OAK TREE MEDICAL SYSTEMS INC, 10KSB, 2000-09-13

OAK TREE MEDICAL SYSTEMS INC
10KSB, 2000-09-13
HEALTH SERVICES

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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, 2000

[ ] 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

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OAK TREE MEDICAL SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)

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

1725 Tenbroeck Avenue
Bronx, New York 10461
(718) 828-6996
(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: $206,365.

The number of shares of Common Stock, par value $0.01 per share,
outstanding as of August 29, 2000: 7,020,022.

The aggregate market value of voting and non-voting Common Stock
(5,280,022 shares) held by non-affiliates computed by reference to the closing
price of the Common Stock as of August 29, 2000: $5,280,022.

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. As of May 31, 2000, the Company closed the one
remaining medical facility in New York City. 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.

New York City Facilities

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, 2000, the Company closed the one remaining facility which
was acquired in October 1996 because the primary medical group referring
patients to the therapy center ceased operations. The cash flows from this
facility was thus insufficient to support its operations.

In compliance with the laws of the State of New York, all treatment
related activities at the Company's New York City clinics were conducted by Oak
Tree Medical Practice, P.C. ("Oak Tree P.C."), an independently owned
professional corporation. The Company had agreements with Oak Tree P.C. pursuant
to which the Company provided to Oak Tree P.C. all administrative and management
services and leased 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 Florida Physical Therapy Care 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.

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. Although the agreements by their terms may be currently
terminated by either the Company or the sellers upon written notice, no such
notice has been delivered by any of the parties and they are continuing to
attempt to satisfy their various conditions to closing. 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 transaction will be met.

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
operations 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, although there can
be no assurance that it will be successful in doing so.

Employees

As of May 31, 2000, the Company had 2 full-time employees and no
part-time employees.

Item 2. Property

The Company's headquarter office is temporarily located at 1725
Tenbroeck Avenue, Bronx, New York 10461.

Set forth below is certain information concerning the Company's leased
facility for its rehabilitative and medical service operations, as of May 31,
2000. 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 10461

<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.

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, 1999:
First Quarter............................. $1.500 $2.750
Second Quarter............................ 1.000 2.750
Third Quarter............................. 2.310 5.880
Fourth Quarter............................ 3.130 5.050

Fiscal Quarter Ended May 31, 2000:
First Quarter............................. $2.688 $2.938
Second Quarter............................ 2.000 2.125
Third Quarter............................. 1.875 2.125
Fourth Quarter............................ 1.313 1.313

As of August 29, 2000, there were approximately 1,600 holders of record
of the Company's Common Stock. The closing bid and asked prices for the
Company's Common Stock on August 29, 2000, was $1.00 and $1.00, 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, 2000, these options have not been exercised. The Company
recorded consulting expenses of approximately $925,000 and $122,000 in years
1999 and 2000, respectively, 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 at $1.69 per share. During the fiscal year ended May 31,
2000, the Company granted Mr. Burton Dubbin options to purchase 300,000 shares
of Common Stock at an exercise price of $1.50 per share. Mr. Burton Dubbin
exercised options to acquire 275,000 shares of Common Stock at $1.69 per share
and 20,000 shares of Common Stock at $1.50 per share.

<PAGE>

B. 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. In August 1999, Mr. Veit exercised options to acquire 2,500 shares.

C. 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, 2000, the options have not been exercised.

D. In July 1998, the Company issued 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.

E. In July 1999, Mr. Fred Singer, Secretary of the Company, exercised options to
acquire 5,000 shares of Common Stock at $1.00 per share.

F. In July 1999, the Company issued 10,000 shares of Common Stock to Richards
Healthcare in consideration of temporary employee services rendered to the
Company during prior year. These shares were valued at an average price of $4.43
per share.

G. From September 1999 to February 2000, Mr. Henry Dubbin, President of the
Company, exercised options to acquire 250,000 shares at $2.00 per share and
100,000 shares at $1.50 per share.

H. In December 1999 and in February 2000, the Company issued 20,000 shares of
Common Stock to Investec Ernst & Company for investment banking services. These
shares were valued at an average price of $2.00 per share.

<PAGE>

I. In January 2000, the Company issued 25,000 shares of Common Stock to Carol
Martino for private placement services rendered. These shares were valued at an
average price of $2.00 per share.

J. In February 2000, the Company issued 25,000 shares of Common Stock to Richard
P. Greene, Esq. for legal services rendered during the current period. These
shares were valued at an average price of $2.00 per share.

