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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 0-16206
OAK TREE MEDICAL SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 02-0401674
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
163-03 HORACE HARDING EXPRESSWAY
FLUSHING, NEW YORK 11365
(Address of principal executive offices)
(718) 460-8400
(Issuer's telephone number, including area code)
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Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES _X_ NO ___
Indicate number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date:
Common Stock, $.01 par value 4,739,525 shares
Class Outstanding at February 13, 1998
Transitional Small Business Disclosure Format (check one):
YES ___ NO _X_
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<PAGE>
Oak Tree Medical Systems, Inc. and Subsidiaries
Index
Part I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet as of February 28, 1998 and May 31, 1997
Consolidated Statement of Operations for the three and nine months
ended February 28, 1998 and 1997
Consolidated Statement of Stockholders' Equity for the nine months
ended February 28, 1998
Consolidated Statement of Cash Flows for the nine months ended
February 28, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
Oak Tree Medical Systems, Inc and Subsidiaries
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
February 28, 1998 May 31, 1997
----------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 899,879 $ 125,919
Patient care receivables, less allowance for contractual
allowances and doubtful accounts of $719,500 and $860,123
as of February 28, 1998 and May 31, 1997, respectively 868,952 848,269
Notes receivable -- 264,401
Other current assets 64,344 141,622
- -------------------------------------------------------------------------------------------------
Total Current Assets 1,833,175 1,380,211
Other Assets
Notes receivable -- 109,534
Investment in affiliated company 4,994,214 4,994,214
Fixed assets 569,714 507,163
Other assets 103,174 80,666
Goodwill 229,868 37,141
=================================================================================================
TOTAL ASSETS $7,730,145 $7,108,929
=================================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
Oak Tree Medical Systems, Inc and Subsidiaries
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
February 28, 1998 May 31, 1997
----------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable - bank $ 197,305
Notes payable - other $ 440,507 --
Accounts payable and accrued expenses 765,960 1,071,843
Deferred compensation -- 100,000
Current portion of long-term debt 51,912 294,445
Current portion of capitalized lease obligations 108,732 147,756
- --------------------------------------------------------------------------------------------------
Total Current Liabilities 1,367,111 1,811,349
Long-term debt 223,146 92,667
Capitalized lease obligations 452,376 311,587
- --------------------------------------------------------------------------------------------------
Total Liabilities 2,042,633 2,215,603
- --------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $.01 par value, 25,000,000 shares
authorized, 4,658,156 and 2,888,144 shares issued
and outstanding as of February 28, 1998 and May 31, 1997,
respectively 46,582 28,881
Additional paid-in-capital 12,166,122 9,772,472
Deficit (6,233,746) (4,726,638)
Less: prepaid consulting and stock
subscription receivable (291,446) (181,389)
- --------------------------------------------------------------------------------------------------
Total Stockholders' Equity $5,687,512 $4,893,326
- --------------------------------------------------------------------------------------------------
==================================================================================================
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $7,730,145 $7,108,929
==================================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
Oak Tree Medical Systems, Inc and Subsidiaries
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended February 28, Ended February 28,
====================================================================
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Net patient services $ 512,915 $ 440,297 $ 1,680,698 $ 2,679,442
===================================================================================================================
EXPENSES
Costs of patient services 487,725 738,383 1,496,237 1,467,853
Selling, general and administrative 363,598 580,157 1,305,279 1,153,313
Depreciation and Amortization 68,691 64,285 198,906 172,090
Interest - net 70,865 233,155 187,384 314,956
Losses on sales and rescission -- 777,054 777,054
===================================================================================================================
TOTAL EXPENSES 990,879 2,393,034 3,187,806 3,885,266
===================================================================================================================
(LOSS) BEFORE INCOME TAXES (477,964) (1,952,737) (1,507,108) (1,205,824)
PROVISION FOR INCOME TAXES ( 971,575) (710,386)
===================================================================================================================
NET (LOSS) ($ 477,964) ($ 981,162) ($1,507,108) ($ 495,438)
===================================================================================================================
NET (LOSS) PER COMMON SHARE ($ 0.13) ($ 0.36) ($ 0.40) ($ 0.18)
===================================================================================================================
