OAK TREE MEDICAL SYSTEMS INC, 10KSB, 1999-09-13

OAK TREE MEDICAL SYSTEMS INC
10KSB, 1999-09-13
HEALTH SERVICES

Previous: KLEINWORT BENSON AUSTRALIAN INCOME FUND INC, DEF 14A, 1999-09-13

Next: DURAMED PHARMACEUTICALS INC, 10-K/A, 1999-09-13

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

-----------------------

FORM 10-KSB

[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended: May 31, 1999

[ ] 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 Registrant as specified in its charter)

DELAWARE 02-0401674
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

2797 Ocean Parkway
Brooklyn, New York 11235
(718) 769-6042
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)

Check whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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: ___

Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the 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: $750,690.

The number of shares of Common Stock, par value $0.01 per share,
outstanding as of August 31 , 1999: 5,936,022.

The aggregate market value of voting and non-voting Common Stock
(5,213,147 shares) held by non-affiliates computed by reference to the closing
price of the Common Stock as of August 31, 1999: $14,987,798.

Transactional Small Business Disclosure Format: Yes:__ No: X

<PAGE>

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, the Company, through its subsidiary
Oak Tree Medical Management, Inc., operates one New York City based physical
therapy care center. 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.

The Company's clinics offer specific programs for injured workers
compensation patients. Each clinic first evaluates the worker's physical
condition and capacity to perform the requirements of his or her 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 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.

<PAGE>

The Company's strategy has been to take advantage of these trends by
acquiring and integrating a network of health care practices, particularly in
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
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 Facility

In October 1996, the Company acquired the management and assets of
three New York City based physical therapy care centers for an aggregate
purchase price of $900,000 (in cash and assumed debt) and 10,000 shares of
Common Stock (with a guaranteed value of not less than $100,000 and 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 served as the director of operations of the New York City clinics
and Chief Operating Officer of the Company until February 1998. The Company also
assumed three leases for the physical therapy care centers. In July 1998, the
Company sold substantially all of the equipment and operations of two of the
three facilities it acquired in 1996 to a subsidiary of SMR Management Corp.,
Nesconset Sports, Inc. ("Nesconset Sports"), because the cash flows from these
facilities were insufficient to support their operations. The aggregate sales
price was $375,000 in cash, of which $365,000 was used to repay certain of the
Company's lease obligations. The purchaser assumed the outstanding leases.

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 was reduced by $100,000 since the center did not attain a certain
level of billings as of the end of July 1998. In connection with the
acquisition, the Company entered into a lease for the acquired center through
August 2003, and the seller entered into a four-year noncompetition agreement.
In addition, the seller entered into a six-month consulting agreement with the
Company continuing thereafter on a month-to-month basis, at $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
thereafter on

<PAGE>

a month-to-month basis, at $50,000 per annum. On November 2, 1998, the Company
sold all the assets (excluding accounts receivable) of this 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 facility for 50% value of subsequent cash
receipts.

As of May 31, 1999, the Company has one remaining facility which was
acquired in October 1996.

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 flows from
these facilities to the Company were insufficient to support the operations of
these facilities by the Company.

Sales of Physical Therapy Care Centers

Florida Centers:

Following the Company's October 1996 acquisition of three New York City
based

<PAGE>

physical therapy care centers and the hospital service contract, 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, which helped finance the operations of the two
facilities by buying certain of their receivables and financing the purchase
through a receivables funding facility which used the receivables as collateral.
The aggregate sales 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. Neither installment has been paid and, as collection is not
probable, the Company has established a reserve in the amount of the note. In
connection with the sale of the North Florida centers, the purchaser assumed
$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, was given back 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 sales price was $25,000 in cash, with $15,000 paid
at closing and $10,000 paid in April and May 1997.

New York City 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 this facility for 50% value of subsequent
collections.

Pending Acquisition

<PAGE>

the greater New York metropolitan area. Collectively, the centers had revenues
of approximately $66 million and estimated earnings before interest, taxes,
depreciation and amortization of approximately $27 million in calendar year 1998
(subject to audit). The Company intends to finance the pending acquisition
through issuance of debt and equity securities of the Company, which, if
consummated, will result in a substantial change to the Company's current debt
and equity structure. There can be no assurance, however, that the Company will
successfully meet its obligations of raising capital to complete the acquisition
or that all the other conditions to the closing of the transaction will be met.

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 extensive and increasing
federal, state and local regulation. The Company is also subject to laws and
regulations relating to business corporations generally. The Company 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 the physical therapy care center 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

<PAGE>

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 the facility
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.

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 12.5%
of the net mining income from processing of the gold 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 the common stock of Aurum. At the time
of the return of the Accord stock, Accord had neither commenced nor anticipated
commencing mining operations, and the Company desired to take action to realize
the value of the gold ore. Due to (i) the absence of current financial and other
information for Accord, as to both the subsidiary and the underlying gold ore,
(ii) the Company's lack of resources to commence mining, and (iii) the Company's
inability to sell the ore, the Company wrote down its investment in the ore by
$3,000,000, based on its experience marketing the ore, as of May 31, 1998. The
Company intends to continue 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.

Employees

As of May 31, 1999, the Company had 7 full-time employees and no
part-time employees. The Company also hires independent consultants for its
medical service operations from time to time and at May 31, 1999, employed one
person under consulting arrangements.

<PAGE>

Item 2. Properties

The Company's headquarters office is temporarily located in one of the
MRI centers included in the pending acquisition, located at 2797 Ocean Parkway,
Brooklyn, New York 11235.

Set forth below is certain information concerning the Company's leased
facility for its rehabilitative and medical service operations, as of July 31,
1999. The Company believes the facility is adequate for its operations.

Square Monthly Expiration
Location Footage Rent of Lease
- - -------- ------- ---- --------

1725 Tenbroeck Avenue 2,200 $2,560 11/30/01
Bronx, New York

<PAGE>

Item 3. Legal Proceedings

The Company is not a party to any material litigation or other
proceedings that management believes would result in judgements that would have
a material adverse effect on the Company.

Item 4. Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Stockholders on July 21, 1999.
The matter submitted to a vote of the Company's stockholders was the election of
five directors of the Company's Board of Directors.

The Company's stockholders elected Messrs. Henry Dubbin, Fred L.
Singer, Jerry D. Klepner, Maxwell M. Rabb and Scott Rosenblum to the Company's
Board of Directors, to hold office until the next annual meeting of stockholders
and until their respective successors are duly elected and qualified. The
results of the voting were as follows:

Mr. Henry Dubbin

Voted For.................................................4,393,592
Voted Against ............................................ 0
Authority Withheld ....................................... 2,763
Abstained ................................................ 0
Broker non-votes ......................................... 0

Mr. Fred L. Singer

Voted For.................................................4,393,592
Voted Against ............................................. 0
Authority Withheld ........................................ 2,763
Abstained ................................................. 0
Broker non-votes .......................................... 0

Jerry D. Klepner

<PAGE>

Maxwell M. Rabb

Scott S. Rosenblum

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"). The following table sets forth, for the fiscal
quarters indicated, high and low closing 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 Quarter Ended May 31, 1998:
First Quarter............................. $2.125 $4.469
Second Quarter............................ 1.875 4.641
Third Quarter............................. 1.750 2.938
Fourth Quarter............................ 1.063 2.406

Fiscal Quarter Ended May 31, 1999:
First Quarter............................. $1.500 $2.750
Second Quarter............................ 1.000 2.750
Third Quarter............................. 2.310 5.880
Fourth Quarter............................ 3.130 5.060

As of August 31, 1999, there were approximately 140 holders of record
of the Company's

<PAGE>

Common Stock. The closing bid and asked prices for the Company's Common Stock on
August 31, 1999, was $2.69 and $2.94, 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 December 1996, the Company granted ten year options to acquire 375,000
shares of Common Stock to Burton Dubbin, the son of Mr. Henry Dubbin, in
exchange for consulting services. These options had an exercise price of $1.6875
per share and were to vest upon the earlier to occur of (i) the Company's
achievement of certain financial benchmarks, (ii) the five year anniversary of
the issuance of the options and Mr. Burton's being an employee with the Company
or (iii) a change of control (as defined). Mr. Burton Dubbin became an employee
of the Company in April 1997. 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 2007. In June 1998, the Company extended Mr. Burton
Dubbin's consulting agreement until August 31, 2002. In addition, the Company
granted Mr. Burton Dubbin options to purchase 500,000 shares of Common Stock at
an exercise price of $2.17 per share and were exercisable six months from date
of grant. As of May 31, 1999, an aggregate of 225,000 shares of Common Stock
have been issued to Mr. Burton Dubbin.