K. In February 2000, the Company issued 50,000 shares of Common Stock to Rush &
Co. in a private placement. These shares were valued at an average price of
$1.00 per share.

L. In April 2000, the Company issued 50,000 shares of Common Stock to Washburn &
Enright in consideration of consulting services outside of the United States.
These shares were valued at a price of $1.50 per share.

M. In May 2000, the Company issued 200,000 shares of Common Stock in a private
placement to TTC Vermogensberatung A.G. at an offering price of $1.35 per share,
with net proceeds to the Company of $1.00 per share.

The issuances set forth above were made pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), as transactions by an
issuer not involving any public offering, and, alternatively, in the case of
employee options, on a no-sale theory.

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. As of May 31, 2000, the Company closed the one
remaining facility which was acquired in October 1996 because the cash flows
from this facility was insufficient to support its operations.

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>

Results of Operations

2000 Fiscal Year Compared to 1999 Fiscal Year

Patient revenues decreased by 72.51% from $750,690 to $206,365 in the
fiscal year ended May 31, 2000 ("Fiscal 2000") compared with the fiscal year
ended May 31, 1999 ("Fiscal 1999"). The decrease in revenues was primarily
attributable to the Company's sale of three physical care centers in New York
City during Fiscal 1999 and sluggish revenues in the last two quarters of Fiscal
2000. The primary medical group referring patients to the therapy center ceased
operations as of January 2000.

Total expenses decreased by 19.37% to $3,343,468 for Fiscal 2000 from
$4,146,787 for Fiscal 1999, primarily attributable to the Company's sale of
three physical care centers in New York City during Fiscal 1999 and lower
consulting expenses in Fiscal 2000 offset by deferred acquisition costs of
$667,950 due to the length of negotiations related to the pending acquisition.
Costs of patient services, selling, and administrative expenses (excluding
acquisition costs), consulting, depreciation and amortization and interest
expense (recurring operating expenses) decreased by 34.55% from $4,087,782 to
$2,675,518. Costs of patient services, as a percentage of patient revenues,
decreased from 74.7% in Fiscal 1999 to 72.4% in Fiscal 2000 primarily because of
gradual staffing adjustments relating to the sale of the three New York City
physical care centers. Selling, general and administrative expenses (excluding
acquisition costs) decreased 13.51% from $1,721,583 in Fiscal 1999 to $1,488,985
in Fiscal 2000, primarily due to the sale of the three physical care centers in
New York City and a significant reduction in legal expenses offset by a Black
Scholes adjustment for stock options issued of $531,000. Consulting expenses
decreased by 41.89% from $1,703,455 in Fiscal 1999 to $989,934 in Fiscal 2000
due to a lower Black Scholes stock option adjustment in Fiscal 2000. The
adjustment in Fiscal 2000 was $746,000 compared to $1,300,000 in Fiscal 1999.
During Fiscal 1999, the Company recognized a loss of $59,005 in connection with
the sale of three physical care centers in New York City. Total expenses as a
percentage of revenues increased to 1620% for Fiscal 2000 from 552.4% for Fiscal
1999 as a result of these factors.

Income taxes for Fiscal 2000 and 1999 are not representative of an
effective tax rate. For Fiscal 2000 and 1999, deferred income tax benefits have
been reduced by increases in the allowance for the realization of deferred
income tax assets of $838,000 and $1,044,670, respectively, because, as of both
May 31, 2000 and 1999, 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,
2000 and 1999, net operating loss carryforwards were $6,849,000 and $5,077,000,
respectively, increased due to the increases in taxable losses for each year.

The above factors contributed to a net loss of $3,137,103 ($.52 per
share) for Fiscal 2000 compared with a net loss of $3,396,097 ($.65 per share)
for Fiscal 1999.

<PAGE>

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.

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. 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 February 2000, the Company issued 50,000 shares of Common Stock to a
private investor at a price of $1.00 per share. In May 2000, the Company issued
200,000 shares of Common Stock to a group of private investors at a net price of
$1.00 per share. Proceeds of the sale of these shares have been used for working
capital.

<PAGE>

During Fiscal 2000, the Company issued 112,500 shares of Common Stock
for various services rendered valued at $224,313. In addition, 652,500 stock
options were exercised during Fiscal 2000 for $1,117,169. These proceeds have
been used for working capital.

In July 1998, the Company issued 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.

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). The Company intends to continue its attempt to sell the gold
ore, although there can be no assurance that it will be successful in doing so.

