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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended: May 31, 1999
Commission File No. 0-22155
PERENNIAL HEALTH SYSTEMS, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Colorado 84-0987697
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
325 West Main Street, Suite 1400B, Louisville, Kentucky 40202
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(Address of Principal Executive Offices, Including Zip Code)
Issuer's telephone number, including area code: (502) 568-8923
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
As of August 31, 1999, 13,395,072 Shares of the Registrant's No Par Value
Common Stock were outstanding. The aggregate market value of voting stock
held by nonaffiliates of the Registrant on that date was approximately
$5,751,000.
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 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. [ ]
State Issuer's revenues for its most recent fiscal year: $13,693,000.
Documents incorporated by reference: None
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1
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Perennial Health Systems, Inc. (formerly known as In-House Rehab
Corportion) and its subsidiaries (the "Company") are engaged in providing, on
a contract basis, physical, speech, occupational and respiratory therapy and
behavioral health services primarily to long-term care providers. More
recently, the Company formed Perennial Health Management, Inc. ("PHM") as a
wholly owned subsidiary for the purpose of acquiring, operating and managing
nursing home properties. The Company intends to focus its efforts going
forward on the operations of PHM and anticipates that a significant portion of
its future revenues will be from such operations.
The Company was initially formed under the laws of the State of Colorado
in May 1985 under the name of Perennial Development Corporation for the
purpose of engaging in real estate activities.
On September 29, 1995, the Company acquired all of the outstanding stock
of In-House Rehab, Inc. ("IHR"), a Kentucky corporation, in exchange for
10,460,000 shares of the Company's authorized but unissued Common Stock. Such
shares were issued to the former shareholders of IHR and represented 85% of
the Company's Common Stock outstanding. As a result of this transaction,
there was a change in control of the Company. All of the Company's officers
and directors resigned, and new officers and directors selected by IHR were
elected.
IHR was formed in September 1994, and is engaged in providing, on a
contract basis, physical, speech and occupational therapy services to
long-term care providers.
Effective March 1, 1996, the Company acquired certain assets and
liabilities of Total Rehab South, Inc. ("TRS"), a Tampa, Florida based
provider of rehabilitation, speech and occupational therapists to nursing
homes and long-term care facilities in Florida and Georgia. Included in the
assets acquired by the Company were $900,000 in accounts receivable and the
rights of TRS under contracts it held to provide therapists to 28 facilities.
The Company also assumed up to $75,000 of liabilities of TRS. The total price
paid by the Company under the asset purchase agreement was $1,010,601
including a non-competition agreement in the amount of $185,601. In
connection with this acquisition, the therapists employed by TRS became
employees of the Company. TRS was merged into IHR on May 31, 1996.
Effective September 1, 1996, the Company acquired all of the stock of
Regal Health Care, Inc. ("RHC") for $1.00. RHC is a Clearwater, Florida based
provider of behavioral health services to nursing homes and long-term care
facilities in North Carolina. Upon acquisition, RHC had assets totaling
approximately $30,000 and liabilities totaling approximately $70,000. This
acquisition allowed the Company to add behavioral health services to the
rehabilitation services it currently offers. Effective September 10, 1997,
RHC changed its name to In-House Medical Resources, Inc.
In November 1996, the Company's shareholders approved an amendment to the
Company's Articles of Incorporation to change the name of the Company to
"In-House Rehab Corporation," and this became effective on December 9, 1996.
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Effective December 1, 1996, the Company acquired all of the stock of RT
Group Inc. ("RTG"), in exchange for $150,000 in cash. RTG is a Indianapolis,
Indiana based provider of respiratory care to nursing homes and long-term care
facilities in Indiana. Upon acquisition, RTG had assets totaling
approximately $75,000 and liabilities totaling approximately $49,000. The
Company now offers respiratory therapy services along with rehabilitation and
psych/social services in facilities under contract.
Effective December 1, 1996, the Company acquired all of the stock of
Daily Rehabilitation Institute, Inc. ("DRI") in exchange for $1.00 and an
option to purchase 30,000 shares of the Company's Common Stock at $2.25 per
share. DRI is a Jacksonville, Florida based provider of outpatient rehab
services in a clinic setting. Upon acquisition, DRI had assets totaling
approximately $116,000 and liabilities totaling approximately $124,000. The
clinic is a Medicare certified facility that the Company now markets in the
Florida based assisted living community.
Effective January 1, 1997, the Company acquired nine contracts to provide
therapy services to certain long-term care providers from Tri-Therapy
Services, Inc. ("TSI") in exchange for $100,000 in cash which included $10,000
for a noncompete agreement. TSI is a Madison, Mississippi based provider of
physical, occupational and speech therapy care to nursing homes and long-term
care facilities in Arkansas.
In July 1997, the Company entered into an agreement with an unrelated
company whereby the Company would provide operational support while the
partner company would provide the marketing support to sell the services
offered by the Company. This new company was a limited liability company,
Rehab Partners, L.L.C. ("RP") and IHR had an 85% interest in RP. Effective
May 31, 1998, RP was dissolved.
On September 30, 1997, the Company acquired the assets of Rehab & Therapy
Center of Naples, Inc.("RTCN"), an operator of a comprehensive outpatient
rehabilitation facility in southern Florida. This acquisition was made in
exchange for $20,000 in cash and 2,857 shares of the Company's Common Stock.
Effective December 12, 1997, IHR formed a new subsidiary, Doctors Rehab &
Therapy, Inc. ("DRT") and transferred the assets acquired from RTCN to DRT.
On March 30, 1998, the Company acquired all of the outstanding common
stock of Gateway Rehabilitation, Inc. ("Gateway") in exchange for 43,000
shares of the Company's Common Stock in a private transaction. The
acquisition was made pursuant to the terms of a Stock Purchase Agreement dated
March 1, 1998, among the Company, Gateway and Gateway's shareholders. Gateway
provided physical therapy, occupational therapy and rehabilitation program
management under contracts with thirty long-term care facilities in Illinois
and southwestern Indiana. During the year ended December 31, 1997, Gateway
had approximately $2,760,000 in sales and had a net loss of approximately
$17,000. At February 28, 1998, Gateway had approximately $883,000 in assets
and $1,137,000 in liabilities.
Two of the former shareholders of Gateway entered into two-year
employment agreements with the Company. Under the terms of the Stock Purchase
Agreement, the former shareholders of Gateway have the right to require the
Company to repurchase the shares of the Company's Common Stock received by
them in the transaction for $5.00 per share during the 10 day period
commencing May 31, 1999. The former shareholders provided notice to the
Company of their intent for the Company to repurchase their shares. In October
1998, the Company filed a complaint against the former shareholders alleging
misrepresentation and seeking to reform the Stock Purchase Agreement based on
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the true state of Gateway at the time of closing. The former shareholders
filed a counterclaim seeking enforcement of the agreement and damages.
Effective August 27, 1999, the Company reached an agreement in principle to
settle with the former shareholders whereby the Company will pay a total of
$462,500 to the former shareholders over a 17 month period to satisfy any
further obligations under the agreement.
On June 3, 1997, the Company formed Perennial Health Management, Inc. as
a wholly-owned subsidiary for the purpose of acquiring, operating and managing
nursing home properties. PHM is exploring acquisition and nursing home
management opportunities which may arise as a result of the new Medicare
reimbursement-billing system which is expected to have a significant effect on
nursing home operators. Management anticipates that some operators may be
unable to adapt to the new system and that acquisition and management
opportunities may arise.
In November 16, 1998, the Company's shareholders approved an amendment to
the Company's Articles of Incorporation to change the name of the Company to
"Perennial Health Systems, Inc."
On December 4, 1998, the Company acquired Scott County Healthcare (SCH),
formerly Healthcare of Indiana, a 99 bed nursing home facility in Scottsburg,
Indiana, and certain other assets. The acquisition was made in exchange for
$3,400,000 in cash from a loan, a seller financed promissory note in the
amount of $762,400, and non-qualified stock options to purchase 50,000 shares
of the Company's common stock at $2.00 per share. The stock options vest
immediately and expire three years from the date of grant. The acquisition
was accounted for as a purchase and, accordingly, the results of SCH
operations are included in the Company's consolidated financial statements
from the date of acquisition.
Effective July 1, 1999, the Company entered into a 20-year lease
agreement on a 228 bed nursing home facility in Beloit, Wisconsin. Monthly
base rent payments amount to $47,500 during the initial year and escalate, as
scheduled, over the life of the lease. The Company is also responsible for
making monthly tax and insurance deposits, which currently approximate $11,900
per month, to the lessor. The Company also entered into an option with the
lessor to purchase the facility at any time after six months at a
predetermined purchase price. For such option, the Company agreed to make
nonrefundable payments to the lessor totaling $360,000, one half to be paid
within 90 days of the effective date of the lease and one half to be paid no
later than July 1, 2000. Such payments for the option will be credited
against the purchase price if the option is exercised.
Effective September 1, 1999, the Company agreed to sell its rights to
contracts with Central Arkansas Nursing Centers along with related accounts
receivable and certain equipment to an organization owned principally by two
management members of the Company. One of the owners is the son of the
Company's President and Chief Executive Officer. The purchasers also agreed to
assume certain employee-related liabilities. The purchase price will be
approximately $340,000 with a down payment of approximately $250,000 and the
balance to be paid in quarterly installments beginning on April 1, 2000.
All references to the "Company" herein refers to the Company and its
subsidiaries, unless the context otherwise requires.
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NURSING HOME OPERATIONS
The Company believes that the demand for long-term care is increasing.
Improved medical care and advances in medical technology continue to increase
the survival rates for victims of disease and trauma. Many of these patients
never fully recover and require long-term care. The incidence of chronic
medical complications increases with age, particularly in connection with
certain degenerative conditions. As the average age of the United States
population increases, the Company believes that there will be an increase in
the demand for long-term care at all levels of the continuum of care.
At the same time, the healthcare system of the United States is
experiencing a period of significant change. Factors affecting the healthcare
system include the implementation of a Medicare prospective payment system
("PPS") for nursing centers and other cost containment measures, the expansion
of managed care, improved medical technology, an increased focus on measurable
clinical outcomes, a growing public awareness of healthcare spending by
governmental agencies at Federal and state levels, and heightened regulatory
scrutiny by Federal and state regulators. Payors increasingly are requiring
providers to move patients from more costly, high-acuity care environments to
lower-acuity care settings as quickly as is medically appropriate.
Certain members of the Company's management have experience in managing
and operating nursing homes. In addition, the Company has experience in
working with nursing home operators in providing therapy services to their
patients.
The Company plans to acquire, through purchase or lease, long-term care
facilities that provide both routine and ancillary services. Routine services
such as room and board and basic nursing care services are provided in skilled
long-term care facilities and assisted living/independent living facilities.
Certain long-term care facilities may also provide specialty services such as
HIV care, Alzheimer's disease units, wound care, subacute care, and stroke and
accident rehabilitation. It is anticipated that any facilities acquired will
derive most of their revenues from Medicaid and Medicare.
The Company may also agree to manage facilities for nursing home
operators. Such services would be performed under contracts which provide for
a fixed fee or a percentage of revenue as compensation for the management
services provided.
In evaluating an existing facility for acquisition, management will
consider the facility's historical occupancy rates and payor mix, reputation
and compliance history, physical condition and appearance, labor force
stability, the availability of financing on acceptable terms and, in the case
of assisted/independent living facilities, the demographics of the surrounding
area. There can be no assurance that the Company will locate additional
suitable acquisitions or management opportunities.
As of September 1, 1999, the Company owned or leased and operated 2 long-
term care facilities with 327 skilled long-term care beds. These facilities
are located in Indiana and Wisconsin.
The Company has an agreement in principle with The Medilodge Group, Inc.,
based in Detroit, Michigan, to acquire eight skilled nursing centers and one
assisted living center for approximately $79 million. The acquisition is
contingent upon the completion of the Company's due diligence review; the
receipt and approvals from certain licensing authorities; obtaining financing;
and the satisfaction of customary closing conditions. Due to these
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contingencies and the current state of the nursing home industry, it is not
certain when, if ever, this acquisition will occur. In the interim, the
Company is providing contract rehabilitation services at these facilities.
The Company's long-term care facilities provide both routine and
ancillary services. Routine services such as room and board and basic nursing
care services are provided. The Company provides a full range of
occupational, physical, speech and respiratory therapy in its long-term care
facilities. The Company derives most of its revenue for ancillary services
from Medicare reimbursement. See "Reimbursement/Government Programs."
The Company's strategy is to increase the number of long-term care
facilities that it operates primarily by acquiring by purchase or lease
independently-owned long-term care facilities and assisted/independent living
facilities located in the United States. Key elements of this strategy
include: (i) acquiring and developing additional long-term care facilities;
(ii) increasing facility occupancy rates; (iii) improving the payor mix at the
Company's long-term care facilities; and (iv) achieving operating
efficiencies.
THERAPY OPERATIONS
The Company provides rehabilitation services to nursing facilities on a
contract basis. These include physical therapy, occupational therapy,
speech-language pathology and behavioral health services. Physical therapy
enhances muscular and neural responses in an effort to improve patients'
physical strength and range of motion. Occupational therapy is the evaluation
and treatment of physical, cognitive and psychosocial performance deficits in
activities of daily living. Speech-language pathology is the diagnosis and
treatment of speech, language, voice and swallowing disorders. Behavorial
health services is the evaluation and treatment of patients suffering from
psychological and emotional disorders.
The long-term care industry has typically contracted for therapy services
for the following reasons:
INSUFFICIENT CASELOAD. The average nursing facility of
approximately 100 beds has insufficient and/or irregular caseloads, which
makes it uneconomical to operate its own therapy program with the full-time
employment of therapists and the associated costs of administration.
THERAPY STAFFING. Consistent staffing levels are difficult to
maintain, which jeopardizes service levels and quality. Employee turnover in
the rehabilitation industry is high relative to other industries because of
the supply/demand imbalance.
EXPERTISE. Therapy revenues represent a relatively small percentage
of a nursing facility's total revenues and operating activities.
Reimbursement and regulatory complexities concerning appropriate utilization,
documentation, denials management and quality oversight, if inadequately
administered, can seriously erode the profitability of therapy programs
staffed by and managed by employees of the nursing facility. As a result,
nursing facilities frequently choose to contract for specialized expertise,
especially in view of the changing reimbursement environment.
The current environment is unsettled. The Company believes that it is
well-positioned to compete effectively with other contractors due to: (i) a
multi-disciplinary team approach to therapy that is designed to deliver a high
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level of quality, (ii) reimbursement and regulatory expertise to assist
nursing facility operators in their dealings with third-party payors,
principally Medicare, and (iii) sophisticated management information systems
to assist operators in analyzing clinical outcomes, therapy utilization, claim
denials, staffing and marketing and educational activities. However, the
Company expects therapy revenues to become a much smaller percentage of its
overall revenues in the future.
OTHER MATTERS AFFECTING NURSING HOME AND THERAPY OPERATIONS
Competition
The health care industry in general, and rehabilitation in particular, is
highly competitive and subject to continual changes in methods of service
delivery and provider selection.
The Company's competitive position in nursing home operations will vary
within each community served. The Company believes that the quality of care
provided, reputation, location and physical appearance of its nursing centers
and, in the case of private patients, the charges for services, are
significant competitive factors. Although there is limited, if any, price
competition with respect to Medicare and Medicaid patients (since revenues
received for services provided to such patients are based on fixed rates or
cost reimbursement principles), there is significant competition for private
payment patients.
The long-term care industry is divided into a variety of competitive
areas which market similar services. These competitors include nursing
centers, hospitals, extended care centers, assisted living facilities, home
health agencies and similar institutions. The industry includes
government-owned, church-owned, secular not-for-profit and for-profit
institutions.
Therapy services is largely a local market business and competition
varies considerably among markets. The primary competitive factors in such
local markets are quality of patient care services, charges for services and
responsiveness to meeting the needs of patients, customer health care
facilities, referral sources and payors.
Key competitive factors in the contract therapy services business include
the ability to provide therapy staff to meet the therapy needs at customer
facilities and the ability to provide management and clinical support to such
staff. The Company competes in local markets with other national, regional and
local contract therapy providers. The demographics of potential customers are
expected to change as some larger nursing home chains attempt to take their
services in-house. This may increase the competition for remaining customers.
The successful development of such in-house programs by a large number of
customers could adversely affect the Company's ability to expand its customer
contracts in the nursing home industry. The Company has sought to diversify
its customer and revenue base by focusing on the development of its nursing
home operations.
The Company believes that its ability to compete is enhanced by the
relationships management has established within the long-term care industry.
The Company's services are also unique in that the facility administrator has
the option to have the Company manage the rehabilitation department totally,
or to utilize the Company as a traditional provider in selected disciplines.
The flexibility of service approach is different from the larger competitors
which typically offer only contract therapy. The Company is also involved in
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the development of sub-acute care units. This particular aspect of service
appeals to mid-size chains that cannot afford to hire management personnel
with this highly specialized expertise.
Reimbursement/Government Programs
Reimbursement for long-term care services is available through Medicare,
Medicaid, commercial insurance, managed care programs, veterans' benefits,
workers' compensation and other government programs. Medicare is a federally
funded health program which provides health insurance coverage for certain
disabled persons and persons age 65 or older. Medicaid is a health insurance
program, jointly funded by the Federal and state governments, which provides
health insurance coverage for certain financially or medically needy persons
regardless of age. Medicaid benefits supplement Medicare benefits for
financially needy persons age 65 or older. In many states, Medicaid
reimburses for rehabilitation services for eligible recipients.
Nursing home revenues are derived principally from Medicare and Medicaid
programs and from private payment patients. Changes in the mix of the
Company's patient population among these three categories significantly affect
the profitability of the Company's nursing home operations. Although Medicare
and high acuity patients generally produce the most revenue per patient day,
profitability with respect to higher acuity patients is reduced by the costs
associated with the higher level of nursing care and other services required
by such patients. The Company believes that private payment patients
generally constitute the most profitable category and Medicaid patients
generally constitute the least profitable category.
Medicare revenues are subject to the new prospective payment system
("PPS") for Medicare contained in the Balance Budget Act of 1997. Prior to
the implementation of PPS, nursing home reimbursement was based upon
reasonable direct and indirect costs of services provided to patients. For
nursing homes that participated in the Medicare program prior to October 1995,
the Medicare PPS rates will be phased in over a four year period. During the
first three years, the rates will be established by a blend of
facility-specific costs and a federally determined acuity level rate. The
portion of the rate affected by acuity level will increase from 25% in year
one to 75% by year three. In year four, the entire PPS rate will be based on
federal determined acuity levels. Nursing homes that were not in the Medicare
program prior to October 1995 will go directly to the federally determined
acuity level rate.
The payments received under PPS cover all services for Medicare patients
including all ancillary services, such as respiratory therapy, physical
therapy, occupational therapy, speech therapy and certain covered
pharmaceuticals.
A substantial portion of the Company's business is reimbursed by
Medicare, Medicaid and private payment. There can be no assurance that
payments under governmental and private third-party payor programs will remain
at levels comparable to present levels or will be sufficient to cover the
costs allocable to patients eligible for reimbursement pursuant to such
programs. In addition, there can be no assurance that facilities operated by
the Company, or the provision of services and supplies by the company, will
meet the requirements for participation in such programs. The Company could
be affected adversely by the continuing efforts of governmental and private
third-party payors to contain the amount of reimbursement for healthcare
services.
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Government Regulation
The healthcare industry is subject to extensive Federal, state and local
regulation. In particular, the operation of nursing home facilities and the
provision of healthcare services are subject to federal, state and local laws
relating to, among other things, the adequacy of medical care, distribution of
pharmaceuticals, equipment, personnel, operating policies, fire prevention,
compliance with building codes and environmental laws. Nursing home
facilities are also subject to periodic inspection by governmental and other
authorities to assure continued compliance with various standards, their
continued licensing under state law and certification under the Medicare and
Medicaid programs. The failure to obtain or renew any required regulatory
approvals or licenses could adversely affect the Company's growth and could
prevent it from offering its existing or additional services.
Medicare certification is a critical factor for contributing to the
revenues and profitability of a long-term care facility and, accordingly, will
be a key objective of the Company's facility enhancement efforts with respect
to any facilities which the Company may acquire. Medicare certification
depends on a favorable facility review by the Health Standards and Quality
Bureau of the Health Care Financing Administration ("HCFA"). Any suspension
or delay in the administration of HCFA's survey and certification program, as
had been proposed by HCFA in 1995, could delay Medicare certification of any
new facilities acquired by the Company which are not already certified. There
can be no assurance that the Company will be able to obtain or maintain
Medicare certifications at its facilities.
Various federal and state laws govern financial and other arrangements
between healthcare providers. These laws often prohibit certain direct and
indirect payments or fee-splitting arrangements between healthcare providers
that are designed to induce or encourage the referral of patients to, or the
recommendation of, a particular provider for medical products and services.
Such laws include the Antikickback Amendments. These provisions prohibit,
among other things, the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of Medicare and Medicaid patients.
These operations also are subject to additional antifraud and abuse provisions
contained in the Budget Act. In addition, many states prohibit business
corporations from providing, or holding themselves out as a provider of,
medical care. Possible sanctions for violation of any of these restrictions
or prohibitions include loss of licensure or eligibility to participate in
reimbursement programs as well as civil and criminal penalties. These laws
vary from state to state. While the Company intends to structure its
relationships with physicians to comply with these laws, there can be no
assurance that regulatory authorities or other parties will not assert that
the Company's relationship with physicians violates these laws.
In addition to license requirements, many states have statutes that
require a Certificate of Need ("CON") to be obtained prior to the construction
of a new nursing center, the addition of new beds or services or the
incurrence of certain capital expenditures. Certain states also require
regulatory approval prior to certain changes in ownership of a nursing home
facility. Certain states have eliminated their CON programs and other states
are considering alternatives to their CON programs. To the extent that CONs
or other similar approvals are required for expansion of the Company's
operations, either through facility acquisitions, expansion or provision of
new services or other changes, such expansion could be affected adversely by
the failure or inability to obtain the necessary approvals, changes in the
standards applicable to such approvals or possible delays and expenses
associated with obtaining such approvals.
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There have been a number of recent healthcare reform initiatives at the
federal and state levels. The Company cannot make any assessment as to the
ultimate timing and impact that any pending or future healthcare reform
proposals may have on the healthcare industry. No assurance can be given that
any such reform will not have a material adverse effect on the business,
financial condition, results of operations or prospects of the Company.
Insurance
The Company's nursing home and therapy operations are subject to personal
injury and other liability claims which are normally covered by insurance.
The Company maintains liability insurance coverage in amounts deemed
appropriate based on the nature and risks of the business. There can be no
assurance that a future claim will not exceed insurance coverage or that such
coverage will continue to be available. In addition, continued substantial
increases in the cost of such insurance could have an adverse effect on the
Company's business.
EMPLOYEES
As of September 1, 1999, the Company had approximately 203 employees of
which 94 are full-time. The Company's employees are not represented by any
labor union. Management believes that its relationships with employees are
favorable.
ITEM 2. PROPERTIES.
The Company's properties consist principally of its corporate
headquarters and its nursing home facilities.
Effective February 1, 1997, the Company entered into a new five year
lease for approximately 7,400 square feet of office space at Waterfront Plaza,
325 West Main Street, Louisville, Kentucky 40202. The base rent is $7,068 per
month and is fixed for the five year period.
Effective December 4, 1998, the Company acquired Scott County
Healthcare, a 99 bed nursing home facility in Scottsburg, Indiana. Monthly
mortgage payments under a 10-year mortgage are $28,790.
Effective July 1, 1999, the Company entered into a 20-year lease
agreement on a 228 bed nursing home facility in Beloit, Wisconsin. Monthly
base rent payments amount to $47,500 during the initial year and escalate, as
scheduled, over the life of the lease. The Company is also responsible for
making monthly tax and insurance deposits, which currently approximate $11,900
per month, to the lessor. The Company also entered into an option with the
lessor to purchase the facility at any time after six months at a
predetermined purchase price. For such option, the Company agreed to make
nonrefundable payments to the lessor totaling $360,000, one half to be paid
within 90 days of the effective date of the lease and one half to be paid no
later than July 1, 2000. Such payments for the option will be credited
against the purchase price if the option is exercised.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are not currently parties to any
litigation that management believes would have a material adverse effect on
the financial condition or results of operations of the Company except as
described below.
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On October 16, 1998, the Company filed suit in the Jefferson Circuit
Court, Jefferson County, Kentucky, against the former shareholders of Gateway
Rehab, Inc., claiming, among other things, that such shareholders had
misrepresented certain assets and liabilities on the financial statements of
Gateway Rehab that were used in the valuation of the business. The former
shareholders of Gateway Rehab responded to the claims of the Company by filing
a counterclaim asking for enforcement of the agreements without adjustments,
as well as for other damates. Effective August 27, 1999, the Company reached
an agreement in principle to settle with the former shareholders of Gateway
Rehab whereby the Company will pay a total of $462,500 to the former
shareholders over a 17 month period to satisfy any further obligations of the
Company. The settlement amount is included as an accrued expense on the
Company's balance sheet as of May 31, 1999.
During 1995, Greystone Partnerships Group, Inc. ("Greystone") commenced
litigation against David V. Hall, the Company's President, claiming it was
entitled to compensation as a finder for an investment made by Retirement Care
Associates, Inc. in the Company. Effective February 17, 1999, as part of a
settlement agreement the Company agreed to enter into an agreement to retain
Greystone as a finder for potential acquisitions of properties and to pay
Greystone a total of $97,000 over a 24 month period. As of May 31, 1999,
$27,500 of the amount had been paid and the remainder was included as an
accrued expense on the Company's balance sheet at May 31, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareholders
during the fourth quarter of the period covered by this Report.
PART II
ITEM 5. MARKET PRICE FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The principal market for trading the Company's Common Stock has been the
over-the-counter market. Since December 1995, prices for the Company's Common
Stock have been quoted on the OTC Bulletin Board. The trading symbol is
currently "PHSS."
The range of high and low bid quotations for the Company's Common Stock
provided below were obtained from the OTC Bulletin Board and the National
Quotation Bureau. The stock is principally owned or controlled by officers
and directors, and the bid prices reported may not be indicative of the value
of the Common Stock. The volume of trading in the Company's Common Stock has
been very limited. The existence of an active trading market may not exist at
any given time and shareholders may have difficulty selling their shares.
These over-the-counter market quotations reflect inter-dealer prices without
retail markup, markdown or commissions and may not necessarily represent
actual transactions.
BID
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YEAR ENDED MAY 31, 1999 HIGH LOW
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First Quarter $2.56 $1.31
Second Quarter 2.75 .69
Third Quarter 1.69 .75
Fourth Quarter 1.69 .75
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YEAR ENDED MAY 31, 1998 HIGH LOW
----------------------- ---- -----
First Quarter $3.50 $2.25
Second Quarter 2.25 0.81
Third Quarter 1.25 0.88
Fourth Quarter 2.63 1.03
As of September 1, 1999, there were approximately 267 record holders of
the Company's Common Stock. Based on securities position listings, the
Company believes that there are more than 500 beneficial owners of the
Company's Common Stock.
The Company has paid no cash dividends on its Common Stock and has no
present intention of paying cash dividends in the foreseeable future. It is
the present policy of the Board of Directors to retain all earnings to provide
for the growth of the Company. Payment of cash dividends in the future will
depend, among other things, upon the Company's future earnings, requirements
for capital improvements and financial condition.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
This Annual Report on Form 10-KSB includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended ,
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements regarding the Company's expected future
financial position, results of operations, cash flows, liquidity, financing
plans, business strategy, budgets, projected costs and capital expenditures,
competitive position, growth opportunities, plans and objectives of management
for future operations and words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," "may" and other similar expressions are
forward-looking statements. Such forward-looking statements are inherently
uncertain, and stockholders must recognize that actual results may differ
materially from the Company's expectations as a result of a variety of
factors, including, without limitation, those discussed below.
Actual future results and trends for the Company may differ materially
depending on a variety of factors discussed in this "Cautionary Statements"
section and elsewhere in this Annual Report on Form 10-KSB. Factors that may
affect the plans or results of the Company include, without limitation, (i)
the Company's success in implementing its business strategy, (ii) the nature
and extent of future competition, (iii) the extent of future healthcare reform
and regulation, including cost containment measures and changes in
reimbursement policies and procedures, (iv) the Company's ability to
effectively manage and operate its properties, (v) the ability of the Company
and its significant vendors, suppliers and payors to timely identify and
correct all relevant computer codes and date sensitive chips prior to the year
2000 or replace noncompliant equipment with year 2000 compliant equipment and
(ix) changes in the general economic conditions and/or in the markets in which
the Company competes. Many of these factor are beyond the control of the
Company and its management.
OVERALL SUMMARY
The following discusses the results of operations for the fiscal years
ended 1999 and 1998.
12
<PAGE>
FISCAL YEAR ENDED MAY 31, 1999 COMPARED TO FISCAL YEAR ENDED MAY 31, 1998
Net revenues for the year ended May 31, 1999 decreased from the prior
year by $4,994,000, or 27% to $13,693,000. Without new nursing home revenues
of $1,543,000, pertaining to the acquisition of Scott County Healthcare on
December 4, 1998, net revenues would have declined by 35%. The significant
reduction was primarily due to the implementation of Medicare's Prospective
Payment System (PPS) and a reduction in unprofitable therapy contracts. Under
PPS, Medicare payments are made under a fee schedule and certain services are
limited to per beneficiary caps. Prior to PPS, Medicare reimbursement was
made based primarily on the provider's cost of services rendered, with less
extensive limitation.
Cost of services as a percentage of revenue for the year ended May 31,
1999, were 59% as compared to 57% in the prior year. The increase is
primarily attributable to the reduction in net revenues as a result of the
implementation of PPS as discussed above. Costs of providing therapy services
could not be reduced as rapidly as revenues declined.
Selling, general and administrative expenses as a percentage of revenue
for the year ended May 31, 1999, were 46% as compared to 28% in the prior
year. The increase is primarily attributable to the following factors: (1)
the reduction in net revenues as a result of the implementation of PPS and the
reduction in unprofitable contracts as discussed above, (2) over $610,000 in
fourth quarter write offs and adjustments pertaining to litigation settlement
and other matters, and (3) management's decision to incur the necessary start-
up costs to enter the nursing home industry.
Bad debt expense increased to 31% of revenues for the year ended May 31,
1999, as compared to 5% in the prior year. Several significant customers,
including three that filed for protection under bankruptcy statutes, were
unable to pay all or part of their accounts receivable balances during 1999
and were written off or an allowance was provided.
Amortization expense increased to 4.5% of revenues for the year ended May
31, 1999, as compared to .4% in the proir year. The increase is due to the
write off of unrecoverable intangible costs in 1999.
Interest expense for the year ended May 31, 1999, was $508,000 versus
$370,000 in the prior year. The increase resulted from increased borrowings
on the credit line in order to finance the Company's decrease in working
capital during fiscal 1999.
The income tax benefit for the year ended May 31, 1999, was 12.5% as
compared to an income tax provision of 40.6% for the year ended May 31, 1998.
The change resulted from a taxable loss in 1999 compared to taxable income in
1998.
The Company's net loss as a percentage of revenue was 42% for the fiscal
year ended May 31, 1999 as compared to net income of 3% of revenues for the
fiscal year ended May 31, 1998. The decrease is primarily attributable to the
significant increase in bad debt expense and the implementation of PPS as
discussed above.
Fourth Quarter Adjustments
Preparation of financial statements requires a number of estimates and
judgments that are based upon the best available information at the time. In
addition, management regularly reviews the methods used to recognize revenues
13
<PAGE>
and allocate costs to ensure that the financial statements reflect properly
the results of interim periods. During the fourth quarter of 1999, the
Company recorded certain adjustments which significantly impacted operating
results. A summary of such adjustments follows:
Write off of bad debts or provision
for doubtful accounts receivable $3,979,000
Write off unrecoverable intangible
costs 697,000
Litigation settlement costs 428,000
Adjustment of income taxes (288,000)
Other 181,000
----------
$4,997,000
==========
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 1999, the Company had a working capital deficit of
$2,448,000 as compared to positive working capital of $2,616,000 at May 31,
1998. The decrease was primarily due to a decrease in accounts receivable
which was the result of significant bad debts written off and reductions in
revenue as a result of the implementation of PPS and the reduction in
unprofitable contracts as discussed above.
Net cash used in operating activities totaled $141,994 for the year ended
May 31, 1999, as compared to $878,000 of net cash provided by operating
activities in the prior year. The decrease was primarily due to significant
bad debts written off and reductions in revenue as a result of the
implementation of PPS as discussed above.
The Company used $3,710,000 toward investing activities during the year
ended May 31, 1999, compared with $277,000 in the prior year. The increase is
primarily attributable to the acquisition of Scott County Healthcare during
fiscal 1999.
Net cash provided by financing activities for the year ended May 31,
1999, was $3,599,000 as compared to $243,000 of net cash used in financing
activities for the prior year. The increase was primarily due to new
financing related to the acquisition of Scott County Healthcare and a new term
loan pertaining to the Company's repurchase of a promissory note from its
primary lender.
On August 28, 1998, the Company's existing line of credit was replaced by
a line of credit agreement at another lending institution. The new agreement
provides for total borrowings up to $5,000,000, subject to a borrowing base
formula. Borrowings under this agreement bear interest at the LIBO rate plus
3.25%, payable monthly.
The Company's significant loss for the year ended May 31, 1999, resulting
loss of working capital and working capital deficit at May 31, 1999, made it
necessary for the Company to supplement its short-term working capital needs
through the following steps:
* On June 9, 1999, the Company entered into an agreement with its
primary lender to temporarily advance the Company $500,000 against
estimated federal, state and local tax refunds for the year ended May
31, 1999. The advance was repaid to the lender on July 9, 1999.
* On July 9, 1999, the Company received $500,000 from five private
14
<PAGE>
investors in exchange for promissory notes and warrants to purchase
Common Stock.
* On July 16, 1999, the Company entered into a term loan with its primary
lender for $2,300,000. $700,000 of the term loan is to be used as
working capital and $1,600,000 of the loan is to fulfill the Company's
obligation to repurchase a note that was previously sold with recourse
to the lender when the payor of the note filed for Chapter 11
bankruptcy protection. As further consideration, the lender also
received warrants to purchase Common Stock.
The Company's Gateway Rehabilitation, Inc. ("Gateway") subsidiary also
has a revolving line of credit agreement with a bank which provides for total
borrowings of $1,000,000, subject to a borrowing base formula. Borrowings
under this agreement bear interest at the prime rate plus .25%, payable
monthly. This line of credit is collateralized by the accounts receivable of
Gateway. Total borrowings under this agreement were $363,000 at May 31, 1999.
The Company was notified in April 1999 that this line of credit would not be
renewed and the remaining balance is being extinguished as GR accounts
receivable are collected. The remaining balance at August 30, 1999 was
$136,000.
Considerable uncertainty remains with respect to whether the existing
line of credit together with cash flow from operations and the supplement to
short term working capital described above will be sufficient to meet the
Company's current cash requirements and whether the Company has sufficient
access to additional funding sources, if needed. Additionally, the Company is
not in compliance with certain financial ratios and covenants contained in its
line of credit agreement with its primary lender. Additionally, business
expansion may create a need for additional funding which the Company would
need to raise through additional borrowing and/or an offering of debt
securities.
The Company has an agreement in principle with The Medilodge Group, Inc.,
based in Detroit, Michigan, to acquire eight skilled nursing centers and one
assisted living center for approximately $79 million. The acquisition is
contingent upon the completion of the Company's due diligence review; the
receipt and approvals from certain licensing authorities; obtaining financing;
and the satisfaction of customary closing conditions. Due to these
contingencies and the current state of the nursing home industry, it is not
certain when, if ever, this acquisition will occur.
Except as described above, the Company has no commitments for material
capital expenditures.
YEAR 2000 COMPLIANCE
The Company continues to assess its existing computer systems to identify
the hardware and software systems that could be affected by the "Year 2000"
issue, which results from computer programs having been written to define the
applicable year using two digits rather than four digits. These systems will
falsely recognize the year 2000 as 1900.
Policies and procedures for acquisition of hardware and software systems
have been modified to ensure that future technology acquisitions and
enhancements are compliant.
