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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 0-16206
OAK TREE MEDICAL SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 02-0401674
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2797 OCEAN PARKWAY
BROOKLYN, NEW YORK 11235
(Address of principal executive offices)
(718) 769-6042
(Issuer's telephone number, including area code)
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Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES _X_ NO ___
Indicate number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date:
Common Stock, $.01 par value 5,497,653 shares
Class Outstanding at April 14, 1999
Transitional Small Business Disclosure Format (check one):
YES ___ NO _X_
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<PAGE>
Oak Tree Medical Systems, Inc. and Subsidiaries
Index
Part I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet as of February 28, 1999 and May 31, 1998
Consolidated Statement of Operations for the three and nine months
ended February 28, 1999 and 1998
Consolidated Statement of Stockholders' Equity for the nine
months ended February 28, 1999
Consolidated Statement of Cash Flows for the nine months ended
February 28, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
Oak Tree Medical Systems, Inc. and Subsidiaries
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
February 28, 1999 May 31, 1998
--------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 141,453 $ 455,391
Patient care receivables, less allowance for contractual
allowances and doubtful accounts of $1,072,023 and
$642,000 as of February 28, 1999 and May 31, 1998 206,335 788,121
Other current assets 36,805 107,403
- -------------------------------------------------------------------------------------------------
Total Current Assets 384,593 1,350,915
Other Assets
Investment in gold ore and affiliated company 1,994,214 1,994,214
Fixed assets 11,509 502,339
Other assets 46,489 97,740
Goodwill 105,097 226,888
Deferred acquisition costs 156,013 98,804
=================================================================================================
TOTAL ASSETS $2,697,915 $4,270,900
=================================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
Oak Tree Medical Systems, Inc. and Subsidiaries
Consolidated Balance Sheet
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
February 28, 1999 May 31, 1998
--------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable $ $ 334,769
Accounts payable and accrued expenses 465,976 844,726
Current portion of long-term debt 66,856
Current portion of capitalized lease obligations 130,572
- --------------------------------------------------------------------------------------------------
Total Current Liabilities 465,976 1,376,923
Long-term debt 208,201
Capitalized lease obligations 458,414
Accounts payable 61,551
- --------------------------------------------------------------------------------------------------
Total Liabilities 465,976 2,105,089
- --------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $.01 par value, 25,000,000 shares authorized,
5,487,653 and 4,657,753 shares issued and outstanding as of
February 28, 1999 and May 31, 1998,
respectively 54,876 46,577
Additional paid-in-capital 13,192,472 12,140,841
Deficit (10,905,445) (9,784,203)
Less: prepaid consulting and stock
subscription receivable (109,964) (237,404)
- --------------------------------------------------------------------------------------------------
Total Stockholders' Equity 2,231,939 2,165,811
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,697,915 $4,270,900
==================================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
Oak Tree Medical Systems, Inc. and Subsidiaries
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended February 28, Ended February 28,
==============================================================
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Net patient services $ 55,022 $ 512,915 $ 757,707 $ 1,680,698
- ------------------------------------------------------------------------------------------------------------
EXPENSES
Costs of patient services 52,435 487,725 427,855 1,496,237
Selling, general and administrative 402,753 363,598 1,360,578 1,305,279
Depreciation and Amortization 2,850 68,691 71,535 198,906
Interest 18,542 70,865 32,845 187,384
(Gain) on sale ( 13,864)
- ------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 476,580 990,879 1,878,949 3,187,806
- ------------------------------------------------------------------------------------------------------------
NET LOSS ($421,558) ($477,964) ($1,121,242) ($1,507,108)
============================================================================================================
NET LOSS PER COMMON SHARE ($ 0.08) ($ 0.12) ($ 0.22) ($ 0.40)
============================================================================================================
Weighted average number of common and
common equivalent shares outstanding 5,337,247 3,872,745 5,089,509 3,723,596
============================================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
Oak Tree Medical Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
For the Nine Months Ended February 28, 1999
(Unaudited)
<TABLE>
<CAPTION>
Prepaid
Consulting
and
Stock Total
Common Stock Additional subscription Stockholders'
Shares Amount Paid-in-Capital Deficit Receivable Equity
=================================================================================================================================
<S> <C> <C> <C> <C>
<C> <C>
BALANCE MAY 31, 1998 4,657,753 $46,577 $12,140,841 ($9,784,203) ($237,404) $2,165,811
Sale of common stock (net 699,950 6,999 777,381