On November 2, 1998, the Company sold all the assets (excluding
accounts receivable) of its Lower Manhattan, New York physical therapy facility
for $250,000 in cash plus the assumption of outstanding equipment lease
obligations of $194,000. Proceeds of $200,000 were used to repay a note payable
to the previous owner of the facility. On December 22, 1998, the Company sold
the accounts receivable relating to the Lower Manhattan facility for 50% value
of subsequent collections and accordingly, the Company recorded a provision for
doubtful accounts of $300,000 as of May 31,1999. As of May 31, 2000, the Company
has received $31,200 from the sale of the receivables and does not expect any
future receipts.

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, 2000, included
approximately 41 medical practices and MRI facilities located in the greater New
York metropolitan area. (See Item 1. Business. Pending Acquisition.)

As of May 31, 2000, negative working capital increased from $638,692 to
$735,999 primarily due to the Company's increase in the reserve of doubtful
accounts by $52,000 and increase in accrued professional fees by $50,000.

Year 2000

To date, no significant problems related to Year 2000 have been
identified in the Company's internal systems or with its vendors, suppliers,
service providers or customers that would materially impact the Company's
business.

Although the Company does not expect any significant future Year 2000
related failures or malfunctions, the Company will continue to monitor its
internal systems and work closely with its suppliers, service providers and
customers to seek to avoid any material interruptions in its business.

<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) Effective June 6, 1997, the Company appointed Most Horowitz &
Company, LLP ("Most Horowitz"), 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.

(b) Effective August 16, 1999, the Company's Board of Directors
appointed Grant Thornton, LLP ("Grant Thornton") as the Company's independent
accountants for the fiscal year ended May 31, 1999. On August 17, 2000 the
Company dismissed Grant Thornton as the independent accountants for the Company.
Grant Thornton's report on the financial statements of the Company for the
fiscal year ended May 31, 1999 did not contain an adverse opinion or disclaimer
of opinion, and was not qualified or modified as to uncertainty, audit scope or
accounting principles. During the Company's fiscal year ended May 31, 1999 and
through August 17, 2000 there were no disagreements between the Company and
Grant Thornton on any matter of accounting principles or practices, financial
statement disclosure, or auditing or procedure, which disagreements, if not
resolved to the satisfaction of Grant Thornton, would have caused it to make
reference to the subject matter of the disagreement in connection with its
reports. During the Company's fiscal year ended May 31, 1999 and through August
17, 2000, Grant Thornton did not advise the Company of any of the matters
referred to in Item 304(a) (1)(iv) (B) of Regulation S-B.

(c) On August 17, 2000 the Company's Board of Directors engaged Wiss &
Company, LLP as the Company's independent accountants for the fiscal year ended
May 31, 2000.

<PAGE>

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 29, 2000 were as follows:

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

Henry Dubbin 84 President and Director
Fred L. Singer 66 Vice President and Director
Maxwell M. Rabb 90 Director
Jerry D. Klepner 55 Director
Scott S. Rosenblum 51 Director
Simon Boltuch 52 Chief Financial Officer

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.

<PAGE>

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 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, 2000 (collectively, the "named executive
officers") for services rendered in all capacities to the Company during the
fiscal years ended May 31, 1998, 1999 and 2000.
<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 1998 $32,000 -0- -0- -0-
President 1999 $48,000 -0- -0- -0-
2000 $48,000 -0- -0- 250,000
---------------------------------------------------------------------------------------------------------------------
Simon Boltuch (1) 1999 $143,249 -0- -0- 20,000
Chief Financial Officer 2000 $175,000 -0- -0- 60,000

---------------------------------------------------------------------------------------------------------------------
</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. In January 2000, the Company granted options to acquire
a total of 862,500 shares of Common Stock at an exercise price of $1.50 per
share to the following individuals: Mr.Henry Dubbin -250,000 shares, Mr. Fred
Singer - 20,000 shares, Mr. Simon Boltuch -60,000 shares, Mr. Burton Dubbin -
300,000 shares, Mr. Scott Rosenblum -100,000 shares, Mr. Timothy Stoakes -
100,000 shares, Mr. Richard P. Greene -7,500 shares and Mr. Dean Beck - 25000
shares. Mr. Henry Dubbin exercised 100,000 shares of Common Stock and has
150,000 shares of Common Stock remaing. Mr. Burton Dubbin exercised 20,000
shares of Common Stock and has 280,000 shares of Common Stock remaining. All
options expire on January 24, 2005.