B. In August, 1998, the Company added three new members to the Board of
Directors: Mr. Scott Rosenblum, Mr. Jerry Klepner and Ambassador Maxwell Rabb.
The Company issued options to acquire 20,000 shares of Common Stock to each of
the three new members at an exercise price of $2.00 per share and were
exercisable 90 days from date of grant. As of May 31, 1999, no options have been
exercised by the three new members. The options expire on October 31, 2003.

C. On September 1, 1998, the Company employed Mr. Simon Boltuch as its Chief
Financial Officer for a three year term expiring on August 31, 2001. In
connection with his employment, the Company issued options to acquire 20,000
shares of Common Stock to Mr. Simon Boltuch at an exercise price of $2.00 per
share and were exercisable on the one year anniversary from date of grant. All
options will expire on the earlier of (i) 10 years from date of grant, (ii) 90
days after termination of employment for any reason other than cause, or (iii)
immediately upon termination of employment for cause.

D. In March, 1999, Mr. Fredrick Veit, counsel to the Company, exercised options
to acquire 15,000 shares of Common Stock at an exercise price of $1.69 per
share. As of May 31, 1999, Mr. Fredrick Veit has remaining options to acquire
2,500 shares of Common Stock which expire on December 1, 2001.

<PAGE>

E. 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. During fiscal year ended May 31, 1998, options for 110,250 shares, at
prices ranging from $2.00 to $3.00 per share, were exercised. During fiscal year
ended May 31, 1999, the Company extended the options to acquire 143,750 shares
and 75,000 shares an additional year in exchange for consulting services valued
at $10,000. As of May 31, 1999, the options have not been exercised.

F. During the fiscal year ended May 31, 1999, the Company issued 20,000 shares
of Common Stock to Bouchard, Friedlander & Maloneyhuss, in consideration of
legal services. These shares were valued at a price of $2.00 per share.

G. During the fiscal year ended May 31, 1999, the Company issued 28,708 shares
of Common Stock to Mr. William Kedersha in consideration of consulting services.
These shares were valued at a price of $2.00 per share.

H. During the fiscal year ended May 31, 1999, the Company issued 55,000 shares
of Common Stock to NFC Service LTD at a price of $1.43 per share, with net
proceeds to the Company of $78,650.

I. During the fiscal year ended May 31, 1999, the Company issued 100,000 shares
of Common Stock to NFC Service LTD as satisfaction for a loan he made to the
Company. These shares were valued at a price of $1.30 per share.

J. During the fiscal year ended May 31, 1999, the Company issued 26,242 shares
of Common Stock to Kramer Levin Naftalis & Frankel LLP, counsel of the Company,
in consideration of legal services. These shares were valued at an average price
of $3.80 per share.

K. In July 1998, the Company agreed to issue 400,000 shares of Common Stock in a
private placement to "accredited investors" at an offering price of $2.30 per
share, with net proceeds to the Company of $1.09 per share. Signature Equities
Agency, G.m.b.H served as placement agent in connection with the offering. The
Company subsequently amended the agreement by increasing the Common Stock issued
to 600,000 shares from 400,000 shares. The Company incurred expenses of $725,619
and received net proceeds of $654,380.

The issuance set forth above were issued pursuant to Section 4(2) of the
Securities Act of 1933,

<PAGE>

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.

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 currently operates one facility in
New York City.

In July 1998, the Company sold substantially all of the assets and
operations of its facilities located in Flushing and Upper Manhattan, New York,
due to insufficient cash flows from such facilities.

In November and December 1998, the Company sold all the assets of its
Lower Manhattan, New York physical therapy facility due to insufficient cash
flows from such facility.

<PAGE>

will successfully meet its obligations of raising capital to complete the
acquisition or that all the other conditions to the closing of the transaction
will be met.

Results of Operations

1999 Fiscal Year Compared to 1998 Fiscal Year

Patient revenues decreased by 66.8% from $2,258,186 to $750,690 in the
fiscal year ended May 31, 1999 ("Fiscal 1999") compared with the fiscal year
ended May 31, 1998 ("Fiscal 1998"). The decrease in revenues was primarily
attributable to the Company's sale of three physical care centers in New York
City.

Total expenses decreased by 43.3% to $4,146,787 for Fiscal 1999 from
$7,315,751 for Fiscal 1998, primarily attributable to the Company's sale of
three physical care centers in New York City resulting in $1,200,000 lower
expenses offset by $1,300,000 million in expenses attributable to the grant of
stock options during the Fiscal 1999 and the $3,000,000 write-down of the gold
ore that was taken in Fiscal 1998. Costs of patient services, selling, and
administrative expenses, consulting, depreciation and amortization and interest
expense (recurring operating expenses) decreased by 9.6% from $4,524,335 to
4,087,782. Costs of patient services, as a percentage of patient revenues,
increased from 52.1% in Fiscal 1998 to 74.7% in Fiscal 1999 primarily because of
gradual staffing adjustments relating to the sale of the three New York City
physical care centers. Selling, general and administrative expenses decreased
30.8% from $2,485,934 in Fiscal 1998 to $1,719,464 in Fiscal 1999, primarily due
to the sale of the three physical care centers in New York City and a
significant reduction in legal expenses due to large non recurring settlements
made in Fiscal 1998. Consulting expenses increased by 308.2% from $417,329 in
Fiscal 1998 to $1,703,455 in Fiscal 1999 due to recognition of expenses
attributable to stock options granted during Fiscal 1999. Interest expense
decreased 78.7% from $170,700 in Fiscal 1998 to $36,369 in Fiscal 1999 due to
the Company's decision in December 1998 to terminate its agreement with a
finance company to factor patient care receivables. During Fiscal 1998, the
Company recognized a gain in connection with the sale of the North Florida
facilities and the rescission of the Long Island, New York facilities, of
$208,584, while recognizing a loss of $59,005 in connection with the sale of
three physical care centers in New York City during Fiscal 1999. Total expenses
as a percentage of revenues increased to 552.4% for Fiscal 1999 from 324.0% for
Fiscal 1998 as a result of these factors.

Income taxes for Fiscal 1999 and 1998 are not representative of an
effective tax rate. For Fiscal 1999 and 1998, deferred income tax benefits have
been reduced by increases in the allowance for the realization of deferred
income tax assets of $1,044,760 and $2,000,000, respectively, because, as of
both May 31, 1999 and 1998, it was more likely than not that the deferred tax
assets would not be realized. The deferred tax assets result primarily from
impairment of the gold ore and net operating loss carryforwards and the Company
may not generate sufficient future taxable income for their utilization. As of
May 31, 1999 and 1998, net operating loss carryforwards of $5,077,000 and
$3,500,000, respectively, increased due to the increases in taxable losses for
each year.

The above factors contributed to a net loss of $3,396,097 ($.65 per
share) for Fiscal 1999 compared with a net loss of $5,057,565 ($1.49 per share)
for Fiscal 1998.

<PAGE>

1998 Fiscal Year Compared to 1997 Fiscal Year

Patient revenues decreased by 32.5% from $3,344,559 to $2,258,186 in
the fiscal year ended May 31, 1998 ("Fiscal 1998") compared with the fiscal year
ended May 31, 1997 ("Fiscal 1997"). The decrease in revenues was primarily
attributable to the sale of the Company's North Florida facilities in Fiscal
1997, offset in part by a full year of revenues from the Company's New York City
clinics acquired in Fiscal 1997. Revenues from the four Long Island, New York
clinics acquired in December 1996, whose purchase was rescinded by the Company
effective February 28, 1997, were not included in the Company's revenues for
Fiscal 1997.

Total expenses increased by 12.4% to $7,315,751 for Fiscal 1998 from
$6,510,448 for Fiscal 1997, primarily due to the $3,000,000 write-down of the
gold ore, from $4,994,213 to $1,994,213. On the other hand, costs of patient
services, selling, general and administrative expenses, consulting, depreciation
and amortization and interest expense (recurring operating expenses) decreased
by 21.1% from $5,733,391 to $4,524,335. Costs of patient services, as a
percentage of patient revenues, decreased from 56.1% in Fiscal 1997 to 52.1% in
Fiscal 1998 primarily because of a decrease in the provision for contractual
allowances. Selling, general and administrative expenses including consulting
expenses decreased 11.6% from $3,283,010 in Fiscal 1997 to $2,903,263 in Fiscal
1998, primarily due to decreases in the provision for bad debts, the
compensation of executive officers and the travel expenses of executives between
the Company's New York and Florida facilities in Fiscal 1998. The decrease was
partially offset by increased legal and accounting expenses during Fiscal 1998
due to the settlement of certain litigation matters and the preparation of
reports filed with the Securities and Exchange Commission. Interest expense
decreased 57.7% from $403,724 in Fiscal 1997 to $170,700 in Fiscal 1998 due to a
refinancing and lower interest rates. 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, while
recognizing a gain of $208,584 on similar items in Fiscal 1998. Total expenses
as a percentage of revenues increased to 324.0% for Fiscal 1998 from 194.7% for
Fiscal 1997 as a result of these factors and the decrease in revenues for these
periods.

