SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB/A
Amendment No. 1 to Form 10-KSB
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended May 31, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________.
Commission File Number 0-16206
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OAK TREE MEDICAL SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 02-0401674
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
163-03 Horace Harding Expressway, Flushing, New York 11365
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (718) 460-8400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
Check whether the Registrant (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]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
The Registrant's revenues for its most recent fiscal year were $3,344,559.
Number of shares of Common Stock, $.01 par value, outstanding as of January 14,
1998: 4,419,025
Aggregate market value of voting and non-voting Common Stock (3,001,259 shares)
held by non-affiliates computed by reference to the average bid and asked price
of the Common Stock as of January 14, 1998: $12,842,791
Transactional Small Business Disclosure Format: Yes: [ ] No: [X]
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PART I
Item 1. Business
Oak Tree Medical Systems, Inc., a Delaware corporation (the "Company"),
was incorporated in Delaware on May 27, 1986, as Oak Tree Construction
Computers, Inc. From 1986 through 1990, the Company was engaged in the sale of
computer systems for the construction industry. For a number of years
thereafter, the Company was inactive. The Company changed its name to Oak Tree
Medical Systems, Inc. in August 1994. Since January 1995, the Company has been
engaged in the business of operating and managing physical therapy care centers
and related medical practices. Currently, all of the Company's operations are in
the greater New York metropolitan area. The Company through its subsidiary Oak
Tree Medical Management, Inc. operates four New York City based physical therapy
care centers, the management of which the Company acquired in October 1996 and
July 1997. Prior to April 1997, the Company also had operations in Florida.
Unless otherwise indicated by the text, reference herein to the term "Company"
will be deemed to refer to Oak Tree Medical Systems, Inc. and all its
subsidiaries.
Medical Business
The primary focus of the Company to date has been the provision of
physical therapy and related rehabilitative services. Physical therapy aids in
the restoration of patients who have been disabled by injury or disease or are
recovering from surgery. The Company's physical therapy care centers offer
preventive, rehabilitative and pre- and post-operative care for neuromuscular
and musculoskeletal injury. These may include a variety of orthopedic-related
disorders, sports-related injuries, neurologically related injuries, motor
vehicle injuries and work-related injuries.
Patients are primarily referred to the Company's rehabilitation
facilities by physicians. Licensed physical therapists evaluate each patient and
develop a program of rehabilitation to achieve the patient's rehabilitation
goals. Treatments may include traction, ultrasound, electrical stimulation,
therapeutic exercise, heat treatment and hydrotherapy. Patients are usually
treated for one hour per day, three days per week over a period of two to five
weeks. Where appropriate, patients are provided post treatment home maintenance
and exercise programs.
Certain of the Company's clinics offer specific programs for injured
workers compensation patients. The clinic will evaluate the worker's physical
condition and capacity to perform the requirements of his employment. This
evaluation may be used by insurers to estimate the extent of rehabilitation
treatment or as a basis for settlement of disability claims. Thereafter, the
clinic will prescribe and implement a course of "work conditioning" (hardening),
which includes graduated exercise and work stimulation therapies.
The Company believes that purchasers and providers of health care
services such as employers, insurance companies and health maintenance
organizations who are seeking to save on traditional health care services view
physical therapy and rehabilitation services as cost- effective in that they may
prevent short-term disabilities from becoming chronic conditions, and may
accelerate recovery from surgery and neuromuscular and musculoskeletal injuries.
In
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addition, changes in both public and private health insurance reimbursement have
encouraged early hospital discharge, another trend which promotes the need for
outpatient physical therapy services. Also, the aging of the U.S. population has
increased demand for rehabilitation programs to treat chronic conditions of the
elderly.
The Company's strategy has been to take advantage of these trends by
acquiring and integrating a network of physical therapy and rehabilitation
centers, particularly in the Northeastern region of the United States and the
greater New York metropolitan area. The Company believes that attractive
acquisition opportunities exist in its industry because of health care's current
cost containment economics, laws that bar health care practitioners from
referring to entities in which they have an ownership interest and the general
sense of insecurity among health care practitioners resulting from the great
amount of change being experienced by the profession. New reimbursement
schedules and conventions have put particular pressure on the traditional
private practice of medicine and allied health care services. Government health
programs, private insurers and health maintenance type organizations have in
many cases reduced payments to health care professionals and in some cases have
substituted capitation or fixed reimbursement for the traditional "fee for
service" payments.
In this environment, the importance of conducting health care practices,
including physical therapy services, in an efficient and cost-effective manner
has increased. By centralizing non-medical activities, such as administration,
accounting, billing, marketing, procurement and human resources, health care
providers can reduce unit costs, enhance efficiencies and promote profitability.
Centralized management of medical practices also facilitates identification,
negotiation and consummation of advantageous contractual relationships with
health maintenance organizations, preferred provider organizations, hospitals,
nursing homes, school systems and similar institutions. Referrals and contract
work from such organizations and institutions may be essential to the long-term
viability of providers of outpatient rehabilitative services.
Existing Facilities
In October 1996, the Company acquired the management and assets of three
New York City based physical therapy care centers for cash and assumed debt,
totaling $900,000 and 10,000 shares of Common Stock (with aggregate value of not
less than $100,000) issuable in October 1998. Included in the acquisition was a
contract for the provision of physical therapy services to a county hospital in
Westchester, New York. In connection with the acquisition, the Company entered
into a three-year employment agreement with the seller of the clinics, a
licensed physical therapist who continues to serve as the director of operations
of the New York City clinics.
In July 1997, the Company acquired the management and assets of an
additional center in New York City for a purchase price of $400,000. The
purchase price may be reduced by $100,000 if the acquired center does not attain
a certain level of billings. In connection with the acquisition, the Company
entered into a lease for the acquired center through August 2003. In addition,
the seller entered into a four-year noncompetition agreement and a six-month
consulting agreement with the Company continuing on a month-to-month basis
thereafter at
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$150,000 per annum. The Company also entered into a six-month consulting
agreement with the physical therapy care center administrator, a relative of the
seller, continuing on a month-to-month basis thereafter at $50,000 per annum.
In compliance with the laws of the State of New York, all treatment
related activities at the Company's New York City clinics are conducted by Oak
Tree Medical Practice, P.C. ("Oak Tree P.C."), an independently owned
professional corporation. The Company has entered into agreements with Oak Tree
P.C. pursuant to which the Company provides to Oak Tree P.C. all administrative
and management services and leases to Oak Tree P.C. facilities and equipment.
Because of the significant influence and control exercised by the Company over
Oak Tree P.C. (other than with respect to patient treatment), the financial
results of Oak Tree P.C. are consolidated with those of the Company.
Acquisition and Rescission
In December 1996, the Company acquired certain assets of four physical
therapy care centers and a management company located in Long Island, New York
for an aggregate purchase price of $650,000 and 132,190 shares of Common Stock
of the Company, plus other consideration.
Effective February 28, 1997, the Company rescinded the acquisition and
the former sellers returned all stock and notes issued to them in the original
transaction. In addition, the former sellers agreed to pay the Company $448,935,
representing the cash purchase price of the original transaction, the net amount
expended by the Company on the facilities for the period from December 1996 to
February 1997, and the purchase price of 12,000 shares of Common Stock acquired
by the former sellers for $15,000. Of this amount, $50,000 was paid at the
closing, $25,000 was paid in May 1997 and the balance was to be paid over an
18-month period. In December 1997, the Company agreed to the early
extinguishment of the remaining amount owed by the former sellers and received
$325,000 in full settlement. The Company remained obligated to issue 14,286
shares of Common Stock to the landlord of one of the acquired facilities in
satisfaction of certain pre-existing obligations. Although the original
acquisition of the Long Island clinics was consistent with the Company's
strategy of focusing its operations in the New York area, the cash flow from
these facilities to the Company was insufficient to support the operations of
these facilities by the Company.
Sales of Florida Centers
Following the Company's October 1996 acquisition of three New York City
based physical therapy care centers and the hospital contract for the provision
of physical therapy services, the Company determined to shift its geographic
focus from North Florida to the New York City area. Consistent with this
approach, in February 1997, the Company sold substantially all of the assets and
operations of its clinics in Jacksonville and Orange Park, Florida. The
Jacksonville assets were held by the Company's Acorn CORF I, Inc. subsidiary and
the Orange Park assets were held by the Company's Riverside CORF, Inc.
subsidiary. In addition, the Company sold all the shares of Oak Tree
Receivables, Inc. ("OT Receivables"), a wholly-owned subsidiary of the Company,
whose assets consisted of certain of the patient care
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receivables of the North Florida facilities along with an obligation under the
receivables funding facility secured thereby. The purchase price was $200,000,
consisting of $100,000 in cash paid at closing and a note in the amount of
$100,000 payable in two installments in April and May 1997. As collection of the
remaining amount is not probable, the Company has provided for a reserve against
the entire amount of the note. In connection with the sale of the Florida
centers, the purchaser agreed to assume $86,150 of accounts payable and the
balance of the obligation of the receivables funding facility in the amount of
$1,812,500. In exchange for the consent of the lender of the patient care
receivables funding facility, the Company pledged as collateral to the lender
additional accounts receivable in the amount of $700,000. The Company also
terminated the employment agreement with the facilities' medical director,
received the return of 400,000 shares of Common Stock which had been issued in
connection with the Company's acquisition of the facilities in 1995 and was
relieved from its obligation to issue an additional 145,000 shares of Common
Stock.
Continuing the divestiture of its Florida operations, the Company
disposed of its remaining North Florida facility located in St. Augustine,
Florida in April 1997. The sale price was $25,000 in cash, with $15,000 paid at
closing and $10,000 paid in April and May 1997.
Proposed Acquisition
In September 1997, the Company entered into a letter of intent for the
acquisition of the management and assets of 21 medical practice and MRI centers
located in the greater New York metropolitan area. The letter of intent was
further amended in December 1997. These centers are owned by certain companies
controlled directly or indirectly by Pierce Neuman, M.D. Collectively, the
centers had revenues of approximately $65 million and estimated pre-tax profits
in excess of $19 million in calendar year 1997. Pursuant to the proposed
transaction, which shall take effect, if at all, upon execution of a definitive
written agreement, Dr. Neuman will own or control approximately 60% of the
Company's outstanding shares of Common Stock. There can be no assurance,
however, that the Company will successfully negotiate such definitive written
agreement or meet its obligations of raising capital to complete the
acquisition, or that all the other conditions to closing will be met by any of
the parties to the transaction.
Marketing
Because physicians are the primary source of referrals to the Company's
clinics, the clinics individually focus their marketing efforts on local
orthopedic surgeons, neurosurgeons, physiatrists, occupational medicine
practitioners, and general practitioners. On a corporate level, the Company
seeks to establish referral relationships with health maintenance organizations,
preferred provider organizations, industry and case managers and insurance
companies. The Company is also pursuing contractual relationships for the
provision of rehabilitative services with medical institutions, schools, nursing
homes and home health care companies.
Government Regulation
The health care industry is subject to federal, state and local
regulations. The Company is also subject to laws and regulations relating to
business corporations generally. The Company
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believes its operations are in material compliance with applicable law.