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, 2000 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
Shares Acquired on Value # of Unexercised Options In-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 350,000 $650,000 150,000 0 $0 $0
Fred L. Singer 5,000 $ 5,000 20,000 0 $0 $0
Simon Boltuch 0 0 80,000 0 $0 $0

----------------------------------------------------------------------------------------------------------------------
</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 31, 2000 as quoted on the over-the-counter market,
multiplied by the number of shares underlying the option.

<PAGE>

Employment Agreements

The Company had an employment agreement with Henry Dubbin, as amended
September 1997, which expired on September 1, 1999 and provided for a salary of
$48,000 per year. As of September 1, 1999 Mr. Dubbin continues to receive a
salary of $48,000 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 exercised the entire 250,000
shares between September and December 1999. Mr. Dubbin waived his salary for the
1995 and 1996 fiscal years.

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 which provides for (i) an annual salary of $175,000
per year, (ii) performance bonus of up to $35,000 annually and (iii) annual
options to acquire 20,000 shares of Common Stock at an exercise price equal to
the fair market value of the shares on date of grant. 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.

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 29, 2000, no options under the 1994 Plan were outstanding.

18
<PAGE>

Non-Plan Options

As of August 29, 2000, the Company had outstanding non-plan options to
purchase an aggregate of 1,601,250 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 150,000 $1.50 January 24, 2005

Fred L. Singer 20,000 $1.50 January 24, 2005

Simon Boltuch 20,000 $2.00 August 31, 2009
60,000 $1.50 January 24, 2005

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.

<PAGE>

Item 11. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information as of August 1, 2000
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 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 820,000(2) 10.51%
5189 Alton Rd.
Miami Beach, FL 33140

Henry Dubbin 650,000(3) 9.07%
10155 Collins Avenue, Suite 607
Bal Harbor, FL 33154

Simon Boltuch 80,000(4) 1.13%
c/o Oak Tree Medical Systems, Inc.
1725 Tenbroeck Avenue
Bronx, New York 10461

Fred L. Singer 30,000(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 Naftalis & Frankel LLP
919 Third Avenue
New York, NY 10022

Scott S. Rosenblum 120,000(4)(5) *
c/o Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, NY 10022

All directors and executive officers
As a group (6 persons) 920,000(6) 12.37%

------------
* Less than one percent

(1) Based on 7,020,022 shares of Common Stock outstanding as of August 1,
2000. Pursuant to the rules of the Securities and Exchange Commission
(the "Commission"), certain shares of Common Stock which a person has
the right to acquire within 60 days of August 1, 2000 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) 280,000 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.,a corporation of which he is a consultant, and (iii)
50,000 shares held indirectly.
(3) Includes (i) 500,000 shares of Common Stock that Mr. Dubbin
beneficially owns through Nevada Mineral Corporation of which he is the
majority stockholder and president, and (ii) 150,000 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 their respective pecuniary interests therein,
if any.
(6) Includes 420,000 shares subject to presently exercisable options.

<PAGE>

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, 2000,
included approximately 41 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. Although the agreements by their terms may be currently
terminated by either the Company or the sellers upon written notice, no such
notice has been delivered by any of the parties and they are continuing to
attempt to satisfy their various conditions to closing. 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 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 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, 2000, these options have not been exercised. 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 at $1.69 per share. During the
fiscal year ended May 31, 2000, the Company granted Mr. Burton Dubbin options to
purchase 300,000 shares of Common Stock at an exercise price of $1.50 per share.
The Company recorded consulting expenses in 2000 of approximately $65,000
relating to these options. During the fiscal year ended May 31, 2000, Mr. Burton
Dubbin exercised options to acquire 275,000 shares of Common Stock at $1.69 per
share and 20,000 shares of Common Stock at $1.50 per share.

<PAGE>

Item 13. Exhibits, Financial Statements and Reports on Form 8-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 Auditor's Report......................................F-3

Consolidated Balance Sheets as of May 31, 2000 and 1999...........F-4

Consolidated Statements of Operations for the years ended
May 31, 2000 and 1999 ............................................F-5

Consolidated Statement of Stockholders' Equity for the
years ended May 31, 2000 and 1999 ................................F-6

Consolidated Statements of Cash Flows for the years ended
May 31, 2000 and 1999.............................................F-7

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

(b) Reports on Form 8-K.

On August 24, 2000, the Company filed a Current Report on Form 8-K to
report the dismissal of Grant Thornton LLP and the engagement of Wiss & Company,
LLP as the Company's independent accountants as of August 17, 2000.

