwinding
the transaction, the former sellers returned all shares of Company common stock
and promissory notes issued to them in connection with the acquisition. In
addition, the former sellers agreed to pay the Company $448,935, representing
the cash portion of the purchase price in the original transaction and the net
amount expended by the Company on the Long Island facilities since the December
1996 acquisition. Of this amount, $50,000 was paid at closing and $25,000 was
paid in May 1997. The remaining amount was to be paid over an 18-month period.
In December 1997, the Company received $325,000 in full settlement of the
outstanding amount owed by the former sellers. Although the original acquisition
of the Long Island clinics was consistent with the Company's strategy of
focusing its operations in the New York area, the cash flow from these
facilities to the Company was insufficient to support the operations of these
facilities by the Company at that time. The results of operations of the Long
Island facilities have not been reflected in the consolidated financial
statements.
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
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.
In April 1997, the Company agreed to issue 300,000 shares of Common
Stock to a private investor at a price of $.67 per share. Proceeds of the sale
of the shares have been used for working capital. Also, in April and May 1997,
the Company entered into three agreements for financial consulting services.
Under the first of these agreements, the Company agreed to issue to a consultant
50,000 shares of Common Stock and options to acquire an additional 200,000
shares at exercise prices of between $2.50 and $4.25. The second agreement
provides for the issuance to a consultant of 75,000 shares of Common Stock and
options to acquire an additional 75,000 shares at exercise prices of between
$4.50 and $5.00. Under the third agreement, the Company agreed to issue to a
consultant 50,000 shares of Common Stock and options to acquire an additional
250,000 shares at prices of between $2.00 and $4.75. During Fiscal 1998, options
for 110,250 shares, at prices ranging from $2.00 to $3.00 per share, were
exercised.
In September 1996, the Company entered into a loan agreement with a
bank for a line of credit of $200,000 and a term loan in the amount of $400,000.
The loan had interest at the lender's prime rate plus one percent and had a
maturity date of March 31, 1998. The line of credit and the term loan were
collateralized by the accounts receivable and fixed assets of the New York City
physical therapy care centers. The Company paid off the line of credit and term
loans in September 1997.
In March 1997, the Company purchased physical therapy equipment which
were subject to existing operating leases for an aggregate cost of $250,230. The
Company then sold the
- 16 -
<PAGE>
equipment and other fixed assets with a net book value of $239,862 for $450,230
and leased such equipment and assets back for a period of five years with
monthly payments of $11,226. In August 1997, the Company sold the equipment of
the New York City physical therapy center acquired in July 1997 for $171,335 and
leased it back for a period of five years with monthly payments of $4,215.
In September 1997, the Company entered into a financing agreement to
borrow on all of its existing and future patient care receivables for the next
two years. Under the agreement, the financing company will advance to the
Company 75% of under 180-day, eligible receivables (as defined). At the initial
closing, the Company paid an origination fee of $17,457, and, upon each advance,
the Company will pay a discount equal to prime plus 5% per annum. The Company
has assigned and will continue to assign substantially all of these receivables
to the finance company. The Company used the initial proceeds to pay off the
bank term loans.
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. (See Item 1. Business. Investment in Gold Ore.) The ore was appraised as
having a value of $5,000,000. The Company subsequently formed a wholly-owned
subsidiary, 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 common stock of
Accord. The Company had the right to receive a royalty of 12.5% of the net
mining proceeds from the processing of the ore transferred to Accord. In
November 1997, the Company returned the 6,000,000 shares of common stock of
Accord in exchange for 100% of Aurum, because Accord had not commenced and did
not anticipate commencing mining operations and the Company desired to take
action to realize the value of the gold ore.
As of May 31, 1998, the Company (i) has been unsuccessful in its
attempts to sell the gold ore and (ii) does not have the capability or the
resources to commence the mining of the gold ore. For these reasons, and due to
the absence of current financial and other information for Accord, the Company
has written down the value of its investment in the gold ore by $3,000,000 (from
$4,994,214 to $1,994,214). The Company intends to continue its attempt to sell
the gold ore and anticipates a sale in the near future, although there can be no
assurance that it will be successful in doing so.
On January 29, 1998, the Company closed an offshore placement of
1,500,000 shares of Common Stock for an aggregate purchase price of $3,324,025.
The Company incurred expenses of $1,600,868 and received net proceeds of
$1,723,157.
On July 16, 1998, the Company sold substantially all the equipment and
operations of two physical therapy centers in exchange for $375,000 in cash. The
Company also incurred a brokerage fee of 10% of the sales price. Proceeds of
$365,000 were used to repay certain lease obligations.
In September 1997, the Company entered into a letter of intent, amended
in December 1997, to acquire the assets and operations of approximately 30
medical practices and MRI facilities. (See Item 1. Business. Proposed
Acquisition.)
- 17 -
<PAGE>
As of May 31, 1998, negative working capital decreased from $394,499 to
$26,008 as a result of improving the cash flows of the facilities, resolving all
pending legal matters and selling Common Stock. Upon the sale of the two
facilities in July 1998, it is anticipated the working capital will become
positive and continue to improve.
Year 2000
The Company has assessed its financial accounting and reporting system
and it is fully Year 2000 compliant. The Company's patient receivable system
will be assessed in the near future, after taking into account the proposed
acquisition, but the Company does not anticipate that it will incur significant
expenses or be required to make significant investment in computer systems
improvements to become Year 2000 compliant. However, any problems associated
with the compliance of the Company, managed care organizations, government
agencies or providers could have a material adverse effect on the Company's
business, results of operations land financial condition. Accordingly, the
Company plans to devote the necessary resources to resolve all significant Year
2000 issues in a timely manner.
Forward Looking Statements
Certain statements in this report set forth management's intentions,
plans, beliefs, expectations or predictions of the future based on current facts
and analyses. Actual results may differ materially from those indicated in such
statements. Additional information on factors that may affect the business and
financial results of the Company can be found in the other filings of the
Company with the Securities and Exchange Commission.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and information required by Item 7 are
included in the Index shown at Item 13.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) Simon Krowitz Bolin & Associates, P.A. ("Simon Krowitz") served as
the independent auditors from January 4, 1996 to April 29, 1997 and as the
independent auditors of the Company for the fiscal year ended May 31, 1996.
Effective April 29, 1997, Simon Krowitz resigned as the Company's independent
auditors. The report of Simon Krowitz on the Company's financial statements for
the fiscal year ended May 31, 1996 contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principle. In connection with the audit of the Company's financial
statements for the fiscal year ended May 31, 1996 and through April 29, 1997,
there were no disagreements between the Company and Simon Krowitz on any matters
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.
- 18 -
<PAGE>
(b) Effective June 6, 1997, the Company appointed Most Horowitz &
Company, LLP, as its independent auditors
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The directors and executive officers of the Company and their positions
at August 26, 1998 were as follows:
Name Age Position
Henry Dubbin 83 President and Director
Fred L. Singer 65 Vice President and Director
HENRY DUBBIN has been President of the Company since April 1997 and a
director of the Company since May 1993. From May 1993 to April 1997, Mr. Henry
Dubbin served as Vice Chairman of the Board and Vice President of the Company.
Mr. Henry Dubbin currently is the President of Nevada Minerals Corporation. From
1955 to 1992, Mr. Henry Dubbin worked with Canaveral International, Inc., a
diversified public company, from which he retired after being Chairman of the
Board of the Company.
FRED L. SINGER has served as a member of the Board of Directors since
April 1997 and as Vice President of the Company since August 1997. Since 1963,
Mr. Singer has served as director, producer and cinematographer for Coronado
Productions, a/k/a Coronado Studios, a video production company.
Gary Danziger served as Chief Operating Officer and Vice President of
the Company from April 1997 to February 1998, and as a member of the Board of
Directors from July 1997 to February 1998.
Burton Dubbin, the son of Mr. Henry Dubbin, resigned as Vice President
of the Company in August 1997. Mr. Burton Dubbin was Vice President of the
Company from April 1997.
Directors may be elected by the stockholders at an annual meeting or a
special meeting called for that purpose (or in the case of a vacancy, are
appointed by the directors then in office) to serve until the next annual
meeting, until their successors are elected and qualified or until their removal
or resignation. Officers serve at the discretion of the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), requires the Company's officers, directors and persons who
beneficially own more than
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<PAGE>
10% of a registered class of the Company's equity securities ("10%
stockholders") to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and 10% stockholders
also are required to furnish the Company with copies of all Section 16(a) forms
they file. Based solely on its review of the copies of such forms furnished to
it, during the past fiscal year, the Company is of the belief that all such
reports were filed on a timely basis, except as follows: (a) Mr. Henry Dubbin
did not file a Form 4 on a timely basis to report his disposition of shares of
Common Stock of the Company; and (b) Mr. Fred Singer did not file a Form 4 on a
timely basis to report his acquisition of shares of Common Stock of the Company.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth compensation
earned, whether paid or deferred, by the Company's Chief Executive Officer and
its other most highly compensated executive officers who earned over $100,000
during the fiscal year ended May 31, 1998 (collectively, the "named executive
officers") for services rendered in all capacities to the Company during the
fiscal years ended May 31, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
===================================================================================================================================
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------------------
ANNUAL LONG-TERM COMPENSATION
COMPENSATION
---------------------------------------------------------------------------
OTHER COMMON
ANNUAL RESTRICTED STOCK
FISCAL COMPEN- STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY SATION AWARD(S) OPTIONS
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Henry Dubbin 1996 -0- -0- -0- -0-
President 1997 $15,414 -0- -0- -0-
1998 32,000 -0- -0- -0-
- -----------------------------------------------------------------------------------------------------------------------------------
Gary Danziger(1) 1997 $120,641 $100,000 -0- 350,000
Chief Operating Officer 1998 $143,333 -0- -0- -0-
- -----------------------------------------------------------------------------------------------------------------------------------
Fred L. Singer 1997 -0- -0- -0- 20,000
Vice President 1998 16,000 -0- -0- -0-
===================================================================================================================================
</TABLE>
(1) Includes deferred compensation of $100,000 as of May 31, 1997, pursuant
to Mr. Danziger's amended employment agreement with the Company. Mr.
Danziger's employment agreement, deferred compensation and options to
acquire 350,000 shares of Common Stock were terminated upon his
resignation from the Company in February 1998.
Option Grants. The Company did not make any stock option grants to the
named executive officers during the last fiscal year.
Aggregated Option Exercises and Fiscal Year-End Option Values. The
following table sets forth certain information relating to the exercise of stock
options during the fiscal year
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<PAGE>
ended May 31, 1998 for each of the named executive officers and the fiscal
year-end value of the unexercised options held by the named executive officers.