expenses of $725,619) 784,380
Issuance of shares for services,etc. 129,950 1,300 274,250
275,550
Amortization of prepaid consulting
127,440 127,440
Net Loss
(1,121,242) (1,121,242)
=================================================================================================================================
BALANCE February 28, 1999 5,487,653 $54,876 $13,192,472 ($10,905,445) ($109,964) $2,231,939
=================================================================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
Oak Tree Medical Systems, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended February 28,
==============================
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss ($1,121,242) ($1,507,108)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and Amortization 198,975 428,693
Gain on sale (13,864)
Common stock issued for services 275,550 76,550
Decrease (reduction) in allowance
for doubtful accounts 150,000 (140,623)
Increase (decrease) in cash from
Patient care receivables 131,786 119,940
Other current assets 70,598 80,943
Other assets 46,793
Accounts payable and accrued payable (431,081) (498,548)
- ---------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES: (692,485) (1,440,153)
- ---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition (net of notes payable of $300,000) (100,000)
Purchases of fixed assets (net of capital
lease obligations of $171,335 in 1998) (73,217)
Proceeds from sale of fixed assets 171,335
Deferred acquisition costs (57,209)
Refund ( Payments) on security deposits 3,180 (7,140)
Decrease in note receivable 373,935
- ---------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES: (54,029) 364,913
- ---------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds of notes payable and long-term debt 225,000
Payments of notes payable and long-term debt (301,625) (149,943)
Payments of capital lease obligations (50,179) (69,570)
Proceeds from issuance of common stock 784,380 1,844,956
Payments of note payable--bank (441,750)
Proceeds of notes payable-- account receivable financing 1,343,966
Payments of notes payable-- account receivable financing (903,459)
- ----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES: 432,576 1,849,200
- ----------------------------------------------------------------------------------------------------
NET INCREASE ( DECREASE) IN CASH (313,938) 773,960
CASH - Beginning of Period 455,391 125,919
- ----------------------------------------------------------------------------------------------------
CASH - End of Period $141,453 $899,879
====================================================================================================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Interest Expense Paid $53,122 $176,430
====================================================================================================
NONCASH TRANSACTIONS
During the nine months ended February 28, 1999, as a result of contractual
provisions, the Company reduced a note payable by $85,000 and further reduced
goodwill by $85,000. Also, in connection with the July 1998 and November 1998
sales, the purchaser paid off a capital lease obligation on the Company's behalf
of $365,000 and $194,000,respectively.
</TABLE>
See notes to consolidated financial statements
<PAGE>
OAK TREE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OPERATIONS
Oak Tree Medical Systems, Inc., a Delaware corporation, and its
subsidiaries (the "Company") operate physical therapy care centers in New York.
2. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include all the accounts of Oak Tree
Medical Systems, Inc. and its wholly-owned subsidiaries and Oak Tree Medical
Practice, P.C., a professional practice entity over which the Company exercises
significant influence and control. All material intercompany balances and
transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all the information and footnotes required by generally accepted accounting
principles for consolidated financial statements. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation have been included. Operating results for the nine months
ended February 28, 1999 are not necessarily indicative of the results that may
be expected for the fiscal year ending May 31, 1999. These statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the fiscal year ended
May 31, 1998.
3. SALE OF PHYSICAL THERAPY CENTERS
On July 16, 1998, the Company sold substantially all the equipment and
operations of two physical therapy centers in exchange for $375,000, payable in
cash at closing. Proceeds of $365,000 were used to repay certain lease
obligations. The Company also incurred a brokerage fee of 10% of the sale price.
On November 2, 1998, the Company sold all the assets (excluding
accounts receivable) of its Lower Manhattan, New York physical therapy facility
for $250,000 in cash plus the assumption of outstanding equipment lease
obligations of $194,000. Proceeds of $200,000 were used to repay a note payable
to the previous owner of the facility. On December 22, 1998, the Company sold
the accounts receivable relating to the Lower Manhattan facility for 50% value
of subsequent collections.
4. SUBSEQUENT EVENTS
Subsequent to February 28, 1999, the Company issued 10,000 shares in
exchange for professional services valued at $44,000.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is engaged in the business of operating and managing
physical therapy care centers. The Company currently operates one facility in
Bronx, NY.
In July 1997, the Company acquired a physical therapy care center in
the downtown area of New York City. During November and December 1998, the
Company sold all the assets and operations of this facility due to insufficient
cash flow.