3.1 Certificate of Incorporation, as amended. Incorporated by reference
from Registration Statement on Form S-18 - Commission File No.
33-8166B, August 20, 1986.

3.2 Amendments to Certificate of Incorporation dated August 1, 1994.
Incorporated by reference from Exhibit 3.2 of the Annual Report on
Form 10-KSB for the fiscal year ended May 31, 1995.

3.3 By-Laws. Incorporated by reference from Registration Statement on Form
S-18-Commission File No. 33-8166B, August 20, 1986.

4.1 Form of Common Stock Certificate. Incorporated by reference from Form
10-KSB for the fiscal year ended May 31, 1994.

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 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.

10.4 Consulting Agreement, dated as of August 29, 1997, between Registrant
and Burton Dubbin. Incorporated by reference from Exhibit 10.18 of the
Form 10-KSB for the fiscal year ended May 31, 1997 (the "1997 Form
10-KSB").

10.5 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.

10.6 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.

22
<PAGE>

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

10.8 Agreement of Sale, dated November 2, 1998, between Rehabilitation
Medicine Practice of N.Y., P.L.L.C. and Oak Tree Medical Management,
Inc. Incorporated by reference from Exhibit 10.1 of the Form 10-QSB
for the fiscal quarter ended November 30, 1998 (the "November 30, 1998
Form 10-QSB").

10.9 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. Incorporated by reference from Exhibit 10.2 of the November 30,
1998 Form 10-QSB.

10.10 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.
Incorporated by reference from Exhibit 10.3 of the November 30, 1998
Form 10-QSB.

10.11 Asset Purchase Agreement, dated as of July 9, 1999, by and among Oak
Tree Medical Systems, Inc., Oak Tree Medical Systems Practice
Management, Inc. and the other parties thereto.

10.12 Stock Purchase Agreement, dated as of December 10, 1999, by and among
Oak Tree Medical Systems, Inc., Oak Tree Medical Systems Practice
Management, Inc., Northeast Medical Management, Inc. and the
stockholders of Northeast Medical Management, Inc.

16.1 Letter from Grant Thorton, LLP, dated August 22, 2000, addressed to
the Securities and Exchange Commission. Incorporated by reference from
Form 8-K filed on August 24, 2000.

21 Subsidiaries:

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, 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 September 13, 2000
------------------------
Henry Dubbin

/s/ Simon Boltuch Chief Financial Officer September 13, 2000
------------------------ (Principal Financial and
Simon Boltuch Accounting Officer)

/s/ Fred L. Singer Vice President and September 13, 2000
------------------------ Director
Fred L. Singer

------------------------ Director
Jerry D. Klepner

------------------------ Director
Maxwell M. Rabb

/s/ Scott S. Rosenblum Director September 13, 2000

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

Consolidated Statements of Operations F-5

Consolidated Statement of Stockholders' Equity F-6

Consolidated Statements of Cash Flows F-7

Notes to Consolidated Financial Statements F-8

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, 2000, 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, 2000, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended in conformity with generally accepted accounting principles.

The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note A to the financial
statements, the Company has incurred substantial losses from operations end at
May 31, 2000 and has a working capital deficiency of $735,999. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/S/ WISS & COMPANY LLP

Livingston, New Jersey
August 29, 2000

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, 1999, 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, 1999, 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/ GRANT THORNTON, LLP

New York, New York
September 3, 1999

F-3

<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
May 31,
ASSETS 2000 1999
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 145,369 $ 121,477
Patient care receivables 20,000 100,000
Other current assets 13,500 3,894
------------ ------------

Total current assets 178,869 225,371

INVESTMENT IN GOLD ORE 1,994,214 1,994,214
FIXED ASSETS 1,962 10,826
DEFERRED ACQUISITION COSTS 0 162,450
------------ ------------
$ 2,175,045 $ 2,392,861
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and accrued expenses $ 914,868 $ 864,063
------------ ------------

Total current liabilities 914,868 864,063

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized,
25,000,000 shares; issued and
outstanding, 6,617,703 and 5,602,703 shares,
respectively 66,176 56,026

Additional paid-in capital 17,511,404 14,653,072
Deficit (16,317,403) (13,180,300)
------------ ------------
1,260,177 1,528,798
------------ ------------
$ 2,175,045 $ 2,392,861
============ ============
</TABLE>

The accompanying notes are an integral part of these statements.