Income taxes for Fiscal 1998 and 1997 are not representative of an
effective tax rate. For Fiscal 1998 and 1997, deferred income tax benefits have
been reduced by increases in the allowance for the realization of deferred
income tax assets of $2,000,000 and $610,000, respectively, because, as of both
May 31, 1998 and 1997, it was more likely than not that the deferred tax assets
would not be realized. The deferred tax assets result primarily from impairment
of the gold ore and net operating loss carryforwards and the Company may not
generate sufficient future taxable income for their utilization. As of May 31,
1998 and 1997, net operating loss carryforwards of $3,500,000 and $1,800,000,
respectively, increased due to the increases in taxable losses for each year.

The above factors contributed to a net loss of $5,057,565 ($1.49 per
share) for Fiscal 1998 compared with a net loss of $2,554,212 ($0.99 per share)
for Fiscal 1997.

<PAGE>

Liquidity and Capital Resources

In the past, 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 Fiscal 1998, the Company undertook a number of
actions to consolidate its geographic focus, and with other actions undertaken
during Fiscal 1999, the Company hopes 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 pending 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.

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. During Fiscal 1998, options
for 110,250 shares, at prices ranging from $2.00 to $3.00 per share, were
exercised. During Fiscal 1999, the Company extended the options to acquire
143,750 shares and 75,000 shares an additional year in exchange for consulting
services valued at $10,000. As of May 31, 1999, the options have not been
exercised.

<PAGE>

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. (See Item 1. Business. Investment in Gold Ore.) The ore was appraised as
having a value of $5,000,000. The Company subsequently formed a wholly-owned
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 12.5% 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.

The Company (i) has been unsuccessful in its attempts to sell the gold
ore and (ii) does not have the capability or the resources to commence the
mining of the gold ore. For these reasons, and due to the absence of current
financial and other information for Accord, the Company in Fiscal 1998 wrote
down the value of its investment in the gold ore by $3,000,000 (from $4,994,214
to $1,994,214). As of May 31, 1999, the Company intends to continue 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.

In July 1998, the Company agreed to issue 400,000 shares of Common
Stock in a private placement to "accredited investors" at an offering price of
$2.30 per share, with net proceeds to the Company of $1.09 per share. The
Company subsequently amended the agreement by increasing the Common Stock issued
to 600,000 shares from 400,000 shares. The Company incurred expenses of $725,619
and received net proceeds of $654,380.

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

<PAGE>

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. As of May 31, 1999, the Company has received $27,200 from the sale
of the receivables. The Company expects total future receipts to be less than
what has already been collected. Accordingly, the Company recorded a provision
for doubtful accounts of $300,000.

In September 1997, the Company entered into a letter of intent,
subsequently amended in December 1997, for the acquisition of the management and
assets of medical practices and MRI facilities located in the greater New York
metropolitan area. In May 1999, the Company entered into definitive written
agreements to complete the acquisition which as of May 31, 1999, included
approximately 37 medical practices and MRI facilities located in the greater New
York metropolitan area (See Item 1. Business. Pending Acquisition.)

As of May 31, 1999, negative working capital increased from $26,008 to
$638,692 primarily due to the Company's increase in the reserve of doubtful
accounts and increase in accrued professional fees from $642,000 to $1,314,238.
The additional reserve related primarily to the receivables of the three New
York City facilities sold during Fiscal 1999.

Year 2000

The Company has completed its assessment of whether it will have to
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company has implemented a plan and acquired and installed new computer hardware
and upgraded software in its facilities. The total year 2000 project cost is not
expected to be material. The Company believes that with the modifications to
existing software and conversions to new software the year 2000 issue will not
pose significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
year 2000 issue could have a material adverse effect on the operations of the
Company.

The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived using numerous assumptions of future events,
including the continued availability of certain resources and factors. However,
there can be no assurance that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.

It has been acknowledged by governmental authorities that year 2000
problems have the potential to disrupt global economies, that no business is
immune from the potentially far-reaching effects of year 2000 problems, and that
it is difficult to predict with certainty what will happen after December 31,
1999. Consequently, it is possible that year 2000 problems will have a material
effect on the Company's business even if the Company takes all appropriate
measures to ensure that it and its key suppliers are year 2000 compliant.

<PAGE>

Forward Looking Statements

This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Exchange Act, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. The
Company intends that all forward-looking statements be subject to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements reflect the Company's views as of the date they
are made with respect to future events and financial performance, but are
subject to many risks and uncertainties, which could cause the actual results of
the Company to differ materially from any future results expressed or implied by
such forward-looking statements. Additional information on factors that may
affect the business and financial results of the Company can be found in the
other filing of the Company with the Securities and Exchange Commission. The
Company does not undertake to update any forward-looking statements.

Item 7. Financial Statements

The financial statements and information required by Item 7 are
included in the Index shown at Item 13.

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

(a) Simon Krowitz Bolin & Associates, P.A. ("Simon Krowitz") served as
the independent auditors from January 4, 1996 to April 29, 1997 and as the
independent auditors of the Company for the fiscal year ended May 31, 1996.
Effective April 29, 1997, Simon Krowitz resigned as the Company's independent
auditors. The report of Simon Krowitz on the Company's financial statements for
the fiscal year ended May 31, 1996 contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principle. In connection with the audit of the Company's financial
statements for the fiscal year ended May 31, 1996 and through April 29, 1997,
there were no disagreements between the Company and Simon Krowitz on any matters
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.

(b) Effective June 6, 1997, the Company appointed Most Horowitz &
Company, LLP, as its independent auditors of the Company for the Fiscal Years
ended May 31, 1997 and May 31, 1998. On August 13, 1999, Most Horowitz resigned
as the Company's independent auditors. The report of Most Horowitz on the
Company's financial statements for the two most recent fiscal years did not
contain an adverse opinion or disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting principles. During the
Company's two most recent fiscal years and for the interim periods thereafter
there were no disagreements between the Company and Most Horowitz on any matter
of accounting principles or practices, financial statement disclosure, or
auditing or procedure, which disagreements, if not resolved to the satisfaction
of Most Horowitz, would have caused it to make reference to the subject matter
of the disagreement in connection with its reports. On August 16, 1999, the
Company's Board of Directors appointed Grant Thornton, LLP as the Company's
independent accountants for the fiscal year ended May 31, 1999.

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 August 31, 1999 were as follows:

Name Age Position
---- --- --------

Henry Dubbin 83 President and Director
Fred L. Singer 65 Vice President and Director
Maxwell M. Rabb 89 Director
Jerry D. Klepner 54 Director
Scott S. Rosenblum 50 Director
Simon Boltuch 51 Chief Financial Officer

<PAGE>

HENRY DUBBIN has served as President of the Company since April 1997
and a director of the Company since May 1993. Mr. Dubbin also served as Vice
Chairman of the Board of Directors and Vice President of the Company from May
1993 to April 1997. Mr. Dubbin currently is the President of Nevada Minerals
Corporation, a diversified company engaged in the mining business. From 1955 to
1992, Mr. Dubbin worked with Canaveral International, Inc., a diversified public
company, from which he retired as Chairman of the Board.

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.

SIMON BOLTUCH has served as Chief Financial Officer of the Company
since September 1998. Prior to joining the Company, Mr. Boltuch served as Chief
Financial Officer of News America In-Store from 1996 to 1998. Mr. Boltuch served
as Vice President of Taxation for News America Publishing, Inc. from 1992 to
1995. From 1980 to 1991, Mr. Boltuch served as Vice President Controller of News
America Publishing, Inc. Mr. Boltuch is a certified public accountant.

JERRY D. KLEPNER has served as a member of the Board of Directors since
October 1998 and has served as Managing Director at Black, Kelly, Scruggs &
Healey since February 1998. From June 1996 to February 1998, Mr. Klepner was a
Senior Vice President at Ketchum Public Relations, a public relations firm. From
January 1993 to June 1996, he served as Assistant Secretary for Legislation at
the U.S. Department of Health and Human Services under Secretary Donna Shalala
as an advocate before the U.S. Congress on health and human services
initiatives. He also served as Acting Chief of Staff and Transition Director for
Secretary of Labor Alexis Herman during the spring of 1997, and was a Senior
Advisor for Domestic Policy to the Clinton-Gore Transition Team from November
1992 to January 1993. From 1987 to 1992, Mr. Klepner was Director of Legislation
for the American Federation of State, County and Municipal Employees, a health
care and public sector union.