Weighted average number of common and
common equivalent shares outstanding 3,672,745 2,733,261 3,723,596 2,692,347
===================================================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
Oak Tree Medical Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
For the Nine Months Ended February 28, 1998
(Unaudited)
<TABLE>
<CAPTION>
Prepaid
Consulting and Total
Common Stock Additional Stock subscription Stockholders'
Shares Amount Paid-in-Capital Deficit Receivable Equity
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
BALANCE MAY 31, 1997 2,888,144 $28,881 $9,772,472 ($4,726,638) ($181,389) $4,893,326
Sale of stock 1,500,000 15,000 1,712,957 1,727,957
Exercise of options 115,250 1,153 265,847 267,000
Issuance of shares for services 154,762 1,548 414,846 (339,844) 76,550
Amortization of prepaid consulting 229,787 229,787
Net (Loss) (1,507,108) (1,507,108)
==================================================================================================================================
BALANCE FEBRUARY 28, 1998 4,658,156 $46,582 $12,166,122 ($6,233,746) ($291,446) $5,687,512
==================================================================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
Oak Tree Medical Systems, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended February 28,
==============================
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net (Loss) ($1,507,108) ($495,438)
Adjustments to reconcile net (loss)
to net cash used in operating activities:
Depreciation and Amortization 428,693 422,090
Loss on sales and rescission 777,054
Common stock issued for services 76,550
Capitalization of deferred interst
and other financing costs (662,500)
Reduction of allowance for doubtful accounts (140,623) (336,270)
Increase (decrease) in cash from
Patient care receivables 119,940 (1,070,715)
Other current assets 80,943 (3,200)
Other assets (14,002)
Accounts payable and accrued expenses (305,881) 443,997
Other liabilities (192,667)
Deferred income tax (710,386)
=================================================================================================
NET CASH (USED) BY OPERATING ACTIVITIES: (1,440,153) (1,649,370)
=================================================================================================
INVESTING ACTIVITES
Acquisition (net of notes payable of $300,000 in 1998) (100,000) (455,000)
Purchases of fixed assets (net of capitalized
lease obligations of $171,335 in 1998) (73,217) (69,598)
Proceeds from sale of fixed assets 171,335
Payments on security deposits (7,140)
Decrease in note receivable 373,935
Increase in note receivable (448,935)
=================================================================================================
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES: 364,913 (973,533)
=================================================================================================
FINANCING ACTIVITIES
Proceeds of notes payable and long-term debt 225,000 1,112,235
Payments of notes payable and long-term debt (149,943) (335,688)
Obligation to issue common stock 21,429
Proceeds from issuance of common stock 1,844,956
Payments of capitalized lease obligations (69,570)
Payments of notes payable - bank (441,750) (244,027)
Proceeds of notes payable - accounts receivable financing 1,343,966 2,507,893
Payments of notes payable - accounts receivable financing (903,459) (695,393)
=================================================================================================
NET CASH PROVIDED BY FINANCING ACTIVITIES: 1,849,200 2,366,449
=================================================================================================
NET INCREASE (DECREASE) IN CASH 773,960 (256,454)
CASH - Beginning of Period 125,919 292,315
=================================================================================================
CASH - End of Period $899,879 $35,861
=================================================================================================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Interest Expense Paid $176,430 $64,956
=================================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
OAK TREE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OPERATIONS
Oak Tree Medical Systems, Inc., a Delaware corporation, and its
subsidiaries (the "Company") operate physical therapy and rehabilitation care
centers and related medical practices in the New York metropolitan area.
2. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Oak Tree
Medical Systems, Inc. and its wholly-owned subsidiaries and Oak Tree Medical
Practice, P.C., a professional practice entity over which the Company exercises
significant influence and control. All material intercompany balances and
transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all the information and footnotes required by generally accepted accounting
principles for consolidated financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended February 28, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending May 31, 1998. These statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB for the fiscal year ended May 31, 1997, as amended.
3. ACQUISITION
On July 16, 1997, the Company acquired a 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 due in 18 quarterly installments of
$18,343, including interest at 8%, per annum, commencing November 1, 1997. The
note is collateralized by all the assets acquired. In addition, the seller, a
physician, has entered into a noncompete agreement for four years. The purchase
price may be reduced by $100,000 if the acquired center does not attain certain
billings.