Nevertheless, because of the complexity of the statutes and regulations in the
health care area, many of which have not been subject to judicial or regulatory
interpretation, there can be no assurance that aspects of the Company's
operations will not be subject to legal or administrative challenge. Also, the
health care regulatory environment has been in the past, and is likely to be in
the future, subject to substantial and ongoing change. Accordingly, there can be
no assurance that future changes in the law will not restrict or otherwise
adversely affect the Company's business.
The laws of a number of states, including New York where the Company's
clinics are located, prohibit a corporation from engaging in the provision of
health care, including physical therapy, or from exercising direct control over
professionals engaged in the health care field. The Company believes that its
ownership of physical therapy care centers and the provision of equipment,
location, managerial, administrative and non-medical support services to the
clinics does not constitute the corporate practice of physical therapy, since
licensed physical therapists exercise complete control over the provision of all
physical therapy services. Nevertheless, there can be no assurance that the
statutes prohibiting the corporate practice of physical therapy services will
not be construed or modified in the future to prohibit the operations of the
Company as they are presently being conducted.
There also exist federal and state statutes that impose civil sanctions
and substantial criminal penalties on health care providers that fraudulently or
wrongfully bill governmental and other third-party payors for health care
services. The federal statute prohibiting false billing permits private persons
to bring a civil action in the name of the United States to remedy violations of
the statute. The Company believes that it is in compliance with these fraudulent
billing statutes. However, billing for health care services is technical and
complex, and there can be no assurance that the Company's billing practices will
not be challenged or scrutinized by government authorities.
Competition
The health care industry generally and the physical therapy business in
particular are highly competitive. In addition to corporate-owned,
physician-owned and other private physical therapy clinics, the Company competes
with the physical therapy departments of hospitals and area chiropractic
practices. The competitive factors in the physical therapy business are quality
of care, cost, treatment outcomes, convenience of location and ability to meet
the needs of referral and payor sources. Certain of the Company's competitors
may have substantially greater financial, marketing, developmental and other
resources than the Company. Both larger and smaller competitors may have
individual facilities with greater treatment resources than individual,
competing facilities operated by the Company. Also, the industry is subject to
continuous changes regarding the provision of services and the selection of care
providers, and certain competitors may be more successful than the Company in
adapting to these changes in a timely and effective manner.
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Investment in Gold Ore
In May 1993, the Company acquired 50,000 tons of gold ore from Nevada
Minerals Corporation in exchange for the issuance of 1,350,000 shares of Common
Stock. The ore was appraised as having a $5,000,000 value. The Company
subsequently formed a wholly-owned subsidiary, Aurum Mining Corporation
("Aurum"), with the gold ore as its only asset. In June 1995, the Company
exchanged the stock of Aurum for 6,000,000 shares of common stock of Accord
Futronics Corp. ("Accord"), an unaffiliated privately-held company with other
mining related assets. The Company had the right to receive a royalty of 12 1/2%
of the net mining income from processing of the gold ore transferred to Accord.
In June 1995, the Company granted Accord options, until June 21, 1997,
to acquire 50,000 shares of Common Stock at an exercise price equal to the
lesser of $2.00 per share or 50% of the quoted market price. Accord subsequently
transferred the options to a third party, and these options were exercised by
L.M. Spencer & Associates, Inc., for 50,000 shares of Common Stock at $.50 per
share in exchange for a note receivable due on April 15, 1999 at an interest
rate of 8.5% per annum.
The Company previously announced its intention to write-down its
investment in Accord at the end of the fiscal quarter ended February 28, 1997,
because of the absence of current financial information for Accord and
management's inability to otherwise determine the value of the Accord interest.
The Company subsequently received requested financial information from Accord
and an updated appraisal report which valued the gold ore at $5,181,000. In
November 1997, the Company returned the 6,000,000 shares of common stock of
Accord in exchange for 100% of the common stock of Aurum. At the time of the
return of the Accord stock, Accord had not yet commenced mining operations. The
Company intends to continue to review possibilities of realizing the value of
the gold ore, although there can be no assurance that it will be successful in
doing so.
Employees
As of December 31, 1997, the Company had 32 full-time employees and 10
part-time employees. The Company also hires independent consultants for its
medical service operations from time to time and at December 31, 1997, employed
four persons under consulting arrangements.
Item 3. Legal Proceedings
Medbrook Corporation v. Ronald W. Dennie, M.D. and 1st Coast Physical
Medicine Associates, Inc., Case No. 95-4524-CA (4th Judicial Circuit, Duval
County, Florida). Plaintiffs in this action sued 1st Coast Physical Medicine
Associates, Inc. ("1st Coast"), the former owner of the Jacksonville, Florida
physical therapy care centers and Dr. Ronald W. Dennie, the medical manager of
the Jacksonville operations, alleging that Dr. Dennie was in violation of a
covenant not to compete with Medbrook Corporation ("Medbrook"). Medbrook had
managed the Jacksonville operations prior to their sale to the Company by Dr.
Dennie. Plaintiff sought
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damages and injunctive relief. The matter was settled in December 1997 without
material effect on the Company.
Westcap Corporation v. Oak Tree Medical Systems, Inc., Index No.
604059/97 (Supreme Court of the State of New York, County of New York, New
York). A former consultant of the Company recently filed an action against the
Company alleging breach of contract and other claims. The plaintiff sought
$50,000 in monetary damages and warrants to acquire 250,000 shares of Common
Stock. In December 1997, the Company settled the matter by agreeing to issue
22,000 shares of Common Stock to the plaintiff (and, if a certain stock value is
not met, an additional 2,500 shares of Common Stock) and a cash payment of
$3,000.
Irwin Bosh Stack and Irene Stack v. Oak Tree Medical Systems, Inc. and
Henry Dubbin, Case No. 97-17996 CA 13 (11th Judicial Circuit, Dade County,
Florida). In August 1997, a stockholder, the wife of the Company's former
Chairman of the Board of Directors, filed a lawsuit against the Company,
alleging unreasonable restraint on the alienability of her shares of Common
Stock of the Company and breach of fiduciary duty on the part of Mr. Henry
Dubbin. The stockholder claimed that the Company has unjustifiably refused her
request for a opinion letter from counsel to remove a restrictive legend. The
plaintiff is seeking unspecified compensatory and punitive damages and
injunctive relief. Management believes this matter is without merit and will
result in no material adverse effect to the Company.
U.S. Consultancy, Inc. and FYM, Inc. v. Henry Dubbin, Burton Dubbin,
Fred Singer, William Kedersha, Michael Gerber, Ellis Group, Inc., Liberty
International, Inc., NFC (Service)Ltd. and Oak Tree Medical Systems, Inc., C.A.
No. 15994 (Court of Chancery of the State of Delaware, New Castle County,
Delaware). Plaintiffs filed an action on October 20, 1997, alleging, among other
things, (i) the Company's failure to hold an annual meeting of stockholders
within the time prescribed by Section 211 of Delaware General Corporation Law
(the "DGCL") and (ii) breach of fiduciary duties by current and former officers
and directors of the Company in (a) issuing shares of Common Stock for the
purpose of entrenchment, (b) rejecting potential investment and acquisition
opportunities for personal reasons, (c) engaging in self-dealing and wasteful
transactions, (d) failing to file annual and quarterly reports with the
Securities and Exchange Commission and (e) issuing unregistered stock of the
Company. Plaintiffs sought, among other things, an order compelling the Company
to hold an annual meeting of stockholders, rescission of all issuances of shares
of Common Stock and options to certain individuals pursuant to Form S-8
registration statements filed in June 1997, and unspecified damages. Plaintiffs
also sought to inspect certain books and records of the company pursuant to
Section 220 of the DGCL. Management does not believe this actrion will have any
material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock is currently traded in the over-the-counter
market on the OTC Electronic Bulletin Board of the National Association of
Securities Dealers (the "NASD").
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The following table sets forth, for the periods indicated, high and low bid
prices for the Common Stock in the over-the-counter market as reported by the
NASD. The information below reflects inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
Low Bid High Bid
Fiscal Year Ended May 31, 1996 ------- --------
First Quarter 2-3/4 8
Second Quarter 7 8-1/2
Third Quarter 6-1/8 9
Fourth Quarter 6 8-7/16
Fiscal Year Ended May 31, 1997
First Quarter 4-5/8 7-3/4
Second Quarter 4 7-7/8
Third Quarter 3 5-1/2
Fourth Quarter 7/8 2-9/16
As of January 14, 1998, there were approximately 140 holders of record
of the Company's Common Stock. The closing bid and asked prices for the
Company's Common Stock on January 14, 1998, was $2-7/8 and $2-15/16,
respectively.
The Company has not paid any cash dividends on its Common Stock to date,
and the payment of cash dividends in the foreseeable future is not contemplated
by the Company. The future dividend policy will depend on the Company's
earnings, capital requirements, financial condition, and other factors
considered relevant to the Company's ability to pay dividends.
Recent Sales of Unregistered Securities
A. In connection with the Company's acquisition of three physical
therapy care centers in October 1996, the Company issued 54,237 shares of Common
Stock. These shares were issued in settlement of indebtedness in the amount of
$400,000 owed by the seller of the clinics and assumed by the Company.
B. In connection with the Company's acquisition of four physical therapy
care centers and related assets in December 1996, and in partial consideration
for such acquisition, the Company issued to the sellers 6,000 shares of Common
Stock. The Company agreed to issue to the sellers an additional 111,904 shares
of Common Stock on the eighteen month anniversary of the acquisition (increasing
to 142,105 shares if the price per share of Common Stock did not equal or exceed
$7.00 at any time prior to such eighteen month anniversary). The Company also
agreed to issue on the eighteen month anniversary of the acquisition 14,286
shares of Common Stock to the landlord of one of the acquired centers in
satisfaction of certain pre-existing obligations. Effective February 28, 1997,
the Company rescinded its December 1996 acquisition. The former sellers returned
all stock and notes issued to them in the original
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transaction, and the Company was relieved from its obligation to issue
additional shares of Common Stock to such former sellers. In connection with the
rescission, the former sellers acquired 12,000 shares of Common Stock for an
aggregate purchase price of $15,000.
C. In December 1996, the Company issued ten year options to acquire
375,000 shares to William Kedersha, the Company's former Chief Executive
Officer. The options have an exercise price of $1 11/16 per share and vest upon
the earlier to occur of the Company's achievement of certain financial
benchmarks, the five year anniversary of the issuance of the options or a change
of control (as defined). In September 1997, the Company entered into a
settlement agreement with Mr. Kedersha, whereby the Company cancelled such
options and issued to Mr. Kedersha 22,500 shares of Common Stock.
D. In December 1996, the Company granted ten year options to acquire
375,000 shares to Burton Dubbin, the son of Mr. Henry Dubbin and the Company's
former Vice President. The options have an exercise price of $1 11/16 per share
and vest upon the earlier to occur of the Company's achievement of certain
financial benchmarks, the five year anniversary of the issuance of the options
or a change of control (as defined). In August 1997, Mr. Burton Dubbin
terminated his employment with the Company and entered into a two-year
consulting agreement at a fee of $150,000 per annum, plus 125,000 shares of
Common Stock, of which 25,000 shares were immediately issuable and 5,000 shares
are issuable monthly (in an aggregate amount not to exceed 100,000 shares) for
the duration of Mr. Burton Dubbin's service with the Company. In addition, the
Company amended the terms of the options, making such options immediately
exercisable and extending the expiration date until August 2007.