<TABLE>
<CAPTION>
===================================================================================================================================
AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS VALUES
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES VALUE OF UNEXERCISED IN-
ACQUIRED ON VALUE # OF UNEXERCISED OPTIONS THE-MONEY OPTIONS AT FISCAL
EXERCISE REALIZED AT FISCAL YEAR END YEAR END (1)
- -----------------------------------------------------------------------------------------------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Henry Dubbin 0 $0 250,000 0 $42,969 $0
- -----------------------------------------------------------------------------------------------------------------------------------
Fred L. Singer 5,000 $5,000 15,000 0 $17,578 $0
===================================================================================================================================
</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 29, 1998 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 Henry Dubbin, as amended
September 1997, expiring on September 1, 1998 and providing for a salary of
$50,000 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. In January 1995, in consideration of past services, the Company granted
to Mr. Dubbin options to acquire 250,000 shares of Common Stock, exercisable at
$2.00 per share until January 1, 1999. Mr. Dubbin waived his salary for the 1995
and 1996 fiscal years.
Gary Danziger had a three-year employment agreement with the Company,
as amended in July 1997, expiring in October 1999 which provided for (i) an
annual salary of $260,000, (ii) deferred compensation for the year ended May 31,
1997 of either $100,000 or 50,000 shares, (iii) incentive bonuses of up to
$30,000 per quarter, (iv) options to acquire 350,000 shares of Common Stock,
exercisable at $1.00 per share until October 1, 1998, (v) a loan facility of
$350,000, payable in three years from the date of borrowing at interest of 7%
per annum and (vi) severance equal to 200% or 100% of annual salary if
terminated during twelve months ended September 30, 1998 or 1999, respectively.
In February 1998, Mr. Danziger resigned all positions with the Company and his
employment agreement was terminated, including his right to receive 50,000
shares of Common Stock (which was recorded as deferred compensation of $100,000)
and his options to acquire 350,000 shares of Common Stock in exchange for
$60,000 in cash. In addition, the Company forgave outstanding net loans to Mr.
Danziger in the amount of $34,924.
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
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<PAGE>
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 under the plan and
awards granted are no longer outstanding, provided that incentive options may be
granted only 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 August 26, 1998, no options under the 1994 Plan were outstanding.
Non-Plan Options
As of August 26, 1998, the Company had outstanding non-plan options to
purchase an aggregate of 986,500 shares of Common Stock. The outstanding options
granted to current and former officers and directors of the Company are as set
forth below.
<TABLE>
<CAPTION>
Number of
Name Option Shares Exercise Price Expiration Date
<S> <C> <C> <C>
Henry Dubbin 250,000 $2.00 January 1, 1999
Fred L. Singer 15,000 $1.00 April 16, 1999
</TABLE>
Expenses and Meetings
All officers and directors are reimbursed for any expenses incurred on
behalf of the Company. Directors, other than Company officers, are 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 such conduct was unlawful.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of August 26,
1998 with respect to (i) those persons known to the Company to beneficially own
more than 5% of the Company's Common Stock, (ii) each director of the Company,
(iii) each named executive officer, and
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<PAGE>
(iv) all directors and executive officers of the Company as a group. The
information is determined in accordance with Rule 13d-3 promulgated under the
Securities Exchange Act. Except as indicated below, the beneficial owners have
sole voting and dispositive power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
<S> <C> <C>
Henry Dubbin(1) 928,375 17.2%
10155 Collins Avenue, Suite 607
Bar Harbor, FL 33154
Nevada Minerals Corporation 678,375 13.2%
10155 Collins Avenue, Suite 607
Bar Harbor, FL 33154
Fred L. Singer(2) 20,000 *
9240 West Bay Harbor Dr., Apt. 3-C
Bay Harbor Islands, FL 33154
All officers and directors as a group 948,375 17.5%
(2 persons)(3)
</TABLE>
- -------------------------------
* Less than 1%.
(1) Includes (i) 678,375 shares of Common Stock that Mr. Henry Dubbin
beneficially owns through Nevada Minerals Corporation, a corporation of
which he is the majority stockholder and president, and (ii) 250,000
shares of Common Stock subject to currently exercisable options.
(2) Includes 15,000 shares of Common Stock subject to currently
exercisable options.
(3) Includes 265,000 shares of Common Stock subject to currently
exercisable options and 678,375 shares of Common Stock held by Nevada
Minerals Corporation.
Change in Control
In September 1997, the Company entered into a letter of intent to
acquire certain companies whose assets consist primarily of approximately 30
medical practices and MRI facilities located in the greater New York
metropolitan area. The letter of intent was further amended in December 1997.
Collectively, the centers had revenues of approximately $70 million and
estimated earnings before interest, taxes, depreciation and amortization of
approximately $23 million in calendar year 1997. The Company intends to finance
the proposed acquisition through issuance of debt and equity securities of the
Company, which, if consummated, will result in a substantial change to the
Company's current debt and equity structure. There can be no assurance, however,
that the Company will successfully negotiate a definitive written agreement for
the purchase of these facilities or meet its obligations of raising capital to
complete the acquisition or that all the other conditions to closing will be met
by any of the parties to the transaction.
- 23 -
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 28, 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
restricted Common Stock. The gold ore was appraised as having a $5,000,000
value. On June 28, 1994, the Company formed a wholly owned subsidiary, Aurum
Mining Corporation, with the gold ore as its only asset. On June 21, 1995, an
agreement was signed between the Company and Accord whereby 100% of the stock of
Aurum was exchanged for 6,000,000 shares of common stock of Accord. Accord was
to pay the Company a royalty equal to 12.5% of the net mining income for the
productive life of the property. On November 15, 1997, the Company returned the
6,000,000 shares of common stock of Accord in exchange for 100% of the common
stock of Aurum.
In November 1996, Mr. Fred L. Singer produced a marketing video for the
Company and received $25,000 in compensation.
On December 3, 1996, the Company granted an option to purchase 375,000
shares of Common Stock to Burton Dubbin, Mr. Henry Dubbin's son, in exchange for
consulting services. The option was exercisable at $1.69 per share until
December 2006. Mr. Burton Dubbin became an employee of the Company in April
1997. In August 1997, Mr. Burton Dubbin terminated his employment with the
Company and entered into a consulting agreement for a period of two years at a
fee of $150,000 per year, plus 125,000 shares of Common Stock, with 25,000
shares issued immediately and 5,000 shares issued monthly. In addition, the
option to acquire 375,000 shares of Common Stock has been amended to provide for
immediate exercisability and extension until August 2007.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM S-K
The following documents are filed as part of this Annual Report on
Form 10-KSB.
<TABLE>
<CAPTION>
(a) Financial Statements: Page
<S> <C> <C>
Independent Auditor's Report consolidated financial statements
for the years ended May 31, 1998 and 1997....................................................... F-1
Consolidated Balance Sheet as of May 31, 1998 and 1997........................................... F-2
Consolidated Statement of Operations for the years ended
May 31, 1998 and 1997 ........................................................................... F-4
Consolidated Statement of Stockholders' Equity for the years ended
May 31, 1998 and 1997 ........................................................................... F-5
Consolidated Statement of Cash Flows for the years ended
- 24 -
<PAGE>
May 31, 1998 and 1997............................................................................ F-6
Notes to Consolidated Financial Statements....................................................... F-8
</TABLE>
(b) Reports on Form 8-K.
None.
(c) The following documents are filed as exhibits to this Annual Report
on Form 10-KSB.
3.1 Certificate of Incorporation, as amended. Incorporated by reference
from Registration Statement on Form S-18 - Commission File No.
33-8166B, August 20, 1986.
3.2 Amendments to Certificate of Incorporation dated August 1, 1994.
Incorporated by reference from Exhibit 3.2 of the Annual Report on
Form 10-KSB for the fiscal year ended May 31, 1995.
3.3 By-Laws. Incorporated by reference from Registration Statement on Form
S-18 - Commission File No. 33-8166B, August 20, 1986.
4.1 Form of Common Stock Certificate. Incorporated by reference from Form
10-KSB for the fiscal year ended May 31, 1994.
4.2 Term Loan Agreement, dated September 30, 1996, between Oak Tree
Medical Management, Inc. and First Union National Bank. Incorporated
by reference from Quarterly Report on Form 10-Q for the fiscal quarter
ended August 31, 1996.
4.3 Security Agreement, dated September 30, 1996, between Oak Tree Medical
Management, Inc. and First Union National Bank. Incorporated by
reference from Quarterly Report on Form 10-Q for the fiscal quarter
ended August 31, 1996.
4.4 Promissory Note, dated September 30, 1996, between Oak Tree Medical
Management, Inc. and First Union National Bank. Incorporated by
reference from Quarterly Report on Form 10-Q for the fiscal quarter
ended August 31, 1996.
4.5 Unconditional Guaranty, dated September 30, 1996, among Registrant,
Oak Tree Medical Management, Inc. and First Union National Bank.
Incorporated by reference from Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 1996.
4.6 Purchase Agreement, dated July 23, 1997, between Oak Tree Medical
Practice, P.C. and PFS VI, Inc. Incorporated by reference from Exhibit
4.7 of the Annual Report on form 10-KSB for the fiscal year ended May
31, 1997 (the "1997 Form 10-KSB").
10.1 Form of 1994 Equity Performance Plan. Incorporated by reference from
Information Statement dated July 11, 1994.
- 25 -
<PAGE>
10.2 Form of Employment Agreement with Mr. Henry Dubbin. Incorporated by
reference from Form 10-KSB for the Fiscal Year Ended May 31, 1994.
10.3 Agreement of Sale, dated October 1, 1996, among Oak Tree Medical
Management, Inc. and Orthopedic & Sports Therapy Services of Queens,
L.P. and Parkside of Queens, Inc. Incorporated by reference from Form
10-Q filed for the fiscal quarter ended August 31, 1996.
10.4 Agreement of Sale, dated October 1, 1996, between New Medical
Practice, P.C. and Parkside Physical Therapy Services, P.C.
Incorporated by reference from Form 10-Q filed for the fiscal quarter
ended August 31, 1996.
10.5 Agreement of Sale, dated October 1, 1996, among Oak Tree Medical
Management, Inc. Gary Danziger and PTSR, Inc. Incorporated by
reference from Form 10-Q filed for the fiscal quarter ended August 31,
1996.
10.6 Employment Agreement, dated as of October 1, 1996, between New Medical
Practice, P.C. and Gary Danziger. Incorporated by reference from
Exhibit 10.12 of the 1997 Form 10-KSB.
10.7 Executive Employment Agreement, dated as of December 3, 1996, between
Registrant and William Kedersha. Incorporated by reference from Form
10-QSB filed for the fiscal quarter ended November 30, 1996.
10.8 Stock Option Agreement, dated as of December 3, 1996, between
Registrant and Burton Dubbin. Incorporated by reference from Form
10-QSB filed for the fiscal quarter ended November 30, 1996.
10.9 Consulting Agreement, dated as of August 29, 1997, between Registrant
and Burton Dubbin. Incorporated by reference from Exhibit 10.18 of the
1997 Form 10-KSB.
10.10 Purchase Agreement, dated as of February 6, 1997, among Registrant,
Acorn CORF I, Inc., Riverside CORF, Inc. and MB Data Corporation.
Incorporated by reference from Form 8-K filed on February 27, 1997.