In connection with the acquisition, the Company entered into: (1) a lease
for the center requiring minimum annual rents of $47,738 increasing to $53,438
through August 2003, plus additional rent for increases in real estate taxes,
operating expenses, etc., (2) a 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)
a 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.
4. COMMON STOCK
Issuance of Common Stock
Through February 28, 1998, the Company issued an aggregate of 6,762 shares
of common stock in exchange for legal services of $30,550.
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 such shares at $29,531.
<PAGE>
In September 1997, 125,000 shares of common stock issuable pursuant to the
terms of a consulting agreement with a related party (Note 12) have been
recorded at $2.72 per share. The aggregate consulting fees of $339,844 are being
amortized over the term of the agreement.
In January 1998, a Director of the Company exercised an option for 5,000
shares of common stock at an exercise price of $1.00 per share.
In January 1998, the Company and a former consultant settled a matter
requiring the Company to issue 22,000 (and, if a certain stock value is not met,
an additional 2,500) shares of common stock and pay $3,000 in cash. As of
February 28, 1998, the Company issued 23,000 shares of common stock and paid
$3,000 as full settlement.
Sale of Common Stock
On January 29, 1998, the Company completed an offering for the sale of
1,500,000 shares of common stock for an aggregate purchase price of
approximately $3,300,000 and incurred expenses of approximately $1,500,000 in
connection with the offering.
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, 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 $2.00 to $5.00, 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.
Through February 28, 1998, options for 110,250 shares of common stock, at
prices ranging from $2.00 to $3.00 per share, have been exercised.
5. NOTES RECEIVABLE
In connection with the acquisition (December 11, 1996) and subsequent
rescission (February 28, 1997) of certain assets and management of four physical
therapy care centers located in Long Island, New York, the Company held a note
receivable in the original amount of $373,000. On December 11, 1997, the Company
received payment of $325,000 in full settlement of the remaining amount of the
note receivable, net of adjustments and discount.
6. INVESTMENT IN AFFILIATED COMPANY
As of May 31, 1997, investment in affiliated company consisted of:
Investment $5,000,000
Equity in loss (5,786)
----------
$4,994,214
==========
In June 1995, the Company exchanged 100% of the common stock of a
subsidiary, the sole asset of which was 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% of the outstanding common stock of Accord, and the right to
receive from Accord 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 recover control of the gold ore. No gain or
loss was recognized on the exchange.
<PAGE>
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
===========
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)
==========
7. NOTES 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. 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.
On September 10, 1997, the line of credit and term loans were paid off
(Note 8).
8. NOTES PAYABLE - OTHER
In August 1997 the Company borrowed $225,000 from a financial consulting
company (Note 4). In October 1997 the financial consultant exercised options to
acquire 56,250 shares of Common Stock for an aggregate cost of $150,000, which
was offset against the notes payable. In November 1997, the Company paid the
balance of the obligation in the amount of $80,967, including interest.
Financing Arrangement
In September 1997, the Company entered into an agreement to sell all
existing and future patient care receivables for a period of two years. Under
the agreement, the purchaser will advance 75% of under 180 day, eligible
receivables, as defined. Upon each sale, the Company will pay a discount equal
to prime plus 5%, per annum and, at the initial closing, paid an origination fee
of $17,457. The Company and the President of the Company have each guaranteed
the collection of these receivables.
On September 10, 1997, the Company closed on the initial sale of accepted
receivables of $775,867 and used proceeds of $547,304 to pay off the notes
payable - bank (Note 7).
<PAGE>
9. CAPITALIZED LEASE OBLIGATIONS
In August 1997, the Company sold the equipment acquired on July 16, 1997
for $171,335 and leased back the equipment for a period of five years, requiring
equal monthly payments of $4,215. (Note 3)
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 market value of the assets.
10. 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.
As of February 28, 1998, realization of the Company's deferred tax assets
of $1,200,000 resulting from the net operating loss carryforwards and temporary
differences, is considered unlikely and, accordingly, a valuation allowance of
$1,200,000 has been established.