As of April 12, 1999, the Year 2000-compliance assessment for corporate
operations was complete. All hardware systems have been evaluated to ensure
15
<PAGE>
that their internal processors are compliant. Non-compliant systems have been
either replaced or updated to conform to compliance.
The Company is in the process of converting to a new financial and
clinical package that conforms to Year 2000 requirements. The corporate
office plans to be fully converted and operational on October 1, 1999.
Facilities owned or managed by the company as of August 15, 1999 are planned
to be fully converted as of the same date.
The Company has completed an evaluation of the risks of non-information
technology problems connected to Y2K. Areas of potential exposure to risk
have been identified as of May 31, 1999, and are being resolved.
Corporate acquisitions will be evaluated for Year 2000 compliance as
those transactions are completed. Due diligence on potential acquisitions to
this date have revealed no cause for concern regarding the Year 2000 issue.
Additionally, relationships may exist with third-party payors, suppliers,
vendors, and others that may have non-compliant computer systems outside of
the Company's control. No assurance can be given that fiscal intermediaries,
governmental agencies, and other payors with which the Company transacts
business and who are responsible for payment to the Company will not
experience significant problems with Year 2000 compliance. Failure of these
payors to remedy Year 2000 problems could have a material and adverse effect
on the Company's business, financial condition and results of operations.
NEW ACCOUNTING STANDARDS
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-based Compensation," which encourages, but does not require, companies
to measure the compensation cost of stock-based compensation plans at the
grant date based on the fair value of the stock-based award. Companies may
continue accounting for stock-based compensation under APB Opinion 25,
"Accounting for Stock Issued to Employees," provided the Company discloses the
pro forma effects on net income and earnings per share had the new accounting
requirements been applied. This statement was effective for the Company's
fiscal year ending May 31, 1997 annual financial statements. The Company
continues to account for stock-based compensation awards under the provisions
of APB 25.
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" for the year ended May 31, 1998 including interim
periods. This accounting pronouncement requires the disclosure of basic and
diluted earnings per share. Diluted earnings per share approximates earnings
per share as previously reported. Because the concept of basic earnings per
share does not include the impact of common stock equivalents, such as stock
options, basic earnings per share will be higher than diluted earnings per
share.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The provisions of SFAS No. 130 were
effective for the year ended May 31, 1999 and did not have a material impact
on the Company's financial statements.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
See the consolidated financial statements and the notes thereto beginning
on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
On October 1, 1997, Coopers & Lybrand L.L.P. ("C&L"), which served as the
Company's independent accountants for the fiscal years ended May 31, 1995 and
1996, and had been retained for the Company's fiscal year ended May 31, 1997,
resigned as the Company's independent accountants. The reports of C&L on the
Company's financial statements for the fiscal years ended May 31, 1995 and
1996 did not contain an adverse opinion or disclaimer of an opinion nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles or practices. The Company filed a report on Form 8-K dated October
1, 1997 reporting the resignation of C&L.
The Company is not aware of any "disagreement" or "reportable event"
within the meaning of Item 304 of Regulation S-B, with C&L during the fiscal
years ended May 31, 1995 and 1996, and from that date to the date of C&L's
resignation on October 1, 1997, on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure,
except as described below.
In its audit of the Company's financial statements for the year ended May
31, 1997, C&L had completed most of its audit procedures by the end of July
1997 and had not raised any significant concerns about the Company's financial
statements, other than the following. On Friday, August 1, 1997, prior to the
Company's scheduled fourth quarter earnings release on Monday, August 4, 1997,
C&L advised the Company that it had concerns about the collectability of
certain accounts receivable from Retirement Care, a major customer of the
Company and a 27.4% shareholder of the Company's outstanding Common Stock.
Retirement Care had historically been a slow paying customer, but even at that
time continued to make payments on the balances due to the Company for
services rendered.
C&L also served as the independent accountants for Retirement Care until
August 14, 1997, when C&L resigned as the independent accountants of
Retirement Care. In a letter filed with the Securities and Exchange
Commission concerning its resignation, C&L stated that it was unable to rely
on representations of Retirement Care's management, and did not intend to be
associated with any filings which may be made by Retirement Care with the
Securities and Exchange Commission.
During August and September 1997, the Company, Retirement Care and Chris
Brogdon, the President of Retirement Care and a Director of the Company, made
proposals to C&L to alleviate its concerns. Such proposals included
Retirement Care paying down the balance of the accounts receivable and
providing collateral which the Company's management believed would more than
adequately secure the payment of the remaining accounts receivable of
Retirement Care. However, C&L took the position that the collateral was
insufficient. C&L noted that even if such proposals were adopted that it
would still render an opinion with a "going concern" qualification based on
what C&L believed was the uncollectability of the Retirement Care accounts
receivables. The Company's management offered another proposal to provide a
letter of credit from an unaffiliated third party which would more than
adequately secure the Retirement Care accounts receivable, but C&L would not
17
<PAGE>
provide a written commitment to the Company that this would be sufficient
collateral.
The Company's management believed that C&L's position with respect to the
Retirement Care accounts receivable was unreasonable and appeared to be a
result of C&L's adverse relationship with Retirement Care. Based on this
concern, the Company asked C&L to evaluate C&L's relationship with the Company
under applicable independence and conflicts of interest rules. In response,
C&L denied that any conflicts of interest or independence rules had been
violated, but stated that it was no longer appropriate for it to serve as the
Company's independent accountants because of a deterioration of the
client-auditor relationship.
The Company's management has fully advised the Audit Committee of the
Board of Directors of all of the above matters, and certain members of the
Board of Directors and the Audit Committee of the Board of Directors discussed
the above matters with C&L. However, neither the full Board of Directors nor
the full Audit Committee have discussed these matters with C&L.
The Company provided a copy of its Report on Form 8-K to C&L and
requested that C&L provide the Company with a letter addressed to the
Commission, as required by Item 304(a)(3) of Regulation S-B.
On October 14, 1997, C&L provided the Company with its response to the
Form 8-K (the "Response Letter"), wherein it disagreed with certain statements
made by the Company therein. The Company's management continues to stand by
the statements it made in the Form 8-K. The Company did not want a change in
accountants during an audit and continued to work with C&L to satisfy them
with respect to the collectability of the Retirement Care receivables during
August and September, until C&L's resignation on October 1, 1997.
The Company authorized C&L to respond fully to the inquiries of the
Company's successor independent accountants.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Directors and Officers of the Company are as follows:
NAME AGE POSITIONS AND OFFICES HELD
---- --- --------------------------
David V. Hall 57 Chairman, Chief Executive Officer,
President and a Director
David W. Lester 46 Chief Financial Officer, Treasurer,
Secretary and a Director
Timothy M. Graven 49 Director
Bert L. Blieden 65 Director
Rebecca H. Krueger 44 Chief Operating Officer
There is no family relationship between any Director or Executive Officer
of the Company.
18
<PAGE>
Effective in August 1997, the Company established a compensation
committee and an audit committee. The members of both of these committees are
Timothy M. Graven and Bert L. Blieden. The Company has no nominating
committee.
Set forth below are the names of all Directors and Executive Officers of
the Company, all positions and offices with the Company held by each such
person, the period during which he has served as such, and the principal
occupations and employment of such persons during at least the last five
years:
DAVID V. HALL - CHAIRMAN, CHIEF EXECUTIVE OFFICER, PRESIDENT AND
DIRECTOR. Mr. Hall has been President and Director of the Company since
September 1995, and has held these same positions with In-House Rehab, Inc.
("IHR"), the Company's wholly-owned subsidiary, since September 1994. From
1986 to 1993, he was President of The Cardinal Group, a nursing home operator
which he founded, which grew to 26 nursing homes. Mr. Hall sold this company
in 1993, and he was actively involved in winding up this sale until the Summer
of 1994. During this period of time and until September 1994, he also worked
on plans for starting In-House Rehab, Inc. Since 1994, Mr. Hall has also
served as Chairman of the Board of Hallmark Communications, a company engaged
in selling long distance telephone service, primarily to businesses. From
1980 to 1985, he was President, founder and sole owner of Cardinal Medical
Corporation which operated six full service nursing homes in Kentucky, which
were sold to Hillhaven Corp. in 1985 due to a change in Kentucky's Medicaid
reimbursement regulations. From 1977 to 1980, he was President, founder and
sole owner of Clinical Management Associates, a contract respiratory and
cardiopulmonary company which provided professionals and equipment to acute
care hospitals. At the time that Mr. Hall sold this company, it provided
services to 22 hospitals in five states, had annual revenues of $6 million
and had approximately 220 employees. He received a B.A. Degree from the
University of Louisville in 1964.
DAVID W. LESTER - CHIEF FINANCIAL OFFICER, TREASURER, SECRETARY AND
DIRECTOR. Mr. Lester, a certified public accountant, joined the Company and
has been Chief Financial Officer since June 1999. He has been Treasurer,
Secretary and a Director since July 1999. From March 1998 to May 1999, Mr.
Lester was Chief Financial Officer of Micro Computer Solutions, Inc., a
regional information technology services firm. He served as Chief Operating
Officer and Chief Financial Officer for Kentucky Medical Insurance Company, a
publicly-traded provider of medical professional liability insurance formed by
the Kentucky Medical Association to help combat the medical malpractice crisis
during the late 1970s, from 1985 to 1996. Mr. Lester serviced as Chief
Financial Officer of Stratton-Cheeseman Management Company, a management
company that manages Louisville-based Kentucky Medical Insurance Company and
insurance company operations in several other states, from 1996 to 1997. Mr.
Lester began his career with KPMG Peat Marwick, where he worked in the firm's
Louisville and New York offices from 1975 to 1985. He received a B.S. Degree
in Accounting from Western Kentucky University in 1975.
TIMOTHY M. GRAVEN - DIRECTOR. Mr. Graven has been a Director of the
Company since August 1997, and is the Managing Partner and co-founder of Triad
Investment Company, LLC, a private investment firm founded in 1995. Mr.
Graven previously served as President and Chief Operating Officer of Steel
Technologies, Inc., of Louisville, Kentucky, a steel processing company, from
March 1990 to November 1994, as Chief Financial Officer from May 1985 to March
1990, and as Director from 1982 to 1994. Mr. Graven is currently also a
Director of Performance Food Group Company, a publicly-held company listed on
19
<PAGE>
the Nasdaq Stock Market. Mr. Graven received a B.S. Degree in Accounting from
Murray State University in 1973.
BERT L. BLIEDEN - DIRECTOR. Mr. Blieden has been a Director of the
Company since July 1998. He is President of the Kaden Companies, a position
he has held since that company was formed in 1983. The Kaden Companies are
engaged in commercial real estate development with projects primarily in the
Midwest. Prior to the formation of the Kaden Companies, Mr. Blieden owned and
developed commercial and residential real estate for over twenty years through
his company, Bert L. Blieden Company Realtors. Mr. Blieden attended the
University of Louisville and the University of Louisville School of Law.
REBECCA H. KRUEGER - CHIEF OPERATING OFFICER. Mrs. Krueger became
employed by the Company in June 1996, and became Chief Operating Officer in
September 1996. From September 1990 to December 1995, she was employed by
Transitional Health Services ("THS") which was acquired by WelCare
International Management Corporation, Atlanta, Georgia ("WelCare") in December
1995, and continued to be employed by WelCare until June 1996. THS and
WelCare operate and manage a large number of nursing home facilities.
Initially, Mrs. Krueger was Director of Nursing of a facility owned by THS
where she supervised a nursing staff of approximately 160 persons, and
directed a rehabilitation program. Beginning in May 1992, she became a
Regional Nurse Consultant/Quality Assurance Specialist for THS, and was
responsible for eight facilities in evaluating staff performance and
compliance with federal and state regulations. In January 1994, Mrs. Krueger
became a Regional Director of Operations for THS where she was responsible for
the total operations of three to six long-term care facilities in Indiana,
Kentucky and Arkansas. Finally, from March 1996 to June 1996, she was
National Director of Subacute Services for WelCare, where she was responsible
for the development of all subacute and postacute programs for up to 78
facilities. Mrs. Krueger graduated from the University of the State of New
York in 1989 with an Associate Science and Nursing Degree.
The Company's executive officers hold office until the next annual
meeting of directors of the Company. There are no known arrangements or
understandings between any director or executive officer and any other person
pursuant to which any of the above-named executive officers or directors was
selected as an officer or director of the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on a review of the Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, no persons who were either a
director, officer or beneficial owner of more than 10% of the Company's common
stock, failed to file on a timely basis reports required by Section 16(a) of
the Exchange Act during the most recent fiscal year, except that David V. Hall
filed one Form 4 reporting one transaction late and Bert L. Blieden filed one
Form 4 reporting two transations late.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information regarding the executive
compensation for the Company's President and each other Executive Officer who
received total salary and bonus in excess of $100,000 for the fiscal years
ended May 31, 1999, 1998 and 1997:
20
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM COMPENSATION
---------------------------
AWARDS PAYOUTS
------------------ -------
ANNUAL COMPENSATION SECURI-
-------------------------------- TIES UN-
OTHER RE- DERLYING ALL
ANNUAL STRICTED OPTIONS/ OTHER
NAME AND PRINCIPAL COMPEN- STOCK SARs LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD(S) (NUMBER) PAYOUTS SATION
- ------------------ ---- ------- -------- ------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David V. Hall, 1999 $248,066 $ - $15,350 -0- -0- -0- $8,377
President <FN1> <FN2>
1998 $206,538 $ 4,783 $15,617 -0- 100,000 -0- $10,320
<FN3> <FN2>
1997 $192,308 $ 28,803 $11,271 -0- 200,000 -0- $12,215
<FN4> <FN2>
Robert J. Babine, 1999 $122,834 $ - $15,456 -0- -0- -0- $1,419
Chief Financial <FN6> <FN7>
Officer <FN5> 1998 $123,923 $ - $14,062 -0- -0- -0- $1,774
<FN8> <FN7>
1997 $110,000 $ 15,568 $ 8,347 -0- -0- -0- $ 1,515
<FN9> <FN7>
Rebecca H. Krueger, 1999 $128,142 $ - $ 7,300 -0- -0- -0- $ -
Chief Operating <FN10>
Officer 1998 $108,533 $ 12,500 $ 7,300 -0- 37,500 -0- $ -
<FN10>
Michael J. Kitchen, 1999 $104,892 $ - $ 7,800 -0- -0- -0- $ -
Vice President, <FN11> <F12>
Secretary and
General Counsel
- ------------------
<FN>
<FN1>
Represents $5,532 paid for medical insurance benefits above those provided to
other full-time employees of the Company and $9,818 paid for expenses of an
automobile provided for Mr. Hall's use.
<FN2>
Represents the premium paid for a term life insurance policy provided for Mr.
Hall's benefit.
<FN3>
Represents $5,383 paid for medical insurance benefits above those provided to
other full-time employees of the Company and $10,234 paid for expenses of an
automobile provided for Mr. Hall's use.
<FN4>
Represents $11,271 paid for expenses of an automobile provided for Mr. Hall's
use.
<FN5>
Mr. Babine resigned effective January 21, 1999.
21
<FN6>
Represents $11,700 paid to Mr. Babine for the use of an automobile and $3,756
paid for medical insurance benefits above those provided and other full time
employees of the Company.
<FN7>
Represents the premium paid for a term life insurance policy provided for Mr.
Babine's benefit.
<FN8>
Represents $10,600 paid to Mr. Babine for the use of an automobile and $3,462
paid for medical insurance benefits above those provided and other full time
employees of the Company.
<FN9>
Represents compensation paid to Mr. Babine for the use of an automobile.
<FN10>
Represents an automobile allowance paid to Ms. Krueger.
<FN11>
Mr. Kitchen's employment was terminated effective June 22, 1999.
<F12>
Represents an automobile allowance paid to Mr. Kitchen.
</FN>
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning individual
grants of stock options made to each of the Executive Officers named above
during the fiscal year ended May 31, 1999:
INDIVIDUAL GRANTS
----------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARs
UNDERLYING GRANTED TO EXERCISE
OPTION/SARs EMPLOYEES IN OR BASE EXPIRATION
GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE
----------- ---------------- ------------ ----------
David V. Hall -0- -- -- --
Robert J. Babine -0- -- -- --
Rebecca H. Krueger -0- -- -- --
Michael J. Kitchen -0- -- -- --
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTION/SARs OPTION/SARs
ACQUIRED ON AT FY-END AT FY-END
EXERCISE EXERCISABLE/ EXERCISABLE/
(NUMBER) REALIZED UNEXERCISABLE UNEXERCISABLE
----------- -------- ------------- -------------
David V. Hall -0- -0- 100,000 / 0 $0 / 0
Robert J. Babine -0- -0- 0 / 0 $0 / 0
Rebecca H. Krueger -0- -0- 147,500 / 0 $0 / 0
Michael J. Kitchen -0- -0- 85,000 / 0 $0 / 0
22
<PAGE>
Effective February 1, 1998, the Company entered into a new three year
employment agreement with David V. Hall, President of the Company. The
agreement is for a term of three years, but is automatically renewed for a
three year term on a monthly basis. The Employment Agreement provides that
Mr. Hall will devote a substantial portion of his time to the Company, and
will receive a base salary of $220,000 per year. Mr. Hall will also receive
bonuses at the discretion of the Board of Directors and the use of an
automobile at a maximum cost of $12,000 per year. In addition, the employment
agreement provides that the Company will pay for a term life insurance policy
in the amount of $2,000,000. The proceeds of this policy will be payable to
the estate of Mr. Hall.
In the event that the Company terminates Mr. Hall's employment agreement
without cause, or as a result of a change in control, the Company will be
required to pay the base salary for the remaining initial term of the
agreement, or twelve (12) months, whichever is greater. In addition, the
Company may be required to repurchase up to 50% of the stock held by Mr. Hall
and provide for family medical insurance until the age of 65.
Effective January 21, 1999, the Company announced the resignation of Mr.
Robert J. Babine as Chief Financial Officer, Treasurer and Director of the
Company. Mr. Babine will continue receiving compensation at the rate of
$122,000 per year, plus health benefits, through December 31, 1999.
Effective February 1, 1998, the Company entered into a new employment
agreement with Rebecca Krueger, who is Chief Operating Officer of the Company,
pursuant to which Ms. Krueger agreed to devote a substantial portion of her
time to the business of the Company. The initial term of the agreement is for
one year, but is automatically renewed for one year on a monthly basis. Ms.
Krueger's base salary is $117,200 per year, and her base salary will be
increased each year by at least the increase in the cost of living index. She
will also receive bonuses at the discretion of the Company and an automobile
allowance of $675 per month. In the event that the Company terminates this
employment agreement without cause or as a result of a change in control, the
Company will be required to pay her base salary for twelve (12) months.
Effective June 22, 1999, Mr. Michael J. Kitchen's employment as Vice
President, Secretary and General Counsel with the Company was terminated. Mr.
Kitchen will receive a total of $135,000 plus interest with $42,000 to be paid
during the initial year following his termination and the balance to be paid
under prescribed options, at Mr. Kitchen's discretion. Mr. Kitchen continues
to serve as outside counsel to the Company.
Effective June 1, 1999, the Company entered into a one year employment
agreement with David W. Lester to become the Chief Financial Officer of the
Company. The agreement provides that Mr. Lester will devote a substantial
portion of his business time, energy and skill to the affairs of the Company
and will receive a base salary of $175,000 per year and his base salary will
be increased each year by at least the increase in the cost of living index.
Mr. Lester will also receive bonuses of up to 25% of the base salary based on
meeting certain criteria and the Company will provide an automobile allowance
of $650 per month plus insurance on said vehicle. In addition, the employment
agreement provides that the Company will pay for a term life policy in the
amount of $250,000, the proceeds which shall be payable to Mr. Lester's
estate. Further, the agreement provides that non-qualified, non-plan stock
options to purchase 250,000 shares be issued to Mr. Lester, 100,000 shares of
which vest as of the effective date and 50,000 shares of which vest each
successive six month period of employment.
23
<PAGE>
In the event that the Company terminates Mr. Lester's employment
agreement without cause, or as a result of a change in control, the Company
will be required to pay Mr. Lester's base salary for a period of 180 days.
DIRECTOR COMPENSATION
Effective in August 1997, outside Directors of the Company receive a fee
of $500 per month and will receive stock options to purchase 2,500 shares of
Common Stock each year for their services in such capacity. Directors are
also reimbursed for all reasonable and necessary costs and expenses incurred
as a result of being a Director of the Company.
STOCK OPTION PLAN
In October 1996, the Company's Board of Directors adopted the Company's
1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan allows the Board to
grant stock options from time to time to employees, officers and directors of
the Company and consultants to the Company. The Board has the power to
determine at the time the option is granted whether the option will be an
Incentive Stock Option (an option which qualifies under Section 422 of the
Internal Revenue Code of 1986) or an option which is not an Incentive Stock
Option. However, Incentive Stock Options will only be granted to persons who
are key employees of the Company. Vesting provisions are determined by the
Board at the time options are granted. As originally adopted, the total number
of shares of Common Stock subject to options under the 1996 Plan was not to
exceed 1,000,000, subject to adjustment in the event of certain
recapitalizations, reorganizations and similar transactions. The option price
cannot be less than the fair market value of a share on the date the option is
granted and it must be satisfied by the payment of cash.
The Board of Directors may amend the 1996 Plan at any time, provided that
the Board may not amend the 1996 Plan to materially increase the number of
shares available under the 1996 Plan, materially increase the benefits
accruing to Participants under the 1996 Plan, or materially change the
eligible class of employees without shareholder approval.
OUTSTANDING OPTIONS UNDER THE PLAN
On December 26, 1996, the Company's Board of Directors granted options to
purchase an aggregate of 112,000 shares of Common Stock at $2.00 per share
under the 1996 Plan. The options are fully vested and expire three years after
the date of grant. Included in these options are non-qualified options to
purchase 100,000 shares granted to Rebecca Krueger, Chief Operating Officer of
the Company.
On March 4, 1997, the Company issued non-qualified options, under the
1996 Plan, to purchase 50,000 shares of Common Stock to an outside consultant
at $2.25 per share which was equal to the fair market value on the date of
grant. The options are exercisable for three years from the date of grant.
On May 19, 1997, the Company's Board of Directors granted options to
purchase an aggregate of 158,000 shares of Common Stock at $3.00 per share
under the 1996 Plan. The options vest over various periods up to three years
and expire three years after the date of grant. Included in these options are
options granted to the following officers of the Company: Rebecca Krueger to
purchase 10,000 shares of Common Stock; Michael Kitchen to purchase 15,000
shares of Common Stock; and Nicole Perry to purchase 25,000 shares of Common
Stock. Mr. Kitchen's and Ms. Perry's options were canceled effective with the
24
<PAGE>
termination of their employment on June 22, 1999 and January 18, 1999,
respectively.
On June 9, 1997, the Company's Board of Directors granted options to an
employee to purchase 20,000 shares of Common Stock at $3.31 per share under
the 1996 plan. The options are fully vested and expire three years after the
dte of grant.
On June 12, 1997, the Company's Board of Directors granted options to an
employee to purchase 8,000 shares of Common Stock at $3.56 per share under the
1996 Plan. The options vest over a period of one year and expire seven years
after the date of grant.
On August 27, 1997, the Company's Board of Directors granted options to
purchase an aggregate of 42,500 shares of Common Stock at $2.875 per share to
four employees. These options vest immediately and expire three years after
the date of grant. Included in these options are options granted to Rebecca
Krueger, an officer, to purchase 12,500 shares of Common Stock.
On November 17, 1997, the Company's Board of Directors granted options to
purchase an aggregate of 100,000 and 20,000 shares of Common Stock at $1.20313
and $1.094 per share, respectively, to five employees under the 1996 Plan.
These options vest immediately and expire three years after the date of grant.
Included in these options are options granted to David V. Hall, an officer, to
purchase 100,000 shares at $1.20313, and to Nicole D. Perry, a former officer,
to purchase 12,500 shares of Common Stock at $1.094 per share. Mr. Hall
voluntarily terminated these options effective July 16, 1999. Ms. Perry's
employment was terminated effective January 18, 1999 and these options expired
on May 30, 1999.
Additionally, on November 17, 1997, the Company's Board of Directors
granted non-qualified options to purchase 2,500 shares of Common Stock at
$1.094 per share to each of Chris Brogdon, Mark Clein and Timothy M. Graven,
Directors of the Company. These options vest immediately and expire three
years after the date of grant.
On December 1, 1997, the Company's Board of Directors granted
non-qualified options to purchase an aggregate of 99,999 shares of Common
Stock at $1.0934 per share, which was equal to the fair market value on the
date of grant, to three consultants under the 1996 Plan. These options vest
immediately and expire three years after the date of grant.
On December 16, 1997, the Company's Board of Directors granted
non-qualified options to purchase an aggregate of 75,000 shares of Common
Stock at $1.3125 per share, which was equal to the fair market value on the
date of grant, to three consultants under the 1996 Plan. These options vest
immediately and expire three years after the date of grant.
On December 22, 1997, the Company's Board of Directors granted options to
an employee to purchase 10,000 shares of Common Stock at $1.3125 per share
under the 1996 Plan. The options vest over a period of six months and expire
three years from the date of grant.
On March 24, 1998, the Company's Board of Directors granted options to
purchase an aggregate of 170,500 shares of Common Stock at $1.21875 to 21
employees under the 1996 Plan. These options vest immediately and expire
three years after the date of grant. Included in these options are options
granted to Rebecca H. Krueger, Michael J. Kitchen and Nicole D. Perry,
officers of the Company, to purchase 25,000, 20,000 and 14,000 shares of
25
<PAGE>
Common Stock, respectively. Mr. Kitchen's options were canceled effective
with the termination of his employment on June 22, 1999. Ms. Perry's options
expired effective May 30, 1999.
On July 1, 1998, the Company's Board of Directors granted non-qualified
options to an employee to purchase 160,000 shares of Common Stock at $2.50 per
share under the 1996 Plan. The options vest over a period of one year and
expire three years from the date of grant.
On July 6, 1998, the Company's Board of Directors granted options to an
employee to purchase 45,000 shares of Common Stock at $2.50 per share under
the 1996 Plan. The options vest at the rate of 15,000 per year and expire
three years from the date of grant.
On July 13, 1998, the Company's Board of Directors granted options to an
employee to purchase 5,500 shares of Common Stock at $2.39 per share under the
1996 Plan. The options are fully vested and expire three years after the date
of grant.
On January 18, 1999, the Company's Board of Directors granted options to
an employee to purchase 10,000 shares of Common Stock at $1.28 per share under
the 1996 Plan. The options become fully vested six months after the date of
grant and expire three years after the date of grant.
On March 29, 1999, the Company's Board of Directors granted options to
an employee to purchase 8,000 shares of Common Stock at $1.03 per share under
the 1996 Plan. The options become fully vested six months after the date of
grant and expire three years after the date of grant.
As of May 31, 1999, 972,999 options were outstanding under the Plan at
exercise prices ranging from $1.03 to $3.56.
OTHER OUTSTANDING OPTIONS NOT UNDER THE PLAN
On June 1, 1996, the Company granted a non-plan option to an employee to
purchase 50,000 shares of Common Stock at $1.25 per share which was equal to
the fair market value on the date of grant. The option is exercisable for
three years from the date of grant.
On June 21, 1996, the Company granted non-plan options to two stock
brokers to purchase 20,000 shares of Common Stock at $1.25 per share which was
equal to the fair market value on the date of grant. The options are
exercisable for three years from the date of grant.
On August 1, 1996, the Company granted non-plan options to ten employees
to purchase an aggregate of 95,000 shares of Common Stock at $1.75 per share
which was equal to the fair market value on the date of grant. These options
are exercisable for three years from the date of grant.
On October 24, 1996, the Company granted non-plan options to two
employees to purchase 40,000 shares of Common Stock at $2.25 per share which
was equal to the fair market value on the date of grant. These options are
exercisable for three years from the date of grant.
On December 5, 1996, the Company issued non-plan options to two
shareholders of Daily Rehabilitation Institute, Inc. in connection with the
acquisition of that company. The options are to purchase an aggregate of
30,000 shares of Common Stock at $2.25 per share which was equal to the fair
26
<PAGE>
market value on the date of grant. Of the 30,000 options, 15,000 options
expire on December 15, 1999 and 15,000 expire on December 31, 2000.
On December 26, 1996, the Company issued non-plan options to purchase
200,000 shares of Common Stock to David V. Hall at $2.00 per share which was
equal to the fair market value on the date of grant. Mr. Hall then
transferred these options to his two adult children who are also employees of
the Company. The options are exercisable for three years from the date of
grant.
On December 4, 1998, the Company issued non-plan options to the former
owner of Healthcare of Indiana in connection with the acquisition of that
nursing home facility. The options are to purchase an aggregate of 50,000
shares of Common Stock at $2.00 per share which was equal to the fair market
value on the date of the grant. The options are exercisable for three years
from the date of grant.
On January 18, 1999, the Company issued non-plan options to purchase
15,000 shares of Common Stock to Nicole D. Perry, the former Vice President of
Finance to the Company, at $1.28 per share which was equal to the fair market
value on the date of grant. The options are exercisable for three years from
the date of grant.
On May 5, 1999, the Company issued non-plan options to purchase 250,000
shares of Common Stock to David W. Lester, who became the Company's Chief
Financial Officer effective June 1, 1999, at $1.06 per share which was equal
to the fair market value on the date of grant. The options are exercisable
for three years from the date of grant and vest at the rate of 100,000 on June
1, 1999, 50,000 on December 1, 1999, 50,000 on June 1, 2000 and 50,000 on
December 1, 2000.
As of May 31, 1999, 707,000 non-plan options are outstanding at exercise
prices ranging from $1.06 to $2.25.
401(k) PLAN
The Company maintains a 401(k) employee retirement and savings program
(the "401(k) Plan") for its employees. Under the 401(k) Plan, an employee may
contribute up to 15% of his or her gross annual earnings, subject to a
statutory maximum, for investment in one or more funds identified under the
Plan. The Company may in the future, with the approval of the Board of
Directors, make matching contributions to participants in the 401(k) Plan. No
contributions were made under the Plan for the year ended May 31, 1999.
During the year ended May 31, 1998, the Company made contributions totaling
$12,144 under the 401(k) Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of September 8, 1999, each person
known by the Company to be the beneficial owner of five percent or more of the
Company's Common Stock, all Directors and Executive Officers individually and
all Directors and Executive Officers of the Company as a group. Except as
noted, each person has sole voting and investment power with respect to the
shares shown.
27
<PAGE>
AMOUNT OF BENEFICIAL PERCENTAGE
NAME AND ADDRESS OWNERSHIP OF CLASS
- ---------------- -------------------- ----------
David V. Hall 3,548,225(1) 26.5%
Suite 1400B
325 West Main Street
Louisville, Kentucky 40202
David W. Lester 154,000(2) 1.1%
Suite 1400B
325 West Main Street
Louisville, Kentucky 40202
Timothy M. Graven 2,500(3) --
168 Totem Road
Louisville, KY 40207
Bert L. Blieden 463,000(4) 3.4%
3900 Glen Bluff Road
Louisville, KY 40222
Rebecca H. Krueger 151,500(5) 1.1%
Suite 1400B
325 West Main Street
Louisville, Kentucky 40202
Retirement Care Associates 3,661,000(6) 27.3%
101 Sun Avenue
Albuquerque, New Mexico 87109
Daiwa Healthco-3LLC
Financial Square
32 Old Slip
New York, NY 10005 3,957,857(7) 22.8%
All Executive Officers and 4,316,725 30.6%
Directors as a Group
(5 Persons)
_________________
(1) Includes 3,538,225 shares held directly by Mr. Hall and 10,000 shares
held by his wife as custodian for two minor children.
(2) Includes 2,000 shares held directly by Mr. Lester, 2,000 shares held by
two children, over which he exercises control, 100,000 shares underlying
currently exercisable stock options held by him and 50,000 shares underlying
stock options which are scheduled to vest on December 1, 1999.
(3) Represents 2,500 shares underlying currently exercisable stock options
held by Mr. Graven.
(4) Includes 30,000 shares held directly by Mr. Blieden, 13,000 shares held
by his wife and 320,000 shares underlying currently exercisable warrants held
by Mr. Blieden and 100,000 shares underlying a convertible note held by him.
(5) Includes 4,000 shares held directly by Mrs. Krueger and 147,500 shares
underlying currently exercisable stock options held by her.
28
<PAGE>
(6) Retirement Care Associates, Inc. is now a wholly-owned subsidiary of Sun
Healthcare Group, Inc., a publicly-held company.
(7) Daiwa Healthco-3LLC is the Company's primary lender. Represents
currently exercisable warrants held by Daiwa.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the year ended May 31, 1998, the Company recorded approximately
$6,411,000 in revenues from billings under therapy agreements with Retirement
Care Associates, Inc. (RCA), a principal shareholder of the Company. The
balance of accounts receivable at May 31, 1998 related to RCA was $1,321,000.
Effective June 30, 1998, the stockholders of RCA and Sun Healthcare Group,
Inc. (Sun) approved a Merger Agreement pursuant to which RCA was merged into a
subsidiary of Sun. During January and February 1998, the Company transitioned
RCA facilities serviced by the Company to Sun. As a result, the company had
no contracts for therapy services with RCA at May 31, 1998. RCA and Sun
continued to make payments on its outstanding balance, and as of August 27,
1998, had paid the accounts receivable balance in full.
Approximately $1,076,000 and $1,783,000, or 8% and 10%, of all revenue
for the years ended May 31, 1999 and 1998, respectively, and approximately
$990,000, or 19%, of the balance of accounts receivable at May 31, 1998
related to NewCare Health Corportion (NewCare), which was until September 1998
related to the Company by a common Director. In October, 1998, the Company
ceased providing services to this customer at which time the customer had an
accounts receivable balance of approximately $1,873,000. On November 25,
1998, the Company accepted a note receivable from the customer for the full
amount of the accounts receivable balance. The note receivable bears interest
at the rate of 9.5% and is to be repaid at the rate of $50,000 per month for
24 months with the balance of principal and interest payable at that time.
The Company subsequently sold the note receivable to its primary lender at a
discount. The discount was computed on a basis that would assure the lender a
combined return of 15%. This resulted in a loss on the sale of approximately
$170,000. A provision of the sale agreement stated that if the customer
defaults on monthly payments to the lender, the lender can require the Company
to buy back the note. On May 24, 1999 NewCare announced that it was
restructuring and on June 23, 1999 announced that it had filed for Chapter 11
bankruptcy protection. The Company was notified by its primary lender on June
30, 1999 that NewCare had failed to make its June 1999 payment and that the
Company would be obligated to repurchase that promissory note. The Company
effectuated the repurchase from its primary lender on July 16, 1999. The note
receivable of $1,600,000 and related obligation to the primary lender were
recorded on the Company's balance sheet as of May 31, 1999 and the note
receivable was written off as a bad debt. The Company continues to pursue all
available means to recover some or all of the balance due under the note.
As of May 31, 1999 and 1998, David V. Hall, an Officer, Director and
principal shareholder of the Company, owed the Company $56,000 and $83,000,
respectively, for advances made to him. In addition, as of May 31, 1999 and
1998, Hallmark Communications, a company of which Mr. Hall is the majority
owner, owed the Company $8,000 and $3,600, respectively, for advances made to
it by the Company.
On July 9, 1999, the Company entered into promissory notes with five
individual private lenders for $100,000 each. One of these investors is Bert
Blieden, a Director of the Company. The notes, which bear interest at 12% per
annum, are payable in installments of interest only beginning on August 1,
29
<PAGE>
1999 and on the first day of each successive month. A final payment of all
principal and accrued interest is due on December 31, 1999. The five
promissory notes are collectively collateralized by federal, state and local
estimated tax refunds for the year ended May 31, 1999 by the amount by which
such refunds exceed $500,000 up to $1,000,000. The notes may be retired, at
the lenders option, once such tax refunds are received by the Company. The
notes are further collateralized by the Company's right and interest in a
lease on its Beloit, Wisconsin nursing home facility. Additionally, David V.
Hall, the Company's President and Chief Executive Officer, agreed to
personally guarantee all obligations under the above notes and to pledge
100,000 shares of his holdings of the Company's common stock to each of the
private lenders until all obligations to the lenders have been satisfied.