10.11 Letter Agreement of Rescission, dated March 19, 1997, from Oak Tree
Medical Management, Inc. to James O'Neill, Mark Gentile and Maple
Health Inc. Incorporated by reference from Form 8-K filed on April 3,
1997.
10.12 Agreement of Sale, dated July 16, 1997, between Oak Tree Medical
Practice, P.C. and Peter B. Saadeh, M.D. Incorporated by reference
from Exhibit 10.17 of the 1997 Form 10-KSB.
10.13 Agreement of Sale, dated July 16, 1998, among Oak Tree Medical
Management, Inc., Oak Tree Medical Practice, P.C. and Nesconset
Sports, Inc.
- 26 -
<PAGE>
21 Subsidiaries:
Acorn CORF, Inc. Florida
Acorn CORF I, Inc. Nevada
Aurum Mining Corporation Nevada
Oak Tree Financial Services, Inc. Florida
Oak Tree Medical Management, Inc. New York
Riverside CORF, Inc. Florida
27 Financial Data Schedule.
- 27 -
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1998 AND 1997
INDEX
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET F-2 - F-3
CONSOLIDATED STATEMENT OF OPERATIONS F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F-5
CONSOLIDATED STATEMENT OF CASH FLOWS F-6 - F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 - F-21
- 28 -
<PAGE>
Board of Directors
Oak Tree Medical Systems, Inc.
Flushing, New York
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of Oak Tree
Medical Systems, Inc. and Subsidiaries as of May 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 consolidated financial position of
Oak Tree Medical Systems, Inc. and Subsidiaries as of May 31, 1998 and 1997, and
the consolidated results of its operations and its consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ MOST HOROWITZ & COMPANY, LLP
New York, New York
August 7, 1998
- 29 -
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash (Note 17) $ 455,391 $ 125,919
Patient care receivables (net of
allowance for contractual allowances
and doubtful accounts of $642,000
in 1998 and $860,123 in 1997)
(Notes 4 and 6) 788,121 848,269
Other current assets 107,403 141,622
Note receivable - current
portion (Note 14) 264,401
-------------- -----------
TOTAL CURRENT ASSETS 1,350,915 1,380,211
INVESTMENT IN GOLD ORE AND AFFILIATED
COMPANY (Note 7) 1,994,214 4,994,214
FIXED ASSETS (Note 8) 502,339 507,163
DEFERRED ACQUISITION COSTS (Note 19) 98,804
OTHER ASSETS 97,740 80,666
GOODWILL (Note 3) 226,888 37,141
NOTE RECEIVABLE (Note 14) 109,534
-------------- -----------
TOTAL ASSETS $4,270,900 $7,108,929
========== ==========
</TABLE>
(CONTINUED)
See notes to financial statements
F-2
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1998 AND 1997
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Notes payable (Notes 6 and 9) $ 334,769 $ 197,305
Accounts payable and accrued expenses 844,726 1,024,615
Current portion of capitalized lease
obligations (Note 11) 130,572 158,345
Current portion of long-term
debt (Note 10) 66,856 294,445
Deferred compensation 100,000
------------ ----------
TOTAL CURRENT LIABILITIES 1,376,923 1,774,710
LONG-TERM DEBT (NOTE 10) 208,201 92,667
CAPITALIZED LEASE OBLIGATIONS (Note 11) 458,414 348,226
ACCOUNTS PAYABLE 61,551
------------ -----------
TOTAL LIABILITIES 2,105,089 2,215,603
----------- -----------
COMMITMENTS AND CONTINGENCIES
(Notes 3 and 13)
STOCKHOLDERS' EQUITY (NOTE 5) Common stock, $.01 par value; authorized:
25,000,000 shares; issued and outstanding:
4,657,753 shares, as of May 31, 1998,
and 2,888,144 shares, as of May 31, 1997 46,577 28,881
Additional paid-in capital 12,140,841 9,772,472
Deficit (9,784,203) (4,726,638)
Less: prepaid consulting and stock
subscription receivable (237,404) (181,389)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 2,165,811 4,893,326
----------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $4,270,900 $7,108,929
========== ==========
</TABLE>
See notes to financial statements
F-3
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUE
Patient services (Note 6) $2,258,186 $3,344,559
---------- ----------
EXPENSES
Costs of patient services 1,177,005 1,875,770
Selling, general and administrative
(Note 13) 2,903,263 3,283,010
Depreciation and amortization 273,367 170,890
Interest - net 170,700 403,724
Writedown of investment in gold
ore (Note 7) 3,000,000
(Gains) losses on sales and rescission
(Notes 4, 13 and 14) (208,584) 777,054
----------- -----------
TOTAL EXPENSES 7,315,751 6,510,448
---------- -----------
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY INCOME ( 5,057,565) ( 3,165,889)
INCOME TAX BENEFIT (NOTE 12) 546,677
-------------- -----------
LOSS BEFORE EXTRAORDINARY INCOME ( 5,057,565) ( 2,619,212)
CANCELLATION OF INDEBTEDNESS (NOTE 16) 65,000
-------------- ------------
NET INCOME ($5,057,565) ($2,554,212)
========== ==========
LOSS PER COMMON SHARE
Before extraordinary income ($1.49) ($1.02)
Extraordinary income .03
-------- ------
NET LOSS PER COMMON SHARE ($1.49) ($ .99)
===== =====
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 3,389,574 2,575,361
========= =========
</TABLE>
See notes to financial statements
F-4
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in
Shares Amount Capital
<S> <C> <C> <C>
Balance - June 1, 1996 2,619,869 $26,199 $ 9,766,573
Sales of common stock 325,333 3,253 251,747
Issuance of common stock upon
acquisition 54,237 542 399,458
Reacquisition of shares upon sale of
Florida (400,000) (4,000) (1,068,000)
Issuance of common stock on acquisition
and rescission 14,286 143 99,857
Exercise of options 50,000 500 24,500
Issuance of shares for services 224,419 2,244 298,337
Amortization of prepaid consulting
Net loss for year ending May 31, 1997
------------- ---------- ---------------
Balance - May 31, 1997 2,888,144 28,881 9,772,472
Sales of common stock (net of expenses
of $1,600,868) 1,500,000 15,000 1,708,157
Issuance of shares for services, etc. 154,359 1,544 394,364
Exercises of options 115,250 1,152 265,848
Amortization of prepaid consulting
Net income for year ending May 31, 1998
------------- ---------- ---------------
Balance - May 31, 1998 4,657,753 $46,577 $12,140,841
========= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
Prepaid
Consulting
and Stock Total
Subscription Stockholders'
Deficit Receivable Equity
<S> <C> <C> <C>
Balance - June 1, 1996 ($ 1,984,426) $7,808,346
Sales of common stock 255,000
Issuance of common stock upon
acquisition 400,000
Reacquisition of shares upon sale of
Florida ( 188,000) (1,260,000)
Issuance of common stock on acquisition
and rescission 100,000
Exercise of options ($25,000)
Issuance of shares for services (170,750) 129,831
Amortization of prepaid consulting 14,361 14,361
Net loss for year ending May 31, 1997 ( 2,554,212) ( 2,554,212)
----------- ------------ -----------
Balance - May 31, 1997 ( 4,726,638) (181,389) 4,893,326
Sales of common stock (net of expenses
of $1,600,868) 1,723,157
Issuance of shares for services, etc. (339,844) 56,064
Exercises of options 267,000
Amortization of prepaid consulting 283,829 283,829
Net income for year ending May 31, 1998 ( 5,057,565) ( 5,057,565)
----------- ------------ -----------
Balance - May 31, 1998 ($9,784,203) ($237,404) $2,165,811
========== ----======== -==========
</TABLE>
See notes to financial statements
F-5
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($5,057,565) ($2,554,212)
Adjustments to reconcile net loss to net cash
used in operating activities
Write-down of investment in gold ore 3,000,000
Depreciation and amortization 560,397 464,943
Bad debts 65,935 1,390,276
Common stock issued for services, etc. 56,064 128,081
(Gains) losses on sales and rescission (208,584) 777,054
Gain on termination of employment agreement (5,076)
Deferred compensation 100,000
Equity in loss on investment 5,786
Capitalization of deferred interest
and other financing fees (662,500)
Deferred income taxes (558,782)
Cancellation of indebtedness (65,000)
Increase (decrease) in cash from
Patient care receivables 17,150 (1,780,591)
Other current assets (705) (68,001)
Other assets (5,260) (4,531)
Accounts payable and accrued expenses 20,371 762,245
Deferred compensation (60,000)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ( 1,617,273) ( 2,065,232)
---------- ----------
INVESTING ACTIVITIES
Collections of note receivable 325,000 85,000
Proceeds from sales of fixed assets 171,335 450,230
Acquisition (net of notes payable of $300,000 in 1998 and $189,000 in 1997,
respectively, and accounts payable of $65,000 and common stock issued
stock issued of $400,000 in 1997) (100,000) (436,911)
Expenses on proposed acquisition (98,804)
Purchases of fixed assets (net of capitalized lease
obligations of $190,610 in 1998 and $466,444 in 1997) (50,824) (275,293)
Proceeds from sales of Florida centers
(net of expenses of $13,451) 101,549
Advances on rescission (412,506)
Expenses of rescission (5,866)
-------------- ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 246,707 (493,797)
----------- -----------
</TABLE>
(CONTINUED)
See notes to financial statements
F-6
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 31, 1998 AND 1997
(CONTINUED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of common stock $1,990,157 $ 241,750
Proceeds of notes payable 334,769 2,561,261
Payments of long-term debt (319,388) (421,134)
Payment of note payable (197,305) (2,695)
Payments of capitalized lease obligations (108,195) (21,570)
Proceeds of long-term debt 450,000
Proceeds of note payable - bank 200,000
Payments of notes payable - other (614,979)
----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 1,700,038 2,392,633
---------- ----------
NET INCREASE (DECREASE) IN CASH 329,472 (166,396)
CASH - Beginning of year 125,919 292,315
----------- -----------
CASH - END OF YEAR $ 455,391 $ 125,919
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid $ 202,288 $ 394,559
========== ==========
</TABLE>
NONCASH TRANSACTION
The Company exchanged their investment in affiliated company for 100% of the
outstanding stock of a subsidiary (Note 7).
See notes to financial statements
F-7
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Oak Tree Medical Systems, Inc. and Subsidiaries (Company) operate
physical therapy care centers primarily in New York (Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Investment In Affiliated Company
Investment in affiliated Company was reported on the equity method.
Fixed Assets
Physical therapy equipment and office equipment and furniture were
stated at cost and are being depreciated on the straight-line method over the
estimated useful lives of the assets of five years. Leasehold improvements were
stated at cost and are being amortized over the terms of the leases or the
estimated useful lives of the assets of seven years, whichever is less.
Goodwill
Goodwill resulting from acquisitions of established physical therapy
care centers represents costs in excess of net assets acquired and is being
amortized on a straight-line basis over twenty years. Annually, the Company
evaluates goodwill for impairment by comparing estimated discounted future cash
flows to net book value.
F-8
<PAGE>
Patient Service Revenue
Patient service revenue is reported at the estimated net realizable
amounts from patients, third-party payers and others for services rendered.