MAXWELL M. RABB has served as a member of the Board of Directors since
October 1998 and has served as of counsel to the law firm of Kramer Levin
Naftalis & Frankel LLP since 1991 and was a partner at Stroock & Stroock & Lavan
from 1958 to 1981 and 1989 to 1991. Ambassador Rabb served as the United States
Ambassador to Italy from 1981 to 1989. Ambassador Rabb is a member of the board
of directors of Sterling National Bank, MIC Industries, Inc., Data Systems and
Software, Inc. and Preferred Employers Holdings, Inc. Ambassador Rabb also
serves as a trustee or director of the Cardinals Cooke and O'Connor Inter City
Scholarship Fund, the Lighthouse, the Eisenhower Institute, the George Marshall
International Center and Seaman's Church Institute.

SCOTT S. ROSENBLUM has served as a member of the Board of Directors
since October 1998 and has been a partner of Kramer Levin Naftalis & Frankel LLP
since 1991 and its Managing Director since 1994. Mr. Rosenblum is a member of
the board of directors of several public companies, including Greg Manning
Auctions, Inc., a collectibles auction house, Temco Services Industries, Inc.,
an industrial maintenance company, and I.T. International Theatres, Ltd., a
leading motion picture distributor in Israel and central Europe.

Gary Danziger served as Chief Operating Officer and Vice President of
the Company from April 1997 to February 1998, and as a member of the Board of
Directors from July 1997 to February 1998.

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.

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

<PAGE>

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, 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: (a) Mr. Jerry Klepner,
Mr. Maxwell Rabb, and Mr. Scott Rosenblum did not file a Form 4 on a timely
basis to report stock options granted to them when they became Directors of the
Company; and (b) Mr. Simon Boltuch did not file a Form 4 on a timely basis to
report stock options granted to him when he became Chief Financial Officer of
the Company.

Item 10. Executive Compensation

Summary Compensation Table. The following table sets forth compensation
earned, whether paid or deferred, by the Company's Chief Executive Officer and
its other most highly compensated executive officers who earned over $100,000
during the fiscal year ended May 31, 1999 (collectively, the "named executive
officers") for services rendered in all capacities to the Company during the
fiscal years ended May 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>

=====================================================================================================================
SUMMARY COMPENSATION TABLE
- - ---------------------------------------------------------------------------------------------------------------------
Annual Long-Term Compensation
Compensation
-------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------
Name and Principal Position Fiscal Salary Other Annual Restricted Common Stock
Year Compensation Stock Award(s) Underlying
Options
<S> <C> <C> <C> <C> <C>
Henry Dubbin 1997 $15,414 -0- -0- -0-
President 1998 $32,000 -0- -0- -0-
1999 $48,000 -0- -0- -0-
- - ---------------------------------------------------------------------------------------------------------------------
Simon Boltuch (1) 1999 $143,249 -0- -0- 20,000
Chief Financial Officer
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) On September 1, 1998, the Company employed Mr. Simon Boltuch as its Chief
Financial Officer for a three

<PAGE>

year term expiring on August 31, 2001. In connection with his employment,
the Company issued options to acquire 20,000 shares of Common Stock to Mr.
Simon Boltuch at an exercise price of $2.00 per share and were exercisable
on the one year anniversary from date of grant. All options will expire on
the earlier of (i) 10 years from date of grant, (ii) 90 days after
termination of employment for any reason other than cause, or (iii)
immediately upon termination of employment for cause.

Option Grants. Other than to Simon Boltuch, as noted above, the Company
did not make any stock option grants to the named executive officers during the
last fiscal year.

Aggregated Option Exercises and Fiscal Year-End Option Values. The
following table sets forth certain information relating to the exercise of stock
options during the fiscal year ended May 31, 1999 for each of the named
executive officers and the fiscal year-end value of the unexercised options held
by the named executive officers.

<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS
VALUES
- - ----------------------------------------------------------------------------------------------------------------------
Value of Unexercised In-
Shares Acquired on Value # of Unexercised Options The-Money Options at Fiscal
Exercise Realized At Fiscal Year End Year End (1)
Name Exercisable Unexercisable Exercisable Unexercisble
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Henry Dubbin 0 $0 250,000 0 $312,500 $0
Fred L. Singer 0 0 15,000 0 $33,750 $0
Simon Boltuch 0 0 0 $25,000 $0
20,000
- - ----------------------------------------------------------------------------------------------------------------------
</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 29, 1999 as quoted on the over-the-counter market,
multiplied by the number of shares underlying the option.

Employment Agreements

The Company has an employment agreement with Henry Dubbin, as amended
September 1997, expiring on September 1, 1999 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. In January 1995, in consideration of past services, the Company granted
to Mr. Dubbin options to acquire 250,000 shares of Common Stock, exercisable at
$2.00 per share until January 1, 2000. Mr. Dubbin waived his salary for the 1995
and 1996 fiscal years.

Gary Danziger had a three-year employment agreement with the Company,
as amended in July 1997, expiring in October 1999 which provided 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%

<PAGE>

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.
In February 1998, Mr. Danziger resigned all positions with the Company and his
employment agreement was terminated, including his right to receive 50,000
shares of Common Stock (which was recorded as deferred compensation of $100,000)
and his options to acquire 350,000 shares of Common Stock in exchange for
$60,000 in cash. In addition, the Company forgave outstanding net loans to Mr.
Danziger in the amount of $34,924.

On September 1, 1998, the Company entered into an employment agreement
with Mr. Simon Boltuch as its Chief Financial Officer for a three year term
expiring on August 31, 2001 and providing for a salary of $175,000 per year. In
connection with his employment, the Company issued options to acquire 20,000
shares of Common Stock to Mr. Simon Boltuch at an exercise price of $2.00 per
share and were exercisable on the one year anniversary from date of grant. All
options will expire on the earlier of (i) 10 years from date of grant, (ii) 90
days after termination of employment for any reason other than cause, or (iii)
immediately upon termination of employment for cause.

<PAGE>

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,
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 August 31, 1999, no options under the 1994 Plan were outstanding.

Non-Plan Options

As of August 31, 1999, the Company had outstanding non-plan options to
purchase an aggregate of 1,296,250 shares of Common Stock. The outstanding
options granted to the named executive officers are as set forth below.

Number of
Name Option Shares Exercise Price Expiration Date
- - ---- ------------- -------------- ---------------

Henry Dubbin 250,000 $2.00 January 1, 2003
Fred L. Singer 10,000 $1.00 April 16, 2000
Simon Boltuch 20,000 $2.00 August 31, 2001

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

<PAGE>

The following table sets forth certain information as of August 31,
1999 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 named executive officer, and (iv) all directors 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 beneficial owners have sole voting and dispositive power
with respect to the shares beneficially owned.

Common Stock
Beneficially Owned(1)
Name of Beneficial Owner Shares Percent
- - ------------------------ ------ -------

Burton Dubbin 721,500(2) 11.2%
5189 Alton Rd.
Miami Beach, FL 33140

Henry Dubbin 772,875(3) 12.5%
10155 Collins Avenue, Suite 607
Bal Harbor, FL 33154

Simon Boltuch 20,000(4) 0
c/o Oak Tree Medical Systems, Inc.
2797 Ocean Parkway
Brooklyn, New York 11235

Fred L. Singer 15,000(4) *
9240 West Bay Harbor Dr., Apt. 3-C
Bal Harbor Island, FL 33154

Jerry D. Klepner 20,000(4) *
c/o Black Kelley Scruggs & Healey
1801 K Street, N.W. Suite 201L
Washington, D.C. 20006

Maxwell M. Rabb 20,000(4)(5) *
c/o Kramer Levin Naftail & Frankel LLP
919 Third Avenue
New York, NY 10022

Scott S. Rosenblum 20,000(4)(5) *
c/o Kramer Levin Naftail & Frankel LLP
919 Third Avenue
New York, NY 10022

Signature Equities Agency GMBH 598,000 10.1%
100 Bush Street
San Francisco, CA 94101

All directors and executive officers
As a group (6 persons) 867,875(6) 23.4%

- - --------------------------

* Less than one percent

(1) Based on 5,936,022 shares of Common Stock outstanding as of August 31,
1999. Pursuant to the rules of the Securities and Exchange Commission
(the

<PAGE>

"Commission"), certain shares of Common Stock which a person has the
right to acquire within 60 days of August 31, 1999 pursuant to the
exercise of stack options are deemed to be outstanding for the purpose
of computing the percentage ownership of such person but are not deemed
outstanding for the purpose of computing the percentage ownership of
any other person.
(2) Includes (i) 21,500 shares of Common Stock subject to currently
exercisable options, (ii) 500,000 shares subject to currently
exercisable options held in the name of Progressive Planning
Associates, Inc., (iii) 150,000 shares held directly and (iv) 50,000
shares held indirectly.
(3) Includes (i) 522,875 shares of Common Stock that Mr. Dubbin
beneficially owns through Nevada Mineral Corporation of which he is the
majority stockholder and president, and (ii) 250,000 shares of Common
Stock subject to currently exercisable options.
(4) Represents shares of Common Stock subject to currently exercisable
options.
(5) Mr. Rabb is of counsel to and Mr. Rosenblum is a partner at the law
firm of Kramer Levin Naftalis & Frankel LLP ("Kramer Levin"). While the
reporting person owns directly no securities of the Company, Kramer
Levin owns securities of the Company. Messrs. Rabb and Rosenblum
disclaim beneficial ownership of the securities held by Kramer Levin,
except to the extent of his pecuniary interest therein, if any.
(6) Includes 866,500 shares subject to presently exercisable options.

