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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 August 31, 1997
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)
----------
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 ___ NO _X_
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 4,569,025 shares
Class Outstanding at February 24, 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 August 31, 1997 and May 31, 1997
Consolidated Statement of Operations for the three months ended
August 31, 1997 and 1996
Consolidated Statement of Stockholders' Equity for the three
months ended August 31, 1997
Consolidated Statement of Cash Flows for the three months ended
August 31, 1997 and 1996
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>
August 31, 1997 May 31, 1997
--------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 109,056 $ 125,919
Patient care receivables, less allowance for contractual
allowances and doubtful accounts of $ 858,169 and $ 860,123
as of August 31, 1997 and May 31, 1997, respectively 861,848 848,269
Notes receivable 329,575 264,401
Other current assets 210,517 141,622
- -----------------------------------------------------------------------------------------------
Total Current Assets 1,510,996 1,380,211
Other Assets
Notes receivable 44,360 109,534
Investment in affiliated company 4,994,214 4,994,214
Fixed assets 690,788 507,163
Other assets 110,290 80,666
Goodwill 235,828 37,141
===============================================================================================
TOTAL ASSETS $7,586,476 $7,108,929
===============================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
Oak Tree Medical Systems, Inc. and Subsidiaries
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
August 31, 1997 May 31, 1997
--------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilites
Note payable - bank $ 197,305 $ 197,305
Note payable - other 225,000 --
Accounts payable and accrued expenses 1,094,663 1,071,843
Deferred compensation 100,000 100,000
Current portion of long-term debt 345,339 294,445
Current portion of capitalized lease obligations 121,485 147,756
- ----------------------------------------------------------------------------------------------
Total Current Liabilities 2,083,792 1,811,349
Long-term debt 343,147 92,667
Capitalized lease obligations 502,711 311,587
- ----------------------------------------------------------------------------------------------
Total Liabilites 2,929,650 2,215,603
- ----------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $.01 par value, 25,000,000 shares authorized,
2,940,997 and 2,888,144 shares issued and outstanding as
of August 31, 1997 and May 31, 1997, respectively 29,410 28,881
Additional paid-in-capital 9,882,493 9,772,472
Deficit (5,130,349) (4,726,638)
Less: prepaid consulting and stock
subscription receivable (124,728) (181,389)
- ----------------------------------------------------------------------------------------------
Total Stockholders' Equity 4,656,826 4,893,326
- ----------------------------------------------------------------------------------------------
==============================================================================================
TOTAL LIABILITES AND
STOCKHOLDERS' EQUITY $ 7,586,476 $ 7,108,929
==============================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
Oak Tree Medical Systems, Inc. and Subsidiaries
Consolidated Statement of Operations
(Unaudited)
For the Three Months
Ended August 31,
---------------------
1997 1996
---- ----
REVENUE
Net patient services $466,147 $1,002,463
- --------------------------------------------------------------------------------
EXPENSES
Costs of patient services 433,990 375,823
Selling, general and administrative 349,488 296,116
Depreciation and Amortization 61,524 44,640
Interest 24,856 43,072
================================================================================
TOTAL EXPENSES 869,858 759,651
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(LOSS) INCOME BEFORE INCOMES TAXES (403,711) 242,812
PROVISION FOR INCOME TAXES -- 91,189
================================================================================
NET (LOSS) INCOME ($403,711) $151,623
================================================================================
NET (LOSS) INCOME PER COMMON SHARE ($0.11) $0.06
================================================================================
Weighted average number of common and
common equivalent shares outstanding 3,529,200 2,679,375
================================================================================
See notes to consolidated financial statements
<PAGE>
Oak Tree Medical Systems, Inc. and Subsidiaries
Conslidated Statement of Stockholders' Equity
For the Three Months Ended August 31, 1997
<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
Exercise of options 50,000 500 99,500 100,000
Issuance of shares for services 2,853 29 10,521 10,550
Amortization of prepaid consulting 56,661 56,661
Net (Loss) (403,711) (403,711)
====================================================================================================================================
BALANCE AUGUST 31, 1997 2,940,997 $29,410 $9,882,493 ($5,130,349) ($124,728) $4,656,826
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
Oak Tree Medical Systems, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
For the Three Months
Ended August 31,
-------------------
1997 1996
---- ----
OPERATING ACTIVITIES
Net (Loss) Income ($403,711) $ 151,623
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and Amortization 119,559 44,640
Common stock issued for services 10,550
Increase (decrease) in cash from
Patient care receivables (13,579) (515,172)
Other current assets 106,105
Accounts payable and accrued payable 22,820 (39,413)
Deferred income tax 80,793
================================================================================
NET CASH (USED) BY OPERATING ACTIVITIES: (158,256) (277,529)
================================================================================
INVESTING ACTIVITES
Acquisition (net of notes payable of $300,000) (100,000)
Purchases of fixed assets (net of capitalized
lease obligations of $171,335 in 1997) (69,985) (9,835)
Decrease in goodwill 10,395
Payments on security deposits (7,140)
================================================================================
NET CASH (USED) PROVIDED
BY INVESTING ACTIVITIES: (177,125) 560
================================================================================
FINANCIAL ACTIVITIES
Proceeds of notes payable and long-term debt 225,000 122,235
Payments of notes payable and long-term debt (6,482) (30,687)
Proceeds from issuance of common stock 100,000
================================================================================
NET CASH PROVIDED BY FINANCING ACTIVITIES: 318,518 91,548
================================================================================
NET (DECREASE) IN CASH (16,863) (185,421)
CASH - Beginning of Period 125,919 292,315
================================================================================
CASH - End of Period $ 109,056 $ 106,894
================================================================================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Interest Expense Paid $ 15,728 $ 43,072
================================================================================
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 months ended August 31, 1997 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 in to: (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 August 31, 1997, the Company issued an aggregated of 2,853 shares
of common stock in exchange for legal services of $10,550.