Stock Based Compensation
Stock based compensation to employees and nonemployees has been
recorded on the fair value method.
Income Taxes
Deferred income taxes have been provided for temporary differences
between consolidated financial statement and income tax reporting, resulting
primarily from the use of the cash basis method for income tax purposes and net
operating loss carryforwards.
Earnings Per Share
Earnings per share was computed based on the weighted average number of
common shares outstanding during the year.
The Company adopted FASB Statement No. 128, "Earnings Per Share," which
changed the calculations and disclosures of earnings per share for the year
ended May 31, 1998, without a material effect.
3. ACQUISITIONS
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 (Note 10) and (c) the issuance of 54,237 shares
of common stock to a creditor of the seller. In addition, the seller will
receive 10,000 shares of common stock issuable on October 1, 1998, but no less
than a fair value of $100,000 (Note 13).
In connection with the acquisition, the Company incurred expenses of
$101,911, including a finder's fee of $90,000 to a company in which the wife of
the former chief executive officer of the Company is an owner, and which was
agreed to prior to employment by the Company. The finder's fee was paid $25,000
in cash and the balance was due in a note payable due on January 15, 1998, with
interest at 12.5%, per annum (Note 16).
In addition, the Company assumed three leases for physical therapy care
centers (Note 13).
F-9
<PAGE>
The results of operations of the acquired physical therapy care centers
have been included in the consolidated statement of operations from October 1,
1996, the date of the acquisition. The acquisition was recorded on the purchase
method and the total purchase price, including related costs (and net of the
imputed interest of $11,000 on the due to seller) was allocated to the fair
values of the assets acquired and the excess to goodwill, as follows:
Patient care receivables (net of
allowance for doubtful accounts) $ 750,000
Supplies 5,000
Physical therapy equipment 261,689
Deposits 35,800
Goodwill 38,422
----------
$1,090,911
On July 16, 1997, the Company acquired an additional physical therapy
care center in New York City for a purchase price of $400,000, payable $100,000
in cash, which was paid at closing, and a note of $300,000 (Note 10). In
addition, the seller, a physician, has entered into a noncompete agreement for
four years. If the acquired physical therapy care center does not achieve
certain billings, which, as of August 7, 1998, does not appear to have been met,
the purchase price may be reduced by $100,000.
In connection with the acquisition, the Company entered into a: (1)
lease for the center (Note 13), (2) consulting agreement with the seller for a
six month period and then on a month-to-month basis, at $150,000, per annum, and
(3) consulting agreement with the physical therapy care center administrator, a
relative of the seller, for a six-month period and then on a month-to-month
basis, at $50,000, per annum.
The results of operations of the acquired physical therapy care center
has been included in the consolidated statement of operations from July 16,
1997, the date of the acquisition. The acquisition was recorded on the purchase
method and the total purchase price was allocated to the fair values of the
assets acquired and the excess to goodwill, as follows:
Physical therapy equipment $171,335
Office furniture and equipment 3,665
Covenant not-to-compete 25,000
Goodwill 200,000
--------
$400,000
4. SALES OF FLORIDA CENTERS
On February 12, 1997, certain subsidiaries sold substantially all of
the assets and operations of the physical therapy care centers in Jacksonville
and Orange Park, Florida. In addition, the Company sold all the outstanding
shares of another subsidiary which held the receivables of the two centers, and
was the debtor under the patient care receivables funding facility (Note 6).
In exchange for the assets and subsidiary sold, the Company received
$100,000 in cash and a note in the amount of $100,000 and the purchaser assumed
$86,150 of accounts payable and a note payable
F-10
<PAGE>
of $1,812,500. In exchange for the consent of the lender of the patient care
receivables funding facility, the Company transferred to the lender $700,000 of
additional patient care receivables.
In addition, the Company reacquired 400,000 shares of common stock from
an employee, valued at $3.15, per share, and then retired the shares.
In April 1997, the Company sold its physical therapy care center in St.
Augustine, Florida, for $25,000 in cash, completing its exit from Florida.
During the year ended May 31, 1998, the Company wrote-off unpaid
accounts payables of $138,709 and uncollected accounts receivable of $25,998
related to the sold Florida physical therapy care centers.
A summary of the aggregate loss on the sales of the Florida centers is
as follows:
Reacquisition of common stock $1,260,000
Purchase prices 225,000
Assumption of note payable 1,812,500
Cancellation of obligation to
issue shares of common stock 349,765
Assumption of accounts payable 86,150
Costs of assets sold (2,958,623)
Additional allowance for
doubtful patient care receivables (967,500)
Write-off of deferred interest and
other financing fees (Note 6) (386,458)
Allowance for collection of
note receivable (100,000)
Expenses of sales (13,451)
-----------
Loss on sales ($ 692,617)
==========
5. COMMON STOCK
Issuance of Common Stock
Through May 31, 1998 and 1997, the Company issued an aggregate of 6,359
and 26,919 shares, respectively, of common stock in exchange for legal services.
The shares were valued at an average prices of $2.50 and $3.66, per share,
respectively.
On September 3, 1997, the Company entered into a settlement agreement
with its former chief executive officer and issued 22,500 shares of common stock
and, as of May 31, 1997, recorded the shares of common stock at $29,531.
On January 29, 1998, the Company completed an off-shore offering for
the sale of 1,500,000 shares of common stock for an aggregate purchase price of
approximately $3,324,025 and incurred expenses of $1,600,868 in connection with
the offering.
F-11
<PAGE>
Public Relations Consulting Agreements
In April and May 1997, the Company entered into three public relations
consulting agreements, two for a period of one year and the other through
December 31, 1997, in exchange for an aggregate compensation of: (a) 175,000
shares of common stock for an aggregate purchase price of $1,750, (b) $3,000,
per month, for one year and (c) options to acquire 525,000 shares of common
stock. The options are exercisable at $2 to $5, per share, through December 31,
1997, as extended. The shares were recorded at $.75 to $1.69, per share. The
aggregate consulting fees of $170,750 have been capitalized and are being
amortized over the terms of the agreements.
During the year ended May 31, 1998, options for 110,250 shares of
common stock were exercised at prices ranging from $2 to $3, per share, and
options to acquire 143,750 and 75,000 shares were extended to December 31, 1998
and February 29, 1999, respectively, in exchange for consulting services valued
at $10,000.
Options
On December 31, 1996, the Company granted options to purchase 17,500
shares of common stock in exchange for legal services, exercisable at $1.75, per
share, through May 1, 2001.
In April 1997, the Company granted options to purchase 20,000 shares of
common stock to a director, exercisable at $1, per share, through April 1999.
During the year ended May 31, 1998, options to purchase 5,000 shares were
exercised.
In April 1997, a related party exercised options to purchase 50,000
shares of common stock at $.50, per share, in exchange for a note receivable due
on April 15, 1999, with interest at 8.5%, per annum. These options had been
acquired from Accord (Note 7).
The value of all options issued by the Company have been assumed to be
immaterial.
For the years ended May 31, 1998 and 1997, a summary of the status of
stock options were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------ --------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding - beginning
of year 1,542,500 $2.24 515,000 $2.20
Granted 60,000 $1.59 1,662,500 $2.15
Exercised (115,250) $2.32 (50,000) $ .50
Forfeited (350,000) $1.00 (585,000) $2.11
Expired (201,000) $3.84
---------- ---------
Outstanding - end of
year 936,250 $2.30 1,542,500 $2.24
=========== =========
</TABLE>
F-12
<PAGE>
As of May 31, 1998, all options were exercisable and, as of May 31,
1997, options to purchase 1,167,500 shares of common stock were exercisable,
with a weighted average exercise price of $2.41, per share.
Stock Option Plan
In addition, the Company has a Performance Equity Plan (Plan) under
which it may grant incentive and non-qualified stock options, stock appreciation
rights, restricted stock awards, deferred stock, stock reload options and other
stock based awards to purchase up to 600,000 shares of common stock to officers,
directors, key employees and consultants. The Company may not grant any options
with a purchase price less than fair market value of common stock as of the date
of the grant. Through May 31, 1998, the Company had not granted any options
under the Plan.
Reserved Shares
As of May 31, 1998, the Company has reserved the following shares of
common stock:
Options 936,250
Plan 600,000
---------
1,536,250
=========
6. PATIENT CARE RECEIVABLES
In September 1996, the Company refinanced their existing patient care
receivable agreement, whereby approximately $2,613,000 of patient care
receivables were provided as collateral for a loan of $1,912,500 (Note 4). In
the event that the lender collects funds in excess of the original $1,912,500,
such excess shall be refunded to the Company, less collection charges. As
collection of any amounts are not probable, the Company has written-off these
patient care receivables. Upon closing, the Company paid interest and other
financing fees of $662,500 (Note 4).
In September 1997, the Company entered into a financing agreement to
borrow on all existing and future patient care receivables for a period of two
years. Under the agreement, the Company may borrow up to 75% of under 180 day,
eligible patient care receivables, as defined. Upon each advance, the Company
will pay a discount equal to 5% above the prime rate, per annum, subject to
adjustment, and, at the initial closing, paid an origination fee of $17,457. The
Company is required to assign substantially all patient care receivables to the
finance company. As of May 31, 1998, the interest rate was 13%, per annum.
In connection with the financing the consultant (Note 15) has
guaranteed up to $225,000 of such financing and the Company has agreed to
indemnify the consultant against any such losses.
On September 10, 1997, $441,749 of proceeds from the initial advance
was used to pay off the notes payable - bank (Note 9).
F-13
<PAGE>
7. INVESTMENT IN GOLD ORE AND AFFILIATED COMPANY
As of May 31, 1998, investment in gold ore and, as of May 31, 1997,
investment in affiliated company consisted of:
1998 1997
---- ----
Investment in gold ore $4,994,214
Allowance for impairment ( 3,000,000)
Investment in affiliated company $5,000,000
Equity in loss (5,786)
-------------- ------------
$1,994,214 $4,994,214
============= ============
In June 1995, the Company exchanged 100% of the common stock of a
subsidiary, which only owned an interest in gold ore (which was previously
acquired for common stock of the Company, with a value of $5,000,000) for
6,000,000 shares of common stock of Accord Futronics Corp. (Accord),
approximately 30%, and was to pay the Company a royalty of 12.5% of net
production income from processing the ore. No gain or loss was recognized on the
exchange.
On November 15, 1997, the Company returned the 6,000,000 shares of
common stock to Accord in exchange for 100% of the common stock of the
subsidiary. Accord had not yet commenced mining nor anticipated commencing in
the near future and the Company desired to commence such mining or other
provision for the gold. No gain or loss was recognized on the exchange.
As of May 31, 1998, the Company: (1) has unsuccessfully attempted to
obtain financial and other information from Accord, as to both the subsidiary
and the underlying gold ore; (2) has unsuccessfully attempted to sell the gold
ore, (3) does not have the resources to commence the mining of the gold ore and
(4) the Company's focus in medical and related areas, and therefore, the Company
has provided a write down for impairment of the investment in gold ore of
$3,000,000, resulting in a carrying value based on recent discussions with
potential buyers.