Change in Control

In September 1997, the Company entered into a letter of intent,
subsequently amended in December 1997, for the acquisition of the management and
certain assets of medical practices and MRI facilities located in the greater
New York metropolitan area. In July 1999, the Company entered into definitive
written agreements to complete the acquisition which as of May 31, 1999,
included approximately 37 medical practices and MRI facilities located in the
greater New York metropolitan area. Collectively, the centers had revenues of
approximately $66 million and estimated earnings before interest, taxes,
depreciation and amortization of approximately $27 million in calendar year 1998
(subject to audit). The Company intends to finance the pending acquisition
through issuance of debt and equity securities of the Company, which, if
consummated, will result in a substantial change to the Company's current debt
and equity structure. There can be no assurance, however, that the Company will
successfully meet its obligations of raising capital to complete the acquisition
or that all the other conditions to the closing of the transaction will be met.

Item 12. Certain Relationships and Related Transactions

On May 28, 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
restricted Common Stock. The gold ore was appraised as having a $5,000,000
value. On June 28, 1994, the Company formed a wholly owned subsidiary, Aurum
Mining Corporation, with the gold ore as its only asset. On June 21, 1995, an
agreement was signed between the Company and Accord whereby 100% of the stock of
Aurum was exchanged for 6,000,000 shares of common stock of Accord. Accord was
to pay the Company a royalty equal to 12.5% of the net mining income for the
productive life of the property. On November 15, 1997, the Company returned the
6,000,000 shares of common stock of Accord in exchange for 100% of the common
stock of Aurum.

In November 1996, Mr. Fred L. Singer produced a marketing video for the
Company and received $25,000 in compensation.

In December 1996, the Company granted ten year options to acquire
375,000 shares of Common Stock to Burton Dubbin, the son of Mr. Henry Dubbin, in
exchange for consulting services. These options had an exercise price of $1.6875
per share and were to vest upon the earlier to occur of (i) the Company's
achievement of certain financial benchmarks, (ii) the five

<PAGE>

year anniversary of the issuance of the options and Mr. Burton's being an
employee with the Company or (iii) a change of control (as defined). Mr. Burton
Dubbin became an employee of the Company in April 1997. 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 2007. In June
1998, the Company extended Mr. Burton Dubbin's consulting agreement until August
31, 2002. In addition, the Company granted Mr. Burton Dubbin options to purchase
500,000 shares of Common Stock at an exercise price of $2.17 per share and were
exercisable six months from date of grant. .

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

Independent Auditor's Report consolidated financial
statements for the years ended May 31, 1999 and 1998..............F-1

Consolidated Balance Sheet as of May 31, 1999 and 1998............F-2

Consolidated Statement of Operations for the years ended
May 31, 1999 and 1998 ............................................F-4

Consolidated Statement of Stockholders' Equity for the
years ended May 31, 1999 and 1998 ................................F-5

Consolidated Statement of Cash Flows for the years ended
May 31, 1999 and 1998.............................................F-6

Notes to Consolidated Financial Statements........................F-8

(b) Reports on Form 8-K.

None.

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.

<PAGE>

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 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-Q for the fiscal quarter
ended August 31, 1996.

4.3 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-Q for the fiscal quarter
ended August 31, 1996.

4.4 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-Q for the fiscal quarter
ended August 31, 1996.

4.5 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-Q for the
fiscal quarter ended August 31, 1996.

4.6 Purchase Agreement, dated July 23, 1997, between Oak Tree Medical
Practice, P.C. and PFS VI, Inc. Incorporated by reference from Exhibit
4.7 of the Annual Report on form 10-KSB for the fiscal year ended May
31, 1997 (the "1997 Form 10-KSB").

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. Henry Dubbin. Incorporated by
reference from Form 10-KSB for the Fiscal Year Ended May 31, 1994.

10.3 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-Q filed for the fiscal quarter ended August 31, 1996.

10.4 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-Q filed for the fiscal quarter
ended August 31, 1996.

10.5 Agreement of Sale, dated October 1, 1996, among Oak Tree Medical
Management, Inc. Gary Danziger and PTSR, Inc. Incorporated by
reference from Form 10-Q filed for

<PAGE>

the fiscal quarter ended August 31, 1996.

10.6 Employment Agreement, dated as of October 1, 1996, between New Medical
Practice, P.C. and Gary Danziger. Incorporated by reference from
Exhibit 10.12 of the 1997 Form 10-KSB.

10.7 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.

10.8 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.

10.9 Consulting Agreement, dated as of August 29, 1997, between Registrant
and Burton Dubbin. Incorporated by reference from Exhibit 10.18 of the
1997 Form 10-KSB.

10.10 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.

10.11 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.

10.12 Agreement of Sale, dated July 16, 1997, between Oak Tree Medical
Practice, P.C. and Peter B. Saadeh, M.D. Incorporated by reference
from Exhibit 10.17 of the 1997 Form 10-KSB.

10.13 Agreement of Sale, dated July 16, 1998, among Oak Tree Medical
Management, Inc., Oak Tree Medical Practice, P.C. and Nesconset
Sports, Inc.

10.14 Agreement of Sale, dated November 2, 1998, between Rehabilitation
Medicine Practice of N.Y., P.L.L.C. and Oak Tree Medical Management,
Inc.

10.15 Agreement of Sale, dated November 2, 1998, between Rehabilitation
Medicine Practice of N.Y., P.L.L.C. and Oak Tree Medical Practice,
P.C.

10.16 Agreement of Sale, dated December 23, 1998, between Oak Tree Medical
Practice, P.C. and Rehabilitation Medicine Practice of N.Y., P.L.L.C.

10.17 Acknowledgment Letter from Most Horowitz & Company, LLP to the
Company, dated August 13, 1999, regarding its resignation as the
Company's independent accountants.

21 Subsidiaries:

<PAGE>

Acorn CORF, Inc. Florida
Acorn CORF, Inc. Nevada
Aurum Mining Corporation Nevada
Oak Tree Financial Services, Inc. Florida
Oak Tree Medical Management, Inc. New York
Riverside CORF, Inc. Florida

27 Financial Data Schedule.

<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 report to be signed on
its behalf by the undersigned thereunto duly authorized.

Dated: September 13, 1999 OAK TREE MEDICAL SYSTEMS, INC.

By: /s/ HENRY DUBBIN
-------------------------
Henry Dubbin, President

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Name Title Date
- - ---- ----- ----

/s/ HENRY DUBBIN President and Director September 13, 1999
- - ------------------------
Henry Dubbin

/s/ SIMON BOLTUCH Chief Financial Officer September 13, 1999
- - ------------------------ (Principal Financial and
Simon Boltuch accounting Officer)

/s/ FRED L. SINGER Vice President and September 13, 1999
________________________ Director
Fred L. Singer

________________________ Director
Jerry D. Klepner

________________________ Director
Maxwell M. Rabb

/s/ SCOTT S. ROSENBLUM Director September 13, 1999
________________________
Scott S. Rosenblum

<PAGE>

I N D E X

Page
----

Report of Independent Certified Public Accountants F-2

Independent Auditors' Report F-3

Consolidated Financial Statements

Consolidated Balance Sheets F-4 - F-5

Consolidated Statements of Operations F-6

Consolidated Statement of Stockholders' Equity F-7

Consolidated Statements of Cash Flows F-8 - F-9

Notes to Consolidated Financial Statements F-10 - F-25

F-1
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Oak Tree Medical Systems, Inc.

We have audited the accompanying consolidated balance sheet of Oak Tree Medical
Systems, Inc. and Subsidiaries as of May 31, 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years 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, 1999, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.