As further consideration for entering into the above promissory notes,
each of the five lenders, including Mr. Blieden, received: (1) a warrant to
purchase 120,000 shares of the Company's common stock at $.01 per share,
exercisable within one year from the issue date, (2) a warrant to purchase
200,000 shares of the Company's common stock at $.35 per share, exercisable
within two years from the issue date, and (3) an option to convert up to
$50,000 of each note into shares of the Company's common stock at $.50 per
share, exercisable with notice to the company within 30 days of the maturity
of the notes or within 10 days of receipt of notice that the Company has
received the aforementioned tax refunds.
In connection with a debt financing, on July 16, 1999, the Company
issued Daiwa Healthco-3 LLC, the Company's primary lender, a warrant to
purchase up to 18% of the Company's common stock at an aggregate price of
$1.00 and a warrant to purchase 300,000 shares of the Company's common stock
at a purchase price of $1.00 per share. Both warrants are exercisable through
July 6, 2004. The percentage of the Company's stock that can be purchased
under the first warrant can be reduced based on the Company's repayment of the
debt, but in no event to less than 10% of the Company's common stock.
In April 1999, David V. Hall, the Company's President and Chief Executive
Officer, advanced the Company $200,00 in cash to be used as working capital.
The advance bears interest at 12% per annum and is payable upon demand, but is
subordinated to the Company's primary lender.
Additionally, Mr. Hall has personally guaranteed all indebtedness of the
Company to the primary lender for up to $1,600,000.
30
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed as part of this Report:
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
3.1 Articles of Incorporation, Incorporated by reference to
as amended Exhibit 3.1 to Registrant's
Registration Statement on
Form 10SB
3.2 Bylaws Incorporated by reference to
Exhibit 3.2 to Registrant's
Registration Statement on
Form 10SB
10.1 1996 Stock Option Plan Incorporated by reference to
Exhibit 10.1 to Registrant's
Registration Statement on
Form 10SB
10.2 Employment Agreement with Incorporated by reference to
David V. Hall Exhibit 10.2 to Registrant's
Annual Report on Form 10-KSB
for the year ended May 31, 1998
10.3 Employment Agreement with Incorporated by reference to
Robert J. Babine Exhibit 10.3 to Registrant's
Annual Report on Form 10-KSB
for the year ended May 31, 1998
10.4 Lease Agreement on Office Incorporated by reference to
Space Exhibit 10.4 to Registrant's
Registration Statement on
Form 10SB
10.5 Contracts for Therapy Incorporated by reference to
Program Services with Exhibit 10.5 to Registrant's
Affiliates Form 10-KSB for the year ended
May 31, 1997
10.6 Credit Facility Agreement with Incorporated by reference to
Great Financial Bank and Exhibit 10.7 to Registrant's
related Security Agreement and Form 10-KSB for the year ended
Promissory Note May 31, 1997
10.7 Loan and Security Agreement Incorporated by reference to
with Daiwa Healthco-3 LLC Exhibit 10.7 to Registrant's
and related Promissory Note Annual Report on Form 10-KSB
for the year ended May 31, 1998
10.8 Second Amendment to Loan Filed herewith electronically
and Security Agreement with
Daiwa Healthco-3 LLC
31
<PAGE>
10.9 Form of Warrant issued to Filed herewith electronically
Daiwa Healthco-3LLC
10.10 Employment Agreement with Incorporated by reference to
Rebecca Krueger Exhibit 10.8 to Registrant's
Annual Report on Form 10-KSB
for the year ended May 31, 1998
10.11 Employment Agreement with Incorporated by reference to
Michael Kitchen Exhibit 10.9 to Registrant's
Annual Report on Form 10-KSB
for the year ended May 31, 1998
10.12 Employment Agreement with Filed herewith electronically
David W. Lester
10.13 Convertible Promissory Note Filed herewith electronically
issued to Bert L. Blieden
and related Leasehold
Mortgage and Security
Agreement, Stock Pledge
Agreement, and forms of
Warrants to Purchase
Common Stock
21 Subsidiaries of the Filed herewith electronically
Registrant
23 Consent of Strothman & Filed herewith electronically
Company PSC
27 Financial Data Schedule Filed herewith electronically
(b) Reports on Form 8-K. No Reports on Form 8-K were filed during the
last quarter of the period covered by this Report.
32
<PAGE>
C O N T E N T S
Report of Independent Accountants'................................ F-2
Financial Statements
Consolidated Balance Sheets.................................. F-3
Consolidated Statements of Operations........................ F-4
Consolidated Statements of Stockholders' Equity (Deficit).... F-5
Consolidated Statements of Cash Flows........................ F-6
Notes to Consolidated Financial Statements................... F-8
F-1
<PAGE>
Report of Independent Accountants'
Board of Directors and Stockholders
Perennial Health Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Perennial
Health Systems, Inc. and Subsidiaries as of May 31, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide 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 Perennial Health Systems, Inc. and Subsidiaries as of May 31, 1999 and
1998, and the consolidated results of its operations and the cash flows for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Note 2, the Company incurred a net loss in the year ended May 31, 1999 and has
a working capital deficiency as of that date. These conditions 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 2.
The consolidated financial statements do not include adjustments, if any, to
reflect possible future effects on the recoverability and classification of
recorded asset amounts or the amounts and classifications of liabilities that
may result from the outcome of this uncertainty.
/s/ Strothman & Company PSC
Louisville, Kentucky
September 14, 1999
F-2
<PAGE>
Perennial Health Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
May 31, 1999 and 1998
<TABLE>
<CAPTION> 1999 1998
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 105,136 $ 358,230
Accounts receivable, less allowance
for doubtful accounts of $694,497 and
$516,792 in 1999 and 1998, respectively 2,945,043 5,206,978
Accounts receivable-related parties - 2,276,147
Income tax receivable 1,000,420 -
Advances to related parties 64,000 84,224
Other current assets 182,623 299,862
----------- ----------
Total current assets 4,297,222 8,225,441
Property and equipment, at cost:
Land 50,000 -
Buildings and improvements 2,647,448 322,092
Equipment 760,867 58,819
Less accumulated depreciation (268,199) (107,455)
----------- ----------
Net property and equipment 3,190,116 273,456
Intangible assets, net of accumulated
amortization of $50,470 and $284,328
in 1999 and 1998, respectively 1,549,482 802,012
Deferred tax asset - 249,312
Other assets 170,120 211,109
----------- ----------
$ 9,206,940 $9,761,330
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings $ 2,628,455 $4,206,535
Note payable 1,601,329 104,500
Current portion of long term debt 89,633 -
Advances from stockholder 200,000 -
Accounts payable 651,331 263,392
Accrued expenses 1,574,112 1,005,207
Deferred tax liability - 29,921
----------- ----------
Total current liabilities 6,744,860 5,609,555
Long term debt:
Mortgage payable 3,280,029 -
Seller note payable 738,041 -
----------- ----------
Total long term debt 4,018,070 -
Stockholders' equity (deficit):
Preferred stock, $10 par value; 10,000,000
shares authorized; no shares issued - -
Common stock, no par value; 20,000,000 shares
authorized; 13,395,072 and 13,390,072 shares
issued and outstanding at May 31, 1999
and 1998, respectively 2,142,678 2,136,584
Subordinated convertible common stock, no
par value; 1,200,000 shares authorized;
no shares issued - -
Retained earnings (deficit) (3,698,668) 2,015,191
----------- ----------
Total stockholders' equity (deficit) (1,555,990) 4,151,775
----------- ----------
$ 9,206,940 $9,761,330
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Perennial Health Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended May 31, 1999 and 1998
1999 1998
----------- -----------
Revenues:
Contract services $12,149,968 $10,493,002
Contract services-related parties - 8,193,980
Nursing home 1,543,485 -
----------- -----------
13,693,453 18,686,982
Cost of services:
Salaries, wages and benefits
related to contract services 6,420,344 8,693,421
Contract therapists 651,419 2,021,176
Nursing home 1,065,058 -
----------- -----------
8,136,821 10,714,597
----------- -----------
Gross profit 5,556,632 7,972,385
Selling, general and administrative expense 6,251,458 5,198,843
Rental expense 299,934 329,432
Bad debt expense 4,244,998 902,694
Depreciation 161,239 60,508
Amortization 622,777 74,725
----------- -----------
Income (loss) from operations (6,023,774) 1,406,183
Interest expense 508,377 370,032
----------- -----------
Income (loss) before income taxes (6,532,151) 1,036,151
Provision for (benefit from) income taxes (818,292) 420,871
----------- -----------
Net income (loss) $(5,713,859) $ 615,280
=========== ===========
Net income (loss) per common share - basic $ (0.43) $ 0.05
=========== ===========
Net income (loss) per common
share - assuming dilution $ (0.42) $ 0.05
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Perennial Health Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended May 31, 1999 and 1998
<TABLE>
<CAPTION>
Common
Stock
Common Stock Subscrip- Retained Total
----------------------- tions Earnings Stockholders'
Shares Amount Receivable (Deficit) Equity (Deficit)
---------- ---------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balances at
May 31, 1997 13,344,215 $1,886,584 $ (58,577) $ 1,399,911 $ 3,227,918
Issuance of stock
in conjunction
with acquisitions 45,857 220,000 220,000
Issuance of stock
options for
services 30,000 30,000
Accrued interst (342) (342)
Receipt of stock
subscription
payments 58,919 58,919
Net income 615,280 615,280
---------- ---------- --------- ----------- ---------
Balances at
May 31, 1998 13,390,072 $2,136,584 - 2,015,191 4,151,775
Issuance of stock
in conjunction with
exercise of options 5,000 6,094 6,094
Net loss (5,713,859) (5,713,859)
---------- ---------- --------- ----------- -----------
Balances at
May 31, 1998 13,395,072 $2,142,678 $ - $(3,698,668) $(1,555,990)
========== ========== ========= =========== ==========
</TABLE>
See accompaning notes to consolidated financial statements.
F-5
<PAGE>
Perennial Health Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended May 31, 1999 and 1998
1999 1998
----------- -----------
Cash flows from operating activities:
Net income (loss) $(5,713,859) $ 615,280
Adjustments to reconcile net income (loss)
to net cash used in operating activities
Depreciation 161,239 60,508
Amortization 622,777 74,725
Provision for losses on accounts receivable 4,244,998 902,293
Deferred income taxes 219,391 (115,619)
Stock option compensation charge - 30,000
Changes in assets and liabilities, net of
effects from acquisitions
Accounts receivable 293,084 (308,504)
Interest receivable - 3,792
Other current assets 137,463 (288,597)
Other assets 40,989 (90,307)
Accounts payable 387,939 (388,926)
Accrued expenses 464,405 413,716
Income taxes (1,000,420) (30,169)
----------- -----------
Net cash provided by (used in)
operating activities (141,994) 878,192
Cash flows from investing activities:
Purchase of equipment (120,385) (111,064)
Acquisition of businesses (3,589,720) (20,000)
Investment in subsidiary - (145,500)
----------- -----------
Net cash used in investing activities (3,710,105) (276,564)
Cash flows from financing activities:
Issuance of short-term borrowings 13,917,909 3,200,257
Repayments of short-term borrowings (15,495,989) (3,380,332)
Issuance of term note payable 1,601,329 -
Issuance of long-term debt 3,400,000 -
Repayments of long-term debt (30,338) -
Advance from stockholder 200,000 -
Issuance of common stock 6,094 -
Proceeds from stock subscriptions receivable - 58,577
Checks issued in excess of cash on deposit - (121,900)
----------- -----------
Net cash provided by (used in)
financing activities 3,599,005 (243,398)
----------- -----------
Net increase (decrease) in cash (253,094) 358,230
Cash, beginning of year 358,230 -
----------- -----------
Cash, end of year $ 105,136 $ 358,230
=========== ============
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Perennial Health Systems, Inc.
Consolidated Statements of Cash Flows, Continued
For the Years Ended May 31, 1999 and 1998
1999 1998
---------- -----------
Supplemental disclosures:
Cash paid for interest $ 503,213 $ 329,221
=========== ==========
Cash paid for income taxes $ 42,641 $ 850,916
=========== ==========
Supplemental schedule of noncash investing
and financing activities:
Assumption of borrowings in
connection with acquisitions $ 738,041 $ 725,456
=========== ==========
Issuance of common stock $ - $ 250,000
=========== ==========
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Notes to Consolidated Financial Statements
1. Nature of Operations
Perennial Health Systems, Inc. (formerly known as In-House Rehab Corporation)
and its subsidiaries (the "Company") are engaged in providing, on a contract
basis, physical, speech, occupational and respiratory therapy and behavioral
health services and management services primarily to long-term care providers.
More recently, the Company formed Perennial Health Management, Inc. (PHM) as a
wholly owned subsidiary for the purpose of acquiring, operating and managing
nursing home properties, which is where the Company intends to focus its
efforts going forward.
2. Going Concern Matters
The Company incurred a net loss for the year ended May 31, 1999 of $5,714,000
and has a working capital deficiency of $2,448,000 as of May 31, 1999.
Management has attributed a significant amount of the loss to the following:
* Significant bad debts. Several large customers, including three that filed
for protection under bankruptcy statutes, were unable to pay all or part of
their accounts receivable balances during the year ended May 31, 1999.
* Medicare Reimbursement Changes. The Company has experienced the impact of
Medicare cost limitations imposed by the Health Care Financing
Administration upon all providers of skilled nursing home Medicare
services. Beginning in July 1998, a portion of the Company's rehab
customers, and the Company's skilled nursing facilities began a 3 year
transition from cost-based reimbursement to the Prospetive Payment Sytem
(PPS).
In general, PPS provides a standard payment for Medicare Part A services to
all providers regardless of their costs. PPS creates an incentive for
providers to reduce their costs. Cost reimbursement for Part B services
has been replaced by a system that effeectively limits the maximum fees
that may be charged for therapy services. Additionally, reimbursement is
limited to $1,500 per beneficiary per discipline per year.
The accompanying consolidated financial statements have been prepared on a
going concern basis, which assumes the continuity of operations, and the
realization of assets and liquidation of liabilities in the normal course of
business. The consolidated financial statements do not include adjustments,
if any, to reflect possible future effects on the recoverability and
classification of recorded asset amounts or the amounts and classifications of
liabilities that may result from the outcome of this uncertainty.
Management plans to take the following actions to improve operations and
return to profitability:
* Continue to pursue all available means to recover accounts receivable
balances that have been written off or for which an allowance has been
established
* Terminate unprofitable contracts and, when possible, replace them with
profitable contracts
* Continue to evaluate and execute strategies to improve its working capital
position
* Reduce corporate overhead
* Lower clinical salary levels
* Continue to focus the Company on acquiring, operating and managing
profitable nursing home properties
F-8
<PAGE>
Notes to Consolidated Financial Statements, Continued
3. Acquisitions
Rehab & Therapy Center of Naples, Inc.--On September 30, 1997, the Company
acquired the assets of Rehab & Therapy Center of Naples, Inc. (RTCN), an
operator of a comprehensive outpatient rehabilitation facility in southern
Florida. This acquisition was made in exchange for $20,000 in cash and 2,857
shares of the Company's Common Stock. Effective December 12, 1997, RTCN
assets were transferred to Doctors Rehab & Therapy, Inc. (DRT), a newly formed
subsidiary of the Company.
The acquisition was accounted for as a purchase and, accordingly, the results
of RTCN's operations are included in the Company's consolidated financial
statements from the date of acquisition.
Gateway Rehabilitation, Inc.--On March 30, 1998, the Company acquired all of
the outstanding common stock of Gateway Rehabilitation, Inc. (GR) in exchange
for 43,000 shares of the Company's Common Stock in a private transaction. The
acquisition was made pursuant to the terms of a Stock Purchase Agreement dated
March 1, 1998, among the Company, GR and GR's shareholders. GR provided
physical therapy, occupational therapy and rehabilitation program management
under contracts with thirty long-term care facilities in Illinois and
southwestern Indiana. During the year ended December 31, 1997, GR had
approximately $2,760,000 in sales and had a net loss of approximately $17,000.
Two of the former shareholders of GR entered into two-year employment
agreements with the Company. Under the terms of the Stock Purchase Agreement,
the former shareholders of GR had the right to require the Company to
repurchase the shares of the Company's Common Stock received by them in the
transaction for $5.00 per share during the ten day period commencing May 31,
1999. The former shareholders provided notice to the Company of their intent
for the Company to repurchase their shares. In October 1998, the Company
filed a complaint against the former shareholders alleging misrepresentation
and seeking to reform the Stock Purchase Agreement based on the true state of
GR at the time of closing. The former shareholders filed a counterclaim
seeking enforcement of the agreement and damages. Effective August 27, 1999,
the Company reached an agreement in principle to settle with the former
shareholders whereby the Company will pay a total of $462,500 to the former
shareholders over a 17 month period to satisfy any further obligations under
the agreement. The settlement amount is included as an accrued expense on the
Company's balance sheet as of May 31, 1999.
The following is a summary of the allocation of the purchase price for GR:
Fair value of assets acquired,
principally accounts receivable $ 883,080
Liabilities assumed 1,137,206
-----------
Excess of liabilities over
fair value of assets acquired 254,126
Common stock issued 215,000
-----------
Cost in excess of fair value of
net assets acquired (goodwill) $ 469,126
===========
F-9
<PAGE>
Notes to Consolidated Financial Statements, Continued
3. Acquisitions, Continued
The acquisition was accounted for as a purchase and, accordingly, the results
of GR's operations are included in the Company's consolidated financial
statements from the date of acquisition.
Scott County Healthcare--On December 4, 1998, the Company acquired Scott
County Healthcare (SCH), formerly Healthcare of Indiana, a 99 bed nursing home
facility in Scottsburg, Indiana, and certain other assets. The acquisition
was made in exchange for $3,400,000 in cash from a loan, non-qualified stock
options to purchase 50,000 shares of the Company's common stock at $2.00 per
share and a seller financed promissory note in the amount of $762,400, which
has been reduced to $738,041. The stock options vest immediately and expire
three years from the date of grant. The acquisition was accounted for as a
purchase and, accordingly, the results of SCH operations are included in the
Company's consolidated financial statements from the date of acquisition.
The following is a summary of the allocation of the purchase price of SCH:
Fair value of assets acquired:
Land $ 50,000
Building 2,571,500
Equipment 336,014
-----------
2,957,514
Cost in excess of fair value of assets
acquired (goodwill) 1,321,857
-----------
Total $ 4,279,371
===========
The purchase was financed through a 10-year, $3,400,000 first mortgage from a
lending institution and through a five year $762,400 note from the seller (see
Note 8. Debt).
The Medilodge Group, Inc.--The Company has an agreement in principle with The
Medilodge Group, Inc., based in Detroit, Michigan, to acquire eight skilled
nursing centers and one assisted living center for approximately $79 million.
The acquisition is expected to be accounted for as a purchase and is
contingent upon the completion of the Company's due diligence review; the
receipt and approvals from certain licensing authorities; obtaining financing;
and the satisfaction of customary closing conditions. Due to these
contingencies and the current state of the nursing home industry, it is not
certain when, if ever, this acquisition will occur. In the interim, the
Company is providing contract rehabilitation services at these facilities.
4. Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries.
Cash and Equivalents: Cash and equivalents includes highly liquid investments
with an original maturity of three months or less.
F-10
<PAGE>
Notes to Consolidated Financial Statements, Continued
4. Summary of Significant Accounting Policies, Continued
Depreciation: Depreciation is computed using the straight-line method over
the estimated useful lives of the assets.
Cost in Excess of Fair Value of Net Assets Acquired: Assets and liabilities
acquired in connection with business combinations accounted for under the
purchase method are recorded at their respective fair values. Deferred taxes
have been recorded to the extent of the difference between the fair value and
the tax basis of the assets acquired and liabilities assumed. The excess of
the purchase price over the fair value of the net assets acquired, including
the recognition of applicable deferred taxes, is amortized on a straight line
basis over a period up to 25 years. The Company performs an annual assessment
of the recoverability of goodwill based on estimated future undiscounted cash
flows and operating income.
Amortization of Noncompete Agreements: Noncompete agreements are amortized
over a period of one to two years on a straight-line basis.
Stock-Based Compensation: The Company follows the provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," electing to continue accounting for its employee stock options
under the provisions of Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees", accompanied by a disclosure, if
considered material, of the pro forma effects on net income and net income per
share had the expense provisions of the new accounting principle been applied.
Recently Issued Accounting Standards: The Company adopted SFAS No. 128,
"Earnings Per Share" for the year ended May 31, 1998. This accounting
pronouncement requires the disclosure of basic and diluted earnings per share.
Diluted earnings per share approximates earnings per share as previously
reported. Because the concept of basic earnings per share does not include the
impact of common stock equivalents, such as stock options, basic earnings per
share are higher than diluted earnings per share.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The provisions of SFAS No. 130 were
effective for the year ended May 31, 1999 and did not have a material impact
on the Company's financial statements.
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications: Certain amounts in the fiscal 1998 consolidated financial
statements have been reclassified to conform with the fiscal 1999
presentation.
F-11
<PAGE>
Notes to Consolidated Financial Statements, Continued
5. Net Income (Loss) Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
became effective for periods ending after December 15, 1997. This statement
revised the calculation of earnings per share from the "primary" and "fully
diluted" methods previously employed, to the "basic" and "assuming dilution"
methods. The Company had not previously presented fully diluted earnings per
share because the result was not materially different than the primary
calculation. Under the new statement, basic earnings per share represents
earnings divided by the weighted average number of shares outstanding during
the period. Earnings per share-assuming dilution represents the basic weighted
average shares outstanding adjusted for the effects of stock options and
warrants. The calculation of the Company's earnings per share assuming
dilution closely resembles that used in prior calculations of primary earnings
per share.
In accordance with this statement, the Company has replaced its disclosure of
primary net income (loss) per share with net income (loss) per share-basic and
net income (loss) per share-assuming dilution.
The following table sets forth the computation and reconciliation of net
income (loss) per share-basic and net income (loss) per share-assuming
dilution:
For the Three Months For the Year Ended
Ended May 31, May 31,
-------------------------- --------------------------
1999 1998 1999 1998
------------- ----------- ------------ -----------
Net income (loss) $ (4,796,559) $ (206,041) $ (5,713,859) $ 615,280
============= =========== ============ ===========
Weighted average
shares
outstanding:
Basic 13,395,072 13,375,583 13,394,004 13,353,250
Stock options
and warrants 671 149,500 131,008 144,961
------------ ----------- ----------- -----------
Assuming dilution 13,395,743 13,525,083 13,525,012 13,498,211
============ =========== =========== ==========
Net income (loss)
per share:
Basic $ (0.36) $ (0.01) $ (0.43) $ 0.05
============ ============ =========== ===========
Assuming dilution $ (0.36) $ (0.01) $ (0.42) $ 0.05
============ ============ =========== ===========
F-12
<PAGE>
Notes to Consolidated Financial Statements, Continued
5. Net Income (Loss) Per Share, Continued
The Company did not include warrants, equivalent to 360,000 and 520,000 shares
of common stock, or options to purchase 1,453,000 shares and 936,000 shares of
common stock for the three and twelve months ended May 31, 1999, respectively,
because their effects are antidilutive. The Company did not include warrants,
equivalent to 520,000 and 390,000 shares of common stock, or options to
purchase 677,500 and 518,000 shares of common stock for the three and twelve
months ended May 31, 1998, respectively, because their effects are
antidilutive.
6. Major Customers
Central Arkansas Nursing Centers--Approximately $2,607,000 and $1,621,000, or
19% and 9%, of all revenue for the years ended May 31, 1999 and 1998 and
approximately $321,000 and $284,168, or 10% and 4% of the balance of accounts
receivable at May 31, 1999 and 1998, respectively, related to one customer,
Central Arkansas Nursing Centers.
The Medilodge Group, Inc.--Approximately $932,000, or 7%, of all revenue for
the year ended May 31, 1999 and approximately $511,000, or 16%, of the balance
of accounts receivable at May 31, 1999, related to one customer, The Medilodge
Group, Inc.
NewCare Health Corporation--Approximately $1,076,000 and $1,783,000, or 8% and
10%, of all revenue for the years ended May 31, 1999 and 1998, respectively,
and approximately $990,000, or 19%, of the balance of accounts receivable at
May 31, 1998 related to NewCare Health Corporation (NewCare), who was until
September 1998 related to the Company by a common Director. In October 1998,
the Company ceased providing services to this customer at which time the
customer had an accounts receivable balance of approximately $1,873,000. On
November 25, 1998, the Company accepted a note receivable from the customer
for the full amount of the accounts receivable balance. The note receivable
bears interest at the rate of 9.5% and is to be repaid at the rate of $50,000
per month for 24 months with the balance of principal and interest payable at
that time. The Company subsequently sold the note receivable to its primary
lender at a discount. The discount was computed on a basis that would assure
the lender a combined return of 15%. This resulted in a loss on the sale of
approximately $170,000. A provision of the sale agreement stated that if the
customer defaults on monthly payments to the lender, the lender can require
the Company to buy back the note. On May 24, 1999 NewCare announced that it
was restructuring and on June 23, 1999 announced that it had filed for Chapter
11 bankruptcy protection. The Company was notified by its primary lender on
June 30, 1999 that NewCare had failed to make its June 1999 payment and that
the Company would be obligated to repurchase that promissory note. The
Company effectuated the repurchase from its primary lender on July 16, 1999
(see Note 17. Subsequent Events). The note receivable of $1,600,000 and
related obligation to the primary lender were recorded on the Company's
balance sheet as of May 31, 1999 and the note receivable was written off as a
bad debt. The Company continues to pursue all available means to recover some
or all of the balance due under the note.
F-13
<PAGE>
Notes to Consolidated Financial Statements, Continued
6. Major Customers, Continued
Retirement Care Associates, Inc.--Approximately $6,411,000, or 34%, of all
revenue for the years ended May 31, 1998, and $1,321,000, or 17%, of the
balance of accounts receivable at May 31, 1998, related to Retirement Care
Associates, Inc. (RCA), a stockholder and related party of the Company.
Effective June 30, 1998, the stockholders of RCA and Sun Healthcare Group,
Inc. (Sun) approved a Merger Agreement pursuant to which RCA was merged into a
subsidiary of Sun, which provides rehabilitation services similar to those
offered by the Company. During January and February 1998, the Company
transition RCA facilities serviced by the Company to Sun. As a result, the
Company had no contracts for therapy program services with RCA at May 31,
1998. RCA and Sun continued to make payments on its outstanding amount due to
the Company, and as of August 27, 1998, had paid the accounts receivable
balance in full.
7. Intangible Assets
Intangible assets at May 31 consist of the following:
1999 1998
------------ -----------
Goodwill - Scott County Healthcare $ 1,321,857 $ -
Goodwill - Gateway Rehabilitation, Inc. - 469,126
Goodwill - other acquisitions 219,705 309,706
Non-compete agreements - 285,598
Other intangible assets 58,390 21,910
------------ -----------
1,599,952 1,086,340
Less accumulated amortization (50,470) (284,328)
------------ -----------
$ 1,549,482 $ 802,012
============ ===========
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-lived Assets to be Disposed of,"
requires impairment losses to be recognized for long-lived assets used in
operations when indications of impairment are present and the estimate of
undiscounted cash flows is not sufficient to recover asset carrying amounts.
During the fourth quarter of 1999, management determined the goodwill related
to the acquisition of Gateway Rehabilitation, Inc. was impaired and should be
charged to operations. This impairment occurred primarily because of a
downturn in business subsequent to the acquisition. An expense of
approximately $445,000 was recognized in the fourth quarter of 1999.
8. Debt
Short-Term Borrowings--The Company had a line of credit agreement which
provided for total borrowings up to $4,500,000. Borrowings under this
agreement bear interest at the prime rate plus .25%, payable monthly, based
upon the Company's leverage ratio. The line of credit was collateralized by
substantially all of the Company's assets except those held by GR, a
subsidiary. Total borrowings under this agreement were $3,421,657 at May 31,
1998.
F-14
<PAGE>
Notes to Consolidated Financial Statements, Continued
8. Debt, Continued
On August 31, 1998, this line of credit was replaced by a line of credit
agreement at another lending institution. The new agreement with the
Company's primary lender provides for total borrowings up to $5,000,000,
subject to a borrowing base formula. Borrowings under this agreement bear
interest at the London Interbank Offering Rate (LIBOR) plus 3.25%, payable
monthly. This new line of credit is collateralized by substantially all of
the Company's assets except those held by GR. Additionally, the Company's
President and Chief Executive Officer has personally guaranteed all
indebtedness of the Company to the primary lender for up to $1,400,000 at May
31, 1999 (increased to $1,600,000 on July 16, 1999 - see Note 17. Subsequent
Events). Total borrowings under this agreement were $2,265,557 at May 31,
1999. This agreement expires on August 31, 2001. The Company was not in
compliance with certain financial ratios and covenants under this agreement at
May 31, 1999.
GR has a revolving line of credit agreement with another bank which provided
for total borrowings up to $1,000,000, subject to a borrowing base formula.
Borrowings under this agreement bear interest at the prime rate plus .25%,
payable monthly. This line of credit is collateralized by the accounts
receivable of GR. Total borrowings under this agreement were $362,898 and
$785,000 at May 31, 1999 and 1998, respectively. The Company was notified on
April 6, 1999 that this line of credit would not be renewed and the remaining
balance is being extinguished as GR accounts receivable are collected. The
balance remaining at August 30, 1999 was $136,000.
Term Note Payable--The Company has a term note payable to its primary lender
in connection with the repurchase of the NewCare Health Corporation note
receivable (see Note 6. Major Customers and Note 17. Subsequent Events) with
payment terms that extend beyond one year. However, the Company was not in
compliance with certain financial ratios and covenants at May 31, 1999 and has
classified the entire balance as current.
Long-Term Debt--The Company has a first mortgage note in connection with the
acquisition of Scott County Healthcare (SCH). The monthly payments are
$28,790, including interest at 7.25%, for the first 60 months, followed by 60
monthly payments of principal and interest computed at the prime rate on the
fifth anniversary plus .5%. Payments are computed using a 20-year
amortization schedule. All remaining principal and interest is due and
payable on the 10th anniversary of the note. The balance of this note was
$3,369,662 at May 31, 1999. The Company was not in compliance with certain
financial ratios and covenants at May 31, 1999 and received a waiver of such
ratios and covenants through June 1, 2000 from the mortgagor on September 8,
1999.
In connection with the SCH transaction, the Company also has a $738,041 note
payable to the seller with quarterly payments of interest only at 8%. The
principal and any remaining interest is due and payable on the 5th anniversary
of the note.
F-15
<PAGE>
Notes to Consolidated Financial Statements, Continued
8. Debt, Continued
Future principal payments on long-term debt are as follows:
Year Ended May 31,
------------------
2000 $ 89,633
2001 93,157
2002 100,747
2003 108,955
2004 856,514
Thereafter 2,858,697
------------
$ 4,107,703
============
The carrying amount of all of the above debt approximates its market value.
9. Accrued Expenses
Accrued expenses at May 31 consist of the following:
1999 1998
------------ ------------
Compensation and benefits $ 545,837 $ 637,248
Gateway settlement 462,500 -
Health insurance 119,916 201,609
Professional fees 107,761 45,528
Other 338,098 120,822
------------ ------------
$ 1,574,112 $ 1,005,207
============ ============
10. Income Taxes
The provision (benefit) for income taxes for the year ended May 31 consists of
the following:
1999 1998
------------ ------------
Current
Federal $ (905,668) $ 427,225
State (132,015) 109,265
------------ ------------
Total current (1,037,683) 536,490
Deferred
Federal 190,288 (92,071)
State 29,103 (23,548)
------------ ------------
Total deferred 219,391 (115,619)
------------ ------------
Total provision (benefit) $ (818,292) $ 420,871
============ ============
F-16
<PAGE>
Notes to Consolidated Financial Statements, Continued
10. Income Taxes, Continued
Deferred taxes are recognized for the future tax consequences of temporary
differences between the amounts reported in the Company's financial statements
and the tax basis of its assets and liabilities. Primary differences giving
rise to the Company's deferred tax assets and liabilities are as follows:
1999 1998
------------- -----------
Assets
- ------
Allowance for doubtful accounts $ 270,000 $ 115,000
Noncompete agreements - 92,391
Accrued vacation 66,000 30,500
Amortization 271,000 11,500
Net operating loss carryforwards 928,000 -
------------- -----------
1,535,000 249,391
Liabilities
- -----------
Depreciation (30,000) (30,000)
Less valuation allowance (1,505,000) -
------------- -----------
Net Deferred Tax Assets $ - $ 219,391
============= ===========
Based on the Company's prior earnings and the sufficiency of income available
to be utilized in the carryback years, it was more likely than not that the
net deferred tax assets for 1998 will be realized. Therefore, no valuation
allowance was established to reduce deferred tax assets at May 31, 1998. A
valuation allowance for the entire amount of the net deferred tax asset was
recorded at May 31, 1999 since its realization is not assured.
Reconciliation of the federal statutory rate and the effective income tax rate
at May 31 follows:
1999 1998
----- ----
Federal statutory rate (34.0) % 34.0 %
State income taxes, net of federal
income tax benefit (1.6) 4.5
Net operating losses not utilized 22.5 -
Other 0.6 2.1
----- ----
Effective income tax rate (12.5) % 40.6 %
===== ====
The Company has a net operating loss carryforward of approximately $2,365,000,
which expires in 2019.
F-17
<PAGE>
Notes to Consolidated Financial Statements, Continued
11. Commitments and Contingencies
The Company rents office space, certain office equipment and vehicles under
operating leases expiring at various dates through January 2004. These leases
generally include one or more renewal options. Approximate future minimum
rentals on all noncancelable operating leases in effect at May 31, 1999 are as
follows:
2000 $ 152,000
2001 139,000
2002 93,000
2003 3,000
Lease expense was approximately $300,000 and $327,000 for the years ended May
31, 1999 and 1998, respectively.
12. Common Stock and Stock Warrants
On March 12, 1996, the Company offered 2,000,000 shares of no par value common
stock in a Private Placement. As of May 31, 1996, the Company had issued
1,100,000 shares of the no par value common stock for net proceeds of
approximately $1,321,000. The net proceeds included a stock receivable from
the Private Placement Trustee at May 31, 1996 of $225,000 which was collected
in June 1996. As of May 31, 1997, the Company had issued an additional
200,000 shares of the no par value common stock for net proceeds of
approximately $186,000.
Investors who purchased at least eight units (each unit consisted of 20,000
shares costing $25,000) also received warrants to purchase 20,000 shares of
common stock for each unit purchased. The warrants were exercisable at $2.50
per share. In conjunction with the Private Placement, 520,000 warrants were
issued and have now all expired.
F-18
<PAGE>
Notes to Consolidated Financial Statements, Continued
13. Stock Options
In October 1996, the Company's Board of Directors adopted the Company's 1996
Stock Option Plan (the "1996 Plan"). The 1996 Plan allows the Board to grant
stock options from time to time to employees, officers and directors of the
Company and consultants to the Company. The Board has the power to determine
at the time the option is granted whether the option will be an Incentive
Stock Option (an option which qualifies under Section 422 of the Internal
Revenue Code) or an option which is not an Incentive Stock Option. However,
Incentive Stock Options will only be granted to persons who are key employees
of the Company. Vesting provisions are determined by the Board at the time
options are granted. The total number of shares of Common Stock subject to
options under the 1996 Plan is not to exceed 1,000,000. The following
summarizes the stock option award activity during the years ended May 31, 1999
and 1998:
Weighted
1996 Non-1996 Average
Plan Plan Exercise
Shares Shares Price
------- -------- --------
Outstanding at May 31, 1997 320,000 410,000 $1.84
Granted 545,999 - 1.42
Exercised - - -
Canceled (31,500) (18,000) 2.66
------- ------- -----
Outstanding at May 31, 1998 834,499 392,000 1.81
------- ------- -----
Granted 228,500 315,000 1.71
Exercised (5,000) - 1.22
Canceled (85,000) - 1.93
------- ------- -----
Outstanding at May 31, 1999 972,999 707,000 1.78
======= ======= =====
These options are exercisable for a period of three to seven years from the
date of grant. The options price equaled the market price of a share at the
date the options were granted. As of May 31, 1999 options on 5,000 shares
have been exercised and the weighted average remaining contractual life for
the outstanding options is 1.4 years. There were 1,321,999 options which were
exercisable at May 31, 1999, with a weighted average exercise price of $1.76.