E. In December 1996, the Company issued options to acquire 17,500 shares
of Common Stock to Frederick C. Veit, a consultant of the Company, in
consideration of past services. The options have an exercise price of $1.75 per
share and expire on December 1, 2001.
F. In January 1997, the Company issued warrants to acquire 200,000
shares of Common Stock to Gotham City Corporate Relations Group, Inc. ("Gotham
City") in consideration of public relations consulting services to be rendered
to the Company by Gotham City. Warrants to acquire 66,667 shares are exercisable
at $5.00 per share, warrants to acquire 66,667 shares are exercisable at $6.00
per share, and warrants to acquire 66,667 shares are exercisable at $7.00 per
share. All such warrants were to expire on January 1, 1998. In addition, the
Company had agreed to issue Gotham City 10,000 shares of Common Stock. On
February 21, 1997, the Company terminated its agreement with Gotham City, and no
warrants or shares of Common Stock were issued.
G. 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.
H. In April 1997, the Company issued options to acquire 20,000 shares of
Common Stock to Fred L. Singer, a director and Vice President of the Company.
The options are immediately exercisable and have an exercised price of $1.00 per
share. In January 1998, Mr.
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Singer exercised options to acquire 5,000 shares of Common Stock. The remaining
options expire on April 16, 1999.
I. In April 1997, L.M. Spencer & Associates, Inc. exercised options to
acquire 50,000 shares of Common Stock at $.50 per share. These options were
acquired from Accord.
J. In April and May 1997, the Company entered into three agreements for
financial consulting services. Under the first of these agreements, the Company
agreed to issue to a consultant 50,000 shares of Common Stock and options to
acquire an additional 200,000 shares at exercise prices of between $2.50 and
$4.25. The second agreement provides for the issuance to a consultant of 75,000
shares of Common Stock and options to acquire an additional 75,000 shares at
exercise prices of between $4.50 and $5.00. Under the third agreement, the
Company agreed to issue to a consultant 50,000 shares of Common Stock and
options to acquire an additional 250,000 shares at prices of between $2.00 and
$4.75. Subsequent to May 31, 1997, options for 110,250 shares, at prices ranging
from $2.00 to $3.00 per share, have been exercised.
K. In May 1997, the Company issued 24,419 shares of Common Stock to
Kramer, Levin, Naftalis & Frankel, counsel of the Company, in consideration of
past services.
L. Effective May 31, 1997, the Company issued options to acquire 350,000
shares of Common Stock to Gary Danziger, a director and the Chief Operating
Officer of the Company. The options have an exercise price of $1.00 per share
and expire on October 1, 1998.
The issuance set forth above were issued pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), as transactions by an
issuer not involving any public offering, and, alternatively, in the case of
employee options, on a no-sale theory.
Sales of Equity Securities Pursuant to Regulation S
On January 29, 1998, the Company closed an offshore placement of
1,500,000 shares of Common Stock for an aggregate purchase price of
approximately $3.3 million. The Company incurred expenses of approximately $1.5
million, and received net proceeds of approximately $1.8 million. Signature
Equities Agency, G.m.b.H., served as placement agent in connection with the
offering.
The placement was a private transaction not involving a public offering
and was exempt from the registration provisions of the Securities Act, pursuant
to Section 4(2) thereof, and pursuant to Regulation S promulgated under the
Securities Act.
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Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The Company is engaged in the business of operating and managing
physical therapy care centers. The Company operates four facilities in New York
City acquired in October 1996 and July 1997.
In December 1996, the Company acquired four Long Island, New York based
physical therapy care centers. This acquisition was rescinded in March 1997.
In February 1997, the Company sold the assets and certain liabilities of
1st Coast Rehabilitation, Inc. and 1st Coast Physical Therapy Inc. ("1st
Coast"), two physical therapy facilities and related rehabilitative medicine
practices in Jacksonville and Orange Park, Florida, together with a related
comprehensive outpatient rehabilitation facility (CORF) license. In connection
with the sale of these facilities, the Company also sold a wholly-owned
financing subsidiary, effectively terminating its obligations under a
receivables funding facility. In April 1997, the Company disposed of its
physical therapy care center in St. Augustine, Florida, completing its exit from
the North Florida area in order to focus its operations in the Northeast.
Results of Operations
1996 Fiscal Year Compared to 1995 Fiscal Year
The Company acquired the assets and assumed certain liabilities of 1st
Coast in January 1995. Because of the timing of the 1st Coast acquisition, the
later acquisition of two CORF licenses in 1995 and amendments to the acquisition
agreements relating to 1st Coast in August 1995, a strict comparison of the
results of operations for the fiscal year ended May 31, 1996 ("Fiscal 1996") to
the results of operations for the fiscal year ended May 31, 1995 ("Fiscal 1995")
is not meaningful. The later year includes results for a 12 month period and the
former year includes results for only four months. Thus, the following analysis,
where there are comparisons, assume the difference in the time the Company has
pursued its operations during the periods.
During Fiscal 1996 the Company consolidated certain of its activities
and moved some of its operations to a new location with expanded facilities in
the Jacksonville, Florida area. The activities related to the move caused
disruption in the treatment of patients which had a minor impact on revenues
during Fiscal 1996.
Revenues for Fiscal 1996 were $4,663,792 compared to $2,652,889 for
Fiscal 1995, representing an increase of $2,010,903 or 76%. The increase is due
to the difference in the periods of operations covered as discussed above and an
increase in the number of patient visits which is a result of the differing
periods of operations and an actual improvement in the number of patient visits.
- 12 -
<PAGE>
Expenses for Fiscal 1996 were $3,257,931 compared to $2,403,620 for
Fiscal 1995, representing an increase of $854,311 or 36%. Expenses increased for
the same reasons as revenues. Because of the difference in the operations for
the periods, a strict comparison of overall margins are not meaningful for the
two fiscal years, however the Company reduced its operating expenses from 91% of
net patient service income in Fiscal 1995 to 70% of net patient service income
in Fiscal 1996. Expenses include various compensation expenses, selling, general
and administrative expenses, interest expenses and depreciation and amortization
expenses. Compensation expense increased from $797,356 in Fiscal 1995 to
$1,910,452 in Fiscal 1996 because of changes in the compensation of current
employees, and undertaking the direct management of its business from outside
sources and hiring employees directly rather than using leased personnel.
Selling, general and administrative expenses declined from $1,501,538 to
$1,035,782 because of the closing of two locations during Fiscal 1996 and the
concomitant reduction of certain personnel, supply and rent expenses. Interest
expenses increased from $38,600 to $130,920 because of increased borrowings
under a number of credit arrangements for different purposes, the most
significant of which was a receivables funding arrangement from A-R Funding,
Ltd., which included a broker's fee for amounts borrowed.
Net income for Fiscal 1996 was $1,059,091 compared to $144,931 for
Fiscal 1995. Income before income taxes for Fiscal 1996 was $1,405,861 compared
to $249,269 for Fiscal 1995. The Company reported income taxes of $346,770 for
Fiscal 1996 and $104,338 for Fiscal 1995.
1997 Fiscal Year Compared to 1996 Fiscal Year
Patient revenues decreased by 28.3% to $3,344,559 from $4,663,792 in the
fiscal year ended May 31, 1997 ("Fiscal 1997") compared with Fiscal 1996. The
decrease in revenues was attributable to the disposition in Fiscal 1997 of the
Company's North Florida facilities, as well as a fall off in revenues at these
facilities during that year, offset in part by revenues from the Company's New
York City clinics acquired in October 1996. Revenues from the four Long Island,
New York clinics acquired in December 1996, whose purchase was rescinded by the
Company effective February 28, 1997, are not included in the Company's revenues
for Fiscal 1997.
Total expenses increased by 99.8% from $3,257,931 for Fiscal 1996 to
$6,510,448 for Fiscal 1997. The increase in expenses was due to higher operation
expenses incurred in the New York City facilities and costs incurred in
connection with the disposition of the North Florida facilities. Total expenses
include costs of patient services, selling, general and administrative expenses,
losses on sales and rescission, interest expenses and depreciation and
amortization expenses. Costs of patient services as a percentage of patient
revenues increased from 41% in Fiscal 1996 to 56.1% in Fiscal 1997 because of
the Company's discontinuation of operations in North Florida and the higher
costs of doing business in New York. Selling, general and administrative
expenses increased to $3,283,010 in Fiscal 1997 from $1,035,782 in Fiscal 1996.
Selling, general and administrative expenses for Fiscal 1997 included allowances
and write-offs of uncollectible accounts receivable, compensation of executive
officers and travel expenses of executives between the Company's New York and
Florida facilities. The increase was also attributable to expenses related to
the improvement of the Company's financial controls
- 13 -
<PAGE>
and accounting system, and increased legal and accounting expenses during Fiscal
1997 primarily due to the transactional activities of the Company during the
fiscal year, the settlement of certain litigation matters and preparation of
reports filed with the SEC. The Company recognized interest costs of $403,724 in
Fiscal 1997 as compared to $130,920 in Fiscal 1996. Interest increased during
Fiscal 1997 as a result of higher interest rates on the Company's bank
borrowings and increased financing expenses associated with the receivables
funding facility. During Fiscal 1997, the Company also recognized a loss in
connection with the sale of the North Florida facilities and the rescission of
the Long Island, New York facilities, of $777,054. Total expenses as a
percentage of income increased from 69.9% for Fiscal 1996 to 194.7% for Fiscal
1997 as a result of these factors and the decrease in revenues for these
periods.
Income tax (benefit) expenses for Fiscal 1997 and Fiscal 1996 of
($546,677) and $346,770, respectively, are not representative of an effective
tax rate. For Fiscal 1997, the deferred income tax benefit has been reduced by
an increase in the allowance for the realization of deferred income tax assets
of $610,000, because, as of May 31, 1997, it is more likely than not that the
deferred tax assets will not be realized as they relate primarily to net
operating loss carryforwards and the Company may not generate sufficient future
taxable income for their utilization. As of May 31, 1996, there were less net
operating loss carryforwards as compared to Fiscal 1997, and the Company
utilized these net operating losses as a reduction of deferred income tax
payable. For Fiscal 1996, the income tax expense has been reduced by the
reversal of an overaccrual of prior year's taxes of $230,655.
The above factors contributed to a net loss of $2,554,212 for Fiscal
1997, compared with net income of $1,059,091 for the Fiscal 1996.
Liquidity and Capital Resources
In the past, the Company has funded its capital requirements from
operating cash flow, loans against its accounts receivable, the sale of equity
securities and the issuance of equity securities in exchange for assets acquired
and services rendered. During Fiscal 1997, the Company undertook a number of
actions to consolidate its geographic focus. 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
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
- 14 -
<PAGE>
October 1996, the Company determined to shift its geographic focus from North
Florida to the New York City area. Consistent with this approach, in February
1997, the Company sold substantially all of the assets and assigned certain
liabilities of the physical therapy and rehabilitation care centers and related
medical practices in Jacksonville and Orange Park, Florida, together with all of
the shares of OT Receivables. (See Item 1. Business. Sales of Florida Centers.)