/S/ GRANT THORNTON LLP

New York, New York
September 3, 1999

F-2
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors
Oak Tree Medical Systems, Inc.

We have audited the accompanying consolidated balance sheet of Oak Tree Medical
Systems, Inc. and Subsidiaries as of May 31, 1998, 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.

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, 1998, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended in conformity with generally accepted accounting principles.

/S/ MOST HOROWITZ & COMPANY, LLP

New York, New York
August 7, 1998

F-3
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

CONSOLIDATED BALANCE SHEETS

May 31,

ASSETS 1999 1998
---------- ----------

CURRENT ASSETS
Cash $ 121,477 $ 455,391
Patient care receivables (net of allowances of
$1,314,238 and $642,000, respectively) 100,000 788,121
Other current assets 3,894 107,403
---------- ----------

Total current assets 225,371 1,350,915

INVESTMENT IN GOLD ORE 1,994,214 1,994,214

FIXED ASSETS 10,826 502,339

DEFERRED ACQUISITION COSTS 162,450 98,804

OTHER ASSETS 97,740

GOODWILL 226,888
---------- ----------
$2,392,861 $4,270,900
========== ==========

The accompanying notes are an integral part of these statements.

F-4
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

CONSOLIDATED BALANCE SHEETS (CONTINUED)

May 31,

<TABLE>
<CAPTION>
1999 1998
------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 864,063 $ 844,726
Notes payable -- 334,769
Current portion of capitalized lease obligations -- 130,572
Current portion of long-term debt -- 66,856
------------ ------------

Total current liabilities 864,063 1,376,923

LONG-TERM DEBT -- 208,201

CAPITALIZED LEASE OBLIGATIONS -- 458,414

ACCOUNTS PAYABLE -- 61,551

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized,
25,000,000 shares; issued and
outstanding, 5,602,703 and 4,657,753 shares,
respectively 56,026 46,577
Additional paid-in capital 14,653,072 12,140,841
Deficit (13,180,300) (9,784,203)
Less prepaid consulting and stock
subscription receivable -- (237,404)
------------ ------------

1,528,798 2,165,811
------------ ------------

$ 2,392,861 $ 4,270,900
============ ============

</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

Year ended May 31,

1999 1998
----------- -----------

Revenue
Patient services $750,690 $2,258,186

Expenses
Costs of patient services 561,025 1,177,005
Selling, general and administrative 1,721,583 2,485,934
Consulting services 1,703,455 417,329
Depreciation and amortization 65,350 273,367
Interest - net 36,369 170,700
Write-down of investment in gold ore -- 3,000,000
Loss (gain) on sales of facilities 59,005 (208,584)
----------- -----------

Total expenses 4,146,787 7,315,751
----------- -----------

NET LOSS $(3,396,097) $(5,057,565)
=========== ===========

Net loss per common share - basic and diluted $(.65) $(1.49)
==== =====

Weighted-average number of common
shares outstanding - basic and diluted 5,209,013 3,389,574
=========== ===========

The accompanying notes are an integral part of these statements.

F-6
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

Years ended May 31, 1999 and 1998

Prepaid
consulting
Common stock Additional and stock Total
---------------------- paid-in subscription stockholders'
Shares Amount capital Deficit receivable equity
------ ------ ------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 1, 1997 2,888,144 $ 28,881 $ 9,772,472 $ (4,726,638) $(181,389) $4,893,326

Sales of common stock (net of expenses of 1,500,000 15,000 1,708,157 1,723,157
$1,600,868)
Issuance of shares for services 154,359 1,544 394,364 (339,844) 56,064
Exercises of options 115,250 1,152 265,848 267,000
Amortization of prepaid consulting 283,829 283,829
Net loss (5,057,565) (5,057,565)
---------- ----------- ----------- ------------ --------- ----------

Balance at May 31, 1998 4,657,753 46,577 12,140,841 (9,784,203) (237,404) 2,165,811
---------- ----------- ----------- ------------ --------- ----------

Sales of common stock (net of expenses of 655,000 6,550 726,348 732,898
$ 725,619)
Issuance of shares for services 74,950 749 163,783 164,532
Issuance of shares for payoff of loan payable 100,000 1,000 129,000 130,000
Exercises of options 115,000 1,150 193,100 194,250
Amortization of prepaid consulting 237,404 237,404
Issuance of stock options to
consultants 1,300,000 1,300,000
Net loss (3,396,097) (3,396,097)
---------- ----------- ----------- ------------ --------- ----------

Balance at May 31, 1999 5,602,703 $ 56,026 $14,653,072 $(13,180,300) $ -- $1,528,798
========== =========== =========== ============ ========= ==========
</TABLE>

The accompanying notes are an integral part of this statement.

F-7
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended May 31,

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(3,396,097) $(5,057,565)
Adjustments to reconcile net loss to net cash
used in operating activities
Write-down of investment in gold ore -- 3,000,000
Depreciation and amortization 65,350 560,397
Bad debts 223,108 65,935
Stock options issued for services 1,831,936 56,064
Loss (gains) on sales of facilities 59,005 (208,584)
Gain on termination of employment agreement -- (5,076)
Increase (decrease) in cash from
Patient care receivables 165,121 17,150
Other current assets 103,509 (705)
Other assets 97,740 (5,260)
Accounts payable and accrued expenses 19,337 20,371
Other liabilities (61,551) --
Deferred compensation -- (60,000)
----------- -----------

Net cash used in operating activities (892,542) (1,617,273)

Cash flows from investing activities
Proceeds from sale of facilities 625,000
Collections of note receivable 325,000
Proceeds from sales of fixed assets 171,335
Acquisition (100,000)
Costs of proposed acquisition (63,646) (98,804)
Purchases of fixed assets -- (50,824)
----------- -----------

Net cash provided by (used in)
investing activities 561,354 246,707
----------- -----------
</TABLE>

F-8
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Year ended May 31,

<TABLE>
<CAPTION>
1999 1998
--------- -----------
<S> <C> <C>
Cash flows from financing activities
Proceeds from issuance of common stock, net $ 927,148 $ 1,990,157
Proceeds of notes payable -- 334,769
Payments of long-term debt (200,000) (319,388)
Payment of note payable (334,769) (197,305)
Payments of capitalized lease obligations (395,096) (108,195)
--------- -----------

Net cash (used in) provided by financing activities (2,717) 1,700,038
--------- -----------

NET (DECREASE) INCREASE IN CASH (333,914) 329,472

Cash at beginning of year 455,391 125,919
--------- -----------

Cash at end of year $ 121,477 $ 455,391
========= ===========

Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 36,639 $ 202,288
========= ===========

Summary of noncash item:
Capitalized lease obligations $ -- $ 190,610
========= ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-9
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

May 31, 1999 and 1998

NOTE A - BACKGROUND OF THE COMPANY

Oak Tree Medical Systems, Inc. (the "Company), a Delaware corporation, 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. As of May 31, 1999, the
Company, through its subsidiary, Oak Tree Medical Management Inc., operates
one New York City-based physical therapy care center.

Liquidity

The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate continuation of
the Company as a going concern. The Company has incurred substantial losses
in 1999 and 1998, used cash from operating activities in 1999 and 1998, and
has negative working capital at May 31, 1999.

In the past, the Company has funded its capital requirements from operating
cash flow loans against its accounts receivables, sales of equity
securities and the issuance of equity securities in exchange for assets
acquired and services rendered. During fiscal 1998, the Company undertook a
number of actions to consolidate its geographic focus, and with other
actions undertaken during fiscal 1999, the Company hopes 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
pending acquisitions. Although the Company has in the past been and
continues to be in discussions the 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's President has agreed to
personally support the Company's cash requirements to meet its current
obligations through May 31, 2000 and fund future operations. The Company
believes that its ability to raise private equity and support from the
Company's President will provide sufficient liquidity to fund current
operations.

F-10
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

May 31, 1999 and 1998

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Basis of Presentation

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.

2. Revenue Recognition

Patient service revenue is reported at the estimated net realizable
amounts from patients, third-party payers and others for services
rendered, on a service date basis.

3. Use of Estimates

In preparing financial statements in conformity with generally accepted
accounting principles, management is required 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
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.

4. Fixed Assets

Physical therapy equipment and office equipment and furniture are
stated at cost and are being depreciated on the straight-line method
over the estimated useful lives of the assets of five years. Leasehold
improvements are stated at cost and are being amortized over the terms
of the leases or the estimated useful lives of the assets of seven
years, whichever is less.

5. Deferred Acquisition Costs

Deferred acquisition costs incurred in connection with the Company's
comtemplated acquisitions of ten medical practice management companies
amounted to approximately $63,646 and $98,804 for the years ended May
31, 1999 and 1998, respectively.