There were 1,177,999 options which were exercisable at May 31, 1998, with a
weighted average exercise price of $1.77.
The Company's common stock has been quoted on the OTC Bulletin Board since
December 1995 and the Company's Board of Directors have based their
determination of the fair market value of the common stock on the closing bid
quotations on the OTC Bulletin Board.
F-19
<PAGE>
Notes to Consolidated Financial Statements, Continued
13. Stock Options, Continued
As permitted by SFAS No. 123, the Company follows the provisions of APB
Opinion No. 25 and related Interpretations in accounting for its stock option
grants. Under APB 25, the Company recognizes no compensation expense with
respect to stock-based awards to employees. Pro forma information regarding
net income and earnings per share is required by SFAS No. 123 for awards
granted after December 31, 1994 as if the Company had accounted for its
stock-based awards to employees under the fair value method of SFAS No. 123.
The fair value of IHR's stock-based awards to employees was estimated using a
Black-Scholes option pricing model. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. The Black-Scholes model
requires the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's stock-based awards to employees
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's stock-based
awards to employees was estimated assuming an expected term ranging from one
and one half years to two and one half years, a risk-free interest rate
ranging from 5.6% to 6%, stock price volatility of 32.85% and no expected
dividends. The expected turnover was not considered as forfeitures will be
considered in future calculations as they occur.
The weighted average fair value of options was $.26 and $.30 as of May 31,
1999 and 1998, respectively.
If compensation cost had been determined based on the fair value of the awards
at the grant date, net income and earnings per common share would have been as
follows at May 31:
1999 1998
----------- ---------
Net income (loss) - as reported $(5,713,859) $ 615,280
- pro forma (5,898,272) 538,142
Basic earnings (loss) per share - as reported (0.43) 0.05
- pro forma (0.44) 0.04
Diluted earnings (loss) per share - as reported (0.42) 0.05
- pro forma (0.44) 0.04
14. Employee Benefit Plan
The Company has a 401(k) Plan which was created in 1996. All employees are
eligible to participate on the first day of the month following their date of
hire. No contributions were made to the plan during 1999 by the Company. The
Company made a contribution to the plan during 1998 in the amount of $12,144.
F-20
<PAGE>
Notes to Consolidated Financial Statements, Continued
15. Related Party Transactions
The Company provided services to certain customers who are related parties.
See Note 6 for further discussion.
Stockholders, who are also officers and employees of the Company, owe
approximately $56,000 and $84,000 in total to the Company for advances as of
May 31, 1999 and 1998, respectively. Additionally, a company owned by an
officer and employee of the Company owed approximately $8,000 and $3,600 for
advances as of May 31, 1999 and 1998, respectively.
In April, 1999, the Company's President and Chief Executive Officer advanced
the Company $200,000 in cash to be used as working capital. The advance bears
interest at 12% per annum and is payable upon demand, but is subordinated to
the Company's primary lender.
16. Selected Quarterly Financial Data (unaudited)
Quarter Ended
---------------------------------------------------------------
August November February May
31 30 28 31 Year
----------- ----------- ----------- ----------- -----------
1999
Revenue $ 4,118,769 $ 3,533,281 $ 2,821,979 $ 3,219,424 $13,693,453
Gross profit 1,656,584 1,090,222 985,509 1,824,317 5,556,632
Net loss (74,044) (439,163) (404,093) (4,796,559) (5,713,859)
Net loss
per share (0.01) (0.03) (0.03) (0.36) (0.43)
1998
Revenue $ 4,718,106 $ 5,297,221 $ 4,361,218 $ 4,310,438 $18,686,983
Gross profit 1,943,538 2,357,940 1,930,692 1,740,215 7,972,385
Net income
(loss) 278,249 338,408 204,664 (206,041) 615,280
Net income
(loss) per
share 0.02 0.02 0.02 (0.01) 0.05
17. Subsequent Events
On June 9, 1999, the Company entered into an agreement with its primary lender
whereby the lender agreed to temporarily include local, state and federal
estimated tax refunds for May 31, 1999 in the Company's Borrowing Base and to
advance against the tax refunds. As a result, the lender advanced the Company
$500,000 on June 9, 1999. The agreement further stipulated that the advance
would be repaid by the earlier of June 18, 1999 or when the Company obtained
other third party financing. If the advance was not repaid by June 18, 1999,
the Company would be required to pay a $50,000 fee to the lender. The Company
did not obtain other third party financing until July 9, 1999, did not repay
the advance by June 18, 1999, and the lender has charged the fee, but is
considering the Company's request to waive the fee.
F-21
<PAGE>
Notes to Consolidated Financial Statements, Continued
17. Subsequent Events, Continued
On July 9, 1999, the Company entered into promissory notes with five
individual private lenders for $100,000 each. The notes, which bear interest
at 12% per annum, are payable in installments of interest only beginning on
August 1, 1999 and on the first day of each successive month. A final payment
of all principal and accrued interest is due on December 31, 1999. The five
promissory notes are collectively collateralized by federal, state and local
estimated tax refunds for the year ended May 31, 1999 by the amount by which
such refunds exceed $500,000 up to $1,000,000. The notes may be retired, at
the lenders option, once such tax refunds are received by the Company. The
notes are further collateralized by the Company's right and interest in a
lease on its Beloit, Wisconsin nursing home facility. Additionally, the
Company's President and Chief Executive Officer agreed to personally guarantee
all obligations under the above notes and to pledge 100,000 shares of his
holdings of the Company's common stock to each of the private lenders until
all obligations to the lenders have been satisfied.
As further consideration for entering into the above promissory notes, each of
the five lenders received: (1) a warrant to purchase 120,000 shares of the
Company's common stock at $.01 per share, exercisable within one year from the
issue date, (2) a warrant to purchase 200,000 shares of the Company's common
stock at $.35 per share, exercisable within two years from the issue date, and
(3) an option to convert up to $50,000 of each note into shares of the
Company's common stock at $.50 per share, exercisable with notice to the
company within 30 days of the maturity of the notes or within 10 days of
receipt of notice that the Company has received the aforementioned tax
refunds.
On June 30, 1999, the Company's primary lender notified the Company that
NewCare had failed to make its regularly-scheduled payment on June 16, 1999
and that NewCare had filed for protection under Chapter 11 of the bankruptcy
code. Furthermore, the lender notified the Company of its intent to invoke
its right to have the Company repurchase the promissory note.
On July 16, 1999, the Company's primary lender extended the Company a term
loan of $2,300,000. The term loan consisted of: (1) $700,000 to be used as
working capital, and (2) $1,600,000 to fulfill the Company's obligation to
repurchase the aforementioned NewCare promissory note. The loan, which bears
interest at 15% per annum, is payable in installments of interest only
beginning on August 1, 1999 and on the first day of each successive month
through October 1, 1999; $200,000 in principal plus accrued interest beginning
on November 1, 1999 and on the first day of each successive month through
January 1, 2000; $100,000 in principal plus accrued interest beginning on
February 1, 2000 and on the first day of each successive month through October
1, 2000, and a final principal payment of $800,000 plus accrued interest on
November 1, 2000. The term loan is collateralized by (1) the first $500,000
of any federal, state and local tax refunds for the year ended May 31, 1999,
and to the extent such refunds exceed $1,000,000, (2) payments subsequently
received on the promissory note repurchased by the Company, and (3) a personal
guarantee by the Company's President and Chief Executive Officer on all
indebtedness of the Company to the primary lender for up to $1,600,000.
F-22
<PAGE>
Notes to Consolidated Financial Statements, Continued
17. Subsequent Events, Continued
As further consideration for entering into the above term loan, the Company's
primary lender received a warrant to purchase up to 18% of the Company's
common stock at an aggregate purchase price of $1.00 and a warrant to purchase
300,000 shares of the Company's common stock at a purchase price of $1.00 per
share. Both warrants are exercisable through July 6, 2004. The percentage of
the Company's common stock that can be purchased under the first warrant can
be reduced based on the Company's repayment of the term loan, but in no event
to less than 10% of the Company's common stock.
Effective July 1, 1999, the Company entered into a 20-year lease agreement on
a 228 bed nursing home facility in Beloit, Wisconsin. The agreement provides
for the Company to make monthly base rent payments of $47,500 during the
initial year and for such monthly payments to escalate, as scheduled, over the
life of the lease. The Company is also responsible for making monthly tax and
insurance deposits, which currently approximates $11,900 per month, to the
lessor. The Company also entered into an option with the lessor to purchase
the facility at any time after six months at a predetermined purchase price.
For such option, the Company agreed to make nonrefundable payments to the
lessor totaling $360,000, one half to be paid within 90 days of the effective
date of the lease and one half to be paid no later than July 1, 2000. Such
payments for the option will be credited against the purchase price if the
option is exercised.
Effective September 1, 1999, the Company agreed to sell its rights in
contracts with Central Arkansas Nursing Centers along with related accounts
receivable and certain equipment to an organization owned principally by two
management members of the Company. One of the owners is the son of the
Company's President and Chief Executive Officer. The purchasers also agreed
to assume certain employee-related liabilities. The purchase price will
approximate $340,000 with a downpayment of approximately $250,000 and the
balance to be paid in quarterly installments of $15,000 beginning on April 1,
2000.
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PERENNIAL HEALTH SYSTEMS, INC.
Dated: September 14, 1999 By: /s/ David V. Hall
David V. Hall, 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 company
and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ David V. Hall President (Principal September 14, 1999
David V. Hall Executive Officer)
and Director
/s/ David W. Lester Chief Financial Officer, September 14, 1999
David W. Lester Treasurer (Principal
Financial and Accounting
Officer), Secretary
and Director
/s/ Timothy M. Graven Director September 14, 1999
Timothy M. Graven
/s/ Bert L. Blieden Director September 14, 1999
Bert L. Blieden
SECOND AMENDMENT dated as of July 16, 1999 (this "Second
Amendment"), to the LOAN AND SECURITY AGREEMENT, dated as of August 31, 1998
(as amended on June 9, 1999, the "Existing Loan Agreement", and as it may be
further amended, restated, supplemented or modified from time to time,
including by this Amendment, the "Loan Agreement"; capitalized terms used and
not otherwise defined herein shall have the respective meanings ascribed to
such terms in the Existing Loan Agreement), between In-House Rehab, Inc., a
Kentucky corporation ("In-House"), In-House Medical Resources, Inc., a
Kentucky corporation, Doctors Rehab & Therapy, Inc., a Kentucky corporation,
Daily Rehabilitation Institute of Ponte Vedra, Inc., a Florida corporation,
Gateway Rehab, Inc., an Illinois corporation, Perennial Health Management,
Inc., a Kentucky corporation ("PHMI"), Perennial Health Systems, Inc. (f/k/a
In-house Rehab Corporation), a Colorado corporation ("Parent"), as Primary
Servicer and Guarantor and Daiwa Healthco-3 LLC, a Delaware limited liability
company, as lender (the "Lender").
Certain Events of Default are continuing under the Existing Loan
Agreement. The Borrowers have requested that the Lender restructure the
Existing Loan Agreement and make additional advances under the Loan Agreement
that are not provided for under the Existing Loan Agreement, subject to the
terms and conditions set forth herein.
Scott County Healthcare Center, Inc. ("SCHC"), a wholly owned
subsidiary of PHMI, desires to become a "Borrower" under the Loan Agreement
and each other Borrower desires that SCHC becomes a Borrower under the Loan
Agreement.
Accordingly, for good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged the parties hereto hereby agree to
the following:
SECTION 1 AMENDMENTS TO LOAN AGREEMENT
Effective as of the Effective Date, the Existing Loan Agreement is
hereby amended as follows:
1.1 Amendments to Articles I and II.
(a) Sections 1.01(a), 1.02(b) 1.02(c), 1.07(d), the heading
of Section 1.07(a) and the preamble to Article II are hereby amended by
deleting the word "Loan" appearing therein and substituting therefor
the phrase Revolving Loan.
(b) Section 1.09(b) is hereby amended by deleting the phrase
"Revolving Advance" appearing on the fifth and sixth lines thereof
and substituting therefor the word "Loan".
(c) Sections 1.05 and 1.06 of the Existing Loan Agreement are
hereby deleted in their entirety and the following new sections are
hereby substituted therefor:
Section 1.05. The Special Loan. (a) The Funding. The
Lender hereby agrees to lend to the Borrowers on the Effective
Date a term loan in the initial principal amount of $2,300,000
(the "Special Loan"). Amounts borrowed under this Section 1.05
<PAGE>
and repaid or prepaid may not be reborrowed. Amounts prepaid on
the Special Loan shall be applied to the outstanding principal
amount thereof in inverse order of maturity.
(b) Application of Proceeds of the Special Loan. The
Borrower hereby directs the Lender to apply (x) $298,671.06 in
proceeds of the Special Loan to reduce the amounts outstanding
under the Revolving Loan and cure any Borrowing Base Deficiency
existing immediately prior to the Effective Date, (y)
$1,601,328.94 in proceeds of the Special Loan to fulfill the
obligation of In-House to repurchase the Promissory Note pursuant
to Section 2 of the Purchase Agreement, and (z) $400,000 to the
account of In-House.
Section 1.06. Mandatory Payment of Principal on the
Special Loan. The Borrowers shall, until payment in full of
the Special Loan and subject to earlier prepayment thereof, pay to
the Lender the principal sum of the Special Loan in 15 consecutive
monthly installments on the dates (or the next following Business
Day) and in the amounts set forth below:
Payment Date Installment Amount
November 1, 1999; December 1, 1999; and $200,000
January 2, 2000
February 1, 2000; March 1, 2000; April 1, $100,000
2000; May 1, 2000; June 1, 2000; July 1,
2000; August 1, 2000; September 1, 2000,
October 1, 2000; and November 1, 2000
provided, that in any event the last such installment shall be in
the amount necessary to repay in full the unpaid principal amount
of the Special Loan.
(d) The following new subsection (e) is hereby added to
Section 1.07 of the Existing Loan Agreement at the end of Section 1.07.
(e) Interest on Special Loan. The Borrowers shall pay
interest on the unpaid principal amount of the Special Loan
outstanding from time to time (i) on each Interest Payment Date,
and (ii) on the Maturity Date (whether by acceleration or
otherwise) upon demand, in each case at an interest rate per annum
equal to 15%.
1.2 Amendments to Exhibit I.
(a) The defined term "Borrowing Base Deficiency" is
hereby amended by deleting the word "Loan" appearing on the second
line therein and substituting therefor the phrase "Revolving
Loan".
(b) The defined term "Interest Payment Date" is hereby
amended by deleting the word "Revolving Advance" appearing in the
second line therein and substituting therefor the word "Loan".
(c) The defined term "Interest Period" is hereby amended
by deleting the phrase "with respect to such Revolving Advance"
appearing in the second line thereof substituting the following
phrase therefor:
<PAGE>
with respect to each Revolving Advance or the date of initial
advance of the Special Loan, as the case may be,"
(d) The defined term "Loan"is hereby amended by deleting
such term in its entirety and substituting therefor the following:
"Loan" means the Revolving Loan and the Special Loan.
(e) The defined term "Pledge Agreement" is hereby amended
by adding the phrase ", as such agreement is amended, restated,
modified, or supplemented from time to time in accordance with its
terms" at the end of such defined term.
(f) The following terms are hereby added to Exhibit I in
their appropriate alphabetical order:
"Promissory Note" means that certain Promissory Note
in the initial principal amount of $1,873,193.55, dated
November 17, 1998, made by Newcare Health Corporation, a
Nevada corporation in favor of In-House.
"Purchase Agreement" means that certain Promissory
Note Purchase Agreement, dated as of November 30, 1998,
between the Lender and In-House, pursuant to which In-House
is obligated to repurchase from the Lender the Promissory
Note.
"Revolving Loan" has the meaning set forth in Section
1.01(a).
"Special Loan" has the meaning set forth in Section
1.05(a).
SECTION 2 SPECIAL PROVISION FOR THE ADDITION OF SCHC
2.1 Addition of SCHC. SCHC hereby becomes a Borrower under the
Loan Agreement and agrees to be bound by, and to comply with the terms and
provisions of the Loan Agreement in the same manner as if it were an original
signatory thereto as a Borrower and hereby grants, as collateral security for
the Borrowers' obligations to pay the Lender Debt when due and payable, a
first priority Lien on and security interest in and right of set-off against
all of its rights, title and interest in and to (i) its interest in the
Lockbox and the Lockbox Account, (ii) its Collateral, and (iii) all Proceeds
of the foregoing.
2.2 Pledge of SCHC Stock. PHMI hereby becomes a "Grantor" under
the Pledge Agreement (as defined in therein) and hereby agrees to be bound by,
and to comply with the terms and provisions of the Pledge Agreement in the
same manner as if it were an original signatory thereto as a "Grantor". The
Grantors (as defined in the Pledge Agreement) and the Lender hereby amend
Schedule I to the Pledge Agreement by deleting such schedule in its entirety
and substituting therefor Schedule I attached hereto.
SECTION 3 SPECIAL ACKNOWLEDGMENTS RELATING TO SECURITY INTERESTS
3.l Acknowledgment of Lien in Tax Refunds. Each Borrower hereby
acknowledges, confirms, represents and agrees that proposed federal, state and
local tax refunds described in Annex 3.1 hereto (the "Tax Refunds") are,
<PAGE>
without any further action on the part of the Borrowers or the Lender,
including as part of the definition of "Collateral" as such term is defined in
the Loan Agreement, that the Lender has a first priority security interest in
the Tax Refunds (subject to the Lender Consent and Intercreditor Agreement
referred to in Section 4.3 hereof). No Borrower will represent to any other
Person or enter into any other agreement, or suffer or permit any such action,
in contravention of such understanding without the prior written consent of
the Lender.
3.2 Acknowledgement of Lien in promissory Note. In-House hereby
acknowledges, confirms, represents and agrees that the Promissory Note is,
without any further action on the part of the Borrowers or the Lender,
including as part of the definition of "Collateral" as such term is defined in
the Loan Agreement, that the Lender has a first priority security interest in
the Promissory Note. No Borrower will represent to any other Person or enter
into any other agreement, or suffer or permit any such action, in
contravention of such understanding without the prior written consent of the
Lender. In-House agrees that it shall direct any and all payments or
distributions of any kind or nature to be paid directly to the Lender first,
in reduction of amounts outstanding under the Special Loan, and upon payment
in full of the Special Loan, in reduction of any other amounts of Lender Debt.
3.3 Acknowledgment Of Lien in SCHC Collateral. Each Borrower
hereby acknowledges, confirms, represents and agrees that the Lender possesses
a first priority security interest in all of the Collateral of SCHC (subject
to the Intercreditor Agreement, dated as of December 4, 1998 among The
National City Bank of Evansville and the Lender) and in the capital stock of
SCHC (upon delivery thereof to the Agent), as collateral security for the
payment of all Lender Debt when due and payable.
3.4 Acknowledgment of Special Loan. Each Borrower hereby
acknowledges, confirms, represents and agrees that the Lender Debt includes
any and all amounts outstanding under the Special Loan.
SECTION 4 CONDITIONS TO EFFECTIVENESS
This Second Amendment and the transactions contemplated herein and
hereby shall become effective at the time and date (the "Effective Date") that
the Lender receives fully executed counterparts of this Second Amendment and
the following conditions have been fulfilled or waived, in each case, to the
satisfaction of the Lender in its sole discretion:
4.1 Execution of Second Amendment. The Lender shall have received a
fully executed copy of this Second Amendment, together with all exhibits,
annexes and attachments thereto.
4.2 Corporate Authority. The Lender shall have received evidence
that the board of directors of the Parent, In-House and each other Borrower
has approved this Second Amendment and all of the transactions contemplated
hereby.
4.3 $500,000 Investment; Lender Consent and Intercreditor
Agreement. The Lender shall have received evidence that certain investors
shall have advanced $500,000 in cash to the Borrowers pursuant to
documentation satisfactory to the Lender in its sole discretion, including a
fully executed Lender Consent and Intercreditor Agreement in the form of
Exhibit A attached hereto, and fully executed copies of each such agreement
shall have been delivered to the Lender.
<PAGE>
4.4 Warrants. The Lender shall have received (x) a fully executed
warrant for 300,000 shares of common stock of the Parent in the form of
Exhibit B attached hereto, and (y) a fully executed warrant for 18% of the
common stock of the Parent (reducing pursuant to the terms set forth therein)
in the form of Exhibit C attached hereto.
4.5 Second Amendment to Hall Guaranty. The Lender shall have
received a fully executed copy of the Second Amendment to the Hall Guaranty in
the form of Exhibit D attached hereto.
4.6 Assignment of Promissory Note. The Lender shall have received
a fully executed Assignment of Promissory Note in the form of Exhibit E
attached hereto.
4.7 Collateral Assignment of Promissory Note. The Lender shall
have received a fully executed Assignment of Promissory Note as Collateral
Security in the form of Exhibit F attached hereto.
4.8 Subordination Agreement. The Lender shall have received a
fully executed Subordination Agreement in the form of Exhibit G attached
hereto.
4.9 Diligence Documentation. The Lender shall have received the
following documents, each in form and substance satisfactory to the Lender in
its sole discretion:
0.0.1 an executed term sheet from HealthCare Financial Partners
relating to the sale leaseback of certain "Medilodge"
facilities located in the State of Michigan;
0.0.2 a recent personal financial statement from David Hall
together with supporting documentation;
0.0.3 evidence and related supporting documentation that the
Borrowers are entitled and plan to file for local, state and
federal tax refunds in an aggregate minimum net amount of
$1,050,000;
0.0.4 an executed and effective letter of intent between the
Borrowers and Medilodge;
0.0.5 a copy of the check register of the Borrowers for the past 90
days and all known future payment;
0.0.6 evidence supporting the cash flow forecasts of the Borrowers
previously presented to the Lender;
4.10 SCHC Stock Certificate. The Lender shall have received the
stock certificate evidencing PHMI's ownership of SCHC together with a stock
power undated and executed in blank representing 100% of the issued and
outstanding stock of SCHC.
4.11 SCHC Corporate Authority. The Lender shall have received (i)
a certified copy of the certificate or articles of incorporation of SCHC; (ii)
a certificate of the Secretary of SCHC, certifying (A) that attached thereto
is a true and complete copy of SCHC By-laws as in effect on the date of such
certificate and at all times since a date prior to the date of the resolution
described in item (B) below, (B) that attached thereto is a true and complete
<PAGE>
copy of a resolution adopted by SCHC's Board of Directors authorizing the
execution, delivery and performance of this Agreement, and that such
resolution has not been modified, rescinded or amended and is in full force
and effect, (C) that SCHC's certificate or articles of incorporation has not
been amended since the date of the last amendment thereto shown on the
certificate furnished pursuant to (i) above, and (D) as to the incumbency and
specimen signature of each of SCHC's officers executing this Agreement; and
(iii) a certificate of another of SCHC's officers as to incumbency and
signature of its Secretary.
4.12 Opinions. The Lender shall have received legal opinions of
counsel relating to this Second Amendment, each of the documents contemplated
to be delivered hereunder, the security interests of the Lender and certain
securities law matters and matters relating to the Colorado Control Share
Acquisition and Colorado Business Combination statutes.
4.13 On-Site Diligence. The Lender shall conducted on-site due
diligence at the Borrowers offices;
4.14 Credit Committee Approval. The Lender's credit committee
shall have approved the transactions contemplated herein.
4.15 Other Conditions. The Lender shall have received such other
documents as the Lender or Lender's counsel shall reasonably deem necessary.
SECTION 5 MISCELLANEOUS
5.1 Representations and Warranties. Each Borrower reaffirms and
restates the representations and warranties set forth in the Loan Agreement,
as amended by this Second Amendment, and all such representations and
warranties shall be true and correct on the date hereof with the same force
and effect as if made on such date (except for those which expressly related
to a prior date and subject to the Lender Consent and Intercreditor Agreement
described in Section 4.3 hereof and the Intercreditor Agreement referred to in
Section 3.3 hereof). Each Borrower represents and warrants (which
representations and warranties shall survive the execution and delivery
hereof) to the Lender that:
0.0.1 It has the corporate power and authority to execute, deliver
and carry out the terms and provisions of this Second
Amendment and the transactions contemplated hereby and has
taken or caused to be taken all necessary corporate action to
authorize the execution, delivery and performance of this
Second Amendment and the transactions contemplated hereby;
0.0.2 No consent of any other person (including, without
limitation, shareholders or creditors of any Borrower), and
no action of, or filing with any governmental or public body
or authority is required to authorize, or is otherwise
required in connection with the execution, delivery and
performance of this Second Amendment;
0.0.3 This Second Amendment has been duly executed and delivered on
behalf of each Borrower by a duly authorized officer, and
constitutes a legal, valid and binding obligation of each
Borrower enforceable in accordance with its terms, subject to
bankruptcy, reorganization, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights
generally and the exercise of judicial discretion in
accordance with general principles of equity; and
<PAGE>
0.0.4 The execution, delivery and performance of this Second
Amendment will not violate any law, statute or regulation, or
any order or decree of any court or governmental
instrumentality, or conflict with, or result in the breach
of, or constitute a default under any contractual obligation
of any Borrower.
5.2 In addition the Parent hereby further represents and warrants
as follows:
0.0.1 The authorized capital stock and the issued and outstanding
shares of capital stock of the Parent are as set forth on
Schedule 5.2.1 hereto. Except as set forth on Schedule
5.2.1, there are no outstanding securities of the Parent and
no securities convertible into or exchangeable for, or
options or other rights to acquire from the Parent, or other
obligations of the Parent to issue, directly or indirectly
any shares of capital stock or other equity securities of the
Parent. True and correct copies of all documentation
relating to the issuance, sale, transfer, relative rights,
privileges and obligations and any other material terms of
the securities, options or other rights set forth on Schedule
5.2.1 have been provided to the Lender or are available on
EDGAR. All of the issued and outstanding shares of capital
stock of the Parent have been duly authorized and validly
issued, are fully paid and nonassessable, and the holders
thereof are not be entitled or subject to any preemptive
rights, rights of first refusal or other similar rights.
3,870,601 shares of Common Stock have been duly authorized
and reserved for issuance in connection with the exercise of
the Warrants and no more than 16,266,071 shares of Common
Stock and no shares of preferred stock of the Parent will
have been reserved for issuance in connection with the
exchange, conversion or exercise of the other securities of
the Parent. The shares of capital stock to be issued upon
exercise of each of the Warrants will, upon issuance, be,
duly authorized and validly issued, fully paid and
nonassessable, free of any Liens or encumbrances and not
subject to any preemptive rights, rights of first refusal or
similar rights.
0.0.2 Except as set forth on Schedule 5.2.2, (y) neither the Parent
nor any of its Subsidiaries is a party or subject to any
agreement or understanding that affects or relates to the
holding, transfer, voting or giving of consents with respect
to any security or the voting by any director of the Parent
or of its Subsidiaries and (z) to the Parent's knowledge,
there are no such agreements or other arrangements among any
Persons owning equity interests in the Parent and/or its
Subsidiaries.
0.0.3 All outstanding shares of Common Stock and all outstanding
options, warrants, rights (including conversion or preemptive
rights and rights of first refusal) or agreements for the
purchase or acquisition from the Issuer or any of its
Affiliates of any shares of its capital stock, including the
Warrants and the shares of capital stock subject to issuance
upon exercise of the Warrant, have been or will be issued or
<PAGE>
granted in compliance with all applicable Securities Laws and
the requirements of any securities exchange or other
securities market upon which the Common Stock is listed or
quoted. The Common Stock is quoted on the OTC Bulletin
Board.
0.0.4 The Parent has taken all requisite action so that the Lender,
as a result of any of the transactions contemplated hereby,
including, but not limited to, the acquisition of 300,000
shares from the Parent, the issuance and acquisition of the
Warrant and the issuance and acquisition of shares upon
exercise of the Warrant does not become a "significant
shareholder" within the meaning of Article 106, Section 205
of the Colorado Business Corporation Act or any comparable
provision of law that may become applicable to the Company
thereby limiting the ability of the Lender to exercise any of
its rights or remedies against the Parent.
5.3 Ratification. Except as herein expressly amended, the Loan
Agreement and all other documents issued in connection therewith each hereby
ratified and confirmed in all respects and shall remain in full force and
effect in accordance with their respective terms.
5.4 Cross-References. All references to the Loan Agreement in the
Loan Agreement and the other documents and instruments delivered pursuant to
or in connection therewith shall mean the Loan Agreement as amended hereby and
as may in the future be amended, restated, supplemented or modified from time
to time.
5.5 Counterparts. This Second Amendment may be executed by the
parties hereto individually or in combination, in one or more counterparts,
each of which shall be an original and all of which shall constitute one and
the same agreement.
5.6 Delivery by Telecopy. Delivery of an executed counterpart of a
signature page to this Second Amendment by telecopier shall be effective as
delivery of a manually executed counterpart of this Second Amendment.
5.7 Governing Law. THIS SECOND AMENDMENT SHALL, IN A MANNER
CONSISTENT WITH SECTION 5-1401 OF THE GENERAL OBLIGATION LAW OF THE STATE OF
NEW YORK, BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
ANY CONFLICTS OF LAWS PRINCIPLES THEREOF THAT WOULD CALL FOR THE APPLICATION
OF THE LAWS OF ANY OTHER JURISDICTION.
5.8 Further Assurances. The parties hereto shall, at any time and
from time to time following the execution of this Second Amendment, execute
and deliver all such further instruments and take all such further actions as
may be reasonably necessary or appropriate in order to carry out the
provisions of this Second Amendment.
[Remainder of this page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Second Amendment as of the date first above written.
IN-HOUSE REHAB, INC. (individually and as
successor in interest by merger to RT Group,
Inc.), as a Borrower
By /s/ David V. Hall
Name:
Title: Pres.
IN-HOUSE MEDICAL RESOURCES, INC., as a
Borrower
By David V. Hall
Name:
Title: Pres
SCOTT COUNTY HEALTHCARE ENTER, INC.,
as a Borrower
By /s/ David V. Hall
Name:
Title: Pres.
DOCTORS REHAB & THERAPY, INC., as a
Borrower
By /s/ David V. Hall
Name:
Title: Pres
DAILY REHBILITATION INSTITUTE OF
POINTE VEDRA, INC., as a Borrower
By /s/ David V. Hall
Name:
Title: Pres.
<PAGE>
GATEWAY REHAB, INC., as a Borrower
By: /s/ David V. Hall
Name:
Title: Pres.
PERENNIAL HEALTH MANAGEMENT, INC. as
a Borrower
By: /s/ David V. Hall
Name:
Title: Pres.
PERENNIAL HEALTH SYSTEMS, INC. (f/k/a In-
House Rehab Corporation), as Primary Servicer and
Guarantor
By: /s/ David V. Hall
Name:
Title: Pres.
DAIWA HEALTHCO-3LLC, as
Lender
By: /s/ Dwight Jenkins
Name: Dwight Jenkins
Title: Vice President
WARRANT
To Purchase Common Stock of
PERENNIAL HEALTH SYSTEMS, INC.
Warrant No. __
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS 1
"Additional Shares of Common Stock" 1
"Business Day" 1
"Change of Control: 1
"Closing Date" 2
"Commission" 2
"Common Stock" 2
"Convertible Securities" 3
"Current Market Price" 3
"Current Warrant Price" 3
"Exchange Act" 3
"Exercise Period" 3
"Expiration Date" 3
"GAAP" 3
"Holder" 4
"Lender" 4
"Majority Holders" 4
"NASD" 4
"Other Property" 4
"Person" 4
"Restricted Common Stock" 4
"Securities Act" 4
"Transfer" 4
"Transfer Notice" 4
"Voting Stock" 4
"Warrants" 5
"Warrant Price" 5
"Warrant Stock" 5
2. EXERCISE OF WARRANT 5
2.1 Manner of Exercise 5
2.2 Payment of Taxes 6
2.3 Fractional Shares 6
2.4 Continued Validity 6
3. TRANSFER, DIVISION AND COMBINATION 7
3.1 Transfer 7
3.2 Division and Combination 7
3.3 Expenses 7
3.4 Maintenance of Books 7
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4. ADJUSTMENTS 7
4.1 Stock Dividends, Subdivisions and Combinations 8
4.2 Certain Other Distributions 8
4.3 Other Provisions Applicable to Adjustments under
this Section 9
4.4 Reorganization, Reclassification, Merger,
Consolidation or Disposition of Assets 9
5. NOTICES TO WARRANT HOLDERS 10
5.1 Notice of Adjustments 10
5.2 Notice of Certain Corporate Action 10
6. NO IMPAIRMENT 10
7. RESERVATION AND AUTHORIZATION OF COMMON STOCK;
REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY 11
8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS 12
9. RESTRICTIONS ON TRANSFERABILITY 12
9.1 Restrictive Legend 13
9.2 Notice of Proposed Transfers; Request for Registration 13
9.3 Required Registration 14
9.4 Incidental Registration 14
9.5 Registration Procedures 15
9.6 Expenses 17
9.7 Indemnification and Contribution 18
9.8 Termination of Restrictions 19
9.9 Listing on Securities Exchange 20
9.10 Certain Limitations on Registration Rights 20
9.11 Selection of Managing Underwriters 20
10. SUPPLYING INFORMATION 20
11. LOSS OR MUTILATION 21
12. OFFICE OF THE COMPANY 21
13. FINANCIAL AND BUSINESS INFORMATION 21
13.1 Quarterly Information 21
13.2 Annual Information 21
13.3 Filings 22
14. LIMITATION OF LIABILITY 22
ii
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15. MISCELLANEOUS 22
15.1 Nonwaiver and Expenses 22
15.2 Notice Generally 22
15.3 Indemnification 23
15.4 Remedies 23
15.5 Successors and Assigns 24
15.6 Amendment 24
15.7 Severability 24
15.8 Headings 24
15.9 Governing Law 24
EXHIBIT A SUBSCRIPTION FORM 26
EXHIBIT B ASSIGNMENT FORM 27
iii
<PAGE>
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE
PROVISIONS OF THIS WARRANT.
Warrant No. __
WARRANT
To Purchase Common Stock of
PERENNIAL HEALTH SYSTEMS, INC.
This is to certify that Daiwa Healthco-3 LLC, or registered assigns, is
entitled, at any time from time to time during the Exercise Period, to
purchase from Perennial Health Systems, Inc., a Colorado corporation (the
"Company"), an aggregate of 300,000 shares of Common Stock at a purchase price
of $1.00 per share, subject to adjustment as provided herein, all on the terms
and conditions and pursuant to the provisions hereinafter set forth.
1. DEFINITIONS
As used in this Warrant, the following terms have the respective meanings
set forth below:
"Additional Shares of Common Stock" shall mean all shares of Common
Stock issued by the Company after the Closing Date, other than Warrant Stock.
"Business Day" shall mean any day that is not a Saturday or Sunday or a
day on which banks in the City of New York are required or permitted to be
closed.
"Change of Control" shall mean the occurrence of any of the following:
(i) any Person or group (within the meaning of the rules under Section
13(d) of the Exchange Act) becomes the beneficial owner (within the meaning of
Rule 13d-3 of the Exchange Act), directly or indirectly, of more than 20% of
the total voting power of the then outstanding Voting Stock of the Company;
(ii) any Person or group (within the meaning of the rules under Section
13(d) of the Exchange Act) commences or effects, or publicly announces an
intention or proposal to commence or effect, a tender offer, exchange offer,
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<PAGE>
merger, consolidation, share exchange or other transaction if upon successful
consummation thereof such Person or group would become the beneficial owner
(within the meaning of Rule 13d-3 of the Exchange Act), directly or
indirectly, of more than 20% of the total voting power of the then outstanding
Voting Stock of the Company;
(iii) during any period of 24 months, individuals who at the beginning
of such period constituted the Board of Directors of the Company (together
with any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by the
vote of a majority of the directors of the Company then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office;
(iv) the approval by the Board of Directors of the Company (whether
or not subject to approval by the shareholders of the Company) or by the
shareholders of the Company of any plan or proposal for the liquidation or
dissolution of the Company or the distribution of all or a substantial part of
its property, assets or business to shareholders; or
(v) the consolidation or merger of the Company with or into another
Person, a share exchange involving the Company, or the sale, transfer or other
disposition of all or substantially all the Company's property, assets or
business to another Person, or the approval by the Board of Directors of the
Company (whether or not subject to approval by the shareholders of the
Company) or by the shareholders of the Company of any agreement, plan or
proposal providing for such a transaction, unless pursuant to the terms of
such transaction the Voting Stock of the Company outstanding immediately prior
to such transaction is changed into or exchanged for securities having a
majority of the voting power of the outstanding Voting Stock of the Person
surviving such merger or consolidation, or which acquired the Company or all
or substantially all of its property, assets and business, immediately after
giving effect to such transaction.