The purchase price consisted of $200,000 in cash, with $100,000 paid at closing
and a note in the amount of $100,000 payable in two installments in April and
May 1997. As collection of the note is not probable, the Company has provided a
reserve against the remaining amount owed. In connection with the sale of OT
Receivables, the Company pledged as collateral to the lender under the
receivables funding facility additional accounts receivable in the amount of
$700,000. The Company will be entitled to receive 40% of any collections on the
receivables transferred to the lender in excess of the amount owed under the
receivables funding facility. The Company currently does not anticipate any such
excess. In connection with the sale of the two North Florida facilities, the
Company terminated the employment agreement with the facilities' medical
director, received a return of 400,000 shares of the Company's Common Stock that
had been issued in connection with the acquisition of the Company's North
Florida facilities in 1995 and was relieved of its obligation to issue an
additional 145,000 shares of common stock incurred in connection with such
acquisition.
Continuing the divestiture of its Florida operations, the Company sold
its remaining North Florida facility located in St. Augustine, Florida in April
1997. The sale price for this facility was $25,000 in cash, with $15,000 paid at
the closing, $5,000 paid on April 26, 1997 and $5,000 paid on May 29, 1997.
Effective February 28, 1997, the Company rescinded its acquisition of
four Long Island, New York based physical therapy care centers, together with a
related management company. (See Item 1. Business. Acquisition and Recision.)
The acquisition of these businesses had been made in December 1996. In unwinding
the transaction, the former sellers returned all shares of Company common stock
and promissory notes issued to them in connection with the acquisition. In
addition, the former sellers agreed to pay the Company $448,935, representing
the cash portion of the purchase price in the original transaction and the net
amount expended by the Company on the Long Island facilities since the December
1996 acquisition. Of this amount, $50,000 was paid at closing and $25,000 was
paid in May 1997. The remaining amount was to be paid over an 18-month period.
In December 1997, the Company received $325,000 in full settlement of the
outstanding amount owed by the former sellers. Although the original acquisition
of the Long Island clinics was consistent with the Company's strategy of
focusing its operations in the New York area, the cash flow from these
facilities to the Company was insufficient to support the operations of these
facilities by the Company at that time. Assuming the availability of capital
and/or suitable financing, the Company intends to explore the possible
acquisition of other physical therapy facilities in the New York area. The
results of operations of the Long Island facilities have not been reflected in
the consolidated financial statements.
A significant portion of the revenues of the Company are for services
that are paid by third party payors, including insurance companies and Medicare.
As is typical in the health care industry, the Company receives payment after
services are rendered. Such payment is based,
- 15 -
<PAGE>
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. The Company continues to hold
approximately $1,755,000 of uncollected receivables from the Florida operations.
The Company has written off the entire amount, based upon the Company's
assessment of the probability of collection in light of current circumstances.
In April 1997, the Company agreed to issue 300,000 shares of Common
Stock to a private investor at a price of $.67 per share. Proceeds of the sale
of the shares have been used for working capital. Also, in April and May 1997,
the Company entered into three agreements for financial consulting services.
Under the first of these agreements, the Company agreed to issue to a consultant
50,000 shares of Common Stock and options to acquire an additional 200,000
shares at exercise prices of between $2.50 and $4.25. The second agreement
provides for the issuance to a consultant of 75,000 shares of Common Stock and
options to acquire an additional 75,000 shares at exercise prices of between
$4.50 and $5.00. Under the third agreement, the Company agreed to issue to a
consultant 50,000 shares of Common Stock and options to acquire an additional
250,000 shares at prices of between $2.00 and $4.75. Subsequent to May 31, 1997,
options for 110,250 shares, at prices ranging from $2.00 to $3.00 per share,
have been exercised.
In September 1996, the Company entered into a loan agreement with a bank
for a line of credit of $200,000 and a term loan in the amount of $400,000. The
loan had interest at the lender's prime rate plus one percent and had a maturity
date of March 31, 1998. The line of credit and the term loan were collateralized
by the accounts receivable and fixed assets of the New York City physical
therapy care centers. The Company paid off the line of credit and term loans in
September 1997.
In March 1997, the Company purchased physical therapy equipment which
were subject to existing operating leases for an aggregate cost of $250,230. The
Company then sold the equipment and other fixed assets with a net book value of
$239,862 for $450,230 and leased such equipment and assets back for a period of
five years with monthly payments of $11,226. In August 1997, the Company sold
the equipment of the New York City physical therapy center acquired in July 1997
for $171,335 and leased it back for a period of five years with monthly payments
of $4,215.
In September 1997, the Company entered into 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 $775,867 for $547,304.
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
- 16 -
<PAGE>
subsidiary, Aurum, with the gold ore as its only asset. In June 1995, the
Company exchanged the stock of Aurum for 6,000,000 shares of common stock of
Accord. The Company had the right to receive a royalty of 12 1/2% of the net
mining proceeds from the processing of the gold ore transferred to Accord. The
Company previously announced an intention to write-down its investment in Accord
as of the end of the fiscal quarter ended February 28, 1997 because of the
absence of current financial information for Accord and management's inability
to otherwise determine the value of the Accord interest. The Company has
subsequently received requested financial information for Accord and an updated
appraisal report which valued the gold ore at $5,181,000. In November 1997, the
Company returned the 6,000,000 shares of common stock of Accord in exchange for
100% of Aurum. The Company intends to continue to pursue possibilities of
realizing value on the gold ore interest, although there can be no assurance
that it will be successful in doing so.
On January 29, 1998, the Company closed an offshore placement of
1,500,000 shares of Common Stock for an aggregate purchase price of
approximately $3,300,000. The Company incurred expenses of approximately
$1,500,000 and received net proceeds of approximately $1,800,000.
Forward Looking Statements
Certain statements in this report set forth management's intentions,
plans, beliefs, expectations or predictions of the future based on current facts
and analyses. Actual results may differ materially from those indicated in such
statements. Additional information on factors that may affect the business and
financial results of the Company can be found in the other filings of the
Company with the Securities and Exchange Commission.
Item 7. Financial Statements
The financial statements and information required by Item 7 are included
in the Index shown at Item 13.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
The directors and executive officers of the Company and their positions
at January 14, 1998 were as follows:
Name Age Position
---- --- --------
Henry Dubbin 82 President and Director
Gary Danziger 58 Chief Operating Officer, Vice
President and Director
Fred L. Singer 64 Vice President and Director
- 17 -
<PAGE>
HENRY DUBBIN has been President of the Company since April 1997 and a
director of the Company since May 1993. From May 1993 to April 1997, Mr. Henry
Dubbin served as Vice Chairman of the Board and Vice President of the Company.
Mr. Henry Dubbin currently is the President of Nevada Minerals Corporation. From
1955 to 1992, Mr. Henry Dubbin worked with Canaveral International, Inc., a
diversified public company, from which he retired after being Chairman of the
Board of the Company.
GARY DANZIGER has served as Chief Operating Officer and Vice President
of the Company since April 1997 and as a member of the Board of Directors since
July 1997. From 1979 to 1996 Mr. Danziger practiced at and served as
administrator of various physical therapy centers. From 1994 to 1996, Mr.
Danziger operated and managed Orthopedic & Sports Therapy Services of Queens,
L.P., Parkside of Queens, Inc. and PTSR, Inc.
FRED L. SINGER has served as a member of the Board of Directors since
April 1997 and as Vice President of the Company since August 1997. Since 1963,
Mr. Singer has served as director, producer and cinematographer for Coronado
Productions, a/k/a Coronado Studios, a video production company.
Burton Dubbin, the son of Mr. Henry Dubbin, resigned as Vice President
of the Company in August 1997. Mr. Burton Dubbin was Vice President of the
Company from April 1997.
On April 16, 1997, Michael J. Gerber resigned his various positions with
the Company. Mr. Gerber was President and a director of the Company from
September 1995 and was Secretary of the Company from August 1996.
William Kedersha resigned as a director of the Company in March 1997 and
as the Chief Executive Officer in April 1997. Mr. Kedersha served as Chief
Executive Officer and a director of the Company from September 1996 and as a
consultant to the Company from March 1996.
On August 29, 1996, Irwin Bosh Stack resigned his various positions with
the Company. Mr. Stack was the Chairman of the Board, Secretary and a director
of the Company from its incorporation in May 1986 until August 1996, and Chief
Operating Officer of the Company from May 1993 until August 1996.
Directors may be elected by the stockholders at an annual meeting or a
special meeting called for that purpose (or in the case of a vacancy, are
appointed by the directors then in office) to serve until the next annual
meeting, until their successors are elected and qualified or until their removal
or resignation. Officers serve at the discretion of the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), requires the Company's officers, directors and persons who
beneficially own more than 10% of a registered class of the Company's equity
securities ("10% stockholders") to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers,
- 18 -
<PAGE>
directors and 10% stockholders also are required to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on its review of the
copies of such forms furnished to it, during the past fiscal year, the Company
is of the belief that all such reports were filed on a timely basis, except as
follows: Mr. Henry Dubbin did not file a Form 4 on a timely basis to report his
disposition of shares of Common Stock of the Company, and Mr. Singer did not
file a Form 3 and a Form 4 on a timely basis to report his appointment as a
director of the Company and his acquisition of shares of Common Stock.
Item 10. Executive Compensation
The Summary Compensation Table below sets forth certain information
concerning the annual and long-term compensation for services in all capacities
to the Company for the 1997, 1996 and 1995 fiscal years, of those persons who
were the Chief Executive Officer during fiscal 1997 and other most highly
compensated executive officers of the Company who earned over $100,000 during
the last three fiscal years.
<TABLE>
============================================================================================================
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Annual Long-Term
Compensation Compensation
--------------------------------------------------------------
Other Common
Annual Restricted Stock
Fiscal Compen- Stock Underlying
Name and Principal Position Year Salary sation Award(s) Options
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Henry Dubbin 1995 -0- -0- -0- 250,000
President 1996 -0- -0- -0- -0-
1997 $15,414 -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------
Irwin Bosh Stack 1995 $35,000 -0- -0- 250,000
Chairman of the Board, Chief 1996 -0- -0- -0- -0-
Operating Officer and Secretary(1) 1997 -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------
William Kedersha 1997 $76,192 -0- $55,547 375,000
Chief Executive Officers(2)
- ------------------------------------------------------------------------------------------------------------
Michael J. Gerber 1996 -0- -0- -0- 55,000
President(3) 1997 -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------
Gary Danziger(4) 1997 $120,641 $100,000 -0- 350,000
Chief Operating Officer
- ------------------------------------------------------------------------------------------------------------
Burton Dubbin(5) 1997 -0- -0- -0- 375,000
Vice President
============================================================================================================
</TABLE>
(1) Mr. Stack resigned all of his positions with the Company on August 29,
1996, and options to acquire 250,000 shares of Common Stock expired upon
his resignation.
- 19 -
<PAGE>
(2) Mr. Kedersha resigned all of his positions with the Company effective April
30, 1997. Includes the market value, as of May 30, 1997, of 22,500 shares
of restricted stock issued to Mr. Kedersha pursuant to his settlement
agreement with the Company and options to acquire 375,000 shares of Common
Stock which were cancelled as of May 1, 1997.
(3) Mr. Gerber resigned all of his positions with the Company on April 16,
1997. Options to acquire 5,000 shares of Common Stock expired on September
7, 1997, and the remaining options to acquire 50,000 shares of Common Stock
expired upon Mr. Gerber's resignation in April 1997.
(4) Includes deferred compensation of $100,000 as of May 31, 1997, pursuant to
Mr. Danziger's amended employment agreement with the Company.
(5) Mr. Burton Dubbin resigned as Vice President of the Company on August 29,
1997.