F-11
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

May 31, 1999 and 1998

NOTE B (continued)

6. Income Taxes

Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the years in which those
temporary differences are expected to be recovered or settled. A
valuation allowance has been established to reduce deferred tax assets
as it is more likely than not that such deferred tax assets will not be
realized. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.

7. Net Loss Per Share

Net loss per common share is based on the weighted-average number of
common shares outstanding during the periods.

Basic earnings per share exclude dilution and are computed by dividing
income (loss) available to common shareholders by the weighted-average
common shares outstanding for the period. Diluted earnings per share
reflect the weighted-average common shares outstanding plus the
potential dilutive effect of securities or contracts which are
convertible to common shares, such as options, warrants, and
convertible preferred stock.

Options to purchase shares of common stock of 1,401,250 and 936,250
remain outstanding at May 31, 1999 and 1998, respectively, but were not
included in the computation of diluted EPS because to do so would have
been antidilutive for the periods presented.

8. Impairment of Long-Lived Assets

The Company reviews long-lived assets and certain identifiable
intangibles held and used for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company has determined that no additional
provision is necessary for the impairment of long-lived assets at May
31, 1999.

F-12
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

May 31, 1999 and 1998

NOTE B (continued)

9. Certain Reclassifications

Certain reclassifications have been made to prior year's financial
statements in order to conform to the May 31, 1999 presentation.

NOTE C - ACQUISITION

On July 16, 1997, the Company acquired a physical therapy care center in
New York City for a purchase price of $400,000, payable $100,000 in cash,
which was paid at closing, and a note payable in the amount of $300,000. In
addition, the seller, a physician, entered into a noncompete agreement for
four years. Furthermore, since the acquired physical therapy care center
did not achieve certain billings, the purchase price was reduced by
$100,000.

In connection with the acquisition, the Company entered into a: (1) lease
for a facility, (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 $50,000 per annum.

The results of operations of the acquired physical therapy care center have
been included in the consolidated statement of operations from July 16,
1997, the date of the acquisition. The acquisition was recorded on the
purchase method and the total purchase price was allocated to the fair
values of the assets acquired and the excess to goodwill, as follows:

Physical therapy equipment $171,335
Office furniture and equipment 3,665
Covenant not-to-compete 25,000
Goodwill 200,000
-------

$400,000
========

F-13
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

May 31, 1999 and 1998

NOTE D - SALES OF NEW YORK CITY 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 $193,890. 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 "loss on sale of facilities."

A summary of the aggregate loss on the sales of the New York City centers
is as follows:

Proceeds $ 625,000
Expenses related to sales (6,855)
Assumption of capitalized leases 193,890
Costs of assets sold (428,331)
Provision for doubtful accounts (300,000)
Write-off of goodwill (142,709)
--------

Loss on sales of facilities $ (59,005)
=========

NOTE E - COMMON STOCK

1. Issuance of Common Stock

Through May 31, 1999 and 1998, the Company issued an aggregate of
46,242 and 6,359 shares, respectively, of common stock in exchange for
legal services. The shares were valued at an average price of $3.02 and
$2.50, per share, respectively.

F-14
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

May 31, 1999 and 1998

NOTE E (continued)

During the fiscal year ended May 31, 1999, the Company issued 28,708
shares of Common Stock to Mr. William Kedersha in consideration of
consulting services. These shares were valued at a price of $2.00 per
share.

During the fiscal year ended May 31, 1999, the Company issued 55,000
shares of Common Stock to NFC Service LTD at a price of $1.43 per
share.

During the fiscal year ended May 31, 1999, the Company issued 100,000
shares of Common Stock to NFC Service LTD as satisfaction for a loan
made to the Company. These shares were valued at a price of $1.30 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.

On January 29, 1998, the Company completed an off-shore offering for
the sale of 1,500,000 shares of common stock for an aggregate purchase
price of approximately $3,324,025 and incurred expenses of $1,600,868
in connection with the offering.

In July 1998, the Company agreed to issue 400,000 shares of Common
Stock in a private placement to "accredited investors" at an offering
price of $2.30 per share, with net proceeds to the Company of $1.09 per
share. Signature Equities Agency, G.m.b.H., served as placement agent
in connection with the offering. The Company subsequently amended the
agreement by increasing the Common Stock issued to 600,000 shares from
400,000 shares. The Company incurred expenses of $725,619 and received
net proceeds of $654,380.

2. 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, in exchange 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.

F-15
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

May 31, 1999 and 1998

NOTE E (continued)

The options are exercisable at $2 to $5, per share, through December
31, 1997, as extended. The shares were recorded at $.75 to $1.69, per
share. The aggregate consulting fees of $170,750 have been capitalized
and are being amortized over the terms of the agreements.

During the year ended May 31, 1998, options for 110,250 shares of
common stock were exercised at prices ranging from $2 to $3, per share,
and options to acquire 143,750 and 75,000 shares were extended to
December 31, 1998 and February 29, 1999, respectively, in exchange for
consulting services valued at $10,000.

During the year ended May 31, 1999, the Company extended the expiration
dates of 218,750 options issued in a prior year to consultants. The
Company recorded consulting expense relating to such extension totaling
approximately $82,000. 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 2007. In June 1998, the Company extended Mr.
Burton Dubbin's consulting agreement until August 31, 2002. In
addition, the Company granted Mr. Burton Dubbin options to purchase
500,000 shares of Common Stock at an exercise price of $2.17 per share
and were exercisable six months from date of grant. The Company
recorded consulting expenses in 1999 of approximately $925,000 relating
to these options. During the fiscal year ended May 31, 1999, Mr. Burton
Dubbin exercised options to acquire 100,000 shares of Common Stock.

3. Options

In August, 1998, the Company added three new members to the Board of
Directors: Mr. Scott Rosenblum, Mr. Jerry Klepner and Ambassador
Maxwell Rabb. The Company issued options to acquire 20,000 shares of
Common Stock to each of the three new members at an exercise price of
$2.00 per share and were exercisable 90 days from date of grant. The
options expire on October 31, 2003.

F-16
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

May 31, 1999 and 1998

NOTE E (continued)

3. Options

On September 1, 1998, the Company employed Mr. Simon Boltuch as its
Chief Financial Officer for a three-year term commencing as of August
31, 1998, and expiring on August 31, 2001. The Company issued options
to acquire 20,000 shares of Common Stock to Mr. Simon Boltuch at an
exercise price of $2.00 per share and will vest and become exercisable
on the one-year anniversary from date of grant.

In March, 1999, Mr. Fredrick Veit, counsel to the Company, exercised
options to acquire 15,000 shares of Common Stock. As of May 31, 1999,
Mr. Fredrick Veit has remaining options to acquire 2,500 shares of
Common Stock which expire on December 1, 2001.

For the years ended May 31, 1999 and 1998, a summary of the status of
stock options was as follows:

<TABLE>
<CAPTION>
1999 1998
------------------------------- -----------------------------
Weighted- Weighted-
Number average Number average
of exercise Of exercise
shares price shares price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding - beginning of year 936,250 $2.30 1,542,500 $2.24

Granted 580,000 2.15 60,000 1.59
Exercised (115,000) 1.69 (115,250) 2.32
Forfeited -- (350,000) 1.00
Expired -- (201,000) 3.84
--------- ----------

Outstanding - end of year 1,401,250 $2.29 936,250 $2.30
========= ==========
</TABLE>

As of May 31, 1999, options to purchase 1,381,250 shares of common stock
were exercisable, with a weighted-average exercise price of $2.29, per
share. As of May 31, 1998, all options were exercisable.

F-17
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

May 31, 1999 and 1998

NOTE E (continued)

The following table summarizes option data as of May 31, 1999:

<TABLE>
<CAPTION>
Weighted-
average Weighted- Weighted-
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price Exercisable price
------ ----------- ---- ----- ----------- -----

Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," establishes financial accounting
and reporting standards for stock-based employee compensation plans. The
financial accounting standards of SFAS No. 123 permit companies to either
continue accounting for stock-based compensation under existing rules or
adopt SFAS No. 123 and reflect the fair value of stock options and other
forms of stock-based compensation in the results of operations as
additional expense. The disclosure requirements of SFAS No. 123 require
companies which elect not to record the fair value in the statement of
operations to provide pro forma disclosures of net income and earnings per
share in the notes to the financial statements as if the fair value of
stock-based compensation had been recorded.

The Company follows Accounting Principles Board Opinion No. 25 and its
related interpretations in accounting for its stock-based compensation
plan.

The Company utilized the Black-Scholes option pricing model to quantify the
expense of options issued to nonemployees and the pro forma effects on net
loss and net loss per share for the value of the options granted to
employees during the fiscal year ended May 31, 1999.