<PAGE>
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.
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 $1750, (b) $3000, 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 three month period ending August 31, 1997, options for 50,000
shares of common stock, at $2 per share, have been exercised. In October 1997,
options for 4,000 shares of common stock, at $3 per share were 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, 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% of the outstanding common stock of Accord, and Accord 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.
<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. 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. The term loan
is 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 are collateralized by the accounts receivable, fixed assets, etc. of
the New York City physical therapy care centers.
As of August 31, 1997, interest on the loans was 9.5 %, per annum.
On September 10, 1997, the line of credit and term loans were paid-off
(Note 15).
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.
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 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.
<PAGE>
As of August 31, 1997, realization of the Company's deferred tax assets of
$700,000, resulting from the net operating loss carryforwards and temporary
differences, is not considered more likely tan not, and accordingly, a valuation
allowance of $700,000 has been established.
As of August 31, 1997, the Company had net operating loss carryforwards of
approximately $2,138,000 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.
11. COMMITMENTS AND CONTINGENCIES
Employment Agreement
The Company is committed under an employment agreement, as amended July
1997, to its 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
termination, as defined, during the twelve months ended September 30, 1998 or
1999, respectively. The loan will 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 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 cancellation of all stock options.
Litigation
Subsequent to August 31, 1997, 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 May 31, 1997, the Company accrued $75,000, the estimated 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. Management, upon advise of
counsel, believes the matter is without merit and will result in no 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 seeks, 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.
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 1996 amounts have been reclassified to conform to 1997
classifications.
15. SUBSEQUENT EVENTS
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).
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.
<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
Three months ended August 31, 1997 compared to three months ended August 31,
1996.
Total revenue for the three months ended August 31, 1997 was $466,147, a
decrease of $536,316 compared to total revenue of $1,002,463 during the prior
comparable quarter. This reduction in revenue was attributable to the
disposition in fiscal year 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 August 1997 quarter.
Total operating expenses and costs during the three months ended August 31,
1997 were $869,858, an increase of $110,207 compared to total operating expenses
of $759,651 during the prior comparable quarter.
The increase in expenses was due to higher operation expenses incurred in
the New York City facilities and costs incurred in connection with the July 1997
acquisition of the additional New York City facility. Total expenses include
costs of patient services, selling, general and administrative expenses,
interest expenses and depreciation and amortization expenses. Costs of patient
services as a percentage of patient revenues increased from 37% for the August
1996 quarter compared to 93% for the August 1997 quarter because of the
Company's discontinuation of operations in North Florida and corresponding
reduction in revenues, and higher costs of doing business in New York. Selling,
general and administrative expenses increased to $349,488 for the three months
ended August 31, 1997, from $296,116 for the three months ended August 31, 1996.
Selling, general, and administrative expenses for the three months ended August
31, 1997 included 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 increase was also attributable
to the transactional activities of the Company during the quarter ended August
31, 1997, the settlement of certain litigation matters and preparation of
reports filed with the SEC.
The above factors contributed to a net loss of $403,711 for the quarter
ended August 31, 1997, compared with net income of $91,189 for the quarter ended
August 31, 1996.
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 of $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
<PAGE>
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.
(b) In July 1997 and October 1997 options for 50,000 shares and 40,000
shares of common stock were exercised at $2.00 per share and $3.00 per
share, respectively.
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, 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.
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 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 cancellation of all stock options.
Income tax (benefit) expenses for the quarters ended August 31, 1997 and
August 31, 1996 were ($115,000) and $91,189, respectively. For the August 1997
quarter, the deferred income tax benefit has been reduced by an increase in the
allowance for the realization of deferred income tax assets of $115,000, because
as of August 31, 1997, it is more likely than not that the deferred tax assets
will not be realized as they relate primarily to net operation loss
carryforwards and the Company may not generate sufficient future taxable income
for their utilization.
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: February 25, 1998
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<FISCAL-YEAR-END> MAY-31-1997
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