In July 1998, the Company sold all of the assets and operations of its
facilities located in Flushing and Upper Manhattan, New York, due to
insufficient cash flows from these facilities.
In September 1997, the Company entered into a letter of intent,
subsequently amended in March 1999, to acquire approximately 30 medical
practices and MRI facilities in the greater New York metropolitan area, subject
to raising the capital necessary for the acquisitions and other conditions.
RESULTS OF OPERATIONS
Nine and Three months ended February 28, 1999 compared to the Nine and Three
months ended February 28, 1998.
Patient revenues decreased by 54.9% to $757,707 from $1,680,698 in the
nine months ended February 28, 1999 (the "Fiscal 1999 Nine Month Period")
compared with the nine months ended February 28, 1998 (the "Fiscal 1998 Nine
Month Period"). Revenues decreased by 89.3% to $55,022 from $512,915 in the
three months ended February 28, 1999 (the "Fiscal 1999 3rd Quarter") compared
with the three months ended February 28, 1998 (the "Fiscal 1998 3rd Quarter").
This reduction in revenue was attributable to the Company's disposition of three
New York City facilities during the first and second quarters of Fiscal 1999.
Total expenses decreased by 41.1% to $1,878,949 from $3,187,806 for the
Fiscal 1999 Nine Month Period compared with the Fiscal 1998 Nine Month Period.
Total expenses decreased by 51.9% to $476,580 from $990,879 for the Fiscal 1999
3rd Quarter compared with the Fiscal 1998 3rd Quarter. This reduction in
expenses was attributable to the Company's disposition of three New York City
facilities during the first and second quarters of Fiscal 1999. Total expenses
as a percent of revenues increased from 190% to 248% for the Fiscal 1999 Nine
Month Period compared with the Fiscal 1998 Nine Month Period (or, exclusive of
the gain on sale, to 250%). The increase in expenses in relation to revenues was
attributable to the Company's legal and accounting costs not decreasing despite
the disposition of the three New York City facilities during Fiscal 1999. The
legal and accounting costs were attributable to the transactional activities of
the Company, the settlement of certain litigation matters and the preparation of
reports filed with the Securities and Exchange Commission.
The above factors contributed to a net loss of $1,121,242 for the
Fiscal 1999 Nine Month Period as compared to the net loss of $1,507,108 for the
Fiscal 1998 Nine Month Period, and a net loss of $421,558 for the Fiscal 1999
3rd Quarter as compared to the net loss of $477,964 for the Fiscal 1998 3rd
Quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its capital requirements from operating cash
flow, loans against its accounts receivable, sales of equity securities and the
issuance of equity securities in exchange for assets acquired and services
rendered. During the nine months ended February 28, 1999, the Company has been
and is continuing to attract new investment capital,
<PAGE>
which the Company believes will be necessary to sustain its ongoing operations
and to facilitate growth. The Company continues to explore opportunities to
raise private equity capital and, in conjunction therewith, to provide credit
support for the Company's operations and potential acquisitions. Although the
Company has in the past been and continues to be in discussions with potential
investors, there can be no assurance that its efforts to raise any substantial
amount of private capital will be successful. Any substantial private equity
investment in the Company will result in voting dilution of the Company's
existing stockholders and could also result in economic dilution. If the Company
is unable to obtain new capital, the Company will be unable to carry out its
strategy of growth through acquisitions and the long-term ability of the Company
to continue its operations may be in doubt.
A significant portion of the revenues of the Company are for services
that are paid by third party payors, including insurance companies and Medicare.
As is typical in the health care industry, the Company receives payment after
services are rendered. Such payment is based, in part, on established cost
reimbursement principles and is subject to audit and retroactive adjustment.
While waiting for payment from third party payors, the Company is required to
fund its expenses from internal and, to the extent available, external financing
sources.
In September 1997, the Company entered into a financing agreement to
borrow on all of its existing and future patient care receivables for the next
two years. This agreement was terminated on December 22, 1998, due to the
Company's improved operating cash flow.
In May 1993, the Company acquired 50,000 tons of gold ore from Nevada
Minerals Corporation in exchange for the issuance of 1,350,000 shares of Common
Stock. The ore was appraised as having a value of $5,000,000. The Company
subsequently formed a wholly-owned subsidiary, Aurum Mining Corporation, with
the gold ore as its only asset. In June 1995, the Company exchanged the stock of
Aurum for 6,000,000 shares of common stock of Accord Futronics Corp ("Accord").