As of May 31, 1996, the latest date available, the unaudited
consolidated condensed financial statements of Accord were:
BALANCE SHEET
CASH, CASH EQUIVALENTS, AND
MARKETABLE SECURITIES $ 1,365,591
INVESTMENT IN GOLD RESERVES 42,875,000
OTHER ASSETS 1,115,122
-----------
TOTAL ASSETS $45,355,713
===========
F-14
<PAGE>
LIABILITIES NONE
SHAREHOLDERS' EQUITY $45,355,713
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $45,355,713
===========
STATEMENT OF OPERATIONS
REVENUES $195,007
EXPENSES ( 214,294)
-----------
NET LOSS ($ 19,287)
===========
8. FIXED ASSETS
As of May 31, 1998 and 1997, fixed assets consisted of the following:
1998 1997
---- ----
Physical therapy equipment
(Notes 11 and 19) $687,366 $499,437
Office equipment and furniture 56,509 40,258
Leasehold improvements 40,919
-------- --------
784,794 539,695
Less: accumulated depreciation
and amortization 282,455 32,532
-------- --------
$502,339 $507,163
======== ========
As of May 31, 1998 and 1997, fixed assets included capitalized lease
assets of $705,243 and $514,632, respectively.
For the year ended May 31, 1998 and 1997, depreciation expense was
$257,903 and $123,503, respectively.
9. NOTE PAYABLE - BANK
On September 30, 1996, the Company entered into a loan agreement with a
bank for a line of credit of $200,000 and a term loan of $400,000 (Note 10). The
term loan was payable in equal monthly installments of $22,222, plus interest at
1% above the prime rate, per annum, through March 31, 1998. The term loan and
line of credit loan were collateralized by the accounts receivable, fixed
assets, etc. of the New York City physical therapy care centers. The proceeds of
the term loan were used in connection with the New York City acquisition (Note
3).
On September 10, 1997, the line of credit and term loans were paid-off
(Note 6).
F-15
<PAGE>
10. LONG-TERM DEBT
As of May 31, 1998 and 1997, long-term debt consisted of the following:
1998 1997
---- ----
Note payable in equal quarterly
installments of $18,348,
including interest at 8%,
per annum (a) (Note 3) $275,057
Note payable to bank (Note 9) $244,445
Due to former officer
(Notes 3 and 13) 92,667
Note payable assumed, paid in
November 1997, (Note 3) 50,000
---------- --------
275,057 387,112
Less: current portion 66,856 294,445
---------- --------
$208,201 $ 92,667
========== ========
(a) Collateralized by all the assets acquired.
11. CAPITALIZED LEASE OBLIGATIONS
Obligations under the capitalized leases and the related assets were
recorded at the lower of the present value of the minimum lease obligations or
the fair value of the assets. The implicit interest rates on the capital leases
were approximately 11% to 17%, per annum.
In March 1997, the Company purchased primarily physical therapy
equipment which were subject to existing operating leases for an aggregate cost
of $250,230. This equipment and other fixed assets with a net book value of
$239,862 were then sold for $450,230 and leased back for a period of five years.
The leaseback has been accounted for as a capitalized lease. The loss of $39,862
realized on the sale and leaseback has been deferred and is being amortized over
the term of the lease. In July, 1998, the Company paid-off or assigned these
leases in connection with the sale of certain physical therapy care centers
(Note 19).
In August 1997, the Company sold the physical therapy equipment
acquired in August 1997 (Note 3) for $171,335 and leased back the equipment for
a period of five years.
F-16
<PAGE>
As of May 31, 1998, the aggregate future minimum annual lease
obligations under the capital leases were as follows:
Years Ended
May 31,
1999 $198,650
2000 190,149
2001 185,292
2002 158,537
2003 16,831
--------
Total minimum lease obligations 749,459
Less: amount representing interest 160,473
--------
Present value of minimum lease
obligations 588,986
Less: current portion of capitalized
lease obligations 130,572
--------
$458,414
========
12. INCOME TAXES
For the year ended May 31, 1997, income tax benefit consisted of the
following:
Current: State ($ 12,105)
--------
Deferred: Federal 458,782
State 100,000
--------
558,782
--------
$546,677
========
For the years ended May 31, 1998 and 1997, the tax effects of timing
differences which gave rise to deferred income taxes were as follows:
1998 1997
---- ----
Allowance for impairment
of gold ore $1,324,000
Net operating loss
carryforwards 776,000 $ 100,000
Cash basis (100,000) 1,068,782
Less valuation allowance (2,000,000) (610,000)
---------- ----------
None $ 558,782
========== ==========
F-17
<PAGE>
As of May 31, 1998 and 1997, the tax effects of the components of
deferred income tax payable were as follows:
1998 1997
---- ----
Allowance for impairment
of gold ore $1,324,000
Net operating loss
carryforwards 1,376,000 $600,000
Cash basis 100,000
Less valuation allowance ( 2,700,000) ( 700,000)
----------- ---------
None None
=========== =========
The following is a reconciliation of income taxes computed at the 34%
statutory rate to the provision for income taxes:
1998 1997
---- ----
Tax at statutory rate $1,720,000 $1,060,000
State income tax 280,000 87,895
Valuation allowance (2,000,000) (610,000)
Other 8,782
-------------- ------------
None $ 546,677
============== ===========
As of May 31, 1998, realization of the Company's deferred tax assets of
$2,700,000, resulting primarily from impairment of gold ore and net operating
loss carryforwards, is not considered more likely than not, and accordingly, a
valuation allowance of $2,700,000 has been established.
As of May 31, 1998, the Company had net operating loss carryforwards of
approximately $3,500,000 to reduce future Federal taxable income, expiring
through May 31, 2013. As a result of a prior change in control of ownership of
the Company, utilization of approximately $70,000 of these net operating loss
carryforwards, expiring through May 31, 2006, are limited to approximately
$26,000, per year.
13. COMMITMENTS AND CONTINGENCIES
Leases
The Company is committed under noncancellable leases for centers and
office space through November 2003, requiring minimum rents, plus additional
rent for increases in real estate taxes and operating expenses.
F-18
<PAGE>
As of May 31, 1998, the future minimum aggregate annual payments under
these leases, exclusive of those physical therapy care centers sold (Note 19),
were as follows:
Years Ending
May 31,
1999 $ 78,092
2000 79,304
2001 84,839
2002 70,172
2003 53,438
Thereafter 13,359
--------
$379,204
========
For the years ended May 31, 1998 and 1997, rent expense was $352,876
and $382,954, respectively.
Employment Agreement
In February 1998, the Company's chief operating officer resigned and
his employment agreement was terminated, including his right to receive 50,000
shares of common stock (which was recorded as deferred compensation of $100,000)
and options to acquire 350,000 shares of common stock in exchange for $60,000 in
cash and the Company forgave outstanding net loans receivable of $34,924.
The Company also assigned a hospital contract in exchange for an
obligation to issue 10,000 shares of common stock (Note 3), resulting in a gain
of $95,873.
Litigation
On September 1, 1995, a former owner of a center filed a lawsuit
against a subsidiary (Note 4) 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 noncompete agreement
by the physician who was the former sole stockholder of the subsidiary and was
the Company's chief medical officer. Commencing April 30, 1994, and through May,
1995, the former owner provided management services for certain operations of
the subsidiary. In December 1997, the matter was settled without material effect
on the Company. During the year ended May 31, 1998, the Company credited
operations approximately $52,000 for an unused provision for settlement and
legal fees.
During the year ended May 31, 1998, the Company and a former consultant
settled a matter requiring the Company to issue 23,000 shares of common stock
and pay $3,000 in cash. During the year ended May 31, 1998, the Company credited
operations approximately $64,000 for an unused provision for settlement and
legal fees.
In August 1997, the wife of a former chairman of the board of the
Company commenced an action, as a stockholder, against the Company alleging
unreasonable restraint on the transferability of certain shares of common stock
of the Company and for breach of fiduciary duty on the part of the Company's
chairman and is seeking unspecified damages and relief.
In October 1997, a related action was commenced against the Company,
certain current and former directors, officers and consultants alleging, among
other things, breach of fiduciary duties and
F-19
<PAGE>
seeks, among other things, the rescission of the issuance of certain shares of
common stock and related options to acquire shares of common stock.
In May 1998, these two related matters were settled, subject to court
approval, requiring the Company to pay $170,000, payable $120,000 in cash,
$25,000 in cash on August 1, 1998, $25,000 in cash on September 1, 1999. In
addition, the Company issued an option to acquire 60,000 shares of common stock
at $1.59, per share, for a period of two years in exchange for consulting
services.
For the year ended May 31, 1998, the aggregate settlements of
litigation were $164,500.
Insurance
Upon the sales of the Company's physical therapy care centers in
Florida (Note 4), the Company has self-insured for medical malpractice
liabilities, if any. Through August 7, 1998, the Company has not been notified
of any claims for malpractice. The Company is unable to estimate if there will
be or the amounts of any claims.
14. ACQUISITION AND RESCISSION
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, plus other consideration. 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).
Effective February 28, 1997, the Company rescinded the acquisition and
the sellers returned all stock and notes originally issued to them. The payments
of the purchase price and the net revenues and expenses of these centers, for
the period from December 11, 1996 to February 28, 1997, were converted to a note
receivable of $448,935, including $15,000 for the purchase of 12,000 shares of
common stock. The note was collectable $50,000 at closing, $25,000 on May 5,
1997 and the balance in eighteen equal monthly installments, with interest at
10%, per annum. In addition, the finder's fee was also canceled.
In addition, the Company was required to pay a landlord $100,000, which
was settled by the issuance of 14,286 shares of common stock. Upon the
rescission, the Company received $21,429 from the seller as a repayment, and
such amount was included in the note receivable.
The results of operations of the Long Island centers from December 11,
1996 through February 28, 1997 have not been included in the consolidated
statement of operations.
The Company recognized a loss on the rescission of $84,437.
On December 11, 1997, the Company received $325,000 in full settlement
of the note receivable, resulting in a loss of $48,935.
15. RELATED PARTY TRANSACTIONS
Consulting Agreement
On December 3, 1996, the Company granted an option to purchase 375,000
shares of common stock to a consultant who is a relative of the chairman of the
board of the directors. The option was exercisable at $1.69, per share, through
December 2006. The option was to become exercisable upon
F-20
<PAGE>
the earlier of: (1) the Company meeting certain revenue and/or earnings criteria
or (2) five years and being an employee of the Company. In April 1997, the
consultant became an employee of the Company.
In August 1997, the above employee's employment terminated and the
Company entered into a consulting agreement for a period of two years at a fee
of $150,000, per year, plus 125,000 shares of common stock, issuable 25,000
shares immediately and 5,000 shares, per month, as long as the consultant has
not been terminated, as defined. As of May 31, 1998, 125,000 shares have been
issued and are being held in escrow. In addition, the option agreement to
purchase 375,000 shares of common stock has been amended to provide for
immediate exercisability and an extension until August 2007.