"Closing Date" shall mean July __, 1999.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency then administering the Securities Act and other federal
securities laws.
"Common Stock" shall mean the common stock, no par value, of the Company
as constituted on the Closing Date, and any capital stock into which such
Common Stock may thereafter be changed, and shall also include (i) capital
2
<PAGE>
stock of the Company of any other class (regardless of how denominated) issued
to the holders of shares of Common Stock upon any reclassification thereof,
excluding any class which provides for (A) dividends at a fixed rate which
rate does not vary based on the net income or operating results of the Company
and/or its subsidiaries, (B) a preference as to liquidation which is limited
to the consideration received by the Company for such stock and (C) no right
of redemption and (ii) shares of common stock of any successor or acquiring
corporation (as defined in Section 4.4) received by or distributed to the
holders of Common Stock in the circumstances contemplated by Section 4.4.
"Convertible Securities" shall mean evidences of indebtedness, shares of
stock or other securities which are convertible into or exchangeable, with or
without payment of additional consideration in cash or property, for Common
Stock, either immediately or upon the occurrence of a specified date or a
specified event or other contingency.
"Current Market Price" shall mean, in respect of any share of Common
Stock on any date herein specified, the average of the daily market prices for
30 consecutive Business Days commencing 45 days before such date. The daily
market price for each such Business Day shall be (i) the last sale price on
such day on the principal stock exchange on which such Common Stock is then
listed or admitted to trading, (ii) if no sale takes place on such day on any
such exchange, the average of the last reported closing bid and asked prices
on such day as officially quoted on any such exchange, (iii) if the Common
Stock is not then listed or admitted to trading on any stock exchange, the
average of the last reported closing bid and asked prices on such day in the
over-the-counter market, as furnished by the National Association of
Securities Dealers Automatic Quotation System or the National Quotation
Bureau, Inc., (iv) if neither such corporation at the time is engaged in the
business of reporting such prices, as furnished by any similar firm then
engaged in such business, or (v) if there is no such firm, as furnished by any
member of the NASD selected mutually by the Majority Holders and the Company
or, if they cannot agree upon such selection, as selected by two such members
of the NASD, one of which shall be selected by the Majority Holders and one of
which shall be selected by the Company.
"Current Warrant Price" shall mean the price at which a share of Common
Stock may be purchased at any date pursuant to the exercise of this Warrant on
such date; the initial Current Warrant Price is stated in the preamble on to
this Warrant.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.
"Exercise Period" shall mean the period during which this Warrant is
exercisable pursuant to Section 2.1.
"Expiration Date" shall mean July __, 2004.
3
<PAGE>
"GAAP" shall mean generally accepted accounting principles in the United
States of America from time to time in effect.
"Holder" shall mean the Person in whose name the Warrant set forth herein
is registered on the books of the Company maintained for such purpose.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976.
"Lender" shall mean Daiwa Healthco-3 LLC, a Delaware limited liability
company.
"Majority Holders" shall mean the Holders of Warrants exercisable for in
excess of 50% of the aggregate number of shares of Common Stock then
purchasable upon exercise of all Warrants, whether or not then exercisable.
"NASD" shall mean the National Association of Securities Dealers, Inc.,
or any successor corporation thereto.
"Other Property" shall have the meaning set forth in Section 4.4.
"Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, limited liability company, incorporated organization,
association, corporation, institution, public benefit corporation, entity or
government (whether federal, state, county, city, municipal or otherwise,
including, without limitation, any instrumentality, division, agency, body or
department thereof).
"Restricted Common Stock" shall mean shares of Common Stock which are, or
which upon their issuance on the exercise of this Warrant would be, evidenced
by a certificate bearing the restrictive legend set forth in Section 9.1(a).
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Transfer" shall mean any disposition of any Warrant or Warrant Stock or
of any interest in either thereof, which would constitute a sale thereof
within the meaning of the Securities Act.
"Transfer Notice" shall have the meaning set forth in Section 9.2.
"Voting Stock" of a Person shall mean all classes of capital stock or
other interests (including, but not limited to, partnership and limited
liability company interests) of such Person then outstanding and entitled
(without regard to the occurrence of any contingencies) to vote in the
election of directors, managers, trustees thereof.
4
<PAGE>
"Warrants" shall mean this Warrant and all warrants issued upon transfer,
division or combination of, or in substitution for, any thereof. All Warrants
shall at all times be identical as to terms and conditions and date, except as
to the number of shares of Common Stock for which they may be exercised.
"Warrant Price" shall mean an amount equal to (i) the number of shares of
Common Stock being purchased upon exercise of this Warrant pursuant to Section
2.1, multiplied by (ii) the Current Warrant Price as of the date of such
exercise.
"Warrant Stock"shall mean the shares of Common Stock purchased by the
holders of the Warrants upon the exercise thereof.
2. EXERCISE OF WARRANT
2.1 Manner of Exercise. From time to time after the Closing Date and
until 5:00 P.M., New York time, on the Expiration Date, Holder may exercise
this Warrant, on any Business Day, for all or any part of the shares of Common
Stock purchasable hereunder.
In order to exercise this Warrant, in whole or in part, Holder shall
deliver to the Company at its principal office at 325 West Main Street, Suite
1400 B, Louisville, Kentucky 40202 or at the office or agency designated by
the Company pursuant to Section 12, (i) a written notice of Holder's election
to exercise this Warrant, which notice shall specify the number of shares of
Common Stock to be purchased, (ii) payment of the Warrant Price and (iii) this
Warrant; provided, that any notice of exercise given hereunder may be made
contingent upon the happening of, and effective concurrently with the
effectiveness of, any event, including, without limitation, the participation
of any Holder in or closing of any public offering proposed to be effected by
the Company or the closing of a sale pursuant to the exercise of any tag-along
or other rights of participation by any Holder, if such contingency and such
event are specified in such notice. Such notice shall be substantially in the
form of the subscription form appearing at the end of this Warrant as Exhibit
A, duly executed by Holder or its agent or attorney. Upon receipt thereof,
the Company shall, as promptly as practicable, and in any event within one (1)
Business Day thereafter, execute or cause to be executed and deliver or cause
to be delivered to Holder a certificate or certificates representing the
aggregate number of full shares of Common Stock issuable upon such exercise,
together with cash in lieu of any fraction of a share, as hereinafter
provided. The stock certificate or certificates so delivered shall be, to the
extent possible, in such denomination or denominations as such Holder shall
request in the notice and shall be registered in the name of Holder or,
subject to Section 9, such other name as shall be designated in the notice.
This Warrant shall be deemed to have been exercised and such certificate or
certificates shall be deemed to have been issued, and Holder or any other
Person so designated to be named therein shall be deemed to have become a
5
<PAGE>
holder of record of such shares for all purposes, as of the date the notice,
together with the cash or check or checks and this Warrant, is received by the
Company as described above and all taxes required to be paid by Holder, if
any, pursuant to the last sentence of Section 2.2 prior to the issuance of
such shares have been paid. If this Warrant shall have been exercised in
part, the Company shall, at the time of delivery of the certificate or
certificates representing Warrant Stock, deliver to Holder a new Warrant
evidencing the rights of Holder to purchase the unpurchased shares of Common
Stock called for by this Warrant, which new Warrant shall in all other
respects be identical with this Warrant, or, at the request of Holder,
appropriate notation may be made on this Warrant and the same returned to
Holder.
Payment of the Warrant Price shall be made at the option of the Holder in
cash or by check.
2.2 Payment of Taxes. All shares of Common Stock issuable upon the
exercise of this Warrant pursuant to the terms hereof shall be validly issued,
fully paid and nonassessable and without any preemptive rights. The Company
shall pay all expenses in connection with, and all taxes and other
governmental charges that may be imposed with respect to, the issue or
delivery thereof; if such tax or charge is imposed by law upon Holder, it
shall be paid by the Company on behalf of Holder or reimbursed by the Company
if paid by Holder. The Company shall not be required, however, to pay any tax
or other charge imposed in connection with any transfer involved in the issue
of any certificate for shares of Common Stock issuable upon exercise of this
Warrant in any name other than that of Holder.
2.3 Fractional Shares . The Company shall not be required to issue a
fractional share of Common Stock upon exercise of any Warrant. As to any
fraction of a share which the Holder of one or more Warrants, the rights under
which are exercised in the same transaction, would otherwise be entitled to
purchase upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to the same fraction of the
Current Market Price per share of Common Stock on the date of exercise.
2.4 Continued Validity. A holder of shares of Common Stock issued
upon the exercise of this Warrant, in whole or in part (other than a holder
who acquires such shares after the same have been publicly sold pursuant to a
Registration Statement under the Securities Act or sold pursuant to Rule 144
thereunder), shall continue to be entitled with respect to such shares to all
rights to which it would have been entitled as Holder under Sections 9, 10, 13
and 15 of this Warrant. The Company will, at the time of each exercise of
this Warrant, in whole or in part, upon the request of the holder of the
shares of Common Stock issued upon such exercise hereof, acknowledge in
writing, in form reasonably satisfactory to such holder, its continuing
obligation to afford to such holder all such rights; provided, however, that
6
<PAGE>
if such holder shall fail to make any such request, such failure shall not
affect the continuing obligation of the Company to afford to such holder all
such rights.
3. TRANSFER, DIVISION AND COMBINATION
3.1 Transfer. Subject to compliance with Section 9, transfer of
this Warrant and all rights hereunder, in whole or in part, shall be
registered on the books of the Company to be maintained for such purpose, upon
surrender of this Warrant at the principal office of the Company referred to
in Section 2.1 or the office or agency designated by the Company pursuant to
Section 12, together with a written assignment of this Warrant substantially
in the form of Exhibit B hereto duly executed by Holder or its agent or
attorney and funds sufficient to pay any transfer taxes payable upon the
making of such transfer. Upon such surrender and, if required, such payment,
the Company shall, subject to Section 9, execute and deliver a new Warrant or
Warrants in the name of the assignee or assignees and in the denomination
specified in such instrument of assignment, and shall issue to the assignor a
new Warrant evidencing the portion of this Warrant not so assigned, and this
Warrant shall promptly be canceled. A Warrant, if properly assigned in
compliance with Section 9, may be exercised by a new Holder for the purchase
of shares of Common Stock without having a new Warrant issued.
3.2 Division and Combination. Subject to Section 9, this Warrant may
be divided or combined with other Warrants upon presentation hereof at the
aforesaid office or agency of the Company, together with a written notice
specifying the names and denominations in which new Warrants are to be issued,
signed by Holder or its agent or attorney. Subject to compliance with Section
3.1 and with Section 9, as to any transfer which may be involved in such
division or combination, the Company shall execute and deliver a new Warrant
or Warrants in exchange for the Warrant or Warrants to be divided or combined
in accordance with such notice.
3.3 Expenses. The Company shall prepare, issue and deliver at its
own expense (other than transfer taxes) the new Warrant or Warrants under this
Section 3.
3.4 Maintenance of Books. The Company agrees to maintain, at its
aforesaid office or agency, books for the registration and the registration of
transfer of the Warrants.
4. ADJUSTMENTS
The number of shares of Common Stock for which this Warrant is
exercisable and the Current Warrant Price shall be subject to adjustment from
time to time as set forth in this Section 4. The Company shall give each
Holder notice of any event described below which requires an adjustment
pursuant to this Section 4 at the time of such event in accordance with
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Section 5.1. Notwithstanding anything to the contrary in this Section 4, no
adjustment under this Section 4 (other than subsection 4.1(c)) shall increase
the Current Warrant Price or decrease the number of shares of Common Stock for
which this Warrant is exercisable.
4.1 Stock Dividends, Subdivisions and Combinations. If any time the
Company shall:
(a) take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, Additional Shares of Common Stock,
(b) subdivide its outstanding shares of Common Stock into a larger
number of shares of Common Stock, or
(c) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock,
then (i) the number of shares of Common Stock for which this Warrant is
exercisable immediately after the occurrence of any such event shall be
adjusted to equal the number of shares of Common Stock which a record holder
of the same number of shares of Common Stock for which this Warrant is
exercisable immediately prior to the occurrence of such event would own or be
entitled to receive after the happening of such event, and (ii) the Current
Warrant Price shall be adjusted to equal (A) the Current Warrant Price
multiplied by the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to the adjustment divided by (B) the number of
shares for which this Warrant is exercisable immediately after such
adjustment.
4.2 Certain Other Distributions. If at any time the Company shall
take a record of the holders of its Common Stock for the purpose of entitling
them to receive any dividend or other distribution of:
(a) cash, any evidences of its indebtedness, any shares of its
stock or any other securities or property of any nature whatsoever (other than
Additional Shares of Common Stock), or
(b) any warrants or other rights to subscribe for or purchase any
evidences of its indebtedness, any shares of its stock or any other securities
or property of any nature whatsoever (other than Additional Shares of Common
Stock),
or shall otherwise effect any such distribution, then, upon exercise of this
Warrant, the Company shall deliver to Holder, for no additional consideration,
(on a proportionate basis if this Warrant is exercised in part) such of the
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items described in subparagraphs (a) or (b) above as Holder would have
received if it had exercised this Warrant (whether or not then exercisable)
and become the record owner of the Common Stock issuable upon exercise of this
Warrant immediately prior to the record date for such distribution, together
with any distributions or other payments with respect thereto as Holder would
have received if it had acquired such items at the same time as holders of
Common Stock. A reclassification of the Common Stock (other than a change in
par value, or from par value to no par value or from no par value to par
value) into shares of Common Stock and shares of any other class of stock
shall be deemed a distribution by the Company to the holders of its Common
Stock of such shares of such other class of stock within the meaning of this
Section 4.2 and, if the outstanding shares of Common Stock shall be changed
into a larger or smaller number of shares of Common Stock as a part of such
reclassification, such change shall be deemed a subdivision or combination, as
the case may be, of the outstanding shares of Common Stock within the meaning
of Section 4.1. The redemption or other acquisition for value of Common Stock
by the Company or any of its subsidiaries shall be deemed a distribution of
the total consideration paid in such transaction pro rata to the holders of
all outstanding shares of Common Stock.
If any item described in subparagraphs (a) or (b) above is distributed to
holders of Common Stock while this Warrant is outstanding then any such item
to which Holder would be entitled upon exercise of this Warrant shall at the
time of such distribution be deposited by the Company in escrow (with an
escrow agent reasonably satisfactory to Holder) to be released to Holder upon
such exercise.
4.3 Other Provisions Applicable to Adjustments under this Section .
If the Company shall take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend or distribution or
subscription or purchase rights and shall, thereafter and before the
distribution to stockholders thereof, legally abandon its plan to pay or
deliver such dividend, distribution, subscription or purchase rights, then
thereafter no adjustment shall be required by reason of the taking of such
record and any such adjustment previously made in respect thereof shall be
rescinded and annulled.
4.4 Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another Person
(where the Company is not the surviving Person or where there is a change in
or distribution with respect to the Common Stock of the Company), effect a
share exchange, or sell, transfer or otherwise dispose of all or substantially
all its property, assets or business to another Person and, pursuant to the
terms of such reorganization, reclassification, merger, consolidation, share
exchange or disposition of assets, shares of common stock of the successor or
acquiring Person, or any cash, shares of stock or other securities or property
of any nature whatsoever (including warrants or other subscription or purchase
rights) in addition to or in lieu of common stock of the successor or
acquiring Person ("Other Property"), are to be received by or distributed to
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the holders of Common Stock of the Company, then each Holder shall have the
right thereafter to receive, upon exercise of such Warrant, the number of
shares of common stock of the successor or acquiring Person or of the Company,
if it is the surviving Person, and Other Property receivable upon or as a
result of such reorganization, reclassification, merger, consolidation or
disposition of assets by a holder of the number of shares of Common Stock for
which this Warrant is exercisable immediately prior to such event. The
Company shall not consummate any such reorganization, reclassification,
merger, share exchange, consolidation or disposition of assets, unless the
successor or acquiring Person (if other than the Company) shall expressly
assume the due and punctual observance and performance of each and every
covenant and condition of this Warrant to be performed and observed by the
Company and all the obligations and liabilities hereunder, subject to such
modifications as may be deemed appropriate by Holder in good faith in order to
provide for adjustments of shares of the Common Stock for which this Warrant
is exercisable which shall be as nearly equivalent as practicable to the
adjustments provided for in this Warrant. For purposes of this Section,
"common stock of the successor or acquiring Person" shall include (i) stock or
other equity interests in such Person of any class which does not provide for
(A) dividends at a fixed rate which does not vary based on the net income or
operating results of the Company and/or its subsidiaries, (B) a preference as
to liquidation which is limited to the consideration received by the Company
for such stock and (C) a right of redemption and (ii) any evidences of
indebtedness, shares of stock or other securities which are convertible into
or exchangeable for any such stock, either immediately or upon the arrival of
a specified date or the happening of a specified event and any warrants or
other rights to subscribe for or purchase any such stock. The foregoing
provisions of this Section shall similarly apply to successive
reorganizations, reclassification, mergers, consolidations, share exchanges or
disposition of assets.
5. NOTICES TO WARRANT HOLDERS
5.1 Notice of Adjustments . Whenever the Current Warrant Price or
the number of shares of Common Stock for which this Warrant is exercisable
shall be adjusted pursuant to Section 4, or the Company shall authorize, enter
into any agreement with respect to or effect any transactions to which Section
4.4 applies, the Company shall forthwith prepare a certificate to be executed
by the chief financial officer of the Company setting forth, in reasonable
detail, such event and the consequences thereof under the terms of this
Warrant. The Company shall promptly cause an executed copy of such
certificate to be delivered to each Holder in accordance with Section 15.2.
The Company shall keep at its office or agency designated pursuant to Section
12 copies of all such certificates and cause the same to be available for
inspection at said office during normal business hours by any Holder or any
prospective purchaser of a Warrant designated by a Holder thereof.
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5.2 Notice of Certain Corporate Action. The Holder shall be entitled
to the same rights to receive notice of corporate action as any holder of
Common Stock.
6. NO IMPAIRMENT
The Company shall not by any action including, but not limited to,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issuance or sale of
securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate to protect the
rights of Holder against impairment. Without limiting the generality of the
foregoing, the Company will (a) not establish any par value of any shares of
Common Stock issuable upon the exercise of this Warrant, (b) take all such
action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this Warrant, and (c) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to
perform its obligations under this Warrant.
The Company shall not adopt or permit to exist any "rights plan", "poison
pill" or similar arrangement that does not exempt from its operation the
acquisition of Common Stock or other securities or assets issuable upon
exercise of this Warrant or which otherwise could reasonably be expected to
adversely affect the value of this Warrant or the Warrant Stock to Holder or
otherwise interfere with the realization of the benefits of this Warrant or
the Warrant Stock. The Company shall not take any action that would result
in, and shall take all such action as may be necessary to prevent, Holder from
being a "significant shareholder" within the meaning of Article 106, Section
205 of the Colorado Business Corporation Act or any comparable provision of
law that may become applicable to the Company.
Upon the request of Holder, the Company will at any time during the
period this Warrant is outstanding acknowledge in writing, in form
satisfactory to Holder, the continuing validity of this Warrant and the
obligations of the Company hereunder.
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7. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH
OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY
From and after the Closing Date, the Company shall at all times reserve
and keep available for issue upon the exercise of Warrants such number of its
authorized but unissued shares of Common Stock as will be sufficient to permit
the exercise in full of all outstanding Warrants. All shares of Common Stock
which shall be so issuable, when issued upon exercise of any Warrant and
payment therefor in accordance with the terms of such Warrant, shall be duly
and validly issued and fully paid and nonassessable, and not subject to
preemptive rights.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock for which this Warrant is exercisable or in
the Current Warrant Price, the Company shall take all actions required,
including, without limitation, amending its certificate of incorporation, to
ensure that it has a sufficient number of shares of authorized and unissued
shares of Common Stock in order to permit the exercise of the Warrants
following such adjustment and obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction thereof.
If any shares of Common Stock required to be reserved for issuance upon
exercise of Warrants require registration or qualification with any
governmental authority under any federal or state law before such shares may
be so issued, the Company will in good faith and as expeditiously as possible
and at its expense endeavor to cause such shares to be duly registered.
If at any time or from time to time Holder notifies the Company that it
may exercise this Warrant and that it has determined that its acquisition of
the Common Stock or other securities or assets issuable upon exercise of this
Warrant may be subject to the notification and waiting period provisions of
the HSR Act, the Company shall forthwith (and in no event more than five
Business Days after Holder's notice) file such notifications as may be
required to be filed by the Company with respect to such acquisition under the
HSR Act and shall take such other action as Holder may request to satisfy the
requirements of the HSR Act and to obtain expiration or termination of the
applicable waiting period thereunder as quickly as possible. The Company
shall pay any required filing fee. The Company shall not consummate any
Change of Control prior to five Business Days after expiration or termination
of any waiting period applicable to the acquisition of Common Stock or other
securities or assets upon exercise of this Warrant or enter into any agreement
providing for (or recommend or otherwise support) a Change of Control on a
basis inconsistent with the foregoing.
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8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS
In the case of all dividends or other distributions by the Company to the
holders of its Common Stock with respect to which any provision of Section 4
refers to the taking of a record of such holders, the Company will in each
such case take such a record and will take such record as of the close of
business on a Business Day. The Company will not at any time, except upon
dissolution, liquidation or winding up of the Company, close its stock
transfer books or Warrant transfer books so as to result in preventing or
delaying the exercise or transfer of any Warrant.
9. RESTRICTIONS ON TRANSFERABILITY
The Warrants and the Warrant Stock shall not be transferred, hypothecated
or assigned before satisfaction of the conditions specified in this Section 9,
which conditions are intended to ensure compliance with the provisions of the
Securities Act with respect to the Transfer of any Warrant or any Warrant
Stock. Holder, by acceptance of this Warrant, agrees to be bound by the
provisions of this Section 9.
9.1 Restrictive Legend. (a) Except as otherwise provided in this
Section 9, each certificate for Warrant Stock initially issued upon the
exercise of this Warrant, and each certificate for Warrant Stock issued to any
subsequent transferee of any such certificate, shall be stamped or otherwise
imprinted with a legend in substantially the following form:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and are subject to the
conditions specified in a certain Warrant dated July __, 1999, originally
issued by Perennial Health Systems, Inc. No transfer of the shares
represented by this certificate shall be valid or effective until such
conditions have been fulfilled. A copy of the form of said Warrant is on file
with the Secretary of Perennial Health Systems, Inc. The holder of this
certificate, by acceptance of this certificate, agrees to be bound by the
provisions of such Warrant."
(b) Except as otherwise provided in this Section 9, each Warrant
shall be stamped or otherwise imprinted with a legend in substantially the
following form:
"This Warrant and the securities represented hereby have not been
registered under the Securities Act of 1933, as amended, and may not be
transferred in violation of such Act, the rules and regulations thereunder or
the provisions of this Warrant."
9.2 Notice of Proposed Transfers; Request for Registration . Prior
to any Transfer or attempted Transfer of any Warrants or any shares of
Restricted Common Stock, other than in connection with a Change in Control,
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the holder of such Warrants or Restricted Common Stock shall give ten days'
prior written notice (a "Transfer Notice") to the Company of such holder's
intention to effect such Transfer, describing the manner and circumstances of
the proposed Transfer, and obtain from counsel to such holder who shall be
reasonably satisfactory to the Company, an opinion that the proposed Transfer
of such Warrants or such Restricted Common Stock may be effected without
registration under the Securities Act. After receipt of the Transfer Notice
and opinion, the Company shall, within five days thereof, so notify the holder
of such Warrants or such Restricted Common Stock and such holder shall
thereupon be entitled to Transfer such Warrants or such Restricted Common
Stock, in accordance with the terms of the Transfer Notice. Each certificate,
if any, evidencing such shares of Restricted Common Stock issued upon such
Transfer shall bear the restrictive legend set forth in Section 9.1(a), and
each Warrant issued upon such Transfer shall bear the restrictive legend set
forth in Section 9.1(b), unless in the opinion of such counsel such legend is
not required in order to ensure compliance with the Securities Act.
The holder of Warrants and Warrant Stock shall have the right to request
registration of such Warrant Stock pursuant to Sections 9.3 and 9.4.
9.3 Required Registration. After receipt of a written request from
the holders of Warrants and/or Warrant Stock representing at least an
aggregate of 30% of the total of (i) all shares of Warrant Stock then subject
to purchase upon exercise of all Warrants and (ii) all shares of Warrant Stock
then outstanding, requesting that the Company effect the registration of
Warrant Stock issuable upon the exercise of such holder's Warrants or of any
of such holder's Warrant Stock under the Securities Act and specifying the
intended method or methods of disposition thereof, the Company shall promptly
notify all holders of Warrants and Warrant Stock in writing of the receipt of
such request and each such holder, in lieu of exercising its rights under
Section 9.4, may elect (by written notice sent to the Company within ten
Business Days from the date of such holder's receipt of the aforementioned
Company's notice) to have its shares of Warrant Stock included in such
registration thereof pursuant to this Section 9.3. Thereupon the Company
shall, as expeditiously as is possible, use its best efforts to effect the
registration under the Securities Act of all shares of Warrant Stock which the
Company has been so requested to register by such holders for sale, all to the
extent required to permit the disposition (in accordance with the intended
method or methods thereof, as aforesaid) of the Warrant Stock so registered;
provided, however, that the Company shall not be required to effect more than
three registrations of any Warrant Stock pursuant to this Section 9.3, unless
the Company shall be eligible to file a registration statement on Form S-3 (or
other comparable short form) under the Securities Act, in which event there
shall be no limit on the number of such registrations pursuant to this Section
9.3.
9.4 Incidental Registration . If the Company at any time proposes to
file on its behalf and/or on behalf of any of its security holders ("the
demanding security holders") a Registration Statement under the Securities Act
on any form (other than a Registration Statement on Form S-4 or S-8 or any
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successor form for securities to be offered in a transaction of the type
referred to in Rule 145 under the Securities Act or to employees of the
Company pursuant to any employee benefit plan, respectively) for the general
registration of securities to be sold for cash with respect to its Common
Stock or any other class of equity security (as defined in Section 3(a)(11) of
the Exchange Act) of the Company, it will give written notice to all holders
of Warrants or Warrant Stock at least 30 days before the initial filing with
the Commission of such Registration Statement, which notice shall set forth
the intended method of disposition of the securities proposed to be registered
by the Company. The notice shall offer to include in such filing the
aggregate number of shares of Warrant Stock, and the number of shares of
Common Stock for which this Warrant is exercisable, as such holders may
request.
Each holder of any such Warrants or any such Warrant Stock desiring to
have Warrant Stock registered under this Section 9.4 shall advise the Company
in writing within 30 days after the date of receipt of such offer from the
Company, setting forth the amount of such Warrant Stock for which registration
is requested. The Company shall thereupon include in such filing the number
of shares of Warrant Stock for which registration is so requested, subject to
the next sentence, and shall use its best efforts to effect registration under
the Securities Act of such shares. If the managing underwriter of a proposed
public offering shall advise the Company in writing that, in its opinion, the
distribution of the Warrant Stock requested to be included in the registration
concurrently with the securities being registered by the Company or such
demanding security holder would materially and adversely affect the
distribution of such securities by the Company or such demanding security
holder, then all selling security holders shall reduce the amount of
securities each intended to distribute through such offering on a pro rata
basis. Except as otherwise provided in Section 9.6, all expenses of such
registration shall be borne by the Company.
9.5 Registration Procedures . If the Company is required by the
provisions of this Section 9 to use its best efforts to effect the
registration of any of its securities under the Securities Act, the Company
will, as expeditiously as possible:
(a) prepare and file with the Commission a registration statement
under the Securities Act with respect to such securities and the intended
method of distribution (a "Registration Statement") and use its best efforts
to cause such Registration Statement to become and remain effective for a
period of time required for the disposition of such securities by the holders
thereof;
(b) prepare and file with the Commission such amendments and
supplements to such Registration Statement and the prospectus used in
connection therewith as may be necessary to keep such Registration Statement
effective and to comply with the provisions of the Securities Act with respect
to the sale or other disposition of all securities covered by such
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Registration Statement until the earlier of such time as all of such
securities have been disposed of in a public offering or the expiration of 180
days from the effective date of such Registration Statement;
(c) furnish to such selling security holders such number of copies
of a summary prospectus or other prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and
such other documents, as such selling security holders may reasonably request;
(d) use its best efforts to register or qualify the securities
covered by such Registration Statement under such other securities or blue sky
laws of such jurisdictions within the United States and Puerto Rico as each
holder of such securities shall request (provided, however, the Company shall
not be obligated to qualify as a foreign corporation to do business under the
laws of any jurisdiction in which it is not then qualified or to file any
general consent to service or process), and do such other reasonable acts and
things as may be required of it to enable such holder to consummate the
disposition in such jurisdiction of the securities covered by such
Registration Statement;
(e) furnish, at the request of any holder requesting registration
of Warrant Stock pursuant to Section 9.3, on the date that such shares of
Warrant Stock are delivered to the underwriters for sale pursuant to such
registration or, if such Warrant Stock is not being sold through underwriters,
on the date that the Registration Statement with respect to such shares or
Warrant Stock becomes effective, (1) an opinion, dated such date, of the
independent counsel representing the Company for the purposes of such
Registration Statement, addressed to the underwriters, if any, and if such
Warrant Stock is not being sold through underwriters, then to the holders
making such request, stating that such Registration Statement has become
effective under the Securities Act and that (i) to the best knowledge of such
counsel, no stop order suspending the effectiveness thereof has been issued
and no proceedings for that purpose have been instituted or are pending or
contemplated under the Securities Act, (ii) the Registration Statement, the
related prospectus, and each amendment or supplement thereto, comply as to
form in all material respects with the requirements of the Securities Act
(except that such counsel need express no opinion as to financial statements
contained therein), (iii) the descriptions in the Registration Statement or
the prospectus, or any amendment or supplement thereto, of all legal matters
and contracts and other legal documents or instruments are accurate and fairly
present the information required to be shown, and (iv) such counsel does not
know of any legal or governmental proceedings, pending or contemplated,
required to be described in the Registration Statement or prospectus, or any
amendment or supplement thereto, which are not described as required, nor of
any contracts or documents or instruments of a character required to be
described in the Registration Statement or prospectus, or any amendment or
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supplement thereto, or to be filed as exhibits to the Registration Statement
which are not described and filed or incorporated by reference as required;
such counsel shall also confirm that he has no reason to believe that either
the Registration Statement or the prospectus, or any amendment or supplement
thereto (other than financial material as to which such counsel need make no
statement) contains any untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which made, not
misleading; and (2) a letter dated such date, from the independent certified
public accountants of the Company, addressed to the underwriters, if any, and
if such Warrant Stock is not being sold through underwriters, then to the
holder making such request stating that they are independent certified public
accountants within the meaning of the Securities Act and that, in the opinion
of such accountants, the financial statements and other financial data of the
Company included in the Registration Statement or the prospectus, or any
amendment or supplement thereto, comply as to form in all material respects
with the applicable accounting requirements of the Securities Act. Such
opinion of counsel shall additionally cover such other legal matters with
respect to the registration in respect of which such opinion is being given as
such holders of Warrant Stock may reasonably request or as may be required by
any underwriting agreement that the Company may enter into as contemplated by
subparagraph (f). Such letter from the independent certified public
accountants shall additionally cover such other financial matters (including
information as to the period ending not more than 5 Business Days prior to the
date of such letter) with respect to the registration in respect of which such
letter is being given as the holders holding a majority of the Warrant Stock
being so registered may reasonably request or as may be required by any
underwriting agreement that the Company may enter into as contemplated in
subparagraph (f).
(f) enter into customary agreements (including an underwriting
agreement in such form as the managing underwriter for any offering may
reasonably request), perform its obligations thereunder, use its best efforts
to satisfy the conditions to the underwriters' obligations set forth therein)
and take such other actions as are reasonably required in order to expedite or
facilitate the disposition of such securities;
(g) afford such selling security holders and any underwriter,
and their respective representatives, such access to the books and records,
properties, officers, employees, attorneys and auditors of and for the Company
as they may reasonably request and otherwise cooperate in such diligence
investigations as is customary in underwritten public offerings; and
(h) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, but not later than 18 months after
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the effective date of the Registration Statement, an earnings statement
covering the period of at least 12 months beginning with the first full month
after the effective date of such Registration Statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities Act.
It shall be a condition precedent to the obligation of the Company to
take any action pursuant to this Section 9 in respect of the securities which
are to be registered at the request of any holder of Warrants or Warrant Stock
that such holder shall furnish to the Company such information regarding the
securities held by such holder and the intended method of disposition thereof
as the Company shall reasonably request and as shall be required in connection
with the action taken by the Company.
9.6 Expenses . All expenses incurred in complying with Section 9,
including, without limitation, all registration and filing fees (including all
expenses incident to filing with the NASD), printing expenses, fees and
disbursements of counsel for the Company, the reasonable fees and expenses of
one counsel for the selling security holders (selected by those holding a
majority of the shares being registered), expenses of any special audits
incident to or required by any such registration and expenses of complying
with the securities or blue sky laws of any jurisdictions pursuant to Section
9.5(d), shall be paid by the Company, except that the Company shall not be
liable for any fees, discounts or commissions to any underwriter in respect of
the securities sold by such holder of Warrant Stock.
9.7 Indemnification and Contribution. (a) In the event of any
registration of any of the Warrant Stock under the Securities Act pursuant to
this Section 9, the Company shall indemnify and hold harmless the holder of
such Warrant Stock, such holder's directors and officers, and each other
Person (including each underwriter) who participated in the offering of such
Warrant Stock and each other Person, if any, who controls such holder or such
participating Person within the meaning of the Securities Act, against any
losses, claims, damages or liabilities, joint or several, to which such holder
or any such director or officer or participating Person or controlling Person
may become subject under the Securities Act or any other statute or at common
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) any alleged unsure
statement of any material fact contained, on the effective date thereof, in
any Registration Statement under which such securities were registered under
the Securities Act, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, or (ii) any alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and shall reimburse such holder or
such director, officer or participating Person or controlling Person for any
legal or any other expenses reasonably incurred by such holder or such
director, officer or participating Person or controlling Person in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company shall not be liable in any such
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case to the extent that any such loss, claim, damage or liability arises out
of or is based upon any alleged untrue statement or alleged omission made in
such Registration Statement, preliminary prospectus, prospectus or amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such holder specifically for use therein or (in
the case of any registration pursuant to Section 9.3) so furnished for such
purposes by any underwriter. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of such holder or
such director, officer or participating Person or controlling Person, and
shall survive the transfer of such securities by such holder.
(b) Each holder of any Warrant Stock, by acceptance thereof, agrees to
indemnify and hold harmless the Company, its directors and officers and each
other person, if any, who controls the Company within the meaning of the
Securities Act against any losses, claims, damages or liabilities, joint or
several, to which the Company or any such director or officer or any such
Person may become subject under the Securities Act or any other statute or at
common law, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon information in writing
provided to the Company by such holder of such Warrant Stock contained, on the
effective date thereof, in any Registration Statement under which securities
were registered under the Securities Act at the request of such holder, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereto.
(c) If the indemnification provided for in this Section 9 from the
indemnifying party is unavailable to an indemnified party hereunder in respect
of any losses, claims, damages, liabilities or expenses referred to therein,
then the indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified parties in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying
party and indemnified parties shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact, has been made by, or relates to information supplied by, such
indemnifying party or indemnified parties, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party
in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 9.7 (c) were determined by pro rata
allocation or by any other method of allocation which does not take account of
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the equitable considerations referred to in the immediately preceding
paragraph. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
The Company's obligations under this Section 9.7 are in addition to, and
not in lieu of, any obligations for indemnification or contribution to which
it may be subject under any underwriting agreement.