The Company had the right to receive a royalty of 12.5% of the net mining
proceeds from the processing of the ore transferred to Accord. In November 1997,
the Company returned the 6,000,000 shares of common stock of Accord in exchange
for 100% of Aurum, because Accord had not commenced and did not anticipate
commencing mining operations and the Company desired to take action to realize
the value of the gold ore.
As of May 31, 1998, the Company (i) had been unsuccessful in its
attempts to sell the gold ore and (ii) did not have the capability or the
resources to commence the mining of the gold ore. For those reasons, and due to
the absence of current financial and other information for Accord, the Company
wrote down the value of its investment in the gold ore by $3,000,000 (from
$4,994,214 to $1,994,214). The Company intends to continue
<PAGE>
its attempt to sell the gold ore and anticipates a sale in the near future,
although there can be no assurance that it will be successful in doing so.
On January 29, 1998 and during the nine months ended February 28, 1999
the Company closed offshore placements of 1,500,000 and 599,950 shares of Common
Stock, respectively, for aggregate purchase prices of $3,324,025 and $1,380,000,
respectively. The Company incurred expenses of $1,600,868 and $654,381 in
connection with such placement, resulting in net proceeds of $1,723,157 and
$725,619, respectively.
On July 16, 1998, the Company sold substantially all the equipment and
operations of two physical therapy centers in exchange for $375,000 in cash.
Proceeds of $365,000 were used to repay certain lease obligations. The Company
also incurred a brokerage fee of 10% of the sales price.
On November 2, 1998, the Company sold all the assets (excluding
accounts receivable) of its Lower Manhattan, New York physical therapy facility
for $250,000 in cash plus the assumption of outstanding equipment lease
obligations of $194,000. Proceeds of $200,000 were used to repay a note payable
to the previous owner of the facility. On December 22, 1998, the Company sold
the accounts receivable relating to the Lower Manhattan facility for 50% value
of subsequent collections. Accordingly, the Company recorded a provision for
doubtful accounts of $300,000 which is included in the "(gain) on sale" caption
in Fiscal 1999. An additional provision for doubtful accounts of $100,000 was
recorded during the Fiscal 1999 3rd Quarter.
Working capital decreased from ($26,008) as of May 31, 1998 to
($81,383) as of February 28, 1999, as a result of the provision for doubtful
accounts, weaker cash flow from the operating facilities partially offset by the
sale of Common Stock and the sale of the three facilities during the Fiscal 1999
2nd and 3rd Quarters.
YEAR 2000
The Company has assessed its financial accounting and reporting system
and considers it to be fully Year 2000 compliant. The Company's patient
receivable system will be assessed in the near future, after taking into account
the proposed acquisition, but the Company does not anticipate that it will incur
significant expenses or be required to make significant investment in computer
systems improvements to make the patient receivable system Year 2000 compliant.
However, any problems associated with any aspect of the Year 2000 compliance of
the Company, managed care organizations, or relevant government agencies or
providers could have a material adverse effect on the Company's business,
results of operations land financial condition. Accordingly, the Company plans
to devote the necessary resources to resolve all significant Year 2000 issues in
a timely manner.
FORWARD LOOKING STATEMENTS
Certain statements in this report set forth management's intentions,
plans, beliefs, expectations or predictions of the future based on current facts
and analyses. Actual results may differ materially from those indicated in such
statements. Additional information on factors that may affect the business and
financial results of the Company can be found in the other filings of the
Company with the Securities and Exchange Commission.
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OAK TREE MEDICAL SYSTEMS, INC.
By: /s/ Henry Dubbin
--------------------------------
Henry Dubbin
President
Dated: April 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> NOV-30-1998
<PERIOD-END> FEB-28-1999
<CASH> 141,453
<SECURITIES> 0
<RECEIVABLES> 1,278,358
<ALLOWANCES> 1,072,023
<INVENTORY> 0
<CURRENT-ASSETS> 348,593
<PP&E> 28,727
<DEPRECIATION> (17,218)
<TOTAL-ASSETS> 2,697,915
<CURRENT-LIABILITIES> 465,967
<BONDS> 0
0
0
<COMMON> 54,876
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,697,915
<SALES> 757,707
<TOTAL-REVENUES> 757,707
<CGS> 427,855
<TOTAL-COSTS> 1,846,104
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,845
<INCOME-PRETAX> (1,212,242)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,121,242)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,121,242)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