The following assumptions were made in estimating fair value:

Risk-free interest rate 6%
Expected volatility 50%
Expected option life 10 years

F-18
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

May 31, 1999 and 1998

NOTE E (continued)

Had compensation cost been determined under SFAS No. 123 for the year ended
May 31, 1999, net loss and net loss per share would have been increased as
follows:

Net loss
As reported $(3,396,097)
Pro forma for stock options $(3,483,097
Net loss per share
As reported $(.65)
Pro forma for stock options $(.67)

4. Stock Option Plan

The Company has a Performance Equity Plan (the "Plan") under which it
may grant incentive and nonqualified 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 as of the date of the grant. Through May
31, 1999, the Company had not granted any options under the Plan.

5. Reserved Shares

As of May 31, 1999, the Company has reserved the following shares of
common stock:

Options 1,401,250
Plan 600,000

2,001,250

NOTE F - PATIENT CARE RECEIVABLES

In September 1997, the Company entered into a financing agreement to borrow
on all existing and future patient care receivables for a period of two
years. Under the agreement, the Company may borrow up to 75% of under 180
day, eligible patient care receivables, as defined. Upon each advance, the
Company will pay a discount equal to 5% above the prime rate, per annum,
subject to adjustment, and, at the initial closing, paid an origination fee
of $17,457. The Company is required to assign substantially all patient
care receivables to the finance company. As of May 31, 1998, the interest
rate was 13%, per annum. In December 1998, the Company terminated the
financing agreement.

F-19
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

May 31, 1999 and 1998

NOTE G - INVESTMENT IN GOLD ORE

As of May 31, 1999 and 1998, investment in gold ore is as follows:

Investment in gold ore $ 4,994,214
Allowance for impairment (3,000,000)
------------
$ 1,994,214
============

As of May 31, 1998, the Company unsuccessfully attempted to sell its
investment in gold ore and did not have the resources to commence mining
operations. The Company's focus is in medical and related areas; and,
therefore, the Company provided a write-down for impairment of the
investment in the amount of $3,000,000.
At May 31, 1999, there is no change in the status of the gold ore.

NOTE H - FIXED ASSETS

As of May 31, 1999 and 1998, fixed assets consisted of the following:

1999 1998
-------- -----

Physical therapy equipment $687,366
Office equipment and furniture $28,727 56,509
Leasehold improvements 40,919
-------- --------

28,727 784,794

Less accumulated depreciation
And amortization 17,901 282,455
------ -------

$10,826 $502,339
====== =======

As of May 31, 1999 and 1998, fixed assets included capitalized lease assets of
$0 and $705,243, respectively.

For the years ended May 31, 1999 and 1998, depreciation expense was $64,154 and
$257,903, respectively.

F-20
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

May 31, 1999 and 1998

NOTE I - LONG-TERM DEBT

There is no long-term debt as of May 31, 1999. As of May 31, 1998,
long-term debt consisted of the following:

1998
----

Note payable in equal quarterly
Installments of $18,348,
Including interest at 8%,
Per annum (a) $275,057

Less current portion 66,856
--------
$208,201
========

(a) Collateralized by all the assets acquired.

NOTE J - CAPITALIZED LEASE OBLIGATIONS

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 value of the assets. The implicit interest rates on the capital
leases were approximately 11% to 17%, per annum.

The Company paid off or assigned all outstanding leases in connection with
the sale of certain physical therapy care centers during fiscal 1999 (see
Note D). Accordingly, the Company has no lease obligations as of May 31,
1999.

F-21
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

May 31, 1999 and 1998

NOTE K - INCOME TAXES

For the years ended May 31, 1999 and 1998, the tax effects of timing
differences which gave rise to deferred income taxes were as follows:

1999 1998
----------- -----------
Allowance for impairment
of gold ore $ 1,324,000
Net operating loss
carryforwards $ 708,573 776,000
Cash basis 336,187 (100,000)
Less valuation allowance (1,044,760) (2,000,000)
----------- -----------

$ -- $ --
=========== ===========

As of May 31, 1999 and 1998, the tax effects of the components of deferred
income tax payable were as follows:

1999 1998
---------- ----------

Allowance for impairment
of gold ore $ 1,324,000 $ 1,324,000
Net operating loss
carryforwards 2,084,573 1,376,000
Cash basis 336,187
Less valuation allowance (3,744,760) (2,700,000)
---------- ----------

$ -- $ --
=========== ===========

F-22
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

May 31, 1999 and 1998

NOTE K (continued)

The following is a reconciliation of income tax benefit computed at the 34%
statutory rate to the provision for income taxes:

1998 1998
------------ -----------

Tax at statutory rate $ 1,154,673 $ 1,720,000
State income tax 339,610 280,000
Valuation allowance (1,494,283) (2,000,000)
Other -- --
------------ -----------

$ -- $ --
=========== ===========

As of May 31, 1999, realization of the Company's deferred tax assets of
$3,744,760, resulting primarily from impairment of gold ore and net
operating loss carryforwards, is not considered more likely than not, and
accordingly, a valuation allowance of $3,744,760 has been established.

As of May 31, 1999, the Company had net operating loss carryforwards of
approximately $5,077,000 to reduce future Federal taxable income, expiring
through May 31, 2018.

NOTE L - COMMITMENTS AND CONTINGENCIES

1. Leases

The Company is committed to a noncancellable lease for a physical care
center through November 2001, requiring minimum rents, plus additional
rent for increases in real estate taxes and operating expenses.

F-23
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

May 31, 1999 and 1998

NOTE L (continued)

As of May 31, 1999, the future minimum aggregate annual payments are as
follows:

Year ending May 31,
2000 $30,720
2001 30,720
2002 15,360
-------
$76,800
=======

For the years ended May 31, 1999 and 1998, rent expense was $64,868 and
$352,876, respectively.

2. Employment Agreements

In February 1998, the Company's chief operating officer resigned and
his employment agreement was terminated, including his right to receive
50,000 shares of common stock (which was recorded as deferred
compensation of $100,000) and options to acquire 350,000 shares of
common stock in exchange for $60,000 in cash and the Company forgave
outstanding net loans receivable of $34,924. Such amounts are included
in severance expense.

3. Insurance

The Company has professional liability insurance for medical
malpractice liabilities, which may arise in the normal course of
business.

F-24
<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

May 31, 1999 and 1998

NOTE M - RELATED PARTY TRANSACTIONS

Consulting Agreement

In December 1996, the Company granted ten-year options to acquire 375,000
shares of Common Stock to Burton Dubbin, the son of Mr. Henry Dubbin, the
Company's president, in exchange for consulting services. These options had
an exercise price of $1.6875 per share and were to vest upon the earlier to
occur of (i) the Company's achievement of certain financial benchmarks,
(ii) the five-year anniversary of the issuance of the options and Mr.
Burton's being an employee with the Company or (iii) a change of control
(as defined). Mr. Burton Dubbin became an employee of the Company in April
1997. 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 2007. In June 1998, the Company
extended Mr. Burton Dubbin's consulting agreement until August 31, 2002. In
addition, the Company granted Mr. Burton Dubbin options to purchase 500,000
shares of Common Stock at an exercise price of $2.17 per share and were
exercisable six months from date of grant.

NOTE N - SUBSEQUENT EVENTS

Pending Acquisitions

In July and August 1999, the Company entered into definitive agreements to
purchase substantially all of the assets of 17 medical management companies
which operate a regional network of 37 medical practices consisting of 10
radiology practices and 27 medical practices located in the New York City
and the surrounding metropolitan area. There can be no assurance, however,
that the Company will successfully meet its obligations of raising capital
to complete the acquisitions, or that all the other conditions to the
closing of the transactions will be met.

F-25
<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENT OF OPERATIONS CONTAINED
IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED MAY 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 121,477
<SECURITIES> 0
<RECEIVABLES> 1,414,238
<ALLOWANCES> 1,314,238
<INVENTORY> 0
<CURRENT-ASSETS> 225,371
<PP&E> 28,727
<DEPRECIATION> 17,901
<TOTAL-ASSETS> 2,392,861
<CURRENT-LIABILITIES> 864,063
<BONDS> 0
0
0
<COMMON> 56,026
<OTHER-SE> 1,472,772
<TOTAL-LIABILITY-AND-EQUITY> 2,392,861
<SALES> 750,690
<TOTAL-REVENUES> 750,690
<CGS> 561,025
<TOTAL-COSTS> 4,051,413
<OTHER-EXPENSES> 59,005
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,369
<INCOME-PRETAX> (3,396,097)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,396,097)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,396,097)
<EPS-BASIC> (.65)
<EPS-DILUTED> 0

</TABLE>