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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, 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.)
2797 OCEAN PARKWAY
BROOKLYN, NEW YORK 11235
(Address of principal executive offices)
(718) 332-1919
(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 5,102,859 shares
Class Outstanding at October 14, 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, 1998 and May 31, 1998
Consolidated Statement of Operations for the three months ended
August 31, 1998 and 1997
Consolidated Statement of Stockholders' Equity for the three
months ended August 31, 1998
Consolidated Statement of Cash Flows for the three months ended
August 31, 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>
August 31, 1998 May 31, 1998
--------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 178,622 $ 455,391
Patient care receivables, less allowance for contractual
allowances and doubtful accounts of $642,000 as of
August 31, 1998 and May 31, 1998 748,562 788,121
Other current assets 94,788 107,403
- -------------------------------------------------------------------------------------------------
Total Current Assets 1,021,972 1,350,915
Other Assets
Investment in gold ore and affiliated company 1,994,214 1,994,214
Fixed assets 300,606 502,339
Other assets 54,641 97,740
Goodwill 90,471 226,888
Deferred acquisition costs 98,804 98,804
=================================================================================================
TOTAL ASSETS $3,560,708 $4,270,900
=================================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
Oak Tree Medical Systems, Inc. and Subsidiaries
Consolidated Balance Sheet
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
August 31, 1998 May 31, 1998
--------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable $ 104,400 $ 334,769
Accounts payable and accrued expenses 795,622 844,726
Current portion of long-term debt 32,148 66,856
Current portion of capitalized lease obligations 46,728 130,572
- - ------------------------------------------------------------------------------------------------
Total Current Liabilities 978,898 1,376,923
Long-term debt 118,697 208,201
Capitalized lease obligations 96,644 458,414
Accounts payable 65,099 61,551
- --------------------------------------------------------------------------------------------------
Total Liabilities 1,259,338 2,105,089
- --------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $.01 par value, 25,000,000 shares
authorized, 4,873,003 and 4,657,753 shares issued
and outstanding as of August 31, 1998 and May 31, 1998,
respectively 48,730 46,577
Additional paid-in-capital 12,373,365 12,140,841
Deficit (9,925,801) (9,784,203)
Less: prepaid consulting and stock
subscription receivable (194,924) (237,404)
- --------------------------------------------------------------------------------------------------
Total Stockholders' Equity 2,301,370 2,165,811
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $3,560,708 $4,270,900
==================================================================================================
</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,
==================================
1998 1997
---- ----
REVENUE
Net patient services $ 477,026 $ 466,147
- --------------------------------------------------------------------------------
EXPENSES
Costs of patient services 252,492 433,990
Selling, general and administrative 481,313 349,488
Depreciation and Amortization 41,160 61,524
Interest 13,929 24,856
Gain on sale (170,270)
- --------------------------------------------------------------------------------
TOTAL EXPENSES 618,624 869,858
- --------------------------------------------------------------------------------
NET LOSS ($141,598) ($403,711)
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NET LOSS PER COMMON SHARE ($ 0.03) ($ 0.11)
===============================================================================
Weighted average number of common and
common equivalent shares outstanding 4,698,873 3,529,200
===============================================================================
See notes to consolidated financial statements
<PAGE>
Oak Tree Medical Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
For the Three Months Ended August 31, 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, 1998 4,657,753 $46,577 $12,140,841 ($9,784,203) ($237,404) $2,165,811
Sale of common stock (net 215,250 2,153 232,524 234,677
expenses of $260,513)
Amortization of prepaid consulting 42,480 42,480
Net Loss (141,598) (141,598)
==================================================================================================================================
BALANCE AUGUST 31, 1998 4,873,003 $48,730 $12,373,365 ($9,925,801) ($194,924) $2,301,370
==================================================================================================================================
</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 Three Months
Ended August 31,
==============================
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss ($141,598) ($403,711)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and Amortization 83,639 119,559
Gain on sale (170,270)
Common stock issued for services 10,550
Increase (decrease) in cash from
Patient care receivables 39,559 (13,579)
Other current assets 12,615 106,105
Other assets 41,536
Accounts payable and accrued payable (57,146) 22,820
- -------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES: (191,665) (158,256)
- -------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition (net of notes payable of $300,000) (100,000)
Purchases of fixed assets (net of capital
lease obligations of $171,335 in 1998) (69,985)
Payments on security deposits (7,140)
- -------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES: (177,125))
- -------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds of notes payable and long-term debt 225,000
Payments of notes payable and long-term debt (254,581) (6,482)
Payments of capital lease obligations (65,200)
Proceeds from issuance of common stock 234,677 100,000
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES: (85,104) 318,518
- -------------------------------------------------------------------------------------------------
NET DECREASE IN CASH (276,769) (16,863)
CASH - Beginning of Period 455,391 125,919
- -------------------------------------------------------------------------------------------------
CASH - End of Period $178,622 $109,056
=================================================================================================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Interest Expense Paid $17,433 $15,728
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NONCASH TRANSACTIONS
During the three months ended August 31, 1998, as a result of contractual provisions, the Company
reduced a note payable by $100,000 and further reduced goodwill by $100,000. Also, in connection
with the July 1998 sale, the purchaser paid off a capital lease obligation on the Company's behalf
of $365,000.