9.8 Termination of Restrictions. Notwithstanding the foregoing
provisions of Section 9, the restrictions imposed by this Section upon the
transferability of the Warrants, the Warrant Stock and the Restricted Common
Stock (or Common Stock issuable upon the exercise of the Warrants) and the
legend requirements of Section 9.1 shall terminate as to any particular
Warrant or share of Warrant Stock or Restricted Common Stock (or Common Stock
issuable upon the exercise of the Warrants) (i) when and so long as such
security shall have been effectively registered under the Securities Act and
disposed of pursuant thereto or (ii) when the Company shall have received an
opinion of counsel reasonably satisfactory to it that such legend is not
required in order to ensure compliance with the Securities Act. Whenever the
restrictions imposed by Section 9 shall terminate as to this Warrant, as
hereinabove provided, the Holder hereof shall be entitled to receive from the
Company, at the expense of the Company, a new Warrant bearing the following
legend in place of the restrictive legend set forth hereon:
"THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN WARRANT CONTAINED
IN SECTION 9 HEREOF TERMINATED ON ________________, ____, AND ARE OF
NO FURTHER FORCE AND EFFECT."
All Warrants issued upon registration of transfer, division or combination of,
or in substitution for, any Warrant or Warrants entitled to bear such legend
shall have a similar legend endorsed thereon. Wherever the restrictions
imposed by this Section shall terminate as to any share of Restricted Common
Stock, as hereinabove provided, the holder thereof shall be entitled to
receive from the Company, at the Company's expense, a new certificate
representing such Common Stock not bearing the restrictive legend set forth in
Section 9.1(a).
9.9 Listing on Securities Exchange . If the Company shall list any
shares of Common Stock on any securities exchange, it will, at its expense,
list thereon, maintain and, when necessary, increase such listing of, all
shares of Common Stock issued or, to the extent permissible under the
applicable securities exchange rules, issuable upon the exercise of this
Warrant so long as any shares of Common Stock shall be so listed during any
such Exercise Period. As used in this Warrant, a "securities exchange"
includes any generally recognized securities market on which the Common Stock
may be authorized for quotation (including, but not limited to, the National
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Association of Securities Dealers Automated Quotation or NASDAQ) and "list"
included authorize for quotation.
9.10 Certain Limitations on Registration Rights. Notwithstanding the
other provisions of Section 9, the Company shall not be obligated to register
the Warrant Stock of any holder if, in the opinion of counsel to the Company
and concurred in by counsel to such holder and counsel to any investment
banking firm through which such holder proposes to dispose of such Warrant
Stock, the sale or other disposition of such holder's Warrant Stock, in the
manner proposed by such holder, may be effected without registering such
Warrant Stock under the Securities Act.
9.11 Selection of Managing Underwriters. The managing underwriter or
underwriters for any offering of Warrant Stock to be registered pursuant to
Section 9.3 shall be selected by the holders of a majority of the shares being
so registered (other than any shares being registered pursuant to Section
9.4).
10. SUPPLYING INFORMATION
The Company shall cooperate with each Holder of a Warrant and each holder
of Restricted Common Stock in supplying such information as may be reasonably
necessary for such holder to complete and file any information reporting forms
presently or hereafter required by the Commission as a condition to the
availability of an exemption from the Securities Act for the sale of any
Warrant or Restricted Common Stock.
11. LOSS OR MUTILATION
Upon receipt by the Company from any Holder of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of this Warrant and indemnity reasonably satisfactory to it (it
being understood that the written agreement of Lender shall be sufficient
indemnity) and in case of mutilation upon surrender and cancellation hereof,
the Company will execute and deliver in lieu hereof a new Warrant of like
tenor to such Holder; provided, however, that in the case of mutilation, no
indemnity shall be required if this Warrant in identifiable form is
surrendered to the Company for cancellation.
12. OFFICE OF THE COMPANY
As long as any of the Warrants remain outstanding, the Company shall
maintain an office or agency (which may be the principal executive offices of
the Company) where the Warrants may be presented for exercise, registration of
transfer, division or combination as provided in this Warrant.
21
<PAGE>
13. FINANCIAL AND BUSINESS INFORMATION
13.1 Quarterly Information. The Company will deliver to each Holder,
as soon as practicable after the end of each of the first three quarters of
the Company, and in any event within 45 days thereafter, one copy of an
unaudited consolidated balance sheet of the Company and its subsidiaries as at
the close of such quarter, and the related unaudited consolidated statements
of income and changes in financial position of the Company for such quarter
and, in the case of the second and third quarters, for the portion of the
fiscal year ending with such quarter, setting forth in each case in
comparative form the figures for the corresponding periods in the previous
fiscal year. Such financial statements shall be prepared by the Company in
accordance with GAAP and accompanied by the certification of the Company's
chief executive officer or chief financial officer that such financial
statements are complete and correct and present fairly the consolidated
financial position, results of operations and changes in financial position of
the Company and its subsidiaries as at the end of such quarter and for such
year-to-date period, as the case may be.
13.2 Annual Information. The Company will deliver to each Holder as
soon as practicable after the end of each fiscal year of the Company, and in
any event within 90 days thereafter, one copy of:
(i) an audited consolidated balance sheet of the Company and its
subsidiaries as at the end of such year, and
(ii) audited consolidated statements of income, retained
earnings and changes in financial position of the Company and its subsidiaries
for such year;
setting forth in each case in comparative form the figures for the
corresponding periods in the previous fiscal year; all prepared in accordance
with GAAP, and which audited financial statements shall be accompanied by (i)
an opinion thereon of the independent certified public accountants regularly
retained by the Company, or any other firm of independent certified public
accountants of recognized national standing selected by the Company and (ii) a
report of such independent certified public accountants confirming any
adjustment made pursuant to Section 4 during such year.
13.3 Filings. The Company will file on or before the required date
all regular or periodic reports (pursuant to the Exchange Act) with the
Commission and will deliver to Holder promptly upon their becoming available
one copy of each report, notice or proxy statement sent by the Company to its
stockholders generally, and of each regular or periodic report (pursuant to
the Exchange Act) and any Registration Statement, prospectus or written
communication (other than transmittal letters) (pursuant to the Securities
Act), filed by the Company with (i) the Commission or (ii) any securities
exchange on which shares of Common Stock are listed.
22
<PAGE>
14. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by Holder to
purchase shares of Common Stock, and no enumeration herein of the rights or
privileges of Holder hereof, shall give rise to any liability of such Holder
for the purchase price of any Common Stock or as a stockholder of the Company,
whether such liability is asserted by the Company or by creditors of the
Company.
15. MISCELLANEOUS
15.1 Nonwaiver and Expenses. No course of dealing or any delay or
failure to exercise any right hereunder on the part of Holder shall operate as
a waiver of such right or otherwise prejudice Holder's rights, powers or
remedies. If the Company fails to make, when due, any payments provided for
hereunder, or fails to comply with any other provision of this Warrant, the
Company shall pay to Holder such amounts as shall be sufficient to cover any
costs and expenses including, but not limited to, reasonable attorneys' fees,
including those of appellate proceedings, incurred by Holder in collecting any
amounts due pursuant hereto or in otherwise enforcing any of its rights,
powers or remedies hereunder.
15.2 Notice Generally. Any notice, demand, request, consent,
approval, declaration, delivery or other communication hereunder to be made
pursuant to the provisions of this Warrant shall be sufficiently given or made
if in writing and either delivered in person with receipt acknowledged or sent
by registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
(a) If to any Holder or holder of Warrant Stock, at its last known
address appearing on the books of the Company maintained for such purpose.
(b) If to the Company at:
325 West Main Street, Suite 1400B
Louisville, Kentucky 40202
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in
writing by the party entitled to receive such notice. Every notice, demand,
request, consent, approval, declaration, delivery or other communication
hereunder shall be deemed to have been duly given or served on the date on
which personally delivered, with receipt acknowledged, or three (3) Business
Days after the same shall have been deposited in the United States mail.
Failure or delay in delivering copies of any notice, demand, request,
approval, declaration, delivery or other communication to the person
designated above to receive a copy shall in no way adversely affect the
23
<PAGE>
effectiveness of such notice, demand, request, approval, declaration, delivery
or other communication.
15.3 Indemnification. The Company agrees to indemnify and hold
harmless Holder from and against any liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees,
expenses and disbursements of any kind which may be imposed upon, incurred by
or asserted against Holder in any manner relating to or arising out of
(i) Holder's exercise of this Warrant and/or ownership of any shares of
Warrant Stock issued in consequence thereof, or (ii) any litigation to which
Holder is made a party in its capacity as a stockholder of the Company;
provided, however, that the Company will not be liable hereunder to the extent
that any liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, costs, attorneys' fees, expenses or disbursements
are found in a final non-appealable judgment by a court to have resulted from
Holder's gross negligence, bad faith or willful misconduct in its capacity as
a stockholder or warrantholder of the Company.
15.4 Remedies. Each holder of Warrant and Warrant Stock, in addition
to being entitled to exercise all rights granted by law, including recovery of
damages, will be entitled to specific performance of its rights under Section
9 of this Warrant. The Company agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of the
provisions of Section 9 of this Warrant and hereby agrees to waive the defense
in any action for specific performance that a remedy at law would be adequate.
15.5 Successors and Assigns. Subject to the provisions of Sections
3.1 and 9, this Warrant and the rights evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company and the
successors and assigns of Holder. The provisions of this Warrant are intended
to be for the benefit of all Holders from time to time of this Warrant, and
shall be enforceable by any such Holder.
15.6 Amendment. This Warrant and all other Warrants may be modified
or amended or the provisions hereof waived with the written consent of the
Company and the Majority Holders, provided that no such Warrant may be
modified or amended to reduce the number of shares of Common Stock for which
such Warrant is exercisable or to increase the price at which such shares may
be purchased upon exercise of such Warrant (before giving effect to any
adjustment as provided therein) without the prior written consent of the
Holder thereof.
15.7 Severability. Wherever possible, each provision of this Warrant
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Warrant.
24
<PAGE>
15.8 Headings. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
15.9 Governing Law. This Warrant shall be governed by the laws of
the State of New York, without regard to the provisions thereof relating to
conflict of laws.
Dated: July __ , 1999
PERENNIAL HEALTH SYSTEMS, INC.
By:____________________________
Name:
Title:
Attest:
By:_________________________
Name:
Title:
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<PAGE>
EXHIBIT A SUBSCRIPTION FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant for the purchase of _____ shares of Common Stock of Perennial
Health Systems, Inc. and herewith makes payment therefor, all at the price and
on the terms and conditions specified in this Warrant and requests that
certificates for the shares of Common Stock hereby purchased (and any
securities or other property issuable upon such exercise) be issued in the
name of and delivered to _______________ whose address is ____________________
and, if such shares of Common Stock shall not include all of the shares of
Common Stock issuable as provided in this Warrant, that a new Warrant of like
tenor and date for the balance of the shares of Common Stock issuable
hereunder be delivered to the undersigned.
_______________________________
(Name of Registered Owner)
_______________________________
(Signature of Registered Owner)
_______________________________
(Street Address)
_______________________________
(City) (State) (Zip Code)
NOTICE: The signature on this subscription must correspond with the
name as written upon the face of the within Warrant in
every particular, without alteration or enlargement or any
change whatsoever.
26
<PAGE>
EXHIBIT B ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
shares of Common Stock set forth below:
Name and Address of Assignee Number of Shares of Common Stock
and does hereby irrevocably constitute and appoint _________________________
attorney-in-fact to register such transfer on the books of __________________
maintained for the purpose, with full power of substitution in the premises.
Dated:_________________________ Print Name:___________________
Signature:____________________
Witness:______________________
NOTICE: The signature on this assignment must correspond with the
name as written upon the face of the within Warrant in
every particular, without alteration or enlargement or any
change whatsoever.
27
EMPLOYMENT AGREEMENT
This employment agreement ("Agreement") is made and entered into as of this
date by and between Perennial Health Systems, Inc.., a Colorado corporation
("Corporation"), and David W. Lester ("Employee").
WHEREAS, Corporation and Employee desire that the term of this Agreement begin
on _____________ ("Effective Date").
WHEREAS, Corporation desires to employ Employee as Chief Financial Officer,
and Employee is willing to accept such employment by Corporation, on the terms
and subject to the conditions set forth in this Agreement.
NOW THEREFORE, IT IS AGREED AS FOLLOWS:
Section 1. Duties. During the term of this Agreement, Employee agrees to
be employed by and to serve Corporation as Chief Financial Officer, and
Corporation agrees to employ and retain Employee in such capacity. Employee
shall devote a substantial portion of his business time, energy, and skill to
the affairs of the Corporation as Employee shall report to the Corporation's
President and CEO, and at all times during the term of this Agreement shall
have powers and duties at least commensurate with his position as Chief
Financial Officer, as such duties are outlined in Appendix A hereto.
Section 2. Term of Employment.
2.1 Definitions. For the purposes of this Agreement the following terms
shall have the following meanings:
2.1.1 "Termination For Cause" shall mean termination by Corporation of
Employee's employment by Corporation by reason of Employee's willful
dishonesty towards, fraud upon, or deliberate injury or attempted injury to,
Corporation or by reason of Employee's willful material breach of this
Agreement which has resulted in material injury to Corporation, or continuance
of failure by the Employee to perform his duties in compliance with this
Agreement after written notice to the Employee by the Board of Directors
specifying such failure, provided that such cause shall have been found by a
majority vote of the members of the Board of Directors of the Corporation
other than Employee.
2.1.2 "Termination Other Than For Cause" shall mean termination by
Corporation of Employee's employment by Corporation (other than in a
Termination for Cause) and shall include constructive termination of
Employee's employment by reason of material breach of this Agreement by
Corporation, such constructive termination to be effective upon notice from
Employee to Corporation of such constructive termination.
2.1.3 Voluntary Termination" shall mean termination by Employee of
Employee's employment by Corporation other than (i) constructive termination
as described in subsection 2.1.2, (ii) "Termination Upon a Change in Control,"
and (iii) termination by reason of Employee's death or disability as described
in Sections 2.5 and 2.6.
<PAGE>
2.1.4 "Termination Upon a Change in Control" shall mean a termination of
Employee's employment with Corporation following a "Change in Control."
2.1.5 "Change in Control" shall mean (i) the time that Corporation first
determines that any person and all other persons who constitute a group
(within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act")) have acquired direct or indirect beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act) of forty percent
(40%) or more of Corporation's outstanding securities.
2.2 Initial Term. The term of employment of Employee by Corporation shall
be for a period of one (1) year beginning with Effective Date, unless
terminated earlier pursuant to this Section.. At any time, Corporation and
Employee may by mutual written agreement extend or modify the term of
Employee's employment under the terms of this Agreement.
2.3 Termination For Cause. Termination For Cause may be effected by
Corporation at any time during the term of this Agreement and shall be
effected by written notification to Employee. Upon Termination For Cause,
Employee shall promptly be paid all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, but
Employee shall not be paid any other compensation or reimbursement of any
kind, including without limitation, severance compensation.
2.4 Termination Other Than For Cause. Notwithstanding anything else in
this Agreement, Corporation may effect a Termination Other Than For Cause at
any time upon giving written notice to Employee of such termination. Upon any
Termination Other Than For Cause, Employee shall promptly be paid all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans (including accelerated vesting, if any, of
awards granted to Employee under the Corporation's stock option plan), accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, and all
severance compensation provided in Section 4.2, but no other compensation or
reimbursement of any kind.
2.5 Termination by Reason of Disability. If, during the term of this
Agreement, Employee, in the reasonable judgment of the Board of Directors of
Corporation, has failed to perform his duties under this Agreement on account
of illness or physical or mental incapacity, and such illness or incapacity
continues for a period of more than twelve (12) consecutive months,
Corporation shall have the right to terminate Employee's employment hereunder
by written notification to Employee and payment to Employee of all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
<PAGE>
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with his duties
hereunder, all to the date of termination, with the exception of medical and
dental benefits which shall continue through the expiration of this Agreement,
but Employee shall not be paid any other compensation or reimbursement of any
kind, including without limitation, severance compensation.
2.6 Death. In the event of Employee's death during the term of this
Agreement, Employee's employment shall be deemed to have terminated as of the
last day of the month during which his death occurs and Corporation shall
promptly pay to his estate or such beneficiaries as Employee may from time to
time designate all accrued salary, bonus compensation to the extent earned,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Corporation in which Employee is a participant
to the full extent of Employee's rights under such plans, accrued vacation pay
and any appropriate business expenses incurred by Employee in connection with
his duties hereunder, all to the date of termination. The Employee's estate
shall not be paid any other compensation, including without limitation,
severance compensation.
2.7 Voluntary Termination. In the event of a Voluntary Termination,
Corporation shall promptly pay all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, but no
other compensation or reimbursement of any kind, including without limitation,
severance compensation.
2.8 Termination Upon a Change in Control. In the event of a Termination
Upon a Change in Control within one year of the Effective Date, Employee shall
immediately be paid all accrued salary, bonus compensation to the extent
earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans
(including accelerated vesting, if any, of any awards granted to Employee
under Corporation's Stock Option Plan), accrued vacation pay and any
appropriate business expenses incurred by Employee in connection with his
duties hereunder, all to the date of termination, and all severance
compensation provided in Section 4.1, but no other compensation or
reimbursement of any kind.
2.9 Notice of Termination. Corporation may effect a termination of this
Agreement pursuant to the provisions of this Section upon giving thirty (30)
days' written notice to Employee of such termination. Employee may effect a
termination of this Agreement pursuant to the provisions of this Section upon
giving thirty (30) days' written notice to Corporation of such termination.
Section 3. Salary, Benefits and Bonus Compensation.
3.1 Base Salary. As payment for the services to be rendered by Employee
as provided in Section 1 and subject to the terms and conditions of Section 2,
<PAGE>
Corporation agrees to pay to Employee a "Base Salary" for the ______ calendar
months beginning the Effective Date at the rate of $175,000.00 per annum
payable in equal, bi-weekly installments of $6730.78. Employee's Base Salary
shall be reviewed annually by the Compensation Committee of the Board of
Directors ("Compensation Committee"), and the Base Salary for each year (or
portion thereof) beginning February 1, 2000 shall be determined by the
Compensation Committee which shall authorize an increase in Employee's Base
Salary for such year in an amount which, at a minimum, shall be equal to the
cumulative cost-of-living increment on the Base Salary as report in the
"Consumer Price Index, All Items," published by the U.S. Department of Labor
(using February 1, 1999 as the base date for computation).
3.2 Bonuses. Employee shall be eligible to receive a bonus of up to 25% of
the Base Salary, with said bonus to be contingent upon criteria that is to be
agreed upon and reduced to writing, and a copy thereof shall be attached to
this Agreement. All such bonuses shall be reviewed annually by the
Compensation Committee.
3.3 Additional Benefits. During the term of this Agreement, Employee
shall be entitled to the following fringe benefits:
3.3.1 Employee Benefits. Employee shall be eligible to participate in
such of Corporation's benefits and deferred compensation plans as are now
generally available or later made generally available to executive officers of
the Corporation, including, without limitation, Corporation's Stock Option
Plan, profit sharing plans, annual physical examinations, dental and medical
plans, personal catastrophe and disability insurance, financial planning,
retirement plans and supplementary executive retirement plans, if any. For
purposes of establishing the length of service under any benefit plans or
programs of Corporation, Employee's employment with the Corporation will be
deemed to have commenced on the Effective Date.
3.3.2 Vacation. Employee shall be entitled to three weeks vacation
during each year during the term of this Agreement and any extensions thereof,
prorated for partial years.
3.3.3 Life Insurance. For the term of this Agreement and any
extensions thereof, Corporation shall at its expense procure and keep in
effect term life insurance on the life of Employee payable to the Estate of
the Employee the minimum aggregate amount of two hundred and fifty thousand
dollars ($250,000.00) dollars.
3.3.4 Automobile Allowance. For the term of this agreement and any
extensions thereof the corporation shall provide officer with an automobile
allowance equal to $650 per month, and provide for insurance on said vehicle.
3.3.5 Reimbursement for Expenses. During the term of this Agreement,
Corporation shall reimburse Employee for reasonable and properly documented
out-of-pocket business and/or entertainment expenses incurred by Employee in
connection with his duties under this Agreement.
3.3.6 Stock Options. As part of the consideration for the Employee's
entering into this Agreement, the Corporation shall issue non-qualified, non-
<PAGE>
plan options for the Employee to purchase 250,000 shares of the Corporation's
common stock at a price equal to the median between the bid and the ask for
the Corporation's stock as of the Effective Date. One Hundred Thousand
(100,000) of the aforementioned options to purchase the Corporation's stock
shall vest on the Effective Date, and Fifty Thousand (50,000) options shall
vest each successive six month period of employment.
Section 4. Severance Compensation.
4.1 Severance Compensation in the Event of a Termination Upon a Change in
Control. In the event Employee's employment is terminated in a Termination
Upon a Change in Control, within one year of the Effective Date Employee shall
be paid as severance compensation his Base Salary (at the rate payable at the
time of such termination), for a period of one hundred and eighty (180) days.
4.2 Severance Compensation in the Event of a Termination Other Than for
Cause. In the event Employee's employment is terminated within one year from
the date of this Agreement in a Termination Other Than for Cause, Employee
shall be paid as severance compensation his Base Salary (at the rate payable
at the time of such termination), for a period equal to one hundred and eighty
(180) days. Employee may, in Employees sole discretion, by delivery of a
notice to the Corporation within thirty (30) days following a Termination
Other Than for Cause, elect to receive from Corporation a lump sum severance
payment by cashiers check equal to the present value of the flow of cash
payments that would otherwise be paid to Employee pursuant to this Section.
Employee shall be entitled to an accelerated vesting of any awards granted to
Employee under Corporation's Stock Option Plan to the extent provided in the
stock option agreement entered into at the time of grant.
4.3 No Severance Compensation Upon Other Termination. In the event of a
Voluntary Termination, Termination For Cause, Termination by Death, or
Termination by reason of Employee's disability pursuant to Section 2.6,
Employee or his estate shall not be paid any severance compensation.
Section 5. Outside Activities of Employee. Corporation acknowledges that
Employee has commitments and business activities not related to the
Corporation. There shall be no restriction on Employee's ability to fulfill
such commitments or engage in such business activities, provided that during
the term of Employee's employment under this Agreement or for a period of one
year after the termination of such employment (other than a Termination Other
Than For Cause or a Termination Upon Change in Control) Employee shall not
divert away from the Corporation, for officers personal benefit, or for the
benefit of an organization in which officer has a material financial interest,
any opportunity, arising during such period to pursue such opportunities
personally unless the Board of Directors of the corporation have determined
not to pursue such opportunity.
Section 6. Payment Obligations. Corporation's obligation to pay Employee
the compensation and to make the arrangements provided herein shall be
unconditional, and Employee shall have no obligation whatsoever to mitigate
damages hereunder. If litigation after a Change in Control shall be brought
to enforce or interpret any provision contained herein, Corporation, to the
<PAGE>
extent permitted by applicable law and the Corporations' Articles of
Incorporation and Bylaws, hereby indemnifies Employee for Employee's
reasonable attorneys' fees and disbursements incurred in such litigation.
Section 7. Confidentiality. Employee agrees that all confidential and
proprietary information relating to the business of Corporation shall be kept
and treated as confidential both during and after the term of this Agreement,
except as may be permitted in writing by Corporation's Board of Directors or
as such information is within the public domain or comes within the public
domain without any breach of this Agreement.
Section 8. Withholdings. All compensation and benefits to Employee
hereunder shall be reduced by all federal, state, local and other withholdings
and similar taxes and payments required by applicable law.
Section 9. Indemnification. In addition to any rights to indemnification
to which Employee is entitled to under the Corporation's Articles of
Incorporation and Bylaws, Corporation shall indemnify Employee at all times
during and after the term of this Agreement to the maximum extent permitted
under Kentucky Business Corporation Act or any successor provision thereof and
any other applicable state law, and shall pay Employee's expenses in defending
any civil or criminal action, suit, or proceeding in advance of the final
disposition of such action, suit or proceeding, to the maximum extent
permitted under such applicable state laws.
Section 10. Notices. Any notices permitted or required under this
Agreement shall be deemed given upon the date of personal delivery or forty-
eight (48) hours after deposit in the United States mail, postage fully
prepaid, return receipt requested, addressed to the Corporation at:
325 West Main Street - Suite 1400 B
Louisville, Ky. 40202
addressed to the Employee at:
7503 Pine Knoll Circle
Prospect, Kentucky 40059
or at any other address as any party may, from time to time, designate by
notice given in compliance with this Section.
Section 11. Law Governing. It is acknowledged that the Corporation's home
office is located in Kentucky, that this Agreement is entered into in
Kentucky, and that this Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Kentucky.
Section 12. Titles and Captions. All section titles or captions contained
in this Agreement are for convenience only and shall not be deemed part of the
context nor effect the interpretation of this Agreement.
<PAGE>
Section 13. Entire Agreement. This Agreement contains the entire
understanding between and among the parties and supersedes any prior
understandings and agreements among them respecting the subject matter of this
Agreement.
Section 14. Agreement Binding. This Agreement shall be binding upon the
heirs, executors, administrators, successors and assigns of the parties
hereto.
Section 15. Attorney Fees. In the event an arbitration, suit or action is
brought by any party under this Agreement to enforce any of its terms, or in
any appeal therefrom, it is agreed that the prevailing party shall be entitled
to reasonable attorneys fees to be fixed by the arbitrator, trial court,
and/or appellate court.
Section 16. Computation of Time. In computing any period of time pursuant
to this Agreement, the day of the act, event or default from which the
designated period of time begins to run shall be included, unless it is a
Saturday, Sunday, or a legal holiday, in which event the period shall begin to
run on the next day which is not a Saturday, Sunday, or legal holiday, in
which event the period shall run until the end of the next day thereafter
which is not a Saturday, Sunday, or legal holiday.
Section 17. Pronouns and Plurals. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, neuter, singular, or
plural as the identity of the person or persons may require.
Section 18. Arbitration. If at any time during the term of this Agreement
any dispute, difference, or disagreement shall arise upon or in respect of the
Agreement, and the meaning and construction hereof, every such dispute,
difference, and disagreement shall be referred to a single arbiter agreed upon
by the parties, or if no single arbiter can be agreed upon, an arbiter or
arbiters shall be selected in accordance with the rules of the American
Arbitration Association and such dispute, difference, or disagreement shall be
settled by arbitration in accordance with the then prevailing commercial rules
of the American Arbitration Association, and judgment upon the award rendered
by the arbiter may be entered in any court having jurisdiction thereof.
Section 19. Presumption. This Agreement or any section thereof shall not
be construed against any party due to the fact that said Agreement or any
section thereof was drafted by said party.
Section 20. Further Action. The parties hereto shall execute and deliver
all documents, provide all information and take or forbear from all such
action as may be necessary or appropriate to achieve the purposes of the
Agreement.
Section 21. Parties in Interest. Nothing herein shall be construed to be
to the benefit of any third party, nor is it intended that any provision shall
be for the benefit of any third party.
Section 22. Savings Clause. If any provision of this Agreement, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Agreement, or the application of such provision
to persons or circumstances other than those as to which it is held invalid,
shall not be affected thereby.
<PAGE>
Section 23. Separate Counsel. The parties acknowledge that the
Corporation has been represented in this transaction by counsel, and that the
Employee has not been represented in this transaction by the Corporation's
attorneys, and the Employee has been advised that it is important for the
Employee to seek separate legal advise and representation in this matter.
Date:
Perennial Health Systems, Inc.
a Kentucky Corporation
By: /s/ David Hall /s/ David W. Lester
----------------------------- -----------------------------
David Hall, President David W. Lester, Individually
<PAGE>
May 5, 1999
ADDENDUM
As an addendum to and a clarification of the employment contract signed May 5,
1999 between David W. Lester and Perennial Health Systems, Inc., the parties
mutually agree to the following:
1. The "EFFECTIVE DATE" that employment will commence will be on or before
June 1, 1999.
2. The option price for the options granted in Section 3.3.6 shall be based
as of the date of signing of said agreement and not as of Effective Date.
The parties do hereby agree to the terms of this addendum as is recognized by
the signatures below:
Perennial Health Services, Inc.
By: David V. Hall, President
/s/ David V. Hall /s/ David W. Lester
- --------------------------- -----------------------------
David V. Hall David W. Lester
DVH/cjp
CONVERTIBLE
PROMISSORY NOTE
July 9, 1999
$100,000.00 325 West Main Street
Louisville, Kentucky
FOR VALUE RECEIVED, and in connection with the Subscription Agreement (the
"Subscription Agreement") entered into on even date herewith, the undersigned
Perennial Health Systems, Inc., and Perennial Health Beloit, Inc., jointly and
severally(hereinafter referred to, whether one or more than one person,
corporation, firm, or other entity, as "maker"), located at 325 West Main
Street, Suite 1400B, Louisville, Kentucky, 40202, hereby promises and agrees
to pay to the order of Bert L. Blieden ("lender"), the aggregate principal sum
of One Hundred Thousand Dollars {$100,000), together with interest thereon as
hereinafter provided, in lawful money of the United States of America, as
hereinafter provided.
The principal of this note (the "note") shall bear interest on the unpaid
balance thereof at a rate per annum of 12%. All interest on this note shall be
computed daily on the basis of the actual number of days elapsed over an
assumed year consisting of 360 days.
This note is payable in installments of interest only with the first payment
to be made August 1, 1999. Thereafter payments of accrued interest only shall
be made on the first day of each successive month. Unless the Lender has
forgiven all or any portion due under this Note pursuant to the Subscription
Agreement, a final payment of all principal and accrued interest shall be made
on December 31, 1999.
Principal of this note may be repaid in whole or in part without penalty or
premium at any time prior to maturity. All payments of principal and interest
and any other sums due under this note shall be made in immediately available
funds to lender at an address provided by the lender or to such other person
or at such other address as may be designated in writing by the holder of this
note.
It is understood and agreed that the occurrence of any one or more of the
following events shall constitute a default under this note: (A) the failure
to pay or perform any obligations, liabilities, or indebtedness of the maker
to lender, whether under this note or any other agreement, note, or instrument
now or hereafter existing as and when due (whether at maturity or by
acceleration, and with no prior demand therefor by lender being necessary; (B)
a proceeding being filed by or commenced against the maker of this note for
dissolution or liquidation, or if maker voluntarily or involuntarily
terminates or dissolves or is terminated or dissolved, or the sale of all or
substantially all of the assets of the maker (C) the failure of maker to pay
when due any installment of principal or interest or the failure to perform
any of the covenants, agreements, or conditions of any other note or
indebtedness (or contained in any security agreement, or other document
securing such note or indebtedness), the security for which constitutes an
encumbrance on any property which is security for this note; (D) insolvency
of, business failure of, the appointment of a custodian, trustee, liquidator,
or receiver for or for any of the property of, or an assignment for the
benefit of creditors by or the filing of a petition under bankruptcy,
insolvency, or debtor's relief law, or for any readjustment of indebtedness,
composition, or extension by or against the maker.
<PAGE>
Whenever there is a default under this note the entire principal balance of
and all accrued interest on this note and all other existing or hereafter
created or arising liabilities, indebtedness, and obligations of maker to
lender (however acquired or evidenced) shall, at the option of lender, become
forthwith due and payable, without presentment, notice, protest, or demand of
any kind (all of which are hereby expressly waived by maker).
Failure of the holder of this note to exercise any of its rights and
remedies shall not constitute a waiver of the right to exercise the same at
that or any other time. All rights and remedies of the holder for default
under this note shall be cumulative to the greatest extent permitted by law.
Time shall be of the essence in the payment of all installments of interest
and principal on this note and the performance of makers' other obligations
under this note.
If there is any default under this note, and this note is placed in the
hands of an attorney for collection, or is collected through any court,
including any bankruptcy court, makers promise to pay to the holder hereof its
reasonable attorney fees and court costs incurred in collecting or attempting
to collect or securing or attempting to secure this note or enforcing the
holder's rights in any collateral securing this note, provided the same is
legally allowed by the laws of the Commonwealth of Kentucky or any state where
the collateral or part thereof is situated.
If any one or more of the provisions of this note, or the applicability of
any such provision to a specific situation, shall be held invalid or
unenforceable, such provision shall be modified to the minimum extent
necessary to make it or its application valid and enforceable, and the
validity and enforceability of all other provisions of this note and all other
applications of any such provision shall not be affected thereby. In the event
such provision(s) cannot be modified to make it or them enforceable, the
invalidity or unenforceability of any such provision(s) of this note shall not
impair the validity or enforceability of any other provision of this note.
This note has been delivered in, and shall be governed by and construed in
accordance with the laws of, the Commonwealth of Kentucky.
Maker hereby waives presentment, demand, notice of dishonor, protest,
notice of protest, and nonpayment, and further waives all exemptions to which
it may now or hereafter be entitled under the laws of this or any other state
or of the United States, and further agrees that the holder of this note shall
have the right, without notice, to deal in any way, at any time, with any of
this note or with any other party who may become primarily or secondarily
liable for any of the obligations of maker under this note without waiving any
rights the holder of this note may have hereunder or by virtue of the laws of
this state or any other state of the United States.
CO-MAKER CO-MAKER
Perennial Health Systems, Inc. Perennial Health Beloit, Inc.
______________________ ____________________________
David V. Hall, President David V. Hall President
<PAGE>
LEASEHOLD MORTGAGE AND SECURITY AGREEMENT
THIS LEASEHOLD MORTGAGE AND SECURITY AGREEMENT (hereinafter called
"mortgage") executed by the hereafter-named mortgagor on the date shown by the
notarial certificate hereon, but delivered, effective, and dated July 8, 1999,
by and between Perennial Health Beloit, Inc., a Kentucky corporation, having
its principal office at 325 West Main Street, Suite 1400B, Louisville,
Kentucky 40202 (hereinafter called "mortgagor") Bert L. Blieden as agent for
himself and James H. Thornton, C. Edward Glasscock, Samuel R. Rechter, and W.
Glenn Hogan, individuals and residents of the Commonwealth of Kentucky, each
consenting to have any notice sent to the attention of Bert L. Blieden c/o
Kaden Companies, KADEN TOWER, 14th Floor, 6100 Dutchmans Lane, Louisville,
Kentucky 40205 (hereinafter collectively referred to as "mortgagee").
WITNESSETH:
WHEREAS, mortgagor is justly indebted as a Guarantor and Co-Maker to
mortgagee for money loaned to it by Bert L. Blieden, James H. Thornton, C.
Edward Glasscock, Samuel R. Rechter, and W. Glenn Hogan as evidenced by their
promissory notes (collectively the "note") of even date with the delivery
hereof each in the principal sum of $100,000, for an aggregate obligation to
mortgagee of $500,000, payable to the order of mortgagee on or before December
31, 1999 which is the final maturity date of the indebtedness secured hereby.
NOW, THEREFORE, in consideration of the premises and to secure the payment
of the principal of and interest on the note according to the terms thereof
and the faithful performance of all of the covenants, stipulations, and
agreements set out herein, and in the note, mortgagor does hereby grant,
convey, and mortgage to mortgagee all of mortgagee's right, title, and
interest in and to the following items:
(A) All right title and interest to the leasehold estate of mortgagee in and
to that certain real property described in exhibit A attached hereto (the
"land") and incorporated herein which arises under that certain ground lease
July 1, 1999, between mortgagor as tenant and Lee Gunderson as landlord
(collectively, the "lease"), a form of which lease is recorded in deed book
{_____}, page {_____}, office of the Rock County Court Clerk, Rock County,
Wisconsin.
TOGETHER WITH all of mortgagor's estate, right, title, and interest in, to,
and under all buildings, structures, improvements, and fixtures now existing
or hereafter erected on the land, all easements, rights, and appurtenances
thereto or used in connection with the land, all revenues, income, and other
benefits thereof or arising from the use or enjoyment of any portion thereof,
and all development or other rights relating to the land or the operation
thereof.
TOGETHER WITH all rights and benefits of whatsoever nature derived or to be
derived by the mortgagor under or by virtue of the lease or in the extension,
renewal, or modification thereof.