16. FORGIVENESS OF INDEBTEDNESS
During the year ended May 31, 1997, the related party (Note 3) forgave
the balance due on the finder's fee of $65,000.
17. CONCENTRATION OF CASH
From time to time, the Company had cash in financial institutions in
excess of insured limits. In assessing its risk, the Company's policy is to
maintain funds only with reputable financial institutions.
18. RECLASSIFICATION
Certain 1997 amounts have been reclassified to conform to 1998
classifications.
19. SUBSEQUENT EVENTS
Sale of Physical Therapy Centers
On July 16, 1998, the Company sold substantially all the equipment and
operations of two physical therapy centers in exchange for $375,000, payable in
cash at closing. The Company also incurred a brokerage fee of 10% of the sales
price. Proceeds of $365,000 were used to repay certain lease obligations (Note
11).
Proposed Acquisition
In September 1997, as amended in December 1997, the Company entered
into a letter of intent to acquire the assets and operations of approximately 30
medical practices and MRI centers.
Proposed Sale of Common Stock
Subsequent to May 31, 1998, the Company issued 400,000 shares of Common
Stock, being held in escrow, to an underwriter for subsequent sale.
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: August 28, 1998 OAK TREE MEDICAL SYSTEMS, INC.
By: /s/ HENRY DUBBIN
-----------------------
Henry Dubbin, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ HENRY DUBBIN President and Director August 28, 1998
- ---------------------------
Henry Dubbin
/s/ FRED L. SINGER Vice President and Director August 28, 1998
- ---------------------------
Fred L. Singer
Exhibit 10.13
AGREEMENT OF SALE
THIS AGREEMENT, made on the 16th day of July, 1998, is by and among OAK
TREE MEDICAL MANAGEMENT, INC. and OAK TREE MEDICAL PRACTICE, P.C., each with an
address at c/o Oak Tree Medical Systems, Inc., Attn: Mr. Henry Dubbin, 10155
Collins Avenue, Bal Harbor, Florida 33154 (collectively the "Seller") and
NESCONSET SPORTS, INC., a New York corporation with offices at c/o SMR
Management Corp., 4175 Veterans Memorial Highway, Ronkonkoma, New York 11779
(the "Purchaser").
W I T N E S S E T H :
WHEREAS, the Seller operates physical therapy professional practices
(the "Business") located at (i) 250 West 100th Street, New York, New York 10025
(the "West 100th Street Premises") and (ii) 163-03 Horace Harding Expressway,
Flushing, New York 11365 (the "Flushing Premises")(the West 100th Street
Premises and the Flushing Premises hereinafter collectively the "Premises"); and
WHEREAS, the Seller has agreed to sell and the Purchaser has agreed to
purchase certain assets of the Business owned by the Seller upon the terms and
conditions hereinafter set forth below.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereunder, the parties hereby mutually agree as follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
1.1 Purchase and Sale. At the Closing (as defined below) and upon the
terms and conditions hereinafter set forth, Seller shall sell, assign, transfer,
convey and deliver to Purchaser, and Purchaser shall purchase from Seller, all
of Seller's right, title and interest in certain assets of the Business as
conducted on the Premises, as of the Closing Date, to the extent described in
this Section 1.1 (the "Purchased Assets"), except those assets specifically
excluded pursuant to Section 1.2 hereof:
(a) The exclusive right to use the following telephone numbers of the
Business: 212-666-4435; 718-460-8400; and 718-961- 5224.
(b) All of Seller's right, title and interest in and to all managed
care contracts of Seller set forth on Schedule 1.1(b) annexed hereto.
(c) All of Seller's right, title and interest in and to the various
physical therapy and sports rehabilitation equipment, ancillary equipment and
other personal property
<PAGE>
(including, without limitation, furniture, fixtures and office equipment) all as
described on Exhibit "A" hereto (collectively, the "Equipment").
(d) All of Seller's right, title and interest in and to all leases,
licenses, concessions, service contracts and other agreements affecting the
premises used by the Seller in the Business (the "Premises") and/or the Business
itself, including, without limitation, the instruments set forth on Exhibit "B"
hereto.
(e) All of the Seller's right, title and interest in and to the trade
names "Parkside Physical Therapy," "Oak Tree Queens," and any variant thereof.
(f) All of the Seller's right, title and interest (and the right, title
and interest of each affiliate of the Seller) in and to any and all agreements
restricting the ability of Gary Danziger to compete with the Seller (and any
such affiliate).
In addition, at the Closing, the Seller shall cause to be transferred
to such entity or entities designated by the Purchaser (i) all goodwill related
to the Business, and (ii) all active and inactive patient lists and patient
charts of the Seller.
1.2 Retained Assets. Seller shall retain, and the Purchased Assets
shall not include the following assets: (i) all assets of Seller not used in, or
related to, the Business; and (ii) all of Seller's cash on hand, on deposit,
cash in banks, cash equivalents, bank and mutual fund accounts, and accounts and
notes receivable.
1.3 Purchase Price. The price of the Purchased Assets and the
Noncompetition Agreement set forth in Article IV hereof, shall be $375,000 (the
"Purchase Price"). The Purchase Price shall be paid to Seller at the Closing by
federal funds wire transfer to one or more accounts designated by Seller. It is
acknowledged and agreed by the parties hereto that certain equipment described
on Exhibit A is subject to certain leases the ("Equipment Leases"). The Seller
shall cause the lessee's obligations under said leases to be satisfied in full
at or before the Closing (and may instruct the Purchaser to wire a portion of
the Purchase Price to the lessors thereof in satisfaction of said obligations),
so that the Purchaser shall obtain good and marketable title to the equipment
covered by said leases, free and clear of all liens, claims and encumbrances
whatsoever.
- 2 -
<PAGE>
1.4 Purchase Price Allocation. The Purchase Price shall be
allocated as follows:
Allocation
Physical therapy and office
equipment $ 150,000
Covenant not to Compete $ 25,000
Goodwill $ 200,000
1.5 Assumption of Liabilities. Purchaser shall not assume any
liabilities or obligations of Seller whatsoever except the office leases for the
Premises.
1.6 Closing. The closing of the transactions to be effected hereunder
(the "Closing") will be held at the offices of Davidoff & Malito LLP, 605 Third
Avenue, 34th Floor, New York, New York at 3:30 P.M. on July 16, 1998. The date
and time at which the Closing occurs is sometimes hereinafter referred to as the
"Closing Date").
1.7 Deliveries and Proceedings at Closing. At the Closing:
(a) Premises Leases. The Seller shall deliver to the Purchaser valid
assignments of leases for the West 100th Street Premises and the Flushing
Premises (in each case without amendment), in each case accompanied by written
consent of the landlord with respect to such assignment, together with landlord
waivers in the form annexed hereto as Exhibit 1.7, all in such form as shall be
acceptable to the Purchaser in its discretion. The Purchaser shall reasonably
cooperate in executing and delivering to the Seller assignments of the leases
for the Premises and the aforementioned landlord waivers.
(b) Deliveries by Seller. Seller will deliver or cause to be delivered
to Purchaser a bill of sale in the form annexed hereto as Exhibit "C", together
with such other instruments of assignment with respect to the Purchased Assets
as the Purchaser and its counsel shall request.
1.8 Regarding Certain Consents. Nothing in this Agreement shall be
construed as an attempt to assign any contract, agreement, permit, franchise, or
claim included in the Purchased Assets which is by its terms or in law
nonassignable without the consent of the other party or parties thereto, unless
such consent shall have been given, or as to which all the remedies for the
enforcement thereof enjoyed by Seller would not, as a matter of law, pass to
Purchaser as an incident of the assignments provided for by this Agreement. In
order, however, to provide Purchaser the full realization and value of every
contract, agreement, permit, franchise and claim of the character described in
the immediately preceding sentence, Seller agrees
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<PAGE>
that on and after the Closing Date, it will, at the request and under the
direction of Purchaser, in the name of Seller or otherwise as Purchaser shall
specify, take all reasonable action (including without limitation the
appointment of Purchaser as attorney-in-fact for Seller where reasonably
appropriate) and do or cause to be done all such things as shall in the
reasonable opinion of Purchaser or its counsel be necessary and proper (a) to
assure that the rights of Seller under such contracts, agreements, permits,
franchises, and claims shall be preserved for the benefit of Purchaser and (b)
to facilitate receipt of the consideration to be received by Seller in and under
every such contract, agreement, permit, franchise, and claim, which
consideration shall be held for the benefit of, and shall be delivered to,
Purchaser, provided, however, that no undertaking of Seller under this Section
1.8 shall require Seller to pay any amounts or provide any consideration not
otherwise contemplated by this Agreement. Nothing in this Section shall in any
way diminish Seller's obligations hereunder to obtain all consents and approvals
and to take all such other actions prior to or at Closing as are necessary to
enable Seller to convey or assign valid title to all the Purchased Assets to
Purchaser.
1.9 Maintenance of Managed Care Contracts. From the Closing Date until
such date as the managed care contracts of Seller set forth on Schedule 1.1(b)
hereto have been transferred to Purchaser or Purchaser's designee, and said
managed care plans have accepted Purchaser or its licensed designee as a
provider hereunder, Seller shall continue to provide billing and collection
services for said managed care plans under Seller's tax identification number;
provided, however, that Purchaser shall perform all administrative and clerical
functions with respect to such billing and collection. Purchaser shall cooperate
with the Seller to mitigate any tax effects on the Seller arising out of the
operation of this Section 1.9.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents, warrants, covenants and agrees that:
2.1 Organization, Good Standing and Authority. Oak Tree Medical
Practice, P.C. is a professional corporation duly organized, validly existing
and in good standing under the laws of the State of New York. Oak Tree Medical
Management, Inc. is a corporation duly organized, validly existing and in good
standing under the laws of the State of New York. Seller has full power and
authority to own the Purchased Assets and occupy the Premises, to conduct its
Business as it is now being conducted, and to enter into and perform this
Agreement and all other agreements and documents executed or delivered or to be
executed or delivered by Seller in connection herewith. Seller's execution,
delivery and performance of this Agreement and all other agreements and
documents executed and delivered by Seller
- 4 -
<PAGE>
in connection herewith have been duly authorized by all necessary corporate
action of Seller. This Agreement has been duly executed and delivered by Seller,
and this Agreement and all other agreements and documents executed or delivered
by Seller in connection herewith are (or when executed and delivered by Seller
will be) legal, valid and binding obligations of the Seller, enforceable in
accordance with their respective terms.
2.2 Financial Statements. Seller has delivered to Purchaser a balance
sheet and income statement of the financial operations of the Business as of May
31, 1998 (the "Financial Statement"). The Financial Statement is accurate in all
material respects as of the date thereof, is in accordance with the books and
records of Seller and fairly represents the financial position of the Business
as of the date thereof.
2.3 Absence of Material Adverse Change. Since the date of the Financial
Statement there has been no material adverse change in or to the Business or to
the operations, earnings, prospects or liabilities of the Business.