As of February 28, 1998, the Company had net operating loss carryforwards
of approximately $3,600,000 to reduce future Federal taxable income, expiring
through May 31, 2013. As a result of a prior change in control in ownership of
the Company, utilization of approximately $225,000 of these net operating loss
carryforwards, expiring through May 31, 2006, are limited to approximately
$26,000, per year.
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
Employment Agreement
The Company was committed under an employment agreement, as amended July
1997, to its former Chief Operating Officer through September 30, 1999,
requiring: (1) an annual salary of $260,000; (2) deferred compensation for the
year ended May 31, 1997 of either $100,000 or 50,000 shares of common stock; (3)
bonuses, as defined, up to $30,000, per quarter; (4) options to purchase 350,000
shares of common stock, exercisable at $1, per share, through October 1, 1998;
(5) a loan of $350,000, payable three years from the date of the loan, in cash
or shares of common stock, at $1, per share, with interest at 7%, per annum,
payable quarterly; and (6) severance equal to 200% and 100% of annual salary if
terminated, as defined, during the twelve months ended September 30, 1998 or
1999, respectively. The loan was to be collateralized by the 50,000 shares of
common stock received and the option or shares acquired under the option.
On February 5, 1998, the Chief Operating Officer of the Company resigned
his position and entered into a settlement agreement with the Company. Under the
terms of this agreement, the Company assigned its rights in a hospital service
contract to the former Chief Operating Officer, paid cash of $60,000, and
assumed other obligations totaling approximately $40,000. In exchange, the
Company was released of all obligations to the former Chief Operating Officer
under any agreements then in effect, including the employment agreement and the
cancellation of all stock options.
Litigation
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. Management and the claimant have
reached mutual agreement which will not result in any adverse material effect on
the Company.
In October 1997, an action was commenced against the Company, certain
current and former directors, officers and consultants alleging, among other
things, breach of fiduciary duties and seeking, among other things, the
rescission of the issuance of certain shares of common stock and related options
to acquire shares of common stock. Management does not believe this action will
have any material adverse effect on the Company.
Insurance
Upon the sales of the Company's physical therapy care centers in Florida
(February and April 1997), the Company has self-insured for medical malpractice
liabilities, if any, which may still arise from the Florida operations. The
Company has not been notified of any claims for malpractice and the Company is
unable to determine the effect, if any, of its self-insurance.
<PAGE>
12. RELATED PARTY TRANSACTION
On December 3, 1996, the Company granted an option to purchase 375,000
shares of common stock to an employee who was a relative of the chairman of the
board of directors. The option is exercisable at $1.69, per share, through
December 2006. Subject to such employee's continuing employment with the
Company, the options were to become exercisable upon the earlier of : (1) the
Company meeting certain revenue and/or earnings criteria or (2) five years.
In August 1997, the above employee's employment was 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. (Note 4)
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.
13. 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.
14. RECLASSIFICATION
Certain 1997 amounts have been reclassified to conform to 1998
classifications.
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is engaged in the business of operating and managing physical
medicine and physical therapy care clinics. The Company operates four facilities
in the New York metropolitan area, which were acquired in October 1996 and July
1997. In February 1998, the Company assigned a hospital service contract to the
former Chief Operating Officer of the Company under the terms of a settlement
agreement.
Results of Operations
Nine and Three Months Ended February 28, 1998 Compared to the Nine and Three
Months Ended February 28, 1997.
Patient revenues decreased by 37.3% to $1,680,698 from $2,679,442 in the
nine months ended February 28, 1998 (the "Fiscal 1998 Nine Month Period")
compared with the nine months ended February 28, 1997 (the "Fiscal 1997 Nine
Month Period"). Patient revenues increased by 16.5% to $512,915 from $440,297 in
the three months ended February 28, 1998 (the "Fiscal 1998 3rd Quarter")
compared with the three months ended February 28, 1997 (the "Fiscal 1997 3rd
Quarter"). The reduction in patient revenues for the Fiscal 1998 Nine Month
Period is attributable to the disposition in Fiscal 1997 of the Company's North
Florida facilities, as well as a fall off in revenues at the Company's New York
City facilities during the Fiscal 1998 periods. The increase in patient revenues
for the Fiscal 1998 3rd Quarter is attributable to the New York City facility
acquired in Fiscal 1998.