</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 care centers in New York.
2. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include all 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, consisting of normal recurring adjustments, necessary for a
fair presentation have been included. Operating results for the three months
ended August 31, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending May 31, 1999. 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, 1998.
3. 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. Proceeds of $365,000 were used to repay certain lease
obligations. The Company also incurred a brokerage fee of 10% of the sales price
which remains unpaid and is included in accounts payable and accrued expenses.
4. CONTINGENCY
Insurance
Following the completion of the sales of the Company's physical therapy
care centers in Florida in April 1997, the Company has self-insured for medical
malpractice liabilities, if any. Through October 12, 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.
5. SUBSEQUENT EVENTS
Subsequent to August 31, 1998, the Company closed offshore placement of
approximately 125,000 shares of Common Stock for an aggregate purchase price of
approximately $285,000. The Company incurred expenses of approximately $150,000,
resulting in net proceeds of approximately $135,000.
<PAGE>
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 July 1997, the Company acquired a physical therapy care center in
the downtown area of New York City.
In July 1998, the Company sold 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.
RESULTS OF OPERATIONS
Three months ended August 31, 1998 compared to three months ended August 31,
1997
Patient revenues increased by 2.3% from $466,147 for the three months
ended August 31, 1997 (the "1997 First Quarter") to $477,026 for the three
months ended August 31, 1998 (the "1998 First Quarter"), despite the reduction
in the number of centers operated by the Company from four in the 1997 First
Quarter to two in the 1998 First Quarter.
Total expenses, on the other hand, decreased by 28.9% from $869,858 for
the 1997 First Quarter to $618,624 for the 1998 First Quarter. Exclusive of the
gain on sale of $170,270 in the 1998 First Quarter, total expenses decreased by
9.3% or $80,964. This decrease occured despite an increase in selling, general
and administrative costs of 37.7% from $349,488 for the 1997 First Quarter to
$481,313 for the 1998 First Quarter, and was attributable to decreases in legal
expenses, decreases in compensation and expenses of executives, and improved
operating controls. The gain on sale was related to the sale of the two
practices in July 1998. Total expenses as a percent of revenues decreased from
186.6% to 129.7% (or, exclusive of the gain on sale, only to 165.4%).
The above factors contributed to a net loss of $141,598 ($0.03 per
share) for the 1998 First Quarter as compared to a net loss of $403,711 ($0.11
per share) for the 1997 First Quarter.
LIQUIDITY AND CAPITAL RESOURCES
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 the three months ended August 31, 1998, the Company has been
and is continuing to attract new investment capital,
<PAGE>
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.
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 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. The ore was appraised as having a value of $5,000,000. The Company
subsequently formed a wholly-owned subsidiary, Aurum Mining Corporation, 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").
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) had been unsuccessful in its
attempts to sell the gold ore and (ii) did not have the capability or the
resources to commence the mining of the gold ore. For those reasons, and due to
the absence of current financial and other information for Accord, the Company
wrote 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
<PAGE>
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 and in July and August 1998, the Company closed
offshore placements of 1,500,000 and 215,250 shares of Common Stock,
respectively, for aggregate purchase prices of $3,324,025 and $495,190,
respectively. The Company incurred expenses of $1,600,868 and $260,513 in
connection with such placement, resulting in net proceeds of $1,723,157 and
$234,677, respectively.
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.
Proceeds of $365,000 were used to repay certain lease obligations. The Company
also incurred a brokerage fee of 10% of the sales price, which remains unpaid
and is included in accounts payable and accrued expenses.
Working capital increased from $26,008 as of May 31, 1998 to $43,074 as
of August 31, 1998, as a result of improved cash flows from the facilities, the
sale of Common Stock and the sale of the two facilities in July 1998.
YEAR 2000
The Company has assessed its financial accounting and reporting system
and considers it to be 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 make the patient receivable system Year 2000 compliant.
However, any problems associated with any aspect of the Year 2000 compliance of
the Company, managed care organizations, or relevant 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.
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURE
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: October 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> AUG-31-1998
<CASH> 178,622
<SECURITIES> 0
<RECEIVABLES> 1,390,562
<ALLOWANCES> 642,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,021,972
<PP&E> 481,284
<DEPRECIATION> 180,678
<TOTAL-ASSETS> 3,560,708
<CURRENT-LIABILITIES> 978,898
<BONDS> 0
0
0
<COMMON> 48,730
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,560,708
<SALES> 477,026
<TOTAL-REVENUES> 477,026
<CGS> 252,492
<TOTAL-COSTS> 604,695
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,929
<INCOME-PRETAX> (141,598)
<INCOME-TAX> 0
<INCOME-CONTINUING> (141,598)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (141,598)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