The following tables set forth certain information concerning stock
option grants made during the last fiscal year to the named executive officers
and the fiscal year-end value of such options.
<TABLE>
==========================================================================================================
OPTION GRANTS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Name Options Employees Price Expiration Date
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gary Danziger 350,000 32% $1.00 October 1, 1998
- ----------------------------------------------------------------------------------------------------------
Burton Dubbin 375,000 34% $1.69 August 31, 2007
- ----------------------------------------------------------------------------------------------------------
William Kedersha 375,000 34% $1.69 May 1, 1997
==========================================================================================================
</TABLE>
<TABLE>
=================================================================================================================
AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS VALUES
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Value of Unexercised In-
Shares Acquired on Value # of Unexercised Options the-Money Options at Fiscal
Exercise Realized at Fiscal Year End Year End
- ------------------------------------------ -------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry Dubbin 0 0 $0 250,000 0 $121,094 $0
- -----------------------------------------------------------------------------------------------------------------
Michael J. Gerber 0 0 $0 5,000 0 $4,122 $0
- -----------------------------------------------------------------------------------------------------------------
Gary Danziger 0 0 $0 350,000 0 $519,531 $0
- -----------------------------------------------------------------------------------------------------------------
Burton Dubbin 0 0 $0 0 375,000 $0 $297,891
=================================================================================================================
</TABLE>
(1) Value is calculated on the basis of the difference between the option
exercise price and the average of the bid and asked prices for the
Common Stock at May 30, 1997 as quoted on the over-the-counter market,
multiplied by the number of shares underlying the option.
- 20 -
<PAGE>
Employment Agreements
The Company has an employment agreement with Henry Dubbin, as amended
September 1997, expiring June 1998 and providing for a salary of $50,000 per
year. For fiscal 1994, salary due Mr. Dubbin in the amount of $54,375 was
converted into a note, which was subsequently cancelled by Mr. Dubbin. Mr.
Dubbin waived his salary for the 1995 and 1996 fiscal years.
Gary Danziger has a three-year employment agreement with the Company, as
amended in July 1997, expiring in October 1999 which provides for (i) an annual
salary of $260,000, (ii) deferred compensation for the year ended May 31, 1997
of either $100,000 or 50,000 shares, (iii) incentive bonuses of up to $30,000
per quarter, (iv) options to acquire 350,000 shares of Common Stock, exercisable
at $1.00 per share until October 1, 1998, (v) a loan facility of $350,000,
payable in three years from the date of borrowing at interest of 7% per annum
and (vi) severance equal to 200% or 100% of annual salary if terminated during
twelve months ended September 30, 1998 or 1999, respectively.
The Company had an employment agreement with William Kedersha, effective
as of December 3, 1996. Under the agreement, Mr. Kedersha received an annual
salary of $150,000 and incentive bonuses. In addition, the agreement granted Mr.
Kedersha ten year options to purchase 375,000 shares of Common Stock at a per
share exercise price equal to $1 11/16. In September 1997, the Company issued
22,500 shares of Common Stock to Mr. Kedersha as part of a settlement agreement
and, as of May 31, 1997, recorded the shares of Common Stock at $29,531. The
options granted to Mr. Kedersha were cancelled upon his resignation in April
1997.
The Company had an employment agreement with Irwin Bosh Stack, the
Company's former Chief Executive Officer, providing for a salary of $85,000 per
year. For fiscal 1994, salary due Mr. Stack in the amount of $63,500 was
converted into a note, which was subsequently cancelled by Mr. Stack. Mr. Stack
took a reduced salary of $35,000 for the 1995 fiscal year and waived his salary
for the 1996 fiscal year. Mr. Stack resigned all positions with the Company on
August 29, 1996.
In January 1995, in consideration of past services, the Company granted
to each of Messrs. Stack and Henry Dubbin options to acquire 250,000 shares of
Common Stock, exercisable at $2.00 per share until January 1, 1999. Options
granted to Mr. Stack expired upon his resignation as an officer and director of
the Company in August 1996.
1994 Performance Equity Plan
In February 1994, the Company adopted the 1994 Performance Equity Plan
("1994 Plan") covering 600,000 shares of the Company's Common Stock pursuant to
which officers, directors, key employees and consultants of the Company are
eligible to receive incentive or non-qualified stock options, stock appreciation
rights, restricted stock awards, deferred stock, stock reload options and other
stock based awards. The 1994 Plan will terminate at such time no further awards
may be granted under the plan and awards granted are no longer outstanding,
- 21 -
<PAGE>
provided that incentive options may be granted only until February 16, 2004. The
1994 Plan is administered by the Board of Directors, which determines the
selection of participants, allotment of shares, price, and other conditions of
purchase of awards and administration of the 1994 Plan.
As of January 14, 1998, no options under the 1994 Plan were outstanding.
Non-Plan Options
As of January 14, 1998, the Company has outstanding non-plan options to
purchase an aggregate of 1,532,500 shares of Common Stock. The outstanding
options granted to current and former officers and directors of the Company are
as set forth below.
Number of
Name Option Shares Exercise Price Expiration Date
- ---- ------------- -------------- ---------------
Gary Danziger 350,000 $1.00 October 1, 1998
Burton Dubbin 375,000 $1.69 August 31, 2007
Henry Dubbin 250,000 $2.00 January 1, 1999
Fred L. Singer 15,000 $1.00 April 16, 1999
Expenses and Meetings
All officers and directors are reimbursed for any expenses incurred on
behalf of the Company. Directors, other than Company officers, are reimbursed
for expenses pertaining to attendance at meetings of the Company's Board of
Directors, including travel, lodging and meals.
Indemnification of Officers and Directors
Under the Bylaws of the Company, officers and directors of the Company
and former officers and directors are entitled to indemnification from the
Company to the full extent permitted by law. The Company's Bylaws and the
Delaware General Corporation Act generally provide for such indemnification for
claims arising out of the acts or omissions of Company directors and officers
(and certain other persons) in their capacity as such, undertaken in good faith
and in a manner reasonably believed to be in, or not opposed to, the best
interests of the Company and, with respect to any criminal action or
proceedings, had no reasonable cause to believe that such conduct was unlawful.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of January 14,
1998 with respect to (i) those persons known to the Company to beneficially own
more than 5% of the Company's Common Stock, (ii) each director of the Company,
(iii) each executive officer whose compensation exceeded $100,000 in the fiscal
year ended May 31, 1997, and (iv) all directors
- 22 -
<PAGE>
and executive officers of the Company as a group. The information is determined
in accordance with Rule 13d-3 promulgated under the Securities Exchange Act.
Except as indicated below, the stockholders listed possess sole voting and
investment power with respect to their shares.
Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
- ---------------- -------------------- --------
Gary Danziger(1) 350,000 7.3%
1 Crooked Mile Road
West Port, CT 06880
Burton Dubbin(2) 420,000 7.8%
21394 Marina Cove Circle, Unit H11
North Miami Beach, FL 33180
Henry Dubbin(3) 978,375 21.0%
10155 Collins Avenue, Suite 607
Bar Harbor, FL 33154
William Kedersha 22,500 *
2 Gannett Drive, Suite 215
White Plains, NY 10604
Nevada Minerals Corporation 728,375 16.5%
10155 Collins Avenue, Suite 607
Bar Harbor, FL 33154
Fred L. Singer(4) 20,000 *
9240 West Bay Harbor Dr., Apt. 3-C
Bay Harbor Islands, FL 33154
Irene Stack(5) 684,391 15.5%
P.O. Box 4851
Hialeah, FL 33014
All officers and directors as a group 1,348,375 26.8%
(3 persons)(6)
- -------------------------------
* Less than 1%.
(1) Consists of 350,000 shares of Common Stock subject to currently exercisable
options.
(2) Includes 375,000 shares of Common Stock subject to currently exercisable
options.
(3) Includes (i) 728,375 shares of Common Stock that Mr. Dubbin beneficially
owns through Nevada Minerals Corporation, a corporation of which he is the
majority stockholder and president, and (ii) 250,000 shares of Common Stock
subject to currently exercisable options.
- 23 -
<PAGE>
(4) Includes 15,000 shares of Common Stock subject to currently exercisable
options.
(5) Includes 465,625 shares of Common Stock that Mrs. Stack beneficially owns
through her wholly owned corporation, FYM, Inc.
(6) Includes 615,000 shares of Common Stock subject to currently exercisable
options and 728,375 shares of Common Stock held by Nevada Minerals
Corporation.
Change in Control
In September 1997, the Company entered into a letter of intent to
acquire certain companies controlled directly or indirectly by Pierce Neuman,
M.D. The assets of these companies consist primarily of 21 medical practice and
MRI centers located in the greater New York metropolitan area. The letter of
intent was further amended in December 1997. Collectively, the centers had
revenues of approximately $65 million and estimated pre-tax profits in excess of
$19 million in calendar year 1997. Pursuant to the proposed transaction, which
shall take effect, if at all, upon execution of a definitive written agreement,
Dr. Neuman will own or control approximately 60% of the Company's outstanding
shares of Common Stock. There can be no assurance, however, that the Company
will successfully negotiate such definitive written agreement for the purchase
of these centers or meet its obligations of raising capital to complete the
acquisition or that all the other conditions to closing will be met by any of
the parties to the transaction.
PART IV
Item 13. Exhibits, Financial Statements and Reports on Form S-K
The following documents are filed as part of this Annual Report on Form
10-KSB.
(a) Financial Statements: Page
Report of Independent Certified Public Accountants on
consolidated financial statements for the year ended
May 31, 1997.................................................. F-1
Report of Independent Certified Public Accountants on
consolidated financial statements for the year ended
May 31, 1996.................................................. F-2
Consolidated Balance Sheet as of May 31, 1997 and 1996.......... F-3
Consolidated Statement of Operations for the years ended
May 31, 1997 and 1996 .......................................... F-5
Consolidated Statement of Stockholders' Equity for the years
ended May 31, 1997 and 1996 .................................... F-6
- 24 -
<PAGE>
Consolidated Statement of Cash Flows for the years ended
May 31, 1997 and 1996........................................... F-7
Notes to Consolidated Financial Statements...................... F-9
(b) Reports on Form 8-K.
An amendment to a Form 8-K, filed on February 27, 1997, was filed on
March 10, 1997 to include pro forma financial statements giving effect
to the disposition of the clinics in Jacksonville and Orange Park,
Florida and a press release announcing the Company's intention to
write-down its investment in Accord Futronics Corp.
A report on Form 8-K, dated March 19, 1997, was filed with the
Securities and Exchange Commission on April 3, 1997 disclosing the
rescission of the Company's acquisition of the four Long Island, New
York based physical therapy care centers.
A report on Form 8-K, dated April 29, 1997, was filed with the
Securities and Exchange Commission on May 6, 1997 disclosing the
resignation of Simon Krowitz Bolin & Associates, P.A. as the Company's
independent auditors.
(c) The following documents are filed as exhibits to this Annual Report on
Form 10-KSB.
3.1 Certificate of Incorporation, as amended. Incorporated by reference
from Registration Statement on Form S-18 - Commission File No.
33-8166B, August 20, 1986.
3.2 Amendments to Certificate of Incorporation dated August 1, 1994.
Incorporated by reference from Exhibit 3.2 of the Annual Report on Form
10-KSB for the fiscal year ended May 31, 1995.