Total expenses were $3,187,806 or 189.7% of revenues for the Fiscal 1998
Nine Month Period, compared with total expenses of $3,885,266 or 145.0% of
revenues for the Fiscal 1997 Nine Month Period. Total expenses were $990,879 or
193.2% of revenues for the Fiscal 1998 3rd Quarter, compared with total expenses
of $2,393,034 or 543.5% of revenues for the Fiscal 1997 3rd Quarter. Costs of
patient services as a percentage of patient revenues increased to 89.0% for the
Fiscal 1998 Nine Month Period as compared to 54.8% for the Fiscal 1997 Nine
Month Period. For the Fiscal 1998 3rd Quarter cost of patient services as a
percentage of patient revenues decreased to 95.1% as compared to 167.7% for the
Fiscal 1997 3rd Quarter. These changes were due to the reduction in revenues
attributable to the disposition in Fiscal 1997 of the Company's North Florida
facilities and fall off in revenues at the Company's New York City facilities,
as well as the higher costs of doing business in New York. Further, the Fiscal
1998 3rd Quarter was favorably impacted by the acquisition of a New York City
facility in Fiscal 1998. Selling, general and administrative expenses increased
by 13.2% to $1,305,279 from $1,153,313 for the Fiscal 1998 Nine Month Period
compared with the Fiscal 1997 Nine Month Period and decreased by 37.3% to
$363,598 from $580,157 for the Fiscal 1998 3rd Quarter compared to the Fiscal
1997 3rd Quarter. The increase in selling, general and administrative expenses
in the Fiscal 1998 Nine Month Period was due to higher operation expenses
incurred in the New York City facilities, increased marketing and consulting
expenses, expenses related to the improvement of the Company's financial
controls and accounting system, and increased legal and accounting expenses. The
increases were also attributable to the transactional activities of the Company,
the settlement of certain litigation matters and the preparation of reports
filed with the SEC. The Company's efforts to curtail these expenses and
strengthen systems controls resulted in decreased selling, general and
administrative expenses in the Fiscal 1998 3rd Quarter. Interest expense
decreased by 40.5% to $187,384 from $314,956 for the Fiscal 1998 Nine Month
Period compared to the Fiscal 1997 Nine Month Period, and by 69.6% to $70,865
from $233,155 for the Fiscal 1998 3rd Quarter compared to the Fiscal 1997 3rd
Quarter. These decreases were attributable to decreased levels of borrowing
under accounts receivable financing agreements and interest amortization
expenses associated thereon in Fiscal 1998 and the disposition of the Company's
North Florida facilities in Fiscal 1997. These decreases were partially offset
by increased interest amortization expenses attributable to fixed asset
sale-leaseback transactions in Fiscal 1998. Loss on sales and rescission was
$777,054 for the Fiscal 1997 3rd Quarter and the Fiscal 1997 Nine Month Period.
This expense was attributable to the disposition of the Company's North Florida
facilities and the rescission of the December 1996 acquisition of four Long
Island, New York physical therapy care centers.
The above factors contributed to a net loss of $1,507,108 for the Fiscal
1998 Nine Month Period as compared to a net loss of $495,438 for the Fiscal 1997
Nine Month Period and a net loss of $477,964 for the Fiscal 1998 3rd Quarter as
compared to a net loss of $981,162 for the Fiscal 1997 3rd Quarter.
Income tax (benefit) for the Fiscal 1998 and Fiscal 1997 Nine Month Periods
were ($623,000) and ($710,000), respectively, and for the Fiscal 1998 and Fiscal
1997 3rd Quarters were ($283,000) and ($972,000), respectively. For the Fiscal
1998 Nine Month Period and the Fiscal 1998 3rd Quarter ended February 28, 1998,
the deferred income tax benefit has been reduced by a corresponding increase in
the allowance for the realization of deferred income tax assets of $623,000 and
$283,000, respectively, because as of February 28, 1998, it is unlikely that the
deferred tax assets will be realized as they relate primarily to net operating
loss carryforwards and the Company may not generate sufficient future taxable
income for their utilization.