TOGETHER WITH all right, title, and interest of the mortgagor, if any, in
and to the tenements, hereditaments, and appurtenances thereunto belonging or
in anywise appertaining, and the reversion or reversions, remainder, and
remainders, rents, issues, and profits thereof; and, also, all the estate,
right, title, interest, property claim, and demand whatsoever of the mortgagor
of, in, and to the same and of, in, and to every part and parcel thereof.
<PAGE>
TOGETHER WITH all right, title, and interest of the mortgagor, if any, in
and to the land lying in the bed of any street, road, avenue, or right of way,
opened or proposed, in front of or adjoining the above-described real estate
to the center line thereof and to any strips, gaps, or gores adjoining the
said mortgaged property on all sides thereof.
TOGETHER WITH all machinery, apparatus, equipment, fittings, building
materials, fixtures, and articles of personal property of every kind and
nature whatsoever, other than consumable goods, now or hereafter located in or
upon said mortgaged property or any part thereof and used or useable in
connection with any present or future operation of said real estate
(hereinafter called "equipment") and now owned or hereafter acquired by the
mortgagor, and all of the right, title, and interest of the mortgagor in and
to any equipment which may be subject to any lease, title retention, or
security agreement superior to the lien of this mortgage. The mortgagor agrees
to execute and deliver, from time to time, such further instruments as may be
requested by mortgagee to confirm the lien of this mortgage on any equipment,
including, without limitation, UCC-1 financing statements. Mortgagor grants
and conveys unto mortgagee a security interest in all of said equipment and
proceeds thereof, and this mortgage shall constitute a financing statement
with respect to the equipment described herein and located on the mortgaged
property and proceeds thereof.
The parties hereto covenant and agree to the following terms:
(A) Insurance
The improvements on the mortgaged property shall be insured by mortgagor,
naming mortgagee as an additional insured, until the note is fully paid,
against all risks or hazards, in such amounts and for such periods as
mortgagee may require, in some insurance company or companies authorized to do
business in the State of Wisconsin and acceptable to mortgagee. Such insurance
shall include, but not be limited to, the following types:
(1) Fire and extended coverage property damage insurance, including, but
not limited to, all risk and earthquake insurance, in an amount equal to the
full replacement value of the improvements, without deducting for
depreciation, and containing a waiver of subrogation clause;
(2) Public liability insurance, in such form and amount satisfactory to
mortgagee;
(3) Flood insurance required by and obtainable through the National Flood
Insurance Program sufficient to cover any damage which may be anticipated in
the event of flood, unless mortgagor has provided evidence satisfactory to
mortgagee that no portion of the mortgaged property is located within the
boundaries of the 100-year flood plain; and
Mortgagor shall also carry and maintain liability and indemnity insurance
as may be required, from time to time, by mortgagee and by the terms of the
lease, in forms, amounts, and with companies satisfactory to mortgagee.
Evidence of such insurance, premiums prepaid, shall be deposited by mortgagor
with mortgagee and shall contain provision for not less than 10 days' notice
to mortgagee prior to any cancellation or modification thereof.
<PAGE>
(B) Taxes
All taxes and legal assessments, water rates, and other charges, fines, or
impositions against the mortgaged property and all rentals and other expenses
owing under the lease (the "ground lease payments") shall be promptly paid by
the mortgagor, and upon request the receipts therefor exhibited to mortgagee.
(C) Covenants of mortgagor regarding lease
(1) Mortgagor shall pay all rents and all additional sums payable under the
lease as and when the same shall become due and payable. Mortgagor shall, at
all times, keep, observe, and perform all terms, covenants, and conditions of
the lease and do all things necessary to keep unimpaired the mortgagor's
rights unto the lease and the leased premises thereunder and shall not permit
or suffer any surrender, merger, cancellation, or other termination of the
lease nor commit, or permit to be committed or to occur, any event of default
or default by mortgagor under the lease. Mortgagor shall not modify, amend,
abandon, surrender, supplement, or voluntarily terminate the lease, or any
provision thereof, or waive any default or nonperformance by landlord, without
having first obtained the written consent of mortgagee. Mortgagor shall
exercise all renewal rights which it might have under the lease within the
times and in the manner required thereby and in any event upon written request
from mortgagee.
(2) Upon receiving any notice of default from any other party thereto under
the lease, or when any state of facts exist which, with the giving of notice
or lapse of time, or both, would constitute a default under the lease,
mortgagor shall immediately notify mortgagee and shall immediately forward a
copy of any written notice of the same to the mortgagee. Mortgagee may, but
shall not be obligated to, take any action as mortgagee deems necessary or
desirable to prevent or cure any default by the mortgagor. Mortgagor expressly
grants to mortgagee the absolute and immediate right to enter in and upon the
land to such extent and as often as mortgagee, at its sole discretion, deems
necessary or desirable to prevent or cure any such claimed or suspected
default by mortgagor. The curing by mortgagee of any default under the lease
shall not constitute a waiver of the mortgagor's default under this mortgage
as a result of the occurrence of a default under the lease.
(3) Mortgagor makes the following representations, warranties, and
covenants:
(a) The lease is in full force and effect, and has not been modified in any
respect. Further, the lease creates a valid leasehold estate in mortgagor in
and to the leased premises described therein;
(b) The mortgagor's leasehold estate created by the lease is subject to no
lien, security interest, or other charge or encumbrance except the lien
created hereby and the lien of ad valorem taxes not yet due and payable;
(c) No event of default or default, and to the knowledge and belief of
mortgagor, no event or condition which with a giving of notice or passage of
time or both would constitute a default or event of default, exists under the
lease;
(d) Mortgagor has good and marketable title to the lease and the leased
premises described therein; and
<PAGE>
(e) This mortgage creates a valid first-priority mortgage in the tenant's
leasehold interest created by the lease.
(D) Payments by mortgagor
In the event the mortgagor shall fail to keep the insurance required
hereunder in force or fail to pay said taxes, legal assessments, water rates,
or other charges, fines, or impositions or lease payments, mortgagee may
effect said insurance or pay said taxes, legal assessments, water rates, or
other charges, fines, or impositions or lease payments, but shall be under no
obligation to do so. Any sums so expended by mortgagee will be repaid by
mortgagor upon demand, with interest thereon at the rate set forth in the
note, and said sums and the interest thereon shall be deemed a part of the
debt secured hereby and included herein.
(E) Certificates
Mortgagor, within five business days upon request, shall furnish a written
statement, duly acknowledged and notarized, of all amounts due on any
indebtedness secured hereby or secured by any other lien on the mortgaged
property, whether for principal or interest on the note or otherwise and
covering such other matters with respect to any such indebtedness as mortgagee
may reasonably require, including, but not limited to, any defaults or events
of default.
(F) Events of default
Any of the following circumstances constitute an "event of default":
(1) Mortgagor shall fail to pay the note or any installment thereon when
the same shall become due and payable or within any grace period permitted
herein or in the note;
(2) Mortgagor shall sell or permit the mortgaged property or any legal or
equitable interest therein to be sold, assigned, or conveyed in any manner
without the prior consent of mortgagee;
(3) Mortgagor shall mortgage or encumber the mortgaged property or the
improvements, or any interest therein, without the prior written consent of
mortgagee;
(4) Mortgagor shall file a voluntary petition in bankruptcy or be adjudged
bankrupt or insolvent, make an assignment for the benefit of creditors or be
placed in receivership, or mortgagor shall file any petition or answer
seeking, consenting to, or acquiescing in, any reorganization, arrangement,
adjustment, composition, liquidation, dissolution, or similar relief under any
present or future statute, law, or regulation or shall file an answer
admitting or shall fail to deny the material allegations of a petition against
it for any such relief, or if any such proceeding against mortgagor seeking
any such relief shall not have been dismissed within 60 days after the
commencement thereof;
(5) Mortgagor shall alter, remove, or demolish (other than by casualty
covered by the insurance referred to in paragraph (A) hereof) the improvements
on the mortgaged property, or sever, remove, or sell any fixtures or equipment
on, in, or about said improvements or on the mortgaged property (unless
mortgagor replaces same with similar items of fixtures or equipment).
Mortgagor may not mortgage any of the aforesaid (except as permitted above)
without the prior written consent of mortgagee and any such mortgaging will be
considered an event of default;
<PAGE>
(6) Mortgagor shall permit, commit, or suffer any waste, impairment, or
deterioration of the improvements or any part thereof, or of the equipment on
the mortgaged property, or fail to keep and maintain the same and every part
thereof in good condition and repair and, from time to time, make all needful
and proper replacements so that said improvements, fixtures, and equipment
will, at all times, be in good condition, fit and proper for the purposes for
which they were originally erected or installed and such deficiency is not
cured within 30 days after notice from mortgagee;
(7) The occupancy or use of the mortgaged property shall be restricted,
impaired, or enjoined by action of any third party, including, without
limitation, any federal, state, or local authority, and such restriction,
impairment, or injunction is not removed within 30 days after notice from
mortgagee;
(8) The landlord under the lease shall declare a default thereunder, and
such default is not cured within any applicable grace period thereunder;
(9) Mortgagor shall suffer the loss of any privilege, franchise, license,
permit, or other authorization necessary for the operation of the mortgaged
property and such privilege, franchise, license, permit, or other
authorization is not restored within 30 days after notice from mortgagee;
(10) Mortgagor shall suffer the filing of any lien or encumbrance,
including, without limitation, any mechanic's or materialman's lien, other
statutory lien, or any other lien arising by operation of law and the same is
not removed within 30 days after such filing;
(11) The lease shall be cancelled, surrendered, or terminated; or
(12) Mortgagor, in any manner, shall fail to keep and perform any of the
covenants, stipulations, and agreements set out in the note or herein
contained on its part to be performed.
Then, and in any of such events, mortgagee may immediately declare the
entire unpaid principal balance of the note, with accrued unpaid interest
thereon, and all other indebtedness and obligations secured hereby,
immediately due and payable and proceed to enforce the collection of the same
and all charges and costs, including, without limitation, reasonable attorney
fees incurred by mortgagee, permitted by law and the lien of this mortgage,
and may institute proceedings to enforce the lien of this mortgage.
(G) Remedies upon default
In addition to the rights under paragraph (F) hereof, upon the happening of
any event of default as provided herein, mortgagee may, at any time
thereafter, at its option, without notice and without waiving any right or
remedy available to it by law or under the note or otherwise, take the
following actions:
(1) Institute proceedings to enforce the lien of this mortgage;
(2) Enforce its rights whether by action, suit, or proceeding in equity or
at law for the specific performance of any covenant, condition, or agreement
in the note or in this mortgage, or in aid of the execution of any power
herein granted, or for the enforcement of any other appropriate legal or
equitable remedy or otherwise, as mortgagee shall elect, including appointment
<PAGE>
of a receiver to manage the mortgaged property (subject to the provisions
contained in the consent to leasehold mortgage by way of letter from the
lessor, a copy of which is attached hereto, of even date herewith (the
"consent to mortgage"); and
(3) Enter upon the mortgaged property, and subject to the consent to
mortgage, perform any and all work and take all steps necessary to manage and
operate the mortgaged property by itself or through a receiver.
All sums thus expended by it upon default shall be deemed paid to
mortgagor, and added to any principal amounts owing on the note. For this
purpose, the mortgagor hereby constitutes and appoints mortgagee its true and
lawful attorney in fact, with full power of substitution, to operate and
manage the mortgaged property thereon in the name of the mortgagor and hereby
empowers mortgagee as its said attorney in fact as follows:
(a) To enter upon, take possession of, conduct tests of, manage, and
operate the mortgaged property or any part thereof, and do all things
necessary or appropriate, in mortgagee's sole discretion, in connection
therewith;
(b) To make all necessary or proper repairs, renewals, replacements,
or required alterations, additions, betterments, and improvements to and upon
the mortgaged property as the mortgagee may deem judicious and pay all costs
and expenses of so taking, holding, and managing the same;
(c) To enforce any bond or policy of insurance or otherwise, and,
without limitation, to deal with any bonding or insurance company under any
policy required hereunder as mortgagor might do in its own behalf;
(d) To pay, settle, or compromise all existing bills and claims which
are or may be liens against the mortgaged property or improvements thereon, or
which may be necessary or desirable for the removal of liens and encumbrances,
including but not limited to the payment of any debts related to the pledging
of accounts receivable to Daiwa Healthco-3 LLC, or any other party;
(e) To prosecute and defend all actions or proceedings in connection
with the mortgaged property and to take such action and require such
performance as mortgagee deems necessary; and
(f) To make, enforce, modify, or accept surrender of leases, obtain or
evict tenants, fix or modify rents, or sue for or otherwise collect and
receive all earnings, revenues, rents, issues, profits, and income of the
mortgaged property, the improvements, the leases, or every part thereof.
However, it is acknowledged by mortgagee that any accounts receivable owing to
mortgagor arising out of the operation of the mortgaged property may be
pledged as security for additional financing, and, to the extent that any such
accounts receivable are collected by mortgagee, the same shall be remitted to
the provider (the "receivable lender") of such financing until the lesser of
(x) the obligations of mortgagor to the receivable lender have been satisfied,
or (y) an amount equal to the accounts receivable of the mortgagor as of the
date that mortgagee enforces the rights set forth in this paragraph. The
mortgagor shall provide notice to the mortgagee, in writing, by certified
mail, of the name and address of any receivable lender, and a copy of any
documents evidencing the agreement between the mortgagor and such receivable
lender.
The foregoing power of attorney shall be deemed coupled with an interest
and cannot be revoked.
<PAGE>
(H) Rents and profits
All rents, issues, profits, and proceeds from the mortgaged property are
hereby assigned to mortgagee. Upon the occurrence of any event of default
under paragraph (F) hereof, and subject to the obligations to make payments in
accordance with any accounts receivable financing as set forth in paragraph
(G)(f) hereof, all such rents, issues, profits, and proceeds shall be paid
directly to mortgagee by the person(s) obligated therefor.
(I) Receiver
In any action to foreclose this mortgage, mortgagee may, at its option as a
matter of contract right (subject to the provisions contained in the consent
to mortgage), have a receiver appointed to take charge of the mortgaged
property and to collect such rents, issues, profits, and proceeds, all without
consideration of the value of the mortgaged property as security for the
amount of indebtedness secured hereby. All such rents, issues, profits, and
proceeds paid to mortgagee or collected by such receiver shall be first
applied to the cost of collection thereof (including the cost of such
receivership, if any) and then to the payment of the interest on and principal
of the note. Mortgagor, for itself and any subsequent owner of the mortgaged
property, hereby waives any and all defenses to the application for such
receiver and hereby specifically consents to such appointment without notice.
The rights and remedies herein provided for shall be deemed to be cumulative
and in addition to, not in limitation of, any other such rights or remedies
provided by law.
(J) Assumption of indebtedness
Mortgagor shall not permit the indebtedness secured by this mortgage to be
assumed in any manner without the prior written consent of mortgagee (which
may be withheld at mortgagee's discretion).
(K) No waiver
Failure of mortgagee to exercise any of its remedies or other options
provided for herein in the event of any violation of the warranties,
covenants, and agreements herein contained or referred to, or upon the
occurrence of any event of default, shall not constitute a waiver of its right
to exercise such option because of any subsequent violation.
(L) Additional indebtedness
This mortgage shall secure the payment of all renewals, amendments,
replacements, and extensions of the note or substitutions therefor.
(M) No merger of lease and fee
In the event mortgagor shall acquire the fee interest in the mortgaged
property, notwithstanding any other provision contained in this mortgage or in
the note, the lien of the mortgage shall continue in, and extend to, the
entire interest of mortgagor in the mortgaged property including such fee
interest. Unless mortgagee shall expressly consent in writing, neither the fee
title nor any other estate shall, under any circumstances, be deemed to merge
with the lease, notwithstanding the union of the lease and the fee title or
other estate either in the tenant or landlord under the lease or any third
party by purchase or otherwise and the lease shall be amended as such.
<PAGE>
(N) Successors and assigns
This mortgage shall be binding upon, and inure to the benefit of, the
respective heirs, executors, administrators, successors, and assigns of the
parties hereto.
(O) Security interest
To the extent that this mortgage and security agreement constitutes a
security agreement with respect to personal property, the rights, remedies,
privileges, and duties of the mortgagee hereunder shall be governed in all
respects by the Uniform Commercial Code of the Commonwealth of Kentucky.
Mortgagee shall be deemed to be a secured party as defined therein and shall
have all of the rights, remedies, privileges, and duties of a secured party as
set forth therein. The remedies upon default available to the mortgagee
hereunder shall be in addition to, and not in substitution for, the rights and
remedies of a secured party under the Uniform Commercial Code of Kentucky; all
of the same shall be cumulative to the greatest extent permitted by law.
Subject to the provisions contained in the consent to mortgage, whenever there
exists an event of default hereunder, the mortgagee may exercise, from time to
time, any rights and remedies available to it under applicable law upon
default in payment of indebtedness. The mortgagor shall, promptly upon request
by the mortgagee, assemble the collateral and make it available to the
mortgagee at such place or places, reasonably convenient for both the
mortgagee and the mortgagor, as the mortgagee shall designate. Any
notification required by law of intended disposition by the mortgagor of any
of the collateral shall be deemed reasonably and properly given if given at
least 10 days before such disposition. Without limiting the foregoing, and
subject to the consent to mortgage, whenever there exists a default hereunder,
the mortgagee may, with respect to so much of the collateral as is personal
property under applicable law, to the fullest extent permitted by applicable
law of any kind, take the following actions:
(1) Notify any person obligated on the collateral to perform directly for
the mortgagee its obligations hereunder;
(2) Enforce collection of any of the collateral, by suit or otherwise, and
surrender, release, or exchange all or any part thereof or compromise or
extend or renew for any period (whether or not longer than the original
period) any obligations of any nature of any party with respect thereto;
(3) Endorse any checks, drafts, or other writings in the name of the
mortgagor to allow collection of the collateral;
(4) Take control of any proceeds of the collateral;
(5) Enter upon any premises where any of the collateral may be located and
take possession of and remove such collateral;
(6) Sell any or all of the collateral, free of all rights and claims of the
mortgagor therein and thereto, at any public or private sale; and
(7) Bid for and purchase any or all of the collateral at any such sale.
Any proceeds of any disposition by the mortgagee of any of the collateral may
be applied by the mortgagee to the payment of any expenses or fees incurred in
connection with the collateral, including reasonable attorney fees and legal
<PAGE>
expenses, and any balance of such proceeds shall be applied by the mortgagee
toward the payment of such of the indebtedness and in such order of
application as the mortgagee may determine in its sole discretion. The
mortgagee may exercise, from time to time, any rights and remedies available
to it under the Uniform Commercial Code or other applicable law as in effect
from time to time. The mortgagor hereby expressly waives presentment, demand,
notice of dishonor, protest, and notice of protest in connection with the note
and, to the fullest extent permitted by applicable law, any and all other
notices (except such notice as is expressly required to be given under the
terms hereof), demands, advertisements, hearings, or process of law in
connection with the exercise by the mortgagee of any of its rights and
remedies hereunder. The mortgagor hereby constitutes the mortgagee its
attorney in fact with full power of substitution to take possession of the
collateral upon any event of default and, as the mortgagee in its sole
discretion deems necessary or proper, to execute and deliver all instruments
required by the mortgagor to accomplish the disposition of the collateral.
This power of attorney is a power coupled with an interest and is irrevocable
while any of the indebtedness is outstanding. This mortgage is intended to be
a financing statement within the purview of section 9-402 of the Uniform
Commercial Code with respect to those items of equipment, goods, or inventory
which are fixtures on the premises. The addresses of the mortgagor (debtor)
and mortgagee (secured party) are set forth above. This mortgage is to be
filed for record in the real estate records of the county where the premises
are located.
(P) Execution of documents
Mortgagor hereby agrees that, upon the written request of mortgagee,
mortgagor will execute, deliver, record, and/or file any and all additional
mortgages, security agreements, pledge agreements, and financing statements,
in form and substance satisfactory to mortgagee, in connection with the liens
in and to the mortgaged property granted hereby.
(Q) Notice to landlord and receivable lender of default; landlord's rights
Mortgagee agrees that in the event it elects to declare an event of default
as provided in paragraph (F) hereof, mortgagee shall provide written notice to
the landlord under the lease, and the receivable lender, by hand delivery or
by registered or certified mail, and specifically to the landlord: Lee
Gunderson , Pioneer Court, 2122 Pioneer Drive, Beloit, WI 53511, with a copy
to Robert M. Hesslink, Jr., Hesslink Law Offices, S.C., P.O. Box 930005,
Verona, WI 53593, and the receivable lender: at the address and to the
attention of the party set forth in the notice to the mortgagee given pursuant
to paragraph (G)(f) hereof, (which may be a copy of any default notice sent to
mortgagor) of its intention to declare a default under the terms of this
mortgage and to pursue its remedies hereunder. The landlord may (but shall not
be required to) directly cure any default of mortgagor under the mortgage by
paying any amount due and owing to mortgagee or by performing or causing to be
performed any other act or omission of mortgagor constituting a default under
the mortgage. The landlord shall have the same period of time as mortgagor to
remedy the particular default, which cure period in favor of the landlord
shall commence at the end of the tenant's cure period, and mortgagee shall
accept performance by the landlord as if it had been done or performed by the
mortgagor. If landlord pays the outstanding principal balance due under the
note, together with all interest, penalties, and other amounts due thereunder,
mortgagor shall release the lien of this mortgage of record.
<PAGE>
PROVIDED, HOWEVER, that if mortgagor shall pay the note according to the
terms thereof, then this mortgage shall be void, and mortgagee shall, at
mortgagor's cost and request, release the same.
IN TESTIMONY WHEREOF, witness the signature of mortgagor.
Perennial Health Beloit, Inc.
___________________________
By: David V. Hall, President
Commonwealth of Kentucky
County of Jefferson
The foregoing instrument was acknowledged before me July 8, 1999 by David
V. Hall, President of Perennial Health Beloit, Inc., a Kentucky corporation,
on behalf of the corporation.
_________________________________
Signature
My commission expires _______________
<PAGE>
EXHIBIT A
Legal Description of Property
The land referred to is situated in the State of Wisconsin, County of Rock,
and is described as follows: Lots Twelve (12), Thirteen (13), Fourteen (14),
Fifteen (15), Sixteen (16), Seventeen (17), Eighteen (18), Nineteen (19) and
Twenty (2) of Fairview Gardens, a subdivision, in the City of Beloit, County
of Rock and State of Wisconsin.
<PAGE>
Return to:Edward M. King, Esquire
Brown, Todd & Heyburn PLLC
400 West Market Street, 32nd Floor
Louisville, KY 40202-3363
LEASEHOLD MORTGAGE AND SECURITY AGREEMENT
Prepared by:
MICHAEL KITCHEN, ESQUIRE
Perennial Health Systems, Inc.
Waterfront Plaza
325 West Main Street, Suite 1400B
Louisville, Kentucky 40202
<PAGE>
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (the "agreement") is made and entered into as
of July 9, 1999 by and between DAVID V. HALL, 1011 Alta Vista Road,
Louisville, Kentucky (hereinafter referred to, whether one or more than one
person or entity, as the "stockholder"); and BERT L BLIEDEN ("lender"), an
individual having an address c/o Kaden Companies, Kaden Tower, 14th Floor,
6100 Dutchmans Lane, Louisville, Kentucky 40205.
WHEREAS, stockholder owns 3,438,235 shares (the "shares") of the Common
Stock of Perennial Health Systems, Inc., a Colorado corporation; and
WHEREAS, Perennial Health Systems, Inc. (hereinafter referred to, whether
one or more than one person, corporation, firm, or entity, as "borrower"), 325
West Main Street, Suite1400B, Louisville, Kentucky 40202, desires to transact
business with and to obtain credit from, but lender is unwilling to extend or
continue credit to borrower unless the stockholder shall pledge to lender
certain of the shares, as hereinafter described, as security for all of the
obligations of borrower to lender as hereinafter defined;
NOW THEREFORE, in consideration of the premises and of other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the stockholder, and to induce lender to extend credit to
borrower, and acknowledging that lender in extending such credit shall rely on
this agreement, stockholder and lender do hereby agree as follows:
(A) Deposit and pledge of shares
Stockholder has deposited with, and hereby pledges and assigns to lender
and grants lender a continuing security interest in 100,000 shares (the
"pledged shares") of the common stock of company now registered and standing
in the stockholder's name, which pledged shares are evidenced by the
certificate of company in the stockholder's name on deposit with lender,
together with stock powers duly endorsed in blank attached thereto. The
stockholder and lender acknowledge that, in conjunction with additional pledge
agreements to additional lenders (the "Lenders") executed simultaneously
herewith the stockholder has delivered to Lenders stock certificate #1287,
executed in blank, and representing 3,438,225 shares, for the express purpose
of having said stock delivered to the transfer agent, and having six
certificates re-issued in the name of the stockholder, five certificates in
the amount of 100,000 shares each, and one certificate for 2,938,225 shares,
with all of said shares to be delivered to the Lenders. Upon the delivery of
such certificates, each lender shall retain one stock certificate for 100,000
shares, and an appropriate stock power, and the balance of said certificates
shall be returned to the Lender.
(B) Obligations secured
This agreement is made as collateral security for, and the security
interest granted in the pledged shares secures the following obligations
(hereinafter sometimes referred to collectively as the "obligations"):
<PAGE>
(1) All principal advanced pursuant to and interest (including any
interest due after default and late charges) due under the promissory note
(the "note") of even date herewith in the face principal amount of $100,000
made by borrower to the order of lender, and any renewals and extensions and
amendments of the note or substitutions and replacements for the note;
(2) All expenses, costs, and charges, of any nature whatsoever,
including, without limitation, reasonable attorney fees of lender, required to
be paid by lender in enforcing any of its rights and remedies under the loan
agreement pursuant to which the note was issued, or under any of the other
"loan documents" described in the loan agreement;
(3) The payment of all fees now or hereafter due lender in connection
with or arising out of the note, the loan agreement, and the other loan
documents, and the due and punctual performance and observance of all other
agreements, obligations, warranties, and representations of borrower to lender
under any loan document; and
(4) Any and all other debts, liabilities, and obligations of borrower
to lender, whether created directly by borrower or acquired by assignment or
otherwise, whether joint or several, matured or unmatured, absolute or
contingent, and whether now existing or hereafter arising, whether of the same
or different class or type as the note, and whether or not the creation of
same was reasonably foreseeable or would be naturally contemplated by borrower
or lender on the date of this agreement, it being the intent of lender and
borrower that all of the same be secured hereby for all purposes of this
agreement.
(C) Representations and warranties
Stockholder represents and warrants to lender that:
(1) Stockholder is the registered and absolute beneficial owner of the
pledged shares free from all liens and security interests, charges, equities,
and encumbrances as of the date hereof except for the liens and security
interests created by this agreement.
(2) Stockholder has the right to enter into this agreement, the
execution and performance of which will not, either immediately, or with
notice and/or passage of time, conflict with or constitute a breach under any
agreement to which stockholder is a party, or result in the creation or
imposition of any encumbrance upon the pledged shares except as granted
hereby.
(3) The pledged shares are validly issued and outstanding, fully paid,
and nonassessable. The pledged shares are freely transferable by lender under
this stock pledge agreement without the necessity of complying with any
shareholders agreement or similar arrangement.
(D) Maintenance of pledged shares and of interest in company
Stockholder agrees that until such time as borrower has paid in full
or discharged all of its obligations to lender hereunder, stockholder shall
not sell, assign, pledge, or option all or any portion of the pledged shares
or any interest therein without the prior written consent of lender, and that
any and all new shares of capital stock, securities, rights, warrants,
options, and the like created in respect of the pledged shares, whether by
<PAGE>
stock split, stock dividend, merger, reorganization, consolidation,
recapitalization, or otherwise, shall be delivered promptly on receipt (with
appropriate stock powers endorsed in blank) by the stockholder to, and shall
be held by, lender subject to the terms, provisions, and conditions of this
agreement, and the term "pledged shares" as used herein shall be deemed to
include all such new shares, securities, rights, warrants, options, and the
like and the same are hereby pledged and assigned, and a security interest
therein is hereby granted to lender as security for the obligations.
(E) Cash dividends
So long as no event of default has occurred under this agreement, all
cash dividends declared in respect of any of the pledged shares shall be paid
in full to the stockholder, except for partial or complete liquidation
dividends and other distributions, all of which shall be paid to the lender
for application to the note and the other obligations. From and after the
occurrence of an event of default under this agreement, all such cash
dividends shall be paid directly to the lender for application to the note and
other obligations in such order as lender may select in its sole and absolute
discretion, and if the stockholder receives any such dividends, stockholder
shall be a fiduciary for the lender and stockholder shall receive the same in
trust for lender and immediately shall remit the same to lender for
application to the obligations in the manner aforesaid. Stockholder hereby
constitutes and appoints lender as the irrevocable attorney in fact for
stockholder to endorse stockholder's name to all checks in payment of such
dividends and to execute such documents and instruments and to perform such
other acts as the lender may deem necessary, appropriate, or desirable to
effect the payment of such cash dividends directly to the lender.
(F) Voting of stock prior to event of default
So long as there is no default in the performance of any of the terms,
provisions, and conditions of this agreement, stockholder shall be entitled to
vote the pledged shares for purposes not inconsistent with the covenants,
obligations, or agreements of stockholder contained in this agreement. It is
acknowledged and agreed by stockholder that it would be inconsistent with this
agreement to, and stockholder therefore shall not without prior written
consent of lender, vote the pledged shares prior to default in favor of any
proposals to allow company to (1) issue any additional capital stock of any
kind (common or preferred) or options, subscription rights, warrants, or other
instruments with respect thereto or debt securities convertible into capital
stock, or sell or issue or reissue any treasury stock, or (2) merge into or
with or consolidate with any other corporation or business, or participate in
any reorganization or recapitalization, or (3) sell or lease to others all or
substantially all of its assets, or (4) take any corporate action intended to
accomplish, in whole or in part, any of the foregoing.
(G) Maintenance of priority of pledge
Stockholder shall be liable for and shall timely pay and discharge all
taxes, assessments, and governmental charges imposed upon the pledged shares
by any federal, state, or local authority, the liens of which would or might
be held prior to the rights of lender hereunder in and to the pledged shares,
or which are imposed on the holder and/or registered owner of the pledged
shares. Stockholder shall not, at any time while this agreement is in effect,
enter into any stock restriction or buy-sell agreement applicable to the
pledged shares, or do or suffer any other act or thing whereby the rights of
lender in the pledged shares would or might be materially impaired.
Stockholder shall execute and deliver such further documents and take such
further actions as may be reasonably required to confirm the rights of lender
in and to the pledged shares or otherwise to effect the intended purposes of
this agreement.
<PAGE>
(H) Conversion
Stockholder and lender agree that in the event that the lender
exercises the option granted in the note to the full extent possible ($50,000
for 100,000 shares), then, to the extent that any unpaid balance remains on
the note, the Lender may assign all, or part of his interest in such note to
stockholder, and take in return for such assignment a number of the shares of
the pledged stock equal to the balance due on the note, divided by $.50.
(I) Events of default
Each of the following shall be deemed an "event of default" hereunder:
(1) If any default occurs in the payment or performance of the note or
any of the other obligations described in the section of this agreement
entitled "Obligations secured," strictly in accordance with their respective
terms (including after any applicable requirement for notice and opportunity
to cure which may be expressly provided for in the document, instrument, or
agreement evidencing or governing such obligation); or
(2) If stockholder shall fail to comply fully with any provision of
this agreement and the same is not cured within fifteen (15) days after lender
shall have given stockholder written notice thereof; or
(3) If any warranty or representation made by stockholder to lender
herein or in any certificate, instrument, agreement, or other writing now or
hereafter delivered by stockholder to lender, shall prove to have been untrue
or materially misleading as of the time made.
(J) Remedies upon event of default
Upon the occurrence of any event of default as described in this
agreement, lender shall have the following rights and remedies, in addition to
all other rights and remedies provided by law or in equity, all of which shall
be cumulative and may be exercised from time to time, either successively or
concurrently:
(1) To declare the note and all of the other obligations of
stockholder to be immediately due and payable in full, with all accrued
interest thereon, and to sell the pledged shares in one or more lots, and from
time to time, upon not less then 10 days' prior written notice to stockholder
of the time and place of sale with respect to any public sale, and upon not
less than 10 days' prior written notice to stockholder of the date after which
the pledged shares may be sold with respect to any private sale (which notice
in each case the stockholder hereby agrees is commercially reasonable), for
cash or upon credit or for future delivery, the stockholder hereby waiving all
rights, if any, to require marshalling of the pledged shares and any other
security for the payment of the obligations and, at the option of and in the
discretion of lender, to sell the pledged shares either:
(a) At a public sale or sales, including a sale at or on any broker's
board or stock exchange; or
(b) At a private sale or sales.
Lender may bid for and acquire the pledged shares or any portion thereof
at any public sale, free from any redemption rights of stockholder to the
fullest extent permitted by applicable law, and, in lieu of paying cash
therefor, may make settlement for the selling price of the pledged shares or
part thereof by crediting, against the balance due under the obligations, the
<PAGE>
net selling price of the pledged shares, after deducting all of lender's
reasonable costs and expenses of every kind and nature therefrom, including
reasonable attorney fees of lender incurred in connection with realizing upon
the pledged shares and collecting the obligations, to the full extent that
recovery of such fees by lender is not prohibited by the laws of the
Commonwealth of Kentucky.
Lender may elect at its sole option and in lender's complete
discretion to sell the pledged shares or any portion thereof on credit or for
future delivery, and the pledged shares so sold may, at the option of lender,
either be delivered to the purchaser thereof or retained by lender until the
selling price is paid by the purchaser, but in either event lender shall incur
no liability in case of failure by the purchaser to pay for the pledged shares
sold. If such purchaser shall fail to make payment for the pledged shares, the
pledged shares may be sold again by lender in the manner provided for in this
section, and until such pledged shares are taken up and paid for at a sale as
provided for in this section, the pledged shares shall remain subject to this
agreement and the security interest and rights granted to lender herein.
After deducting all of its reasonable costs and expenses of every
kind, including, without limitation, legal fees and (SEC and other)
registration fees and expenses, if any, in connection with the sale of the
pledged shares, lender shall apply the residue of the proceeds of any sale or
sales of the pledged shares to the note and the other obligations in such
order as lender may select. Lender shall not incur any liability solely
because of the fact that the price or prices for which the pledged shares or
any portion thereof which is sold at a private sale or sales is less than the
price which might have been obtained at a public sale or sales, or vice versa,
or in the event that the price received for the pledged shares is less than
the amount of the obligations. Stockholder agrees that lender may, without
incurring liability therefor, accept the first offer received without offering
the pledged shares to more than one offeree. Stockholder agrees that lender
shall not be liable for any delay in selling the pledged shares or portion
thereof after an event of default, solely because the price of the pledged
shares declines during such interval. Stockholder further agrees that lender
may sell the pledged shares or portion thereof immediately upon the occurrence
of an event of default and shall not be liable therefor even though the price
of the pledged shares should increase after such sale.
(2) To exercise, at the sole and exclusive option of lender, and only
upon the affirmative exercise by lender of such option, all voting rights and
privileges whatsoever with respect to the pledged shares, and to transfer or
have the pledged shares transferred into the name of lender. Without
limitation of the preceding sentence, lender may vote the pledged shares to
remove the directors and officers of the borrower, to elect new directors and
officers of the borrower who thereafter shall manage the affairs of the
borrower, to operate the properties and carry on the business and otherwise
take any action with respect to the affairs of borrower as lender shall deem
necessary or appropriate to the fullest extent permitted by law, to vote to
liquidate borrower or any or all of its businesses, to authorize the borrowing
of money in the name of borrower, to pledge the assets of borrower to secure
any borrowings of borrower, to cause borrower to observe and perform, or to
amend or terminate, any and all agreements of borrower, and to enter into new
agreements. Stockholder hereby constitutes lender in such event as its proxy
and attorney in fact for all purposes regarding voting the pledged shares, and
this appointment shall be deemed coupled with an interest and is and shall be
irrevocable until all of the obligations of borrower to lender secured hereby
have been fully paid and terminated; and all persons whatsoever shall be
conclusively entitled to rely upon lender's verbal or written certification
<PAGE>
that it is entitled to vote the pledged shares hereunder. Anything contained
in this subsection or this agreement to the contrary notwithstanding, lender
pursuant to the execution and delivery of this agreement does not intend nor
shall lender be deemed to be exercising any control over the business or
affairs of borrower, and any exercise of the rights of lender with respect to
the pledged shares and the exercise of any such control over borrower shall
occur only upon the affirmative election of lender to engage in such
activities.