2.4 No Violation of Agreements. The execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated by this
Agreement and the compliance with the terms, conditions and provisions of this
Agreement by Seller, will not (a) conflict with or result in a breach of or
constitute a default (or an event which might, with the passage of time or the
giving of notice or both, constitute a default) under any of the terms,
conditions or provisions of any indenture, mortgage, loan or credit agreement or
any other agreement or instrument to which Seller is a party or by which it or
any of the assets of the Business may be bound or affected, or any judgment or
order of any court or governmental department, commission, board, agency or
instrumentality, domestic or foreign, or any applicable law, rule or regulation,
(b) result in the creation or imposition of any lien, charge or encumbrance of
any nature whatsoever upon assets of the Business or give to others any
interests or rights therein, or (c) result in the termination of or loss of any
right (or give others the right to cause such a termination or loss) under any
agreement or contract constituting a part of the Purchased Assets to which
Seller is a party or by which it is bound. No representation is made herein as
to the assignability of any of Seller's managed care or other contracts. Seller
shall reasonably cooperate with Purchaser's efforts to obtain the consent of any
relevant third party to the assignment to Purchaser of any managed care
contracts relating to the Business.
2.5 True Conveyance of Information. All documents and other information
concerning Seller's Business, executed, delivered, conveyed or otherwise made
available to Purchaser by the Seller in connection with the transactions
contemplated by this Agreement were, to the best knowledge of the person(s)
- 5 -
<PAGE>
furnishing such information, true, correct and complete at the time of
execution, delivery or conveyance.
2.6 Title to Assets; Absence of Encumbrances. Seller has, and upon the
closing, Purchaser will have, good and marketable title to the Purchased Assets;
and none of the Purchased Assets is subject to any liens, mortgages, pledges,
security interests, restrictions, prior assignments, claims and encumbrances of
any kind whatsoever.
2.7 Litigation. To Seller's knowledge, there is no claim, action, suit,
inquiry, proceeding or investigation of any kind or nature whatsoever
(including, but not limited to, malpractice, tax, employment and payroll issues)
by or before any court, governmental or other regulatory or administrative
agency, commission or tribunal pending, threatened against or involving Seller,
the Business or the Purchased Assets, or which questions or challenges the
validity of this Agreement or any action taken or to be taken by Seller pursuant
to this Agreement or in connection with the transactions contemplated hereby
which has or would have a material adverse effect on Seller or Seller's ability
to perform hereunder.
2.8 Absence of Changes. The Seller has not, since the date of the
Financial Statement, entered into any transaction relating to the Business other
than in the ordinary course of business and consistent with past practices,
including but not necessarily limited to, any transaction relating to the (i)
borrowing of money, (ii) purchase, lease (as lessor or lessee), sale or
encumbering of assets or properties, (iii) cancellation, termination, amendment
or waiver of any material agreement or of any rights or claims arising
thereunder or otherwise, or (iv) payment or accrual of bonuses or special
compensation of any kind or an increase in the rate of any and all other forms
of compensation payable to officers, directors, employees, agents or independent
contractors.
2.9 Consents. No consent, approval or authorization of, or registration
or filing with, any person, including any governmental authority or other
regulatory agency, is required in connection with the execution and delivery of
this Agreement by Seller or the consummation of the transactions contemplated
hereby.
2.10 Taxes. Seller has (a) timely filed all tax returns, schedules,
declarations and tax-related documents required to be filed by any jurisdictions
to which it is or has been subject, (b) timely paid in full any taxes, interest
and penalties with respect thereto, subject to audit by the taxing authorities
by such jurisdiction, (c) made timely payment of the taxes required to be
deducted and withheld from the wages paid to its employees, and (d) otherwise
satisfied, in all material respects, all legal requirements applicable to Seller
and the Business with respect to all aforementioned obligations to taxing
jurisdictions. All
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<PAGE>
tax returns filed by Seller correctly reflect in all material respects its
income, expense, deductions, credits, loss carryovers and the taxes due relating
to the Business, and are otherwise accurate and complete in all material
respects and have not been amended. For purposes of this Section 2.10, "tax" and
"taxes" shall include all income, gross receipts, franchise, excise, real and
personal property, and other taxes imposed by any federal, state, municipal,
local or other governmental agency, including assessments in the nature of
taxes.
2.11 Employee Benefit Plans/Employment Matters. Seller does not have
any bonus, profit sharing, pension, retirement, insurance, severance and other
similar arrangement or plan, including, without limitation, any plan to which
any provision of the Employment Retirement Income Security Act of 1974, as
amended, is applicable. No present or former employee of Seller has any valid
and enforceable claim against Seller (whether under federal or state law), under
any employment agreement, or otherwise, or on account of or for (a) overtime
pay, other than overtime pay for the payroll period containing the effective
date of this Agreement, (c) vacation or time off (or pay in lieu thereof), other
than earned in respect of the previous twelve months, or (d) any violation of
any state, ordinance or regulation relating to minimum wages or maximum hours of
work. Seller is not party to any collective bargaining agreement. A complete
list of the employees of Seller and their compensation is annexed hereto as
Schedule 2.11.
2.12 Broker Participation. No agent, broker or other person acting
pursuant to the authorization of Seller is entitled to any commission or
finder's fee in connection with the transactions contemplated by this Agreement
except Corporate Planning Services, Inc., whose commission shall be paid
entirely by the Seller at Closing pursuant to separate agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents, warrants, covenants and agrees that:
3.1 Organization, Good Standing and Authority. It is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New York, and Purchaser has full power and authority to enter into and perform
this Agreement and all other agreements and documents executed or delivered by
Purchaser in connection herewith. Purchaser's execution, delivery and
performance of this Agreement and all other agreements and documents executed or
delivered by Purchaser in connection herewith have been duly authorized by all
necessary corporate action of Purchaser. This Agreement has been duly executed
and delivered by Purchaser and all other agreements and documents executed or
delivered by Purchaser in connection herewith are (or when executed and
delivered by Purchaser will
- 7 -
<PAGE>
be) legal, valid and binding obligations of Purchaser enforceable in accordance
with their respective terms.
3.2 No Interference. Purchaser is not aware of any state of facts which
would prevent or impede completion of the transactions contemplated hereunder.
3.3 Consents. No consent, approval or authorization of, or registration
or filing with, any person, including any governmental authority or other
regulatory agency, is required in connection with the execution and delivery of
this Agreement by Purchaser or the consummation of the transactions contemplated
hereby.
ARTICLE IV
NON COMPETITION
4.1 Non Competition Agreement. Except as provided herein for a period
of three (3) years from the date hereof, neither Seller nor any affiliate (as
hereinafter defined) shall:
(a) directly or indirectly invest in, have any other ownership interest
in, or otherwise participate with or in, as an officer, employee, director,
shareholder or partner, any person or entity that is in a Competitive Business
(as hereinafter defined) located (i) in the case of the West 100th Street
Premises, in an area bounded on the north by 150th Street, on the south by 50th
Street, "river to river," and (ii) in the case of the Flushing Premises, within
a five (5) mile radius thereof (in each case, the "Restricted Area");
(b) directly or indirectly solicit any person or enterprise for any
purpose directly related to a Competitive Business; and
(c) directly or indirectly solicit, employ or interfere with or attempt
to entice away from Purchaser any person who is then (or was at any time within
six months prior to the time of such employment, engagement or offer thereof) an
employee or independent contractor of Purchaser, except employees terminated by
the Purchaser.
4.2 Limited Exceptions; Definitions.
(a) Nothing contained in Section 4.1 shall prohibit the Seller or any
Affiliate from acquiring or holding less than seven (7%) percent of the
outstanding common stock or other publicly traded security in a publicly traded
company in a Competitive Business which is listed on a national securities
exchange or quoted on a national quotation service.
(b) As used herein, "Affiliate" means any person, partnership,
corporation or other entity which directly or
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<PAGE>
indirectly through one or more intermediaries controls or is controlled by, or
under common control with, the Seller. As used herein, Competitive Business
means any person or entity that either (i) is in the principal business of
providing or furnishing physical therapy services in the Restricted Area as a
physical therapy center, or (ii) in the principal business of furnishing
physical therapy equipment to such person or entity described in subclause (i)
hereof in the Restricted Area.
4.3 Acknowledgement. Seller acknowledges that the provisions of Section
4.1 are necessary for the protection of Purchaser and that such provisions are
reasonable under the circumstances including in particular the Purchase Price
paid by Purchaser in consideration of the obligations of Seller hereunder. In
the event that any provision of Section 4.1, including any sentence, clause or
part thereof, shall be deemed contrary to law or invalid or unenforceable in any
respect by a court of competent jurisdiction, the remaining provisions shall not
be affected, but shall, subject to the discretion of such court, remain in full
force and effect and any invalid and unenforceable provisions shall be deemed,
without further action on the part of the parties hereto, modified, amended and
limited to the extent necessary to render the same valid and enforceable.
4.4 Remedies. Seller agrees that any breach of Section 4.1 hereof will
cause Purchaser substantial and irreparable damage and therefore, in the event
of any such breach, in addition to such other remedies which may be available at
law or in equity, Purchaser shall have the right to seek specific performance
and injunctive relief.
ARTICLE V
INDEMNIFICATION
5.1 Indemnification by Seller. Seller shall indemnify, defend and hold
harmless Purchaser, promptly upon demand at any time and from time to time,
against any and all losses, liabilities, claims, actions, damages and expenses,
including without limitation, reasonable attorneys' fees and disbursements
(collectively, "Losses"), arising out of or in connection with any of the
following: (a) All liabilities, debts, obligations and commitments of the Seller
of any nature (including without limitation those arising out of or relating to
the operation of the Business prior to the Closing), whether accrued, absolute,
contingent or otherwise, attributable to any state of facts or event existing or
occurring on or before the Closing Date, and any claim or demand by a third
party (whether or not successful) to cause or require the Purchaser to pay or
discharge any debt, obligation, liability or commitment referred to in this
clause (a); (b) any breach or default in the performance by Seller of any
agreement made by Seller under this Agreement, (c) any breach of warranty or
representation made by Seller under Article II hereof, and (d) any action, suit,
proceedings, compromise,
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<PAGE>
settlement, assessment or judgment arising out of or incident to any of the
matters indemnified against in this Section 5.1.
5.2 Indemnification by Purchaser. Purchaser shall indemnify, defend and
hold harmless Seller, promptly upon demand at any time and from time to time,
against any and all losses, liabilities, claims, actions, damages and expenses,
including without limitation, reasonable attorneys' fees and disbursements
(collectively, "Losses"), arising out of or in connection with any of the
following: (a) the use of Seller's Medicare provider number; (b) the obligations
assumed by the Purchaser hereunder; and (c) any breach of warranty or
representation made by Seller under Article III hereof.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Utilities and Telephone Adjustments. The operation of the Business
and the expenses attributable thereto up to 11:59 P.M. on the day before the
Closing Date shall be for the account of Seller and thereafter shall be for the
account of Purchaser. Prior to the Closing, Seller will notify such utilities
that exist with respect to the sale of the Purchased Assets. To the extent that
service therefor cannot be terminated and reconnected in Purchaser's name,
Seller and Purchaser will pro rate Seller's cost of electricity, if any, and
telephone charges for the period prior to the Closing Date. In the event that
any bills for the above shall not be available at the Closing Date, the parties
agree to pro rate the same within five days following either party's receipt of
a bill for any such utilities, any portion of which is payable by the other.