Liquidity and Capital Resources
In the past, the Company has funded its capital requirements from operating
cash flow, loans against its accounts receivable, the sale of equity securities
and the issuance of equity securities in exchange for assets acquired and
services rendered. During fiscal year 1997, the Company undertook a number of
actions to consolidate its geographic focus. Together with other actions
undertaken following the close of the fiscal year, the Company hopes that these
actions will enable it to attract new investment capital, which the Company
believes will be necessary to sustain its ongoing operations and to facilitate
<PAGE>
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 determined to shift its
geographic focus from North Florida to the New York metropolitan 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.
Continuing the divestiture of its Florida operations, the Company sold its
remaining North Florida facility located in St. Augustine, Florida in April
1997.
In July 1997, the Company acquired a 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 due in 18 quarterly installments of
$18,343, including interest at 8%, per annum, commencing November 1, 1997. The
note is collateralized by all the assets acquired. In addition, the seller, a
physician, has entered into a noncompete agreement for four years. The purchase
price may be reduced by $100,000, if the acquired center does not attain certain
billings.
In connection with the acquisition, the Company entered into: (1) a lease
for the center requiring minimum annual rents of $47,738 increasing to $53,438
through August 2003, plus additional rent for increases in real estate taxes,
operating expenses, etc., (2) a 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)
a 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.
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 public relations 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. Subsequent to May 31, 1997,
options for 110,250 shares, at prices ranging from $2.00 to $3.00 per share,
have been exercised, as follows:
(a) In August 1997 the Company borrowed $225,000 from one of the public
relations consulting companies. In October 1997 the public relations
consulting company exercised options to acquire 56,250 shares of common
<PAGE>
stock for an aggregate cost of $150,000, which was offset against the notes
payable. In November 1997 the Company paid the balance of the obligation in
the amount of $80,967, including interest.
(b) In July and October 1997 options for 50,000 shares and 4,000 shares of
common stock were exercised at prices ranging from $2.00 to $3.00 per
share.
On December 3, 1996, the Company granted an option to purchase 375,000
shares of common stock to an employee who was a relative of the chairman of the
board of directors. The option is exercisable at $1.69, per share, through
December 2006. Subject to such employee's continuing employment with the
Company, the options were to become exercisable upon the earlier of: (1) the
Company meeting certain revenue and/or earnings criteria or (2) five years.
In August 1997, the above employee's employment was 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. 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.
In August 1997, the Company sold the equipment acquired in connection with
the July 1997 purchase of a physical therapy care center for $171,335 and leased
back the equipment for a period of five years, requiring equal monthly payments
of $4,215.
In September 1997, the Company entered into an agreement to sell all of its
existing and future patient care receivables for the next two years. Under the
agreement, the purchaser will advance to the Company 75% of under 180-day,
eligible receivables (as defined). Upon each sale, the Company will pay a
discount equal to prime plus 5% per annum and, at the initial closing, paid an
origination fee of $17,457. The Company and Mr. Henry Dubbin guaranteed the
collection of these receivables. On September 10, 1997, the Company closed on
the first sale of eligible receivables of $774,867 for $547,304.
In January 1998, a director of the Company exercised an option for 5,000
shares of Common Stock at an exercise price of $1.00 per share.
On January 29, 1998, the Company closed an offshore placement of 1,500,000
shares of Common Stock for an aggregate purchase price of approximately
$3,300,000. The Company incurred expenses of approximately $1,500,000, and
received net proceeds of approximately $1,800,000.
On February 5, 1998, the Chief Operating Officer of the Company resigned
his position and entered into a settlement agreement with the Company. Under the
terms of this agreement the Company assigned its rights in a hospital service
contract to the former Chief Operating Officer, paid cash of $60,000, and
assumed other obligations totaling approximately $40,000. In exchange, the
Company was released of all obligations to the former Chief Operating Officer
under any agreements then in effect, including the employment agreement and the
cancellation of all stock options.
<PAGE>
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 Securities and Exchange Commission.
<PAGE>
PART II OTHER INFORMATION
Item 5. Other Information
Effective February 5, 1998, Gary Danziger resigned as Chief Operating
Officer and as a member of the Board of Directors of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OAK TREE MEDICAL SYSTEMS, INC.
By: /s/ Henry Dubbin
--------------------------------
Henry Dubbin
President
Dated: April 14, 1998
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