3.3 By-Laws. Incorporated by reference from Registration Statement on Form
S-18 - Commission File No. 33-8166B, August 20, 1986.
4.1 Form of Common Stock Certificate. Incorporated by reference from Form
10-KSB for the fiscal year ended May 31, 1994.
4.2 Option Agreement, dated June 21, 1995, between Registrant and Accord
Futronics Corporation. Incorporated by reference from Exhibit 4.2 of
the Annual Report on Form 10-KSB for the fiscal year ended May 31,
1995.
4.3 Term Loan Agreement, dated September 30, 1996, between Oak Tree Medical
Management, Inc. and First Union National Bank. Incorporated by
reference from Quarterly Report on Form 10-QSB for the fiscal quarter
ended August 31, 1996.
4.4 Security Agreement, dated September 30, 1996, between Oak Tree Medical
Management, Inc. and First Union National Bank. Incorporated by
reference from Quarterly Report on Form 10-QSB for the fiscal quarter
ended August 31, 1996.
- 25 -
<PAGE>
4.5 Promissory Note, dated September 30, 1996, between Oak Tree Medical
Management, Inc. and First Union National Bank. Incorporated by
reference from Quarterly Report on Form 10-QSB for the fiscal quarter
ended August 31, 1996.
4.6 Unconditional Guaranty, dated September 30, 1996, among Registrant, Oak
Tree Medical Management, Inc. and First Union National Bank.
Incorporated by reference from Quarterly Report on Form 10-QSB for the
fiscal quarter ended August 31, 1996.
4.7* Purchase Agreement, dated July 23, 1997, between Oak Tree Medical
Practice, P.C. and PFS VI, Inc.
10.1 Form of 1994 Equity Performance Plan. Incorporated by reference from
Information Statement dated July 11, 1994.
10.2 Form of Employment Agreement with Mr. Irwin Bosh Stock. Incorporated by
reference from Form 10-KSB for the Fiscal Year Ended May 31, 1994.
10.3 Form of Employment Agreement with Mr. Henry Dubbin. Incorporated by
reference from Form 10-KSB for the Fiscal Year Ended May 31, 1994.
10.4 Form of Acquisition Agreement between Registrant and 1st Coast Physical
Medicine Associates, Inc. Incorporated by reference from Form 8-K,
filed January 1995.
10.5 Amended Oak Tree Medical Systems, Inc. Extension Agreement for
Acquisition by Acorn I, Inc. from 1st Coast Physical Medicine
Associates Inc. of 1st Coast Rehabilitation Inc. and 1st Coast Physical
Therapy Inc. Incorporated by reference from Form 10-KSB filed for the
fiscal year ended May 31, 1995.
10.6 Employment Agreement between Registrant and Dr. Ronald W. Dennie.
Incorporated by reference from Form 10-KSB filed for the fiscal year
ended May 31, 1995.
10.7 Form of purchase agreement between Registrant and Cassandra Armstrong
and Martha Nugent. Incorporated by reference from Form 10-KSB filed for
the fiscal year ended May 31, 1995.
10.8 Form of purchase agreement between Registrant and Vladimir Kavchenko.
Incorporated by reference from Form 10-KSB filed for the fiscal year
ended May 31, 1995.
10.9 Agreement of Sale, dated October 1, 1996, among Oak Tree Medical
Management, Inc. and Orthopedic & Sports Therapy Services of Queens,
L.P. and Parkside of Queens, Inc. Incorporated by reference from Form
10-QSB filed for the fiscal quarter ended August 31, 1996.
10.10 Agreement of Sale, dated October 1, 1996, between New Medical Practice,
P.C. and Parkside Physical Therapy Services, P.C. Incorporated by
reference from Form 10- QSB filed for the fiscal quarter ended August
31, 1996.
- 26 -
<PAGE>
10.11 Agreement of Sale, dated October 1, 1996, among Oak Tree Medical
Management, Inc. Gary Danziger and PTSR, Inc. Incorporated by reference
from Form 10-QSB filed for the fiscal quarter ended August 31, 1996.
10.12* Employment Agreement, dated as of October 1, 1996, between New Medical
Practice, P.C. and Gary Danziger.
10.13 Executive Employment Agreement, dated as of December 3, 1996, between
Registrant and William Kedersha. Incorporated by reference from Form
10-QSB filed for the fiscal quarter ended November 30, 1996.
10.14 Stock Option Agreement, dated as of December 3, 1996, between
Registrant and Burton Dubbin. Incorporated by reference from Form
10-QSB filed for the fiscal quarter ended November 30, 1996.
10.15 Purchase Agreement, dated as of February 6, 1997, among Registrant,
Acorn CORF I, Inc., Riverside CORF, Inc. and MB Data Corporation.
Incorporated by reference from Form 8-K filed on February 27, 1997.
10.16 Letter Agreement of Rescission, dated March 19, 1997, from Oak Tree
Medical Management, Inc. to James O'Neill, Mark Gentile and Maple
Health Inc. Incorporated by reference from Form 8-K filed on April 3,
1997.
10.17* Agreement of Sale, dated July 16, 1997, between Oak Tree Medical
Practice, P.C. and Peter B. Saadeh, M.D.
10.18* Consulting Agreement, dated as of August 29, 1997, between Registrant
and Burton Dubbin.
16.1 Letter from Simon Krowitz Bolin & Associates, P.A., dated May 6, 1997,
addressed to the Securities and Exchange Commission. Incorporated by
reference from Form 8-K, filed May 6, 1997.
22.1 Subsidiaries:
Acorn CORF, Inc. Florida
Acorn CORF I, Inc. Nevada
Aurum Mining Corporation Nevada
1st Coast Rehabilitation, Inc. Florida
Oak Tree Financial Services, Inc. Florida
Oak Tree Medical Management, Inc. New York
Riverside CORF, Inc. Florida
27.1* Financial Data Schedule.
- -------------------------------
* Filed previously.
- 27 -
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
---------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1997 AND 1996
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1997 AND 1996
INDEX
INDEPENDENT AUDITORS' REPORT - Year ended May 31, 1997 F-1
INDEPENDENT AUDITORS' REPORT - Year ended May 31, 1996 F-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET F-3
CONSOLIDATED STATEMENT OF OPERATIONS F-5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F-6
CONSOLIDATED STATEMENT OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
<PAGE>
Board of Directors
Oak Tree Medical Systems, Inc.
Flushing, New York
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of Oak Tree
Medical Systems, Inc. and Subsidiaries as of May 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Oak Tree Medical Systems, Inc. and Subsidiaries as of May 31, 1997, and the
consolidated results of its operations and its consolidated cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ MOST HOROWITZ & COMPANY, LLP
New York, New York
November 21, 1997 (December 31, 1997,
as to Notes 13 and 14)
<PAGE>
Report of Independent Certified Public Accountants
Oak Tree Medical Systems, Inc.
Hialeah, Florida
We have audited the accompanying restated consolidated balance sheet of Oak Tree
Medical Systems Inc. as of May 31, 1996, and the related restated consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Oak
Tree Medical Systems, Inc. as of May 31, 1996, and the consolidated results of
its operations and its consolidated cash flows for the year then ended, in
conformity with generally accepted accounting principles
/s/ Simon, Krowitz, Bolin and Associates, P.A.
August 13, 1996
August 29, 1996 as to Note 12
January 30, 1998 as to restatement
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1997 AND 1996
ASSETS
1997 1996
---------- -----------
CURRENT ASSETS
Cash (Note 17) $ 125,919 $ 292,315
Patient care receivables (net of
allowance for contractual allowances
and doubtful accounts of $860,123
in 1997 and $1,486,270 in 1996)
(Notes 4, 6 and 9) 848,269 3,158,325
Other current assets 141,622 68,621
Note receivable - current
portion (Note 14) 264,401
---------- -----------
TOTAL CURRENT ASSETS 1,380,211 3,519,261
NOTE RECEIVABLE (Note 14) 109,534
INVESTMENT IN AFFILIATED COMPANY
(Note 7) 4,994,214 5,000,000
FIXED ASSETS (Notes 8 and 9) 507,163 394,145
OTHER ASSETS 80,666 58,657
GOODWILL (Note 3) 37,141 1,252,143
---------- -----------
TOTAL ASSETS $7,108,929 $10,224,206
========== ===========
(CONTINUED)
See notes to consolidated financial statements
F-3
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1997 AND 1996
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
------------ -----------
CURRENT LIABILITIES
Note payable - bank (Note 9) $ 197,305
Accounts payable and accrued expenses 1,071,843 $ 920,363
Deferred compensation (Note 13) 100,000
Note payable (Note 6) 310,623
Current portion of long-term
debt (Note 10) 294,445 62,073
Current portion of capitalized lease
obligations (Note 11) 147,756 85,773
Deferred income taxes payable
(Note 12) 558,782
---------- -----------
TOTAL CURRENT LIABILITIES 1,811,349 1,937,614
LONG-TERM DEBT (NOTE 10) 92,667 128,481
CAPITALIZED LEASE OBLIGATIONS (Note 11) 311,587
OBLIGATION TO ISSUE SHARES OF COMMON
STOCK (Note 4) 349,765
---------- -----------
TOTAL LIABILITIES 2,215,603 2,415,860
---------- -----------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Note 5)
Common stock, $.01 par value;
authorized: 25,000,000 shares;
issued and outstanding: 2,888,144
shares, as of May 31, 1997, and
2,619,869 shares as of May 31, 1996 28,881 26,199
Additional paid-in capital 9,772,472 9,766,573
Deficit ( 4,726,638) ( 1,984,426)
Less: prepaid consulting and stock
subscription receivable ( 181,389)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 4,893,326 7,808,346
---------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $7,108,929 $10,224,206
========== ===========
See notes to consolidated financial statements
F-4
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED MAY 31, 1997 AND 1996
1997 1996
---------- ----------
REVENUE
Patient services (Note 6) $3,344,559 $4,663,792
---------- ----------
EXPENSES
Costs of patient services 1,875,770 1,910,452
Selling, general and administrative 3,283,010 1,035,782
Depreciation and amortization 170,890 180,777
Interest - net 403,724 130,920
Losses on sales and rescission
(Notes 4 and 14) 777,054
---------- ----------
TOTAL EXPENSES 6,510,448 3,257,931
---------- ----------
(LOSS) INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY INCOME ( 3,165,889) 1,405,861
INCOME TAX BENEFIT (EXPENSE) (Note 12) 546,677 (346,770)
---------- ----------
(LOSS) INCOME BEFORE
EXTRAORDINARY INCOME ( 2,619,212) 1,059,091
CANCELLATION OF INDEBTEDNESS (Note 16) 65,000
---------- ----------
NET (LOSS) INCOME ($2,554,212) $1,059,091
========== ==========
(LOSS) INCOME PER COMMON SHARE
Before extraordinary income ($1.02) $.42
Extraordinary income .03
----- ----
NET (LOSS) INCOME PER COMMON SHARE ($ .99) $.42
===== ====
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 2,575,361 2,550,456
========= =========
See notes to consolidated financial statements
F-5
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
Prepaid
Common Stock Consulting
---------------------- Additional and Stock Total
Paid-in Subscription Stockholders'
Shares Amount Capital Deficit Receivable Equity
------ ------ ------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance - May 31, 1995, as reported 2,046,969 $20,470 $8,035,371 ($2,927,491) $5,128,350
Restatements (Note 5) 467,500 4,675 1,206,013 ( 116,026) 1,094,662
---------- ------- ----------- ------------ ----------
Balance - May 31, 1995, as restated 2,514,469 25,145 9,241,384 ( 3,043,517) 6,223,012
Sales of common stock 82,200 822 405,178 406,000
Issuance of shares for services (Note 5) 23,200 232 120,011 120,243
Net income for year ending May 31, 1996 1,059,091 1,059,091
--------- -------- ---------- ----------- ----------
Balance - May 31, 1996, as restated 2,619,869 26,199 9,766,573 ( 1,984,426) 7,808,346
Sales of common stock 325,333 3,253 251,747 255,000
Issuance of common stock upon acquisition 54,237 542 399,458 400,000
Reacquisition of shares upon sale of Florida (400,000) (4,000) (1,068,000) ( 188,000) (1,260,000)
Issuance of common stock on acquisition
and rescission 14,286 143 99,857 100,000