F-4

<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

Year ended May 31,
2000 1999
----------- -----------
Revenue
Patient services $206,365 $ 750,690

Expenses
Costs of patient services 149,365 561,025
Selling, general and administrative 2,156,935 1,721,583
Consulting services 989,934 1,703,455
Depreciation and amortization 6,620 65,350
Interest - net 40,614 36,369
Loss on sales of facilities - 59,005
----------- -----------
Total expenses 3,343,468 4,146,787
----------- -----------

NET LOSS $(3,137,103) $(3,396,097)
=========== ===========

Net loss per common share - basic and diluted $(.52) $(.65)
==== =====

Weighted-average number of common
shares outstanding - basic and diluted 6,075,588 5,209,013
=========== ===========

The accompanying notes are an integral part of these statements.

F-5

<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

Years ended May 31, 2000 and 1999

Prepared
consulting
Additiona and stock Total
Common Stock paid-in subscription stockholders'
Shares Amount capital Deficit receivable equity
------ ------ ------- ------- ---------- ------

<S> <C> <C> <C> <C> <C> <C>
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 655,000 6,550 726,348 -- -- 732,898
of $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
---------- --------- ------------ ------------ ---------- ------------
Sale of Common Stock (net of expenses of $70,000) 250,000 2,500 247,500 -- -- 250,000
Issuance of shares for services 112,500 1,125 223,188 -- -- 224,313
Exercise of Options 652,500 6,525 1,110,644 -- -- 1,117,169
Issuance of stock options to consultants -- -- 746,000 -- -- 746,000
Issuance of stock options to employees -- -- 531,000 -- -- 531,000
Net loss -- -- -- (3,137,103) -- (3,137,103)
---------- --------- ------------ ------------ ---------- ------------
Balance at May 31, 2000 6,617,703 $ 66,176 $ 17,511,404 $(16,317,403) $ -- $ 1,260,177
========== ========= ============ ============ ========== ============

The accompanying notes are an integral part of this statement.

</TABLE>

F-6

<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year ended May 31,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(3,137,103) $(3,396,097)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 6,620 65,350
Bad debts -- 223,108
Stock options issued for services 1,751,313 1,831,936
Loss (gains) on sales of facilities -- 59,005
Fixed assets write-down 2,244 --
Acquisition cost write-down 162,450 --
Increase (decrease) in cash from
Patient care receivables 80,000 165,121
Other current assets (9,606) 103,509
Other assets -- 97,740
Accounts payable and accrued expenses 50,805 19,337
Other liabilities -- (61,551)
----------- -----------
Net cash used in operating activities (1,093,277) (892,542)

Cash flows from investing activities
Proceeds from sale of facilities -- 625,000
Costs of proposed acquisition -- (63,646)
----------- -----------

Net cash provided by (used in)
investing activities -- 561,354

Cash flows from financing activities
Proceeds from issuance of common stock, net 1,117,169 927,148
Payments of long-term debt -- (200,000)
Payment of note payable -- (334,769)
Payments of capitalized lease obligations -- (395,096)
----------- -----------
Net cash (used in)
provided by financing activities 1,117,169 (2,717)

NET (DECREASE) INCREASE IN CASH 23,892 (333,914)
----------- -----------
Cash at beginning of year 121,477 455,391
----------- -----------
Cash at end of year $ 145,369 $ 121,477
=========== ===========

Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 40,614 $ 36,369
=========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-7

<PAGE>

Oak Tree Medical Systems, Inc.
and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2000 and 1999

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, 2000, the Company
closed the one remaining New York City-based physical therapy care center.

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 2000 and 1999, used cash from operating activities in 2000 and 1999, and
has negative working capital at May 31, 2000.

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. 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, 2001 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.

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. 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.

F-8

<PAGE>

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 $98,804 for the year ended May 31, 1999. Due to the length
of this pending acquisition, the Company wrote off the entire costs to
operations in May 2000.

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 1,601,250 and 1,401,250
remain outstanding at May 31, 2000 and 1999, respectively, but were not
included in the computation of diluted EPS because to do so would have
been antidilutive for the periods presented.

8. Financial Instruments

Financial instruments include cash, patient care receivables, accounts
payable and accrued expenses. The amounts reported for financial
instruments are considered to be reasonable approximations of their
fair values. The fair value estimates presented herein were based on
market or other information available to management. The use of
different market assumptions and/or estimation methodologies could have
a material effect on the estimated fair value amounts.

F-9

<PAGE>

NOTE C - 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
during the fiscal year ended May 31,1999 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 D - COMMON STOCK

1. Issuance of Common Stock

In July 1999, the Company issued 10,000 shares of Common Stock to Richards
Healthcare Inc. in consideration of temporary employee services. These
shares were valued at a price of $4.43 per share.

