SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-KSB/A
Amendment No. 1
[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>
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-KSB/A amends Item 13 of the Annual
Report on Form 10-K filed on September 14, 1999 (the "Original Form 10-KSB") on
behalf of Oak Tree Medical Systems, Inc.
Item 13 of the Original Form 10-KSB is amended to read in its entirety
as follows:
Item 13. Exhibits, Financial Statements and Reports on Form S-K
The following documents are filed as part of this Annual Report on
Form 10-KSB.
(a) Financial Statements: Page
----
Report of Independent Certified Public Accountants..........F-2
Independent Auditors' Report................................F-3
Consolidated Balance Sheets.................................F-4-F-5
Consolidated Statement of Operations........................F-6
Consolidated Statement of Stockholders' Equity..............F-7
Consolidated Statement of Cash Flows........................F-8-F-9
Notes to Consolidated Financial Statements..................F-10-F-26
(b) Reports on Form 8-K.
None.
(c) The following documents are filed as exhibits to this Annual Report on Form
10-KSB.
3.1 Certificate of Incorporation, as amended. Incorporated by reference
from Registration Statement on Form S-18 - Commission File No.
33-8166B, August 20, 1986.
1
<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
2
<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:
3
<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.
- -----------------
* Previously filed.
4
<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: January 5, 2000 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 January 5, 2000
- ------------------------
Henry Dubbin
/s/ Simon Boltuch Chief Financial Officer January 5, 2000
- ------------------------ (Principal Financial and
Simon Boltuch accounting Officer)
Vice President and
- ------------------------ Director
Fred L. Singer
/s/ Jerry D. Klepner
- ------------------------ Director January 5, 2000
Jerry D. Klepner
/s/ Maxwell M. Rabb
- ------------------------ Director January 5, 2000
Maxwell M. Rabb
Director
- -----------------------
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-26
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 (the "Company") 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.
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.
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, 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.
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
May 31,
1999 1998
---- -----
LIABILITIES AND STOCKHOLDERS' EQUITY
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
=========== ==========
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
<TABLE>
<CAPTION>
Prepaid
consulting
Additional and stock Total
Common stock 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 $1,600,868) 1,500,000 15,000 1,708,157 1,723,157
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 $725,619) 655,000 6,550 726,348 732,898
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,
1999 1998
---- ----
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
----------- -----------
F-8
<PAGE>
Oak Tree Medical Systems, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year ended May 31,
1999 1998
---- ----
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 items:
Capitalized lease obligations $ - $ 190,610
=========== ===========
Issuance of note payable on acquisition $ - $ 300,000
=========== ===========
In the fiscal year ended May 31, 1998, the Company exchanged their investment in
an affiliated company for 100% of the outstanding stock of a subsidiary (Note
G).
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 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'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
contemplated 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.
9. Goodwill
Goodwill resulting from acquisitions of established physical therapy
care centers represents costs in excess of net assets acquired and is
being amortized on a straight-line basis over twenty years.
F-12
<PAGE>
Oak Tree Medical Systems, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 1999 and 1998
NOTE B (continued)
Annually, the Company evaluates goodwill for impairment by comparing
estimated discounted future cash flows to net book value.
10. 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)
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
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
$1 to $1.99 352,500 8.59 $1.66 352,500 $1.66
$2 to $3.50 898,750 8.45 2.19 878,750 2.19
$3.51 to $5.00 150,000 3.59 4.38 150,000 4.38
--------- ---------
1,401,250 1,381,250
========= =========
</TABLE>
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
===========
In June 1995, the Company exchanged 100% of the common stock of a
subsidiary, which only owned an interest in gold ore (which was previously
acquired for common stock of the Company, with a value of $5,000,000), for
6,000,000 shares of common stock of Accord Futronics Corp. ("Accord"),
approximately 30%, and was to pay the Company a royalty of 12.5% of net
production income from processing the ore. No gain or loss was recognized
on the exchange.
On November 15, 1997, the Company returned the 6,000,000 shares of common
stock to Accord in exchange for 100% of the common stock of the subsidiary.
Accord had not yet commenced mining nor anticipated commencing in the near
future and the Company desired to commence such mining or other provision
for the gold. No gain or loss was recognized on the exchange.
As of May 31, 1998, the Company: (i) has unsuccessfully attempted to obtain
financial and other information from Accord, as to both the subsidiary and
the underlying gold ore; (ii) has unsuccessfully attempted to sell the gold
ore; (iii) does not have the resources to commence the mining of the gold
ore; and (iv) focuses in medical and related areas, and, therefore, the
Company has provided a write-down for impairment of the investment in gold
ore of $3,000,000, resulting in a carrying value, based on discussions with
potential buyers.
As of May 31, 1996, the latest data available, the unaudited consolidated
condensed financial statements of Accord were:
BALANCE SHEET
Cash, cash equivalents, and marketable securities $ 1,365,591
Investment in gold reserves 42,875,000
Other assets 1,115,122
-----------
Total assets $ 45,355,713
============
F-20
<PAGE>
Oak Tree Medical Systems, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 1999 and 1998
NOTE G (continued)
Liabilities NONE
Shareholders' equity $45,355,713
-----------
Total liabilities and stockholders' equity $45,355,713
===========
STATEMENT OF OPERATIONS
Revenues $ 195,007
Expenses (214,294)
-----------
NET LOSS $ (19,287)
===========
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-21
<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.
In March 1997, the Company purchased primarily physical therapy equipment
which was subject to existing operating leases for an aggregate cost of
$250,230. This equipment and other fixed assets with a net book value of
$239,862 were then sold for $450,230 and leased back for a period of five
years. The leaseback has been accounted for as a capitalized lease. The
loss of $39,862 realized on the sale and leaseback has been deferred and is
being amortized over the term of the lease.
In August 1997, the Company sold the physical therapy equipment acquired in
August 1997 (Note C) for $171,335 and leased back the equipment for a
period of five years.
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-22
<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)
----------- ------------
$ - $ -
=========== ============
The following is a reconciliation of income tax benefit computed at the 34%
statutory rate to the provision for income taxes:
1999 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 - -
----------- -----------
$ - $ -
=========== ===========
F-23
<PAGE>
Oak Tree Medical Systems, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 1999 and 1998
NOTE K (continued)
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. The Company's ability to utilize net operating losses
may be limited pursuant to Internal Revenue Code Section 382.
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.
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.
F-24
<PAGE>
Oak Tree Medical Systems, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 1999 and 1998
NOTE L (continued)
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 of date of grant.
3. Insurance
The Company has professional liability insurance for medical
malpractice liabilities, which may arise in the normal course of
business.
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.
F-25
<PAGE>
Oak Tree Medical Systems, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
May 31, 1999 and 1998
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-26