Exercise of options 50,000 500 24,500 ($25,000)
Issuance of shares for services 224,419 2,244 298,337 (170,750) 129,831
Amortization of prepaid consulting 14,361 14,361
Net loss for year ending May 31, 1997 ( 2,554,212) (2,554,212)
--------- ------- ----------- ----------- --------- -----------
Balance - May 31, 1997 2,888,144 $28,881 $9,772,472 ($4,726,638) ($181,389) $4,893,326
========= ======= ========== ========== ======== ===========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 31, 1997 AND 1996
1997 1996
------ -----
OPERATING ACTIVITIES
Net (loss) income ($2,554,212) $1,059,091
Adjustments to reconcile net (loss)
income to net cash used in operating
activities
Bad debts 1,390,276
Losses on sales and rescission 777,054
Depreciation and amortization 464,943 180,777
Common stock issued for services 128,081 120,243
Deferred compensation 100,000
Equity in loss of investment 5,786
Capitalization of deferred
interest and other financing fees (662,500)
Deferred income taxes (558,782) 558,782
Cancellation of indebtedness (65,000)
Abandonment of leasehold
improvements 93,557
Increase (decrease) in cash from
Patient care receivables (1,780,591) (1,400,050)
Other current assets (68,001) 8,897
Other assets (4,531) 32,151
Accounts payable and
accrued expenses 762,245 (438,352)
Income taxes payable (280,338)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (2,065,232) (65,242)
---------- ----------
INVESTING ACTIVITIES
Proceeds from sales of fixed assets 450,230
Proceeds from sales of Florida centers
(net of expenses of $13,451) 101,549
Collection of note receivable 85,000
Acquisition (net of notes payable of
$189,000, accounts payable of $65,000
and common stock issued of $400,000) (436,911)
Advances on rescission (412,506)
Purchases of fixed assets (net of
capitalized lease obligations of
$466,444 in 1997 and $80,223 in 1996) (275,293) (181,670)
Expenses of rescission (5,866)
Purchases of licenses (40,000)
Other 37,761
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (493,797) (183,909)
---------- ----------
(CONTINUED)
See notes to consolidated financial statements
F-7
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 31, 1997 AND 1996
(CONTINUED)
1997 1996
------ -----
FINANCING ACTIVITIES
Proceeds of notes payable - other $ 2,561,261 $ 44,975
Proceeds of long-term debt 450,000 310,623
Proceeds from issuance of common stock 241,750 421,000
Proceeds of note payable - bank 200,000
Payments of notes payable - other (614,979)
Payments of long-term debt (421,134) (355,208)
Payments of capitalized lease
obligation (21,570) (18,120)
Payments of note payable - bank (2,695)
---------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 2,392,633 403,270
---------- --------
NET (DECREASE) INCREASE IN CASH (166,396) 154,119
CASH - Beginning of year 292,315 138,196
---------- --------
Cash - End of year $ 125,919 $292,315
========== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid $ 394,559 $130,928
----====== ========
See notes to consolidated financial statements
F-8
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Oak Tree Medical Systems, Inc. and Subsidiaries (Company) operate
physical therapy care centers in northeastern Florida (Note 4) and New York
(Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statements
The consolidated financial statements include the accounts of Oak Tree
Medical Systems, Inc. and its wholly-owned subsidiaries and Oak Tree Medical
Practice, P.C., a professional practice entity over which the Company exercises
significant influence and control. All material intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Investment In Affiliated Company
Investment in affiliated Company was reported on the equity method.
Fixed Assets
Physical therapy equipment and office equipment and furniture were
stated at cost and are being depreciated on the straight-line method over the
estimated useful lives of the assets which are five years. Leasehold
improvements were stated at cost and were amortized over the terms of the leases
or the estimated useful lives of the assets which is seven years, whichever is
less.
Goodwill
Goodwill resulting from acquisitions of established physical therapy
care centers, represents costs in excess of net assets
F-9
<PAGE>
acquired and is being amortized on a straight-line basis over twenty years.
Annually, the Company evaluates goodwill for impairment by comparing estimated
discounted future cash flows to net book value.
Patient Service Revenue
Patient service revenue is reported at the estimated net realizable
amounts from patients, third-party payers and others for services rendered.
Stock Based Compensation
Stock based compensation to employees and nonemployees has been
recorded on the fair value method.
Income Taxes
Deferred income taxes have been provided for temporary differences
between consolidated financial statement and income tax reporting, resulting
primarily from the use of the cash basis method for income tax purposes and net
operating loss carryforwards.
Earnings Per Share
Earnings per share were computed based on the weighted average number
of common shares and common share equivalents outstanding during the year.
The Company adopted FASB Statement No. 128, "Earnings Per Share", which
changed the calculations and disclosures of earnings per share for the year
ended May 31, 1997 without a material effect.
3. ACQUISITION
On October 1, 1996, the Company acquired the operations of three
physical therapy care centers and a hospital service contract located primarily
in New York City for $900,000, payable: (a) $400,000 in cash, (b) $100,000 by
the assumption of a note payable (Note 10) and (c) the issuance of 54,237 shares
of common stock to a creditor of the seller. In addition, the seller will
receive 10,000 shares of common stock issuable on October 1, 1998, but no less
than $100,000.
In connection with the acquisition, the Company incurred expenses of
$101,911, including a finder's fee of $90,000 to a company in which the wife of
the former chief executive officer of the Company is an owner, and which was
agreed to prior to employment by the Company. The finder's fee was paid $25,000
in cash and the balance was due in a note payable due on January 15, 1998, with
interest at 12.5%, per annum (Note 16).
F-10
<PAGE>
In addition, the Company assumed three leases for physical therapy care
centers (Note 13).
The results of operations of the acquired centers have been included in
the consolidated statement of operations from October 1, 1996, the date of the
acquisition. The acquisition was recorded on the purchase method and the total
purchase price, including related costs (and net of the imputed interest of
$11,000 on the amount due to seller), was allocated to the fair values of the
assets acquired and the excess to goodwill, as follows:
Patient care receivables (net of
allowances for doubtful accounts) $ 750,000
Supplies 5,000
Physical therapy equipment 261,689
Deposits 35,800
Goodwill 38,422
----------
$1,090,911
==========
4. SALES OF FLORIDA CENTERS
On February 12, 1997, certain subsidiaries sold substantially all of
the assets and operations of the physical therapy care centers in Jacksonville
and Orange Park, Florida. In addition, the Company sold all the outstanding
shares of another subsidiary which held the receivables of the two centers, and
was the debtor under the receivables funding facility (Note 6).
In exchange for the assets and subsidiary sold, the Company received
$100,000 in cash and a note in the amount of $100,000 and the purchaser assumed
$86,150 of accounts payable and a note payable of $1,812,500. In exchange for
the consent of the lender of the patient care receivables funding facility (Note
6), the Company transferred to the lender $700,000 of additional patient care
receivables.
In addition, the Company reacquired 400,000 shares of common stock from
an employee, valued at $3.15, per share, and then retired the shares. The
Company was also released of an obligation to issue additional shares of common
stock.
In April 1997, the Company sold its physical therapy care center in St.
Augustine, Florida, completing its exit from Florida. The sale price was $25,000
in cash, of which $15,000 was paid at the closing, $5,000 on April 26, 1997 and
$5,000 on May 29, 1997.
F-11
<PAGE>
A summary of the aggregate loss on the sales of the Florida centers is
as follows:
Reacquisition of common stock $1,260,000
Purchase prices 225,000
Assumption of note payable 1,812,500
Cancellation of obligation to
issue shares of common stock 349,765
Assumption of accounts payable 86,150
Costs of assets sold ( 2,958,623)
Additional allowance for
doubtful patient care receivables ( 967,500)
Write-off of deferred interest and
other financing fees (Note 6) ( 386,458)
Allowance for collection of
note receivable ( 100,000)
Expenses of sales ( 13,451)
----------
Loss on sales ($ 692,617)
==========
5. COMMON STOCK
Prior Period Adjustments
The Company's consolidated financial statements have been restated as
of May 31, 1995 to reflect the issuance of 400,000 shares of common stock, with
a fair value of $1,072,000, issued in connection with the acquisition of a
Florida physical therapy care center acquired in January 1995, which had been
reported as issued during the year ended May 31, 1996.
The Company's consolidated financial statements as of May 31, 1995 and
1996 have also been restated to reflect the issuance of shares of common stock
in exchange for various services. These shares have been valued at their fair
values on their respective dates of issuance, as follows:
Years Ending
May 31, Shares Value
------------ ------ --------
1995 67,500 $138,688
1996 23,200 120,243
------ --------
90,700 $258,931
====== ========
The effect of the restatement was to decrease net income for the years
ended May 31, 1996 and 1995 by $72,146 ($.03, per share) and $116,026 ($.05, per
share), respectively, net of income taxes of $22,662 and $48,097, respectively.
F-12
<PAGE>
Exercise of Options
On April 9, 1997, options were exercised to acquire 50,000 shares of
common stock at $.50, per share, in exchange for a note receivable due on April
15, 1999, with interest at 8.5%, per annum. These options had been acquired from
Accord (Note 7).
Issuance of Common Stock
Through May 31, 1997, the Company issued an aggregate of 26,919 shares
of common stock in exchange for legal services. The shares were valued at an
average price of $3.66, per share.
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.
Options
On December 31, 1996, in exchange for legal services, the Company
granted options to purchase 17,500 shares of common stock, exercisable at $1.75,
per share, through May 1, 2001.
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 to $5, per share, through December 31, 1998, 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.
Subsequent to May 31, 1997, options for 110,250 shares, at prices
ranging from $2 to $3, per share, respectively, have been exercised.
Stock Option Plans
As of May 31, 1996, the Company terminated its 1986 stock option plan.
No options were granted under the plan.
The Company has a Performance Equity Plan (Plan) under which it may
grant incentive and non-qualified stock options, stock appreciation rights,
restricted stock awards, deferred stock, stock reload options and other stock
based awards to purchase up to 600,000 shares of common stock to officers,
directors, key employees and consultants. The Company may not grant any options
with a purchase price less than fair market value of common stock
F-13
<PAGE>
as of the date of the grant. Through May 31, 1997, the Company had not granted
any options under the Plan.