During the fiscal year ended May 31, 2000, the Company issued 20,000 shares
of Common Stock to Investec Ernst & Company in consideration of investment
banking services. These shares were valued at a price of $2.00 per share.

In February 2000, the Company issued 50,000 shares of Common Stock to Rush
& Co. in a private placement. These shares were valued at an average price
of $1.00 per share.

In April 2000, the Company issued 50,000 shares of Common Stock to Washburn
& Enright in consideration of consulting services outside of the United
States. These shares were valued at a price of $1.50 per share.

In May 2000, the Company issued 200,000 shares of Common Stock in a private
placement to TTC Vermogensberatung A.G. at an offering price of $1.35 per
share, with net proceeds to the Company of $1.00 per share.

Through May 31, 2000 and 1999, the Company issued an aggregate of 7,500 and
46,242 shares, respectively, of Common Stock in exchange for legal
services. The shares were valued at an average price of $2.00 and $3.02,
per share, respectively.

Through May 31, 2000 and 1999, the Company issued an aggregate of 25,000
and 28,708 shares, respectively, of Common Stock in exchange for consulting
services. The shares were valued at an average 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.

F-10

<PAGE>

In July 1998, the Company issued 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. Consulting Agreements

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. As of May 31, 2000, these
options have not been exercised. The Company recorded consulting expenses
of approximately $925,000 and $517,000 in years 1999 and 2000,respectively
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.
During the fiscal year ended May 31, 2000, the Company granted Mr. Burton
Dubbin options to purchase 300,000 shares of Common Stock at an exercise
price of $1.50 per share. Mr. Burton Dubbin exercised options to acquire
275,000 shares of Common Stock at $1.69 per share and 20,000 shares of
Common Stock at $1.50 per share.

3. Options

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 which provides for (i) an annual salary of
$175,000 per year, (ii) performance bonus of up to $35,000 annually and
(iii) annual options to acquire 20,000 shares of Common Stock at an
exercise price equal to the fair market value of the shares on date of
grant. 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.

In March 1999, Mr. Fredrick Veit, counsel to the Company, exercised options
to acquire 15,000 shares of Common Stock. In August 1999, Mr. Veit
exercised his options to acquire the remaining 2,500 shares of Common
Stock.

In July 1999, Mr. Fred Singer, Secretary of the Company, exercised options
to acquire 5,000 shares of Common Stock. In April 2000, Mr. Singer had
10,000 options to purchase Common Stock expire.

F-11

<PAGE>

From September 1999 to February 2000, in order to provide the Company with
working capital, Mr. Henry Dubbin, president, exercised options to acquire
350,000 shares of Common Stock. Mr. Henry Dubbin has remaining options to
acquire 150,000 shares of Common Stock which expire on January 24, 2005.

For the years ended May 31, 2000 and 1999, a summary of the status of stock
options was as follows:

<TABLE>
<CAPTION>
2000 1999
-------------------------- ----------------------
Weighted- Weighted-
Number average Number average
of exercise Of exercise
shares price shares price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding - beginning of year 1,401,250 $2.29 936,250 $2.30
Granted 862,500 1.50 580,000 2.15
Exercised (652,500) 1.77 (115,000) 1.69
Expired (10,000) 1.00 -- --
--------- ---------
Outstanding - end of year 1,601,250 $2.08 1,401,250 $2.29
========= =========
</TABLE>

As of May 31, 2000, options to purchase 1,581,250 shares of Common Stock
were exercisable, with a weighted-average exercise price of $2.08 per
share.

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.

The following table summarizes option data as of May 31, 2000:

Weighted-average Weighted- Weighted-
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price Exercisable price
------ ----------- ---- ----- ----------- -----

$1 to $1.99 802,500 4.17 $1.51 802,500 $1.51
$2 to $3.50 648,750 3.60 2.27 628,750 2.27
$3.51 to $5.00 150,000 1.00 4.38 150,000 4.38
--------- ---------
1,601,250 1,581,250
========= =========

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

$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
========= =========

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.

F-12

<PAGE>

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 years ended May 31, 2000 and 1999.