Deposits on such utilities of Seller shall be the sole property of Seller and
Purchaser shall place its own deposits with regard thereto. In addition, Seller
agrees and covenants to pay all other amounts relating to the Assumed
Liabilities arising or attributable to operations prior to the Closing Date.
6.2 Sales Tax. Seller shall pay the cost of any and all sales taxes,
including bulk sales tax, applicable to the transactions covered by this
Agreement. Seller shall remit said sales tax to the proper New York tax
authorities at the time of Closing.
6.3 Confidentiality. Seller acknowledges that it possesses confidential
information and trade secrets regarding the Business and the Premises, which,
together with the Purchased Assets and all additional information conveyed to
Purchaser pursuant to this Agreement (collectively, the "Information"),
constitutes valuable assets. Accordingly, Seller shall not, at any time
following the Closing, disclose to anyone, use or convey the Information or any
part thereof other than for the particular purposes necessary to receive
professional advice with respect to the Information or in connection with the
preparation and filing of any documents, tax
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<PAGE>
returns or other disclosure required by law. Seller's covenants under this
Section 6.3 as pertaining to all Information respecting the Business of the
Purchaser, shall survive the termination of this Agreement.
6.4 Costs and Expenses. Seller and Purchaser will each pay their own
expenses incurred in connection with this Agreement and the transactions
contemplated hereby, including all legal fees.
6.5 Services of Anthony Ventura. The Seller shall allow Anthony Ventura
to work full time at the Premises for a period of three (3) weeks after the
Closing. The Seller acknowledges that the Purchaser has the right to purchase
the assets of the Seller's physical therapy located at 1725 Tenbroeck Avenue,
Bronx, New York (the "Bronx Facility"). If for any reason the Purchaser does not
purchase the Bronx Facility, then the Seller shall allow Anthony Ventura to work
half time for an additional six weeks at the Premises following the expiration
of said initial three-week period.
6.6 Services of John Simmons. The Purchaser shall allow the Seller to
work with John Simmons from his arrival at the Premises until 10:00 a.m. on each
of the days of July 22, July 23 and July 24, 1998.
6.7 Payroll. The Seller be responsible for all payroll and related
taxes for all of its employees currently working at either or both of the
Premises through the close of business on July 16, 1998 and shall pay said
employees all unpaid wages for all periods through and including the close of
business on said date no later than Monday, July 20, 1998.
6.8 Use of Alcove Space. The Purchaser shall allow the Seller to use
the alcove space currently occupied by the Seller at the Queens Premises until
the close of business on the 90th day following the date hereof.
ARTICLE VII
COVENANTS
7.1 Access to Information. Purchaser shall have the right to conduct
due diligence reviews upon the business, books, records and operations of
Seller. Seller shall give the other reasonable access during normal business
hours to the assets, properties, materials, books and records necessary to
conduct such review until 5:00 p.m. on the date prior to the Closing Date (the
"Due Diligence Deadline").
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<PAGE>
ARTICLE VIII
TERMINATION; CONDITIONS TO PURCHASER'S OBLIGATION TO CLOSE
8.1 Termination. This Agreement may be terminated by the Purchaser by
written notice of termination to the Seller by the Due Diligence Deadline in the
event that the Purchaser, in its sole discretion, determines not to proceed
based upon its examination of the business, books, records and operations of
Seller.
8.2 Conditions to Purchaser's Obligations to Close. The Purchaser's
obligations to close hereunder shall be subject to the delivery by the Seller to
the Purchaser of the following items on or before the Closing Date, each in form
and substance satisfactory to the Purchaser in its sole and absolute discretion
and each fully executed by all parties thereto except the Purchaser (or the
Purchaser's designee):
(a) An assignment to the Purchaser (or, as the Purchaser shall direct,
the Purchaser's designee) of all contracts between the Seller (or any or all of
them and any affiliate thereof) and Catholic Medical Center of Brooklyn and
Queens, Inc. (the "CMC Contract");
(b) Assignments of the leases for the Premises consented to by the
landlords thereof; and
(c) Landlord waivers in the form annexed hereto as Schedule 1.7 with
respect to each of the leases described in subsection (b) above.
In the event the conditions described in this Section 8.2 are not fulfilled, the
Purchaser may terminate this Agreement at any time on or after the Closing Date
by notice to the Seller. Nothing contained in this Section 8.2 shall be
construed to waive or limit the Purchaser's right to terminate this Agreement
pursuant to Section 8.1 hereof.
8.3 Effect of Termination. In the event that this Agreement is
terminated pursuant to Section 8.1 or Section 8.2 hereof, all further
obligations of the parties under this Agreement shall be terminated without
further liability of any party to the other, provided that no such termination
shall relieve the Seller from liability for its willful breach of this
Agreement.
ARTICLE IX
MISCELLANEOUS
9.1 Further Assurances. The parties shall cooperate and take such
actions, and execute such other documents, at the
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<PAGE>
Closing or subsequently, as either may reasonably request in order to carry out
the provisions or purpose of this Agreement.
9.2 Entire Understanding. This Agreement and all other instruments and
documents executed in connection herewith, contains the entire understanding and
agreement between the parties. Except as may otherwise be provided by this
Agreement, no change, discharge, modification or waiver of any provision hereof
shall be of any force or effect unless it is in writing and signed by all of the
parties hereto.
9.3 Choice of Law. This Agreement shall be governed and interpreted,
and all rights and obligations of the parties hereunder, shall be governed and
determined, in accordance with the laws of the State of New York, without regard
to its conflict of law rules. Any litigation arising hereunder shall be
commenced and conducted in the United States District Court for the Southern
District of New York, or the state courts located in such District.
9.4 Notice. Any notice or other communication to be given hereunder
shall be deemed to have been properly given if in writing and if sent by
certified mail or registered mail, return receipt requested, postage prepaid or
overnight mail, to the parties at their addresses as follows:
If to Seller:
Oak Tree Medical Management, Inc.
163-03 Horace Harding Expressway
Flushing, New York 11365
Telephone No.:
Facsimile:
After the Closing:
c/o Oak Tree Medical Systems, Inc.
Attn: Mr. Henry Dubbin
10155 Collins Avenue
Bal Harbor, Florida 33154
With a copy to:
Frederick C. Veit, Esq.
21 Gordon Avenue
Briarcliff Manor, New York 10510
Telephone No.: (914) 762-8824
Facsimile: (914) 923-1724
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<PAGE>
If to Purchaser:
NESCONSET SPORTS, INC. [or designee]
c/o SMR Management Corp.
4175 Veterans Memorial Highway
Ronkonkoma, New York 11779
Attention: Louis M. DiNitto
Telephone No.: (516) 738-1800
Facsimile: (516) 738-8910
With a copy to:
Larry Hutcher, Esq.
Davidoff & Malito LLP
605 Third Avenue
New York, New York 10158
Telephone No.: (212) 557-7200
Facsimile: (212) 286-1884
9.5 Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, legal representatives, successors in interest and assigns,
provided however, that this Agreement may not be assigned by any party without
the prior written consent of the other party to the Agreement.
9.6 No Waiver. The waiver of any breach of any of the terms or
conditions of this Agreement shall not be deemed to constitute a waiver of any
other breach or of the same or any other terms or condition contained in this
Agreement. The invalidation of any of the provisions of this Agreement shall not
affect the validity of any other provision hereof. In the event that any
provision is declared to be invalid, then this Agreement shall be deemed not to
have contained such provision and the balance of this Agreement shall continue
unaffected thereby. By this clause, the parties shall not be deemed to have
intentionally included any invalid provision. Under no circumstance shall the
parties be deemed or construed by operation of law or otherwise, to have
abandoned this Agreement or any of the terms hereof, unless such abandonment
shall be by a written instrument signed by all of the parties hereto.
9.7 Counterparts. This Agreement may be executed in any manner of
counterparts, and by the different parties hereto in separate counterparts, each
of which shall be deemed as an original, but all of which together shall
constitute one and the same document.
9.8 Prior Agreements. This Agreement supersedes any prior agreements
made among any of the parties hereto, if any, with respect to the subject matter
hereof, and all such prior agreements are hereby terminated.
- 14 -
<PAGE>
9.9 Captions. Headings are for convenience only and shall not be
considered in any manner in connection with any interpretation of this
Agreement.
9.10 Survival. Unless otherwise stated, the representations and
agreements of the parties hereto shall survive the Closing hereof and shall bind
the parties hereto and their heirs, successors in the interest, legal
representatives and assigns.
9.11 Obligations Joint and Several. Each and all of the obligations,
duties, representations, warranties and covenants of the seller hereunder are
joint and several, it being the intent of the parties hereto to confer upon the
Purchaser the maximum rights and remedies possible.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
OAK TREE MEDICAL MANAGEMENT, INC.
By: /s/ FREDERICK C. VEIT
--------------------------
Name: Frederick C. Veit
Title: Acting Secretary
OAK TREE MEDICAL PRACTICE P.C.
By: /s/ FREDERICK C. VEIT
--------------------------
Name: Frederick C. Veit
Title: Acting Secretary
NESCONSET SPORTS, INC.
By: /s/ DAVID W. BARNETT
--------------------------
Name: David W. Barnett
Title: Vice President
THE UNDERSIGNED HEREBY UNCONDITIONALLY
GUARANTEES THE OBLIGATIONS OF THE SELLERS:
OAK TREE MEDICAL SYSTEMS, INC.
By: /s/ FREDERICK C. VEIT
--------------------------
Name: Frederick C. Veit
Title: Acting Secretary
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<PAGE>
ATTACHMENTS:
Exhibit A - Equipment
Exhibit B - Leases, Licenses and Other Agreements
Exhibit C - Form of Bill of Sale
Schedule 1.1(b) - Managed Care Contracts
Schedule 1.7 - Form of Landlord Waiver
Schedule 2.11 - Employees of Seller
- 16 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENT OF OPERATIONS
CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR
ENDED MAY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 455,391
<SECURITIES> 0
<RECEIVABLES> 1,430,121
<ALLOWANCES> 642,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,350,915
<PP&E> 784,794
<DEPRECIATION> 282,455
<TOTAL-ASSETS> 4,270,900
<CURRENT-LIABILITIES> 1,376,923
<BONDS> 0
0
0
<COMMON> 46,577
<OTHER-SE> 2,119,234
<TOTAL-LIABILITY-AND-EQUITY> 4,270,900
<SALES> 2,258,186
<TOTAL-REVENUES> 2,258,186
<CGS> 1,177,005
<TOTAL-COSTS> 4,353,635
<OTHER-EXPENSES> 2,791,416
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 170,700
<INCOME-PRETAX> (5,057,565)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,057,565)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,057,565)
<EPS-PRIMARY> (1.49)
<EPS-DILUTED> 0
</TABLE>