Reserved Shares
As of May 31, 1997, the Company has reserved the following shares of
common stock:
Plan 600,000
Options to consultants (a) 917,500
Options to directors/officers (b) 620,000
Options to former employee (c) 5,000
---------
2,142,500
=========
(a) exercisable from $1.69 to $5, per share, through December
2001
(b) exercisable from $1 to $2, per share, through April 1999
(c) exercisable at $1.66, per share, through September 1997
The value of all options issued by the Company has been assumed to be
immaterial.
6. PATIENT CARE RECEIVABLES
In December 1995, the Company entered into a borrowing agreement under
which the Company borrowed funds utilizing its patient care receivables as
collateral. The agreement required loan discounts of 1.5%, per advance, interest
of 1.5% on monthly outstanding balances and a fee of 2%, per advance.
In September 1996, the Company refinanced its patient care receivable
agreement, whereby approximately $2,613,000 of patient care receivables were
provided as collateral for a loan of $1,912,500. In the event that the lender
collects funds in excess of the original $1,912,500, such excess shall be
refunded to the Company, less collection charges. As collection of any amounts
is not probable, the Company has written-off these patient care receivables.
Upon closing, the Company paid interest and other financing fees of $662,500.
As of May 31, 1997 and 1996, patient care receivables included
approximately 13% and 37%, respectively, due from Medicare.
F-14
<PAGE>
7. 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%, 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.
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)
========
F-15
<PAGE>
8. FIXED ASSETS
As of May 31, 1997 and 1996, fixed assets consisted of the following:
1997 1996
-------- --------
Physical therapy equipment $499,437 $334,435
Office equipment and furniture 40,258 166,870
Leasehold improvements 50,923
-------- --------
539,695 552,228
Less: accumulated depreciation and
amortization 32,532 158,083
-------- --------
$507,163 $394,145
======== ========
As of May 31, 1997, fixed assets included capitalized lease assets of
$514,632.
9. NOTE PAYABLE - BANK
On September 30, 1996, the Company entered into a loan agreement with a
bank for a line of credit of $200,000 and a term loan of $400,000 (Note 10). The
term loan 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. The proceeds of the
term loan were used in connection with the New York City acquisition (Note 3).
As of May 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 19).
F-16
<PAGE>
10. LONG-TERM DEBT
As of May 31, 1997 and 1996, long-term debt consisted of the following:
1997 1996
-------- --------
Note payable to bank (Note 9) $244,445
Due to officer (a) (Note 3) 92,667
Note payable assumed, paid in
November 1997, with interest
at 6.07%, per annum (Note 3) 50,000
Note payable to bank, with
interest at prime plus 1%, per
annum $155,579
Note payable, without interest 34,975
-------- --------
387,112 190,554
Less: current portion 294,445 62,073
-------- --------
$ 92,667 $128,481
======== ========
(a) Chief operating officer of the Company (Note 13).
11. CAPITALIZED LEASE OBLIGATIONS
In March 1997, the Company purchased primarily physical therapy
equipment which were subject to existing operating leases for an aggregate cost
of $250,230. This equipment and other fixed assets with a net book value of
$239,862 were then sold for $450,230 and leased back for a period of five years.
The leaseback has been accounted for as a capitalized lease. The loss of $39,862
realized on the sale and leaseback has been deferred and is being amortized over
the term of the lease.
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. The implicit interest rates on the capital
leases were approximately 11% to 17%, per annum.
F-17
<PAGE>
As of May 31, 1997, the future minimum annual lease obligations under
the capital leases were as follows:
Years Ended
May 31,
-----------
1998 $147,756
1999 132,677
2000 129,747
2001 125,405
2002 100,482
--------
Total minimum lease obligations 636,067
Less: amount representing interest 176,724
--------
Present value of minimum lease
obligations 459,343
Less: current portion of capitalized
lease obligations 147,756
--------
$311,587
========
12. INCOME TAXES
For the years ended May 31, 1997 and 1996, income tax benefit (expense)
consisted of the following:
1997 1996
-------- --------
Current: State ($ 12,105) $ 4,019
Reversal of prior
year's overaccrual 230,655
-------- --------
( 12,105) 234,674
-------- --------
Deferred: Federal 458,782 ( 463,782)
State 100,000 ( 95,000)
-------- --------
558,782 ( 558,782)
-------- --------
$546,677 ($324,108)
======== ========
F-18
<PAGE>
For the years ended May 31, 1997 and 1996, the tax effects of timing
differences which gave rise to deferred income taxes were as follows:
1997 1996
---------- -------
Net operating loss
carryforwards $ 100,000 $300,000
Cash basis 1,068,782 ( 918,782)
Less valuation allowance ( 610,000) 60,000
---------- ---------
$ 558,782 ($558,782)
========== =========
As of May 31, 1997 and 1996, the tax effects of the components of
deferred income tax were as follows:
1997 1996
-------- -------
Net operating loss carryforwards $600,000 $500,000
Cash basis 100,000 ( 968,782)
Less valuation allowance ( 700,000) ( 90,000)
-------- --------
None ($558,782)
======== ========
The following is a reconciliation of income taxes computed at the 34%
statutory rate to the provision for income taxes:
1997 1996
---------- --------
Tax at statutory rate $1,060,000 ($463,000)
State income tax 87,895 ( 50,981)
Reversal of prior year's
Federal overaccrual 194,674
Valuation allowance ( 610,000) 60,000
Other 8,782 ( 64,801)
---------- --------
$ 546,677 ($324,108)
========== ========
As of May 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 than not, and accordingly, a
valuation allowance of $700,000 has been established.
As of May 31, 1997, the Company had net operating loss carryforwards of
approximately $1,800,000 to reduce future Federal taxable income, expiring
through May 31, 2012. 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.
The Company's consolidated financial statements have been restated to
reflect the utilization of the income tax effect of net
F-19
<PAGE>
operating losses of $162,000 against deferred income taxes payable, as of May
31, 1996. The effect of this restatement was to increase net income for the year
ended May 31, 1996 by $162,000 ($.06, per share).
13. COMMITMENTS AND CONTINGENCIES
Leases
The Company is committed under noncancellable leases for centers and
office space through November 2003, requiring minimum rents, plus additional
rent for increases in real estate taxes and operating expenses.
As of May 31, 1997, the future minimum aggregate annual payments under
these leases were as follows:
Years Ending
May 31,
------------
1998 $ 321,801
1999 336,778
2000 349,702
2001 367,494
2002 362,536
Thereafter 256,655
----------
$1,994,966
==========
For the years ended May 31, 1997 and 1996, rent expense was $382,954
and $169,837, respectively.
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.
F-20
<PAGE>
Litigation
On September 1, 1995, a former owner of a center filed a lawsuit
against a subsidiary (Note 4) asserting: (1) breach of contract for failure to
pay amounts due under management service contracts, (2) breach of contract by
improper termination of those contracts and (3) breach of a noncompete agreement
by the physician who was the former sole stockholder of the subsidiary and was
the Company's chief medical officer. Commencing April 30, 1994, and through May,
1995, the former owner provided management services for certain operations of
the subsidiary. In December 1997, the matter was settled without material effect
on the Company.
During the year ended May 31, 1996, management provided $100,000 for
legal costs and settlement, if any, and for the years ended May 31, 1997 and
1996, approximately $12,000 and $36,000, respectively, of costs were incurred.
A subsidiary (Note 4) had filed suit against a former
physician/employee to recover damages relating to the former employee's conduct
in attempting to wrongfully bill and collect in his individual capacity, for
medical services which he rendered while employed with the subsidiary. In
December 1996, the matter was settled without a material effect on the Company.
Subsequent to May 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 April 1996, a former patient commenced a malpractice claim against
the Company, certain subsidiaries and an employee. The claim was settled in
November 1996 and the Company's insurance company paid the settled amount.
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 to 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 (Note 4), the Company has self-insured for medical malpractice
liabilities, if any, which may still arise from the Florida operations. Through
November 21, 1997, the Company has not been notified of any claims for
malpractice. The Company is unable to determine the effect, if any, of its
self-insurance.
F-21
<PAGE>
14. ACQUISITION AND RESCISSION
On December 11, 1996, the Company acquired certain assets of four
physical therapy care centers and a management company located in Long Island,
New York for an aggregate purchase price of $650,000 and 132,190 shares of
common stock of the Company, plus other consideration. In connection with the
acquisition, the Company incurred a finder's fee, equal to 10% of the purchase
price, to a related company (Note 3).
Effective February 28, 1997, the Company rescinded the acquisition and
the sellers returned all stock and notes originally issued to them. The payments
of the purchase price and the net revenues and expenses of these centers, for
the period from December 11, 1996 to February 28, 1997, were converted to a note
receivable of $448,935, including $15,000 for the purchase of 12,000 shares of
common stock. The note was receivable $50,000 at closing, $25,000 on May 5, 1997
and the balance in eighteen equal monthly installments, with interest at 10%,
per annum. In addition, the finder's fee was also cancelled.
In addition, the Company was required to pay a landlord $100,000, which
was settled by the issuance of 14,286 shares of common stock. Upon the
rescission, the Company received $21,429 from the seller as a repayment, and
such amount was included in the note receivable.
The results of operations of the Long Island centers from December 11,
1996 through February 28, 1997 have not been included in the consolidated
statement of operations.
The Company recognized a loss on the rescission of $84,437.
On December 11, 1997, the Company received $325,000 in full settlement
of the remaining amount of the note receivable.
15. RELATED PARTY TRANSACTIONS
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. The options were to become exercisable upon the earlier of: (1)
the Company meeting certain revenue and/or earnings criteria or (2) five years
and being an employee of the Company.
In August 1997, the above employee's employment terminated and the
Company entered into a consulting agreement for a period of two years at a fee
of $150,000, per year, plus 125,000 shares of common stock, issuable 25,000
shares immediately and 5,000 shares, per month, as long as the consultant has
not been terminated, as defined.
F-22
<PAGE>
In addition, the option agreement to purchase 375,000 shares of common
stock has been amended to provide for immediate exercisability and an extension
until August 2007.
16. FORGIVENESS OF INDEBTEDNESS
During the year ended December 31, 1997, the related party (Note 3)
forgave the balance due on the finder's fee of $65,000.
17. CONCENTRATION OF CASH
From time to time, the Company had cash in financial institutions in
excess of insured limits. In assessing its risk, the Company's policy is to
maintain funds only with reputable financial institutions.
18. RECLASSIFICATION
Certain 1996 amounts have been reclassified to conform to 1997
classifications.
19. SUBSEQUENT EVENTS
Acquisition
On July 16, 1997, the Company acquired an additional physical therapy
care center in New York City for a purchase price of $400,000, payable $100,000
in cash, which was paid at closing, and a note of $300,000 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 a: (1)
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) consulting agreement with the seller for a
six-month period and then on a month-to-month basis, at $150,000, per annum, and
(3) consulting agreement with the physical therapy care center administrator, a
relative of the seller, for a six-month period and then on a month-to-month
basis, at of $50,000, per annum.
Sale and Leasebacks
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.
F-23
<PAGE>
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 chairman of the board of directors 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 payoff the
notes payable - bank (Notes 9 and 10).
Sale of Common Stock (Unaudited)
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.
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 on
Form 10-KSB/A to be signed on its behalf by the undersigned thereunto duly
authorized.
Dated: February 4, 1998 OAK TREE MEDICAL SYSTEMS, INC.
By: /s/ HENRY DUBBIN
-------------------------
Henry Dubbin, President