The following assumptions were made in estimating fair value:

2000 1999
---- ----
Risk-free interest rate 6% 6%
Expected volatility 42% 50%
Expected option life 10 years 10 years

Had compensation cost been determined under SFAS No. 123 for the years
ended May 31, 2000 and 1999, net loss and net loss per share would have
been increased as follows:

2000 1999
---- ----
Net loss
As reported $(3,137,103) $(3,396,097)
Pro forma for stock options $(3,362,103) $(3,483,097
Net loss per share
As reported $(.52) $(.65)
Pro forma for stock options $(.55) $(.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, 2000, the Company
had not granted any options under the Plan.

5. Reserved Shares

As of May 31, 2000, the Company has reserved the following shares of common
stock:

Options 1,601,250
Plan 600,000
---------
2,201,250
=========

NOTE E - INVESTMENT IN GOLD ORE

As of May 31, 2000 and 1999, investment in gold ore is as follows:

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

F-13

<PAGE>

As of May 31, 1998, the Company (i) has unsuccessfully attempted to sell
the gold ore, (ii) does not have the resources to commence the mining of
the gold ore; and (iii) 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.

NOTE F - FIXED ASSETS

As of May 31, 2000 and 1999, fixed assets consisted of the following:

2000 1999
---- ----
Office equipment and furniture $26,483 $28,727
Less accumulated depreciation
and amortization 24,521 17,901
------ -------
$ 1,962 $ 10,826
====== =======

For the years ended May 31, 2000 and 1999, depreciation expense was $6,620
and $64,154, respectively.

NOTE G - INCOME TAXES

For the years ended May 31, 2000 and 1999, the tax effects of timing
differences which gave rise to deferred income taxes were as follows:

2000 1999
---- ----
Net operating loss
carryforwards $ 780,000 708,573
Cash basis 58,000 336,187
Less valuation allowance (838,000) (1,044,760)
----------- -----------
$ -- $ --
=========== ===========

As of May 31, 2000 and 1999, the tax effects of the components of deferred
income tax payable were as follows:

2000 1999
---- ----
Allowance for impairment
of gold ore $ 1,324,000 $ 1,324,000
Net operating loss carryforwards 2,864,000 2,084,573
Cash basis 394,000 336,187
Less valuation allowance (4,582,000) (3,744,760)
----------- -----------
$ -- $ --
=========== ===========

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

2000 1999
---- ----
Tax at statutory rate $ 1,067,000 $ 1,154,673
State income tax 314,000 314,610
Valuation allowance (1,381,000) (1,494,283)
------------ -----------
$ -- $ --
=========== ===========

As of May 31, 2000, realization of the Company's deferred tax assets of
$4,582,000 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 $4,582,000 has been established.

As of May 31, 2000, the Company had net operating loss carryforwards of
approximately $6,849,000 to reduce future Federal taxable income, expiring
during various years through May 31, 2019. The Company's ability to utilize
net operating losses may be limited pursuant to Internal Revenue Code
Section 382.

F-14

<PAGE>

NOTE H - 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, 2000, the future minimum aggregate annual payments are as
follows:

Year ending May 31,

2001 30,720
2002 15,360
-------
$46,080
=======

For the years ended May 31, 2000 and 1999, rent expense was $30,720 and
$64,868, respectively.

2. Insurance

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

NOTE I - 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.

NOTE J - SUBSEQUENT EVENTS

In June 2000, the Company entered into a consulting agreement with American
Financial Communications, Inc. (AFC) for a six month period. AFC will act
as a public and financial relations advisor and consultant to the Company.
AFC received 50,000 shares of the Company's Common Stock. These shares are
"restricted securities" within the meaning of Rule 144 under the Securities
Act.

In June 2000, the Company entered into a consulting agreement with EBI
Securities Corporation (EBI) for a one year term. EBI will act as a public
relations advisor and consultant to the Company. EBI received options to
acquire 25,000 shares of the Company's Common Stock at $1.75 per share and
25,000 shares of the Company's Common Stock at $2.00 per share.

In July 2000, the Company entered into a consulting agreement with Timothy
Stoakes for a one year term. Mr. Stoakes will act as a public relations
advisor and consultant to the Company outside the United States. Mr.
Stoakes received options to acquire 150,000 shares of the Company's Common
Stock at $0.60 per share.

In July 2000, the Company entered into a consulting agreement with The
Titan Group LLC (Titan) for a one year term. Titan will provide consulting
and advisory services relating to business management and marketing. Titan
received options to acquire 100,000 shares of the Company's Common Stock at
$0.60 per share, 50,000 shares of the Company's Common Stock at $2.25 per
share, 50,000 shares of the Company's Common Stock at $3.00 per share and
an additional 50,000 shares with an exercise price of $6.00 per share. The
options will expire on July 1, 2002.

F-15