(3) To exercise all rights of a secured party under the Uniform
Commercial Code of Kentucky and all other applicable laws.
(K) Compliance with securities laws
If lender decides to sell all or any of the pledged shares as provided
herein and if, in the opinion of counsel for lender, stockholder, or Perennial
Health Systems, Inc., it is necessary or advisable to comply with the
provisions of any securities laws for exemption from any applicable
registration requirements in connection with such sale, or to have such
pledged shares registered under the provisions of any securities laws,
stockholder agrees without cost or expense to lender to prepare, execute, and
deliver all such documents and to do or cause to be done all other such acts
and things as may be necessary or, in the opinion of lender, advisable,
(including, but not limited to, the payment of fees, costs, expenses, and
charges to or for the actions as shall be necessary to cause the borrower):
(1) to comply with the provisions of any securities laws concerning exemption
from the registration requirements thereof, including but not limited to
furnishing to lender all information which lender in its sole discretion and
judgment deems pertinent to determine the number of pledged shares which may
be sold by lender as exempt transactions under section 4(4) of the Securities
Act of 1933 and Rule 144 of the Securities and Exchange Commission (or any
laws in effect in lieu thereof), as the same are from time to time in effect,
if lender decides to use such provisions in order to effect any transaction in
the pledged shares; and (2) to qualify any pledged shares under any applicable
"Blue Sky Laws" and to obtain the approval of any required government
authority to any such disposition or dispositions, to register all or any part
of the pledged shares under any securities laws, to cause any registration
statement relating to such registration to become effective and to remain
effective for so long as necessary to lawfully effect the sale of any pledged
shares as registered securities, to make all amendments thereto and/or to
related prospectuses which in the opinion of lender are necessary or desirable
under appropriate securities laws, and to do any and all other acts and things
necessary or appropriate in lender's sole discretion and judgment to qualify
or register any of the pledged shares for disposition under any securities
laws.
(L) Indemnity
Stockholder agrees jointly and severally to indemnify and hold lender,
and any affiliate of lender, and any officer, director, employee, agent, or
independent contractor of lender or any affiliate of lender (in this section
all such persons are referred to collectively as "related parties" of lender)
from and against any and all causes of action, suits, actions, losses,
liabilities, costs, demands, claims, expenses (including reasonable legal fees
incurred in connection therewith), and damages (hereinafter in this section
each and all of the foregoing are referred to as the "indemnified claims")
arising out of, based upon, or in connection with: (1) any action taken or
information furnished by stockholder and/or borrower under or pursuant to this
<PAGE>
agreement, including any failure to furnish information necessary to make any
information so furnished complete, accurate, and not misleading, regardless of
any independent investigation made by or on behalf of lender and/or lender's
related parties; (2) any failure by stockholder and/or borrower to take, or
any unreasonable delay by stockholder and/or borrower in taking, any action
stockholder and/or borrower are required to take under or pursuant to this
agreement; or (3) the sale or other disposition of any pledged shares by
lender or the related parties, including any violation or alleged violation or
failure to comply with any securities laws in connection with any aspect of
any such disposition, including, but not limited to, any untrue statement or
alleged untrue statement of a material fact in any document filed with any
government authority with respect to any pledged shares or arising out of or
based on any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make any statement therein not
misleading, such indemnification to be and remain operative regardless of any
investigation independently made by or on behalf of lender and/or any related
parties thereof, provided that stockholder shall not be liable in any case to
the extent that any indemnifiable event is based solely on an untrue statement
or alleged omission generated solely by lender and not in reliance in whole or
part on information furnished by or on behalf of stockholder or borrower,
whether or not such reliance of lender thereon is reasonable.
(M) Acknowledgments and disclaimers
Stockholder agrees that the whole or any part of any security now or
hereafter held for the obligations may be exchanged, compromised, or
surrendered by lender from time to time, so long as not inconsistent with any
other provisions hereof, that any instrument securing the obligations may be
modified and rights of lender or others thereunder waived, and that the
pledged shares shall remain as security for the obligations notwithstanding
any such exchange, compromise, surrender, extension, renewal, acceleration,
indulgence, or release, all of which may be effective without notice to or
further consent by stockholder and none of which shall affect the right of
lender to pursue the remedies available to lender under this agreement. The
ability of lender to pursue its remedies hereunder with respect to the pledged
shares after the occurrence of an event of default shall be direct and
immediate and not conditional or contingent upon the pursuit of any remedies
against any person or against any or all of other security, guaranties, or
liens available to lender for the payment and performance of the obligations.
Stockholder agrees that any claim or right it may have against borrower to
recover the value of the pledged shares or any portion thereof, or any claim
against any other sums paid upon the obligations secured hereby, whether
arising from subrogation to the rights of lender or otherwise, shall be
subordinate to the prior payment to lender of all of the obligations of
borrower to lender, and that no such right or claim shall be asserted by
stockholder against borrower until all of such obligations are paid or
discharged. Stockholder hereby waives any claim to marshalling of assets, any
right to require that any action be brought against any other person prior to
the exercise by lender of its remedies with respect to the pledged shares, and
any right to require that resort be had to any security for the obligations or
to any balance of any deposit account or credit on the books of lender in
favor of any person prior to action by lender hereunder to realize upon the
pledged shares after an event of default.
(N) Return of pledged shares
Stockholder shall be entitled to return of the pledged shares only
upon written request from stockholder to lender made at a time when all of the
obligations of borrower to lender hereunder shall have been extinguished, and
borrower shall not be indebted to lender in any manner whatsoever, whether
direct, indirect, absolute, or contingent, nor entitled to receive credit from
or become indebted to lender.
<PAGE>
(O) Notices
All notices, elections, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been given at the
time delivered or deposited in the United States mails, certified or
registered and postage prepaid, addressed to the parties at the address for
each first set forth in this agreement, or at such other address as to which
any party hereto shall have given notice to the other in accordance with this
section.
(P) Governing law
The laws of the Commonwealth of Kentucky shall govern the construction
of this agreement and the rights, remedies, and duties of the parties
hereunder.
(Q) Successors and assigns
This agreement shall bind stockholder and the successors, assigns, and
legal representatives of stockholder, and shall inure to the benefit of lender
and its successors and assigns.
(R) Complete agreement; modification
This agreement contains the final, complete, and exclusive agreement
of the parties with respect to its subject matter, and may not be modified
except by a writing signed by or on behalf of each of the parties hereto.
(S) Time of essence
Time shall be of the essence in the performance of all of
stockholder's obligations hereunder.
(T) Captions
The captions and headings of the sections shall be ignored in
interpreting the provisions of this agreement.
IN WITNESS WHEREOF, the parties hereto have each duly executed this
agreement as of the day first above set forth, but actually on the date or
dates set forth below.
Stockholder:
______________________
DAVID V. HALL
Date:__________________
Lender:
______________________
BERT L BLIEDEN
Date:__________________
<PAGE>
WARRANT TO PURCHASE COMMON STOCK
OF
PERENNIAL HEALTH SYSTEMS, INC.
THE TRANSFER OF THIS WARRANT IS RESTRICTED BY THE TERMS OF THIS WARRANT.
EXCEPT AS PROVIDED HEREIN, THIS WARRANT MAY NOT BE GIVEN, SOLD, PLEDGED OR
OTHERWISE TRANSFERRED.
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY APPLICABLE STATE SECURITIES LAWS AND THIS WARRANT MAY NOT BE OFFERED FOR
SALE OR SOLD UNLESS IT IS REGISTERED UNDER THE APPROPRIATE SECURITIES LAWS OR
IT OR SUCH OFFER OR SALE IS EXEMPT FROM SUCH REGISTRATION AND THE COMPANY HAS
RECEIVED AN OPINION OF COUNSEL TO THAT EFFECT, REASONABLY SATISFACTORY TO THE
COMPANY IN FORM AND SUBSTANCE.
No. W-1 Warrant to Purchase 200,000 Shares of Common Stock
(subject to adjustment)
Void after July 8, 2001
For valued received, Perennial Health Systems, Inc., a Colorado
corporation (the "Company") hereby certifies that, ________________ or
registered assigns (the "Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company, TWO HUNDRED THOUSAND (200,000) shares of
the Common Stock, without par value, of the Company ("Common Stock"), as
constituted on July 8, 1999 (the "Warrant Issue Date"), upon surrender hereof,
at the principal office of the Company referred to below, with the Notice of
Exercise attached hereto duly executed, and simultaneous payment therefor in
lawful money of the United States as hereinafter provided, at the per share
price of THIRTY-FIVE CENTS ($.35) (the "Exercise Price"). The number,
character and Exercise Price of such shares of Common Stock are subject to
adjustment as provided below. The term "Warrant" as used herein shall include
this Warrant and any warrants delivered in substitution or exchange therefor
as provided herein. This Warrant is registered and its transfer may be
registered upon the books maintained for that purpose by the Company by
delivery of this Warrant duly endorsed.
1. Term of Warrant. Subject to the terms and conditions set forth
herein, this Warrant shall be exercisable, in whole or in part, during the
term commencing on the Warrant Issue Date and ending at 5:00 p.m., Eastern
time, on July 8, 2001, and shall be void thereafter.
2. Exercise of Warrant.
2.1. Method. The purchase rights represented by this Warrant are
exercisable by the Holder in whole or in part, at any time, or from time to
time, during the term hereof as described in Section 1 above, by the surrender
of this Warrant and the Notice of Exercise annexed hereto duly completed and
executed by the Holder, at the office of the Company (or such other office or
agency of the Company as it may designate by notice in writing to the Holder),
upon payment (a) in cash or by wire transfer to a bank account designated by
the Company or by a certified or cashier's check, (b) by cancellation by the
Holder of indebtedness of the Company to the Holder, or (c) by a combination
of (a) and (b), of the Exercise price of the shares to be purchased; provided,
however, that if less than all of the purchase rights represented by this
Warrant are exercised, such exercise shall involve the purchase of at least
<PAGE>
ONE HUNDRED THOUSAND (100,000) shares of Common Stock, adjusted as provided in
Section 6 below.
2.2. Effect. This Warrant shall be deemed to have been exercised at
the time of its surrender for exercise as provided above, and the person
entitled to receive the shares of Common Stock issuable upon such exercise
shall be treated for all purposes as the holder of record of such shares at
and after such time. As promptly as practicable on or after such date and in
any event within ten (10) days thereafter, the Company at its expense shall
issue to the person entitled to receive the same a certificate for the number
of shares of Common Stock issuable upon such exercise. If this Warrant is
exercised in part, the Company at its expense will execute and deliver a new
Warrant exercisable for the number of shares for which this Warrant may then
be exercised.
2.3. Holder Not A Shareholder. The Holder shall neither be entitled
to vote nor receive dividends nor be deemed the holder of Common Stock or any
other securities of the Company that may at any time be issuable on the
exercise hereof for any purpose until the Warrant has been exercised as
provided in this Section 2.
2.4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of any fractional share to which the Holder would otherwise
be entitled, the Company shall make a cash payment equal to the Exercise Price
multiplied by such fraction.
3. Ownership Restrictions
3.1. Record Ownership. The Company shall maintain a register of the
Holders of the Warrants (the "Register") showing their names and addresses and
the serial numbers and number of Common Shares purchasable issued to or
transferred of record by them from time to time. The Register may be
maintained in electronic, magnetic or other computerized form . The Company
may treat the person named as the Holder of this Warrant in the Register as
the sole owner of this Warrant. The Holder of this Warrant is the person
exclusively entitled to receive notifications with respect to this Warrant,
exercise it to purchase shares of Common Stock and otherwise exercise all of
the rights and powers as the absolute owner hereof.
3.2. Registration of Transfer. Transfers of this Warrant may be
registered on the books of the Company maintained for such purpose pursuant to
Section 3.2 above (i.e., the Register). Transfers shall be registered when
this Warrant is presented to the Company duly endorsed with a request to
register the transfer hereof. When this Warrant is presented for transfer and
duly transferred hereunder, it shall be canceled and a new Warrant showing the
name of the transferee as the Holder thereof shall be issued in lieu hereof.
When this Warrant is presented to the Company with a reasonable request to
exchange it for Warrants of other denominations, the Company shall make such
exchange and shall cancel this Warrant and issue in lieu thereof Warrants
exercisable for an equal number of shares of Common Stock in the denominations
requested by the Holder.
3.3. Worn and Lost Warrants. If this Warrant becomes worn, defaced
or mutilated but is still substantially intact and recognizable, the Company
or its agent may issue a new Warrant in lieu hereof upon its surrender. If
this Warrant is lost, destroyed or wrongfully taken, the Company shall issue a
new Warrant in place of the original Warrant if the Holder so requests by
written notice to the Company and the Holder has delivered to the Company an
indemnity agreement reasonably satisfactory to the Company with an affidavit
of the Holder that this Warrant has been lost, destroyed or wrongfully taken.
<PAGE>
3.4. Restrictions on Transfer. This Warrant and the Common Stock
issuable upon the exercise hereof have not been registered under the Act or
any applicable state securities laws and this Warrant and the Common Stock
issuable upon the exercise of this Warrant may not be offered for sale or sold
unless such offer or sale is registered under the appropriate securities laws
or such transfer is exempt from such registration and the Company has received
an opinion of counsel, reasonably satisfactory to the Company in form and
substance, stating that such offer or sale is exempt from registration under
applicable state and federal securities laws. In addition, the Holder may
only transfer this Warrant and the Common Stock issuable upon the exercise
hereof with the prior written consent of the Company.
3.5. Legend. Upon any exercise of a Warrant, the certificates
representing the securities purchased thereby shall bear the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY APPLICABLE STATE SECURITIES LAWS AND THESE SECURITIES MAY NOT BE OFFERED
FOR SALE OR SOLD UNLESS THEY ARE REGISTERED UNDER THE APPROPRIATE SECURITIES
LAWS OR THEY OR SUCH OFFER OR SALE ARE EXEMPT FROM SUCH REGISTRATION AND THE
COMPANY HAS RECEIVED AN OPINION OF COUNSEL TO THAT EFFECT, REASONABLY
SATISFACTORY TO THE COMPANY IN FORM AND SUBSTANCE.
3.6. Warrant Agent. The Company may, by written notice to the Holder
appoint an agent for the purpose of maintaining the Register issuing Common
Stock or other securities then issuable upon the exercise of this Warrant,
exchanging or transferring this warrant, or any or all of the foregoing.
Thereafter, any such registration issuance, exchange, or transfer, as the case
may be, shall be made at the office of such agent.
4. Reservation of Stock. The Company covenants that, during the term
this Warrant is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of Shares to provide for the
issuance of Common Stock upon the exercise of this Warrant and, if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Preferred Stock, the Corporation will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be
sufficient for such purpose, including without limitation, engaging in best
efforts to obtain the requisite shareholder approval of any necessary
amendment to its Articles of Incorporation (the "Articles"). The Company
further covenants that all shares that may be issued upon the exercise of
rights represented by this Warrant, upon exercise of the rights represented by
this Warrant and payment of the Exercise Price, all as set forth herein, will
be duly authorized, validly issued, fully paid, non-assessable and free from
all taxes, liens and charges in respect of the issue thereof (other than taxes
in respect of any transfer occurring contemporaneously or otherwise specified
herein). The Company agrees that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty of executing
stock certificates to execute and issue the necessary certificates for shares
of Common Stock upon the exercise of this Warrant.
5. Distributions. If: (a) the Company sets a record date for the
holders of its Common Stock (or other stock or securities at the time
receivable upon the exercise of this Warrant) for the purpose of entitling
them to receive any dividend or other distribution, or any right to subscribe
for or purchase any shares of stock of any class or any other securities, or
to receive any other right, or (b) there is any capital reorganization of the
Company, any reclassification of the capital stock of the Company, any
consolidation or merger of the Company with or into another entity, or any
<PAGE>
conveyance of all or substantially all of the assets of the Company or (c)
there is any voluntary dissolution, liquidation or winding-up of the Company,
the Company will mail to the Holder a notice specifying, as the case may be,
(A) the record date for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right, or (B)
the date on which such reorganization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation or winding-up is to take place,
and the time, if any is to be fixed, as of which the holders of record of
Common Stock (or such stock or securities at the time receivable upon the
exercise of this Warrant) shall be entitled to exchange their shares of Common
Stock (or such other Stock or securities) for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
conveyance, dissolution, liquidation or winding-up. Such notice shall be
mailed at least fourteen (14) days prior to the date therein specified.
6. Adjustments. The Exercise Price and the number of shares
purchasable hereunder are subject to adjustment from time to time as follows:
6.1. Merger, Sale of Assets, etc. If, at any time while this Warrant
or any portion thereof is outstanding and unexpired, there shall be (a) a
reorganization (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), (b) a merger or
consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a reverse triangular merger in which
the Company is the surviving entity but the shares of the Company's capital
stock outstanding immediately prior to the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash, or
otherwise, or (c) a sale or transfer of the Company's properties and assets
as, or substantially as, an entirety to any other person, then, as a part of
such reorganization, merger, consolidation, sale or transfer, lawful provision
shall be made so that the holder of this Warrant shall thereafter be entitled
to receive upon exercise of this Warrant, during the period specified herein
and upon payment of the Exercise Price then in effect, the number of shares of
stock or other securities or property of the successor corporation resulting
from such reorganization, merger, consolidation, sale or transfer that a
holder of the shares deliverable upon exercise of this Warrant would have been
entitled to receive in such reorganization, consolidation, merger, sale or
transfer if this Warrant had been exercised immediately before such
reorganization, merger, consolidation, sale or transfer, all subject to
further adjustment as provided in this Section 6. The foregoing provisions of
this Section 6.1 shall similarly apply to successive reorganizations,
consolidations, mergers, sales and transfers and to the stock or securities of
any other corporation that are at the time receivable upon the exercise of
this Warrant. If the per-share consideration payable to the Holder hereof for
shares in connection with any such transaction is in a form other than cash or
marketable securities, then the value of such consideration shall be
determined in good faith by the Company's Board of Directors. In all events,
appropriate adjustment (as determined in good faith by the Company's Board of
Directors) shall be made in the application of the provisions of this Warrant
with respect to the rights and interests of the Holder after the transaction,
to the end that the provisions of this Warrant shall be applicable after that
event, as near as reasonably may be, in relation to any shares or other
property deliverable after that event upon exercise of this Warrant.
6.2. Reclassification, etc. If the Company, at any time while this
Warrant or any portion thereof remains outstanding and unexpired, by
reclassification of securities or otherwise, shall change any of the
<PAGE>
securities as to which purchase rights under this warrant exist into the same
or a different number of securities of any other class or classes, this
Warrant shall thereafter represent the right to acquire such number and kind
of securities as would have been issuable as the result of such change with
respect to the securities that were subject to the purchase rights under this
Warrant immediately prior to such reclassification or other change and the
Base Price and Exercise Price therefor shall be appropriately adjusted, all
subject to further adjustment as provided in this Section 6.
6.3. Split, Subdivision or Combination of Shares. If the Company, at
any time while this Warrant or any portion thereof remains outstanding and
unexpired, shall split, subdivide or combine the securities as to which
purchase rights under this Warrant exist, into a different number of
securities of the same class, the Base Price for such securities shall be
proportionately decreased in the case of a split or subdivision or
proportionately increased in the case of a combination, and the number of
shares of Common Stock for which this Warrant is exercisable shall be
proportionately increased in the case of a split or subdivision or
proportionately decreased in the case of a combination.
6.4. Adjustment for Dividends in Stock or Other Securities or
Property. If, while this Warrant or any portion hereof remains outstanding and
unexpired, the holders of the securities as to which purchase rights under
this Warrant exist at the time shall have received, or, on or after the record
date fixed for the determination of eligible shareholders, shall have become
entitled to receive, without payment therefor, other or additional stock or
other securities or property (other than cash) of the Company by way of
dividend, then, and in each case, this Warrant shall represent the right to
acquire, in addition to the number of shares of the security receivable upon
exercise of this Warrant, and without payment of any additional consideration
therefor, the amount of such other or additional stock or other security or
property (other than cash) of the Company that such holder would hold on the
date of such exercise had it been the holder of record of the security
receivable upon exercise of this Warrant on the date hereof and had
thereafter, during the period from the date hereof to and including the date
of such exercise, retained such shares and/or all other additional stock
available by it as aforesaid during such period, giving effect to all
adjustments called for during such period by the provisions of this Section 6.
6.5. Certificate as to Adjustments. Upon the occurrence of each
adjustment pursuant to this Section 6, the Company at its expense shall
promptly compute such adjustment in accordance with the terms hereof and
furnish to the Holder a certificate setting forth such adjustment and showing
in detail the facts upon which such adjustment is based, and the Exercise
Price before and after the adjustment. The Company shall, at any time upon the
written request of any Holder, furnish to such Holder a certificate setting
forth: (a) such adjustments; (b) the Exercise Price then in effect; and (c)
the number of shares and the amount, if any, of other property that at the
time would be received upon the exercise of the warrant.
6.6. No Impairment. The Company will not, by any voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all the provisions of this Section 6 and
in the taking of all such actions as may be necessary or appropriate in order
to protect the rights of the Holder of this Warrant against impairment.
7. Amendments. This Warrant may not be amended without the prior
written consent of the Holder.
<PAGE>
8. Notices. Any notice, certificate or other communication which is
required or convenient under the terms of this Warrant shall be duly given if
it is in writing and delivered in person or mailed by first class mail,
postage prepaid, and directed to the Holder of the Warrant at its address as
it appears on the Register, or, if to the Company, to its principal executive
offices. The time when such notice is sent shall be the time of the giving of
the notice.
9. Time. Where this Warrant provides for a payment or performance on
a Saturday or Sunday or a public holiday in the State of Kentucky, such
payment or performance may be made on the next succeeding business day.
10. Rules of Construction. In this Warrant, unless the context
otherwise requires, words in the singular number include the plural, and in
the plural include the singular, and words of the masculine gender include the
feminine and the neuter, and when the sense so indicates, words of the neuter
gender may refer to any gender. The numbers and titles of sections contained
in this Warrant are inserted for convenience of reference only, and they
neither form a part of this Warrant nor are they to be used in the
construction or interpretation hereof.
11. Governing Law. The validity, terms, performance and enforcement
of this Warrant shall be governed by those laws of the Commonwealth of
Kentucky that are applicable to agreements that are negotiated, executed,
delivered and performed solely in the Commonwealth of Kentucky
IN WITNESS WHEREOF, Perennial Health Systems, Inc. has caused this
Warrant to be executed by its officer thereto duly authorized.
PERENNIAL HEALTH SYSTEMS, INC.
BY:_______________________________
TITLE:_____________________________
<PAGE>
Notice of Exercise
(To be completed and signed only upon exercise of Warrant]
The undersigned, the Holder of this Warrant, hereby irrevocably elects to
exercise the right to purchase Common Stock without par value, of Perennial
Health Systems, Inc. as follows:
___________________________________________________
(whole number of Warrants exercised)
___________________________________________________
(Dollars $)
___________________________________________________
(number of warrants exercised times Exercise Price)
___________________________________________________
(name of holder of shares if different than
Holder of Warrant)
___________________________________________________
(address of holder of shares if different than
address of Holder of Warrant)
__________________________________________________
(Social Security or TIN of holder of shares if
different than Holder of Warrant)
Date:___________ Sign: _____________________________________________
(Signature must conform in all respects to
name of Holder shown on face of this Warrant)
Signature Guaranteed: (Signature must be guaranteed if name of holder of
shares differs from registered Holder of Warrant)
<PAGE>
Assignment of Warrant
The undersigned hereby sell(s) and assign(s) and transfer(s) unto
________________________________________________________________
(name, address and SON or TIN of assignee)
_____________________________________ of this Warrant.
(portion of Warrant)
Date:
Sign:
(Signature must conform in all respects to name of Holder shown on face of
Warrant)
Signature Guaranteed:
<PAGE>
WARRANT TO PURCHASE COMMON STOCK
OF
PERENNIAL HEALTH SYSTEMS, INC.
THE TRANSFER OF THIS WARRANT IS RESTRICTED BY THE TERMS OF THIS WARRANT.
EXCEPT AS PROVIDED HEREIN, THIS WARRANT MAY NOT BE GIVEN, SOLD, PLEDGED OR
OTHERWISE TRANSFERRED.
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY APPLICABLE STATE SECURITIES LAWS AND THIS WARRANT MAY NOT BE OFFERED FOR
SALE OR SOLD UNLESS IT IS REGISTERED UNDER THE APPROPRIATE SECURITIES LAWS OR
IT OR SUCH OFFER OR SALE IS EXEMPT FROM SUCH REGISTRATION AND THE COMPANY HAS
RECEIVED AN OPINION OF COUNSEL TO THAT EFFECT, REASONABLY SATISFACTORY TO THE
COMPANY IN FORM AND SUBSTANCE.
No. W-1 Warrant to Purchase 120,000 Shares of Common Stock
(subject to adjustment)
Void after July 8, 2000
For valued received, Perennial Health Systems, Inc., a Colorado
corporation (the "Company") hereby certifies that, ________________ or
registered assigns (the "Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company, ONE HUNDRED TWENTY THOUSAND (120,000)
shares of the Common Stock, without par value, of the Company ("Common
Stock"), as constituted on July 8, 1999 (the "Warrant Issue Date"), upon
surrender hereof, at the principal office of the Company referred to below,
with the Notice of Exercise attached hereto duly executed, and simultaneous
payment therefor in lawful money of the United States as hereinafter provided,
at the per share price of ONE CENT ($.01) (the "Exercise Price"). The number,
character and Exercise Price of such shares of Common Stock are subject to
adjustment as provided below. The term "Warrant" as used herein shall include
this Warrant and any warrants delivered in substitution or exchange therefor
as provided herein. This Warrant is registered and its transfer may be
registered upon the books maintained for that purpose by the Company by
delivery of this Warrant duly endorsed.
1. Term of Warrant. Subject to the terms and conditions set forth
herein, this Warrant shall be exercisable, in whole or in part, during the
term commencing on the Warrant Issue Date and ending at 5:00 p.m., Eastern
time, on July 8, 2000, and shall be void thereafter.
2. Exercise of Warrant.
2.1. Method. The purchase rights represented by this Warrant are
exercisable by the Holder in whole or in part, at any time, or from time to
time, during the term hereof as described in Section 1 above, by the surrender
of this Warrant and the Notice of Exercise annexed hereto duly completed and
executed by the Holder, at the office of the Company (or such other office or
agency of the Company as it may designate by notice in writing to the Holder),
upon payment (a) in cash or by wire transfer to a bank account designated by
the Company or by a certified or cashier's check, (b) by cancellation by the
Holder of indebtedness of the Company to the Holder, or (c) by a combination
of (a) and (b), of the Exercise price of the shares to be purchased; provided,
however, that if less than all of the purchase rights represented by this
Warrant are exercised, such exercise shall involve the purchase of at least
ONE HUNDRED THOUSAND (100,000) shares of Common Stock, adjusted as provided in
Section 6 below.
<PAGE>
2.2. Effect. This Warrant shall be deemed to have been exercised at
the time of its surrender for exercise as provided above, and the person
entitled to receive the shares of Common Stock issuable upon such exercise
shall be treated for all purposes as the holder of record of such shares at
and after such time. As promptly as practicable on or after such date and in
any event within ten (10) days thereafter, the Company at its expense shall
issue to the person entitled to receive the same a certificate for the number
of shares of Common Stock issuable upon such exercise. If this Warrant is
exercised in part, the Company at its expense will execute and deliver a new
Warrant exercisable for the number of shares for which this Warrant may then
be exercised.
2.3. Holder Not A Shareholder. The Holder shall neither be entitled
to vote nor receive dividends nor be deemed the holder of Common Stock or any
other securities of the Company that may at any time be issuable on the
exercise hereof for any purpose until the Warrant has been exercised as
provided in this Section 2.
2.4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of any fractional share to which the Holder would otherwise
be entitled, the Company shall make a cash payment equal to the Exercise Price
multiplied by such fraction.
3. Ownership Restrictions
3.1. Record Ownership. The Company shall maintain a register of the
Holders of the Warrants (the "Register") showing their names and addresses and
the serial numbers and number of Common Shares purchasable issued to or
transferred of record by them from time to time. The Register may be
maintained in electronic, magnetic or other computerized form . The Company
may treat the person named as the Holder of this Warrant in the Register as
the sole owner of this Warrant. The Holder of this Warrant is the person
exclusively entitled to receive notifications with respect to this Warrant,
exercise it to purchase shares of Common Stock and otherwise exercise all of
the rights and powers as the absolute owner hereof.
3.2. Registration of Transfer. Transfers of this Warrant may be
registered on the books of the Company maintained for such purpose pursuant to
Section 3.2 above (i.e., the Register). Transfers shall be registered when
this Warrant is presented to the Company duly endorsed with a request to
register the transfer hereof. When this Warrant is presented for transfer and
duly transferred hereunder, it shall be canceled and a new Warrant showing the
name of the transferee as the Holder thereof shall be issued in lieu hereof.
When this Warrant is presented to the Company with a reasonable request to
exchange it for Warrants of other denominations, the Company shall make such
exchange and shall cancel this Warrant and issue in lieu thereof Warrants
exercisable for an equal number of shares of Common Stock in the denominations
requested by the Holder.
3.3. Worn and Lost Warrants. If this Warrant becomes worn, defaced
or mutilated but is still substantially intact and recognizable, the Company
or its agent may issue a new Warrant in lieu hereof upon its surrender. If
this Warrant is lost, destroyed or wrongfully taken, the Company shall issue a
new Warrant in place of the original Warrant if the Holder so requests by
written notice to the Company and the Holder has delivered to the Company an
indemnity agreement reasonably satisfactory to the Company with an affidavit
of the Holder that this Warrant has been lost, destroyed or wrongfully taken.
<PAGE>
3.4. Restrictions on Transfer. This Warrant and the Common Stock
issuable upon the exercise hereof have not been registered under the Act or
any applicable state securities laws and this Warrant and the Common Stock
issuable upon the exercise of this Warrant may not be offered for sale or sold
unless such offer or sale is registered under the appropriate securities laws
or such transfer is exempt from such registration and the Company has received
an opinion of counsel, reasonably satisfactory to the Company in form and
substance, stating that such offer or sale is exempt from registration under
applicable state and federal securities laws. In addition, the Holder may
only transfer this Warrant and the Common Stock issuable upon the exercise
hereof with the prior written consent of the Company.
3.5. Legend. Upon any exercise of a Warrant, the certificates
representing the securities purchased thereby shall bear the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY APPLICABLE STATE SECURITIES LAWS AND THESE SECURITIES MAY NOT BE OFFERED
FOR SALE OR SOLD UNLESS THEY ARE REGISTERED UNDER THE APPROPRIATE SECURITIES
LAWS OR THEY OR SUCH OFFER OR SALE ARE EXEMPT FROM SUCH REGISTRATION AND THE
COMPANY HAS RECEIVED AN OPINION OF COUNSEL TO THAT EFFECT, REASONABLY
SATISFACTORY TO THE COMPANY IN FORM AND SUBSTANCE.
3.6. Warrant Agent. The Company may, by written notice to the Holder
appoint an agent for the purpose of maintaining the Register issuing Common
Stock or other securities then issuable upon the exercise of this Warrant,
exchanging or transferring this warrant, or any or all of the foregoing.
Thereafter, any such registration issuance, exchange, or transfer, as the case
may be, shall be made at the office of such agent.
4. Reservation of Stock. The Company covenants that, during the term
this Warrant is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of Shares to provide for the
issuance of Common Stock upon the exercise of this Warrant and, if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Preferred Stock, the Corporation will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be
sufficient for such purpose, including without limitation, engaging in best
efforts to obtain the requisite shareholder approval of any necessary
amendment to its Articles of Incorporation (the "Articles"). The Company
further covenants that all shares that may be issued upon the exercise of
rights represented by this Warrant, upon exercise of the rights represented by
this Warrant and payment of the Exercise Price, all as set forth herein, will
be duly authorized, validly issued, fully paid, non-assessable and free from
all taxes, liens and charges in respect of the issue thereof (other than taxes
in respect of any transfer occurring contemporaneously or otherwise specified
herein). The Company agrees that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty of executing
stock certificates to execute and issue the necessary certificates for shares
of Common Stock upon the exercise of this Warrant.
5. Distributions. If: (a) the Company sets a record date for the
holders of its Common Stock (or other stock or securities at the time
receivable upon the exercise of this Warrant) for the purpose of entitling
them to receive any dividend or other distribution, or any right to subscribe
for or purchase any shares of stock of any class or any other securities, or
to receive any other right, or (b) there is any capital reorganization of the
<PAGE>
Company, any reclassification of the capital stock of the Company, any
consolidation or merger of the Company with or into another entity, or any
conveyance of all or substantially all of the assets of the Company or (c)
there is any voluntary dissolution, liquidation or winding-up of the Company,
the Company will mail to the Holder a notice specifying, as the case may be,
(A) the record date for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right, or (B)
the date on which such reorganization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation or winding-up is to take place,
and the time, if any is to be fixed, as of which the holders of record of
Common Stock (or such stock or securities at the time receivable upon the
exercise of this Warrant) shall be entitled to exchange their shares of Common
Stock (or such other Stock or securities) for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
conveyance, dissolution, liquidation or winding-up. Such notice shall be
mailed at least fourteen (14) days prior to the date therein specified.
6. Adjustments. The Exercise Price and the number of shares
purchasable hereunder are subject to adjustment from time to time as follows:
6.1. Merger, Sale of Assets, etc. If, at any time while this Warrant
or any portion thereof is outstanding and unexpired, there shall be (a) a
reorganization (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), (b) a merger or
consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a reverse triangular merger in which
the Company is the surviving entity but the shares of the Company's capital
stock outstanding immediately prior to the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash, or
otherwise, or (c) a sale or transfer of the Company's properties and assets
as, or substantially as, an entirety to any other person, then, as a part of
such reorganization, merger, consolidation, sale or transfer, lawful provision
shall be made so that the holder of this Warrant shall thereafter be entitled
to receive upon exercise of this Warrant, during the period specified herein
and upon payment of the Exercise Price then in effect, the number of shares of
stock or other securities or property of the successor corporation resulting
from such reorganization, merger, consolidation, sale or transfer that a
holder of the shares deliverable upon exercise of this Warrant would have been
entitled to receive in such reorganization, consolidation, merger, sale or
transfer if this Warrant had been exercised immediately before such
reorganization, merger, consolidation, sale or transfer, all subject to
further adjustment as provided in this Section 6. The foregoing provisions of
this Section 6.1 shall similarly apply to successive reorganizations,
consolidations, mergers, sales and transfers and to the stock or securities of
any other corporation that are at the time receivable upon the exercise of
this Warrant. If the per-share consideration payable to the Holder hereof for
shares in connection with any such transaction is in a form other than cash or
marketable securities, then the value of such consideration shall be
determined in good faith by the Company's Board of Directors. In all events,
appropriate adjustment (as determined in good faith by the Company's Board of
Directors) shall be made in the application of the provisions of this Warrant
with respect to the rights and interests of the Holder after the transaction,
to the end that the provisions of this Warrant shall be applicable after that
event, as near as reasonably may be, in relation to any shares or other
property deliverable after that event upon exercise of this Warrant.
<PAGE>
6.2. Reclassification, etc. If the Company, at any time while this
Warrant or any portion thereof remains outstanding and unexpired, by
reclassification of securities or otherwise, shall change any of the
securities as to which purchase rights under this warrant exist into the same
or a different number of securities of any other class or classes, this
Warrant shall thereafter represent the right to acquire such number and kind
of securities as would have been issuable as the result of such change with
respect to the securities that were subject to the purchase rights under this
Warrant immediately prior to such reclassification or other change and the
Base Price and Exercise Price therefor shall be appropriately adjusted, all
subject to further adjustment as provided in this Section 6.
6.3. Split, Subdivision or Combination of Shares. If the Company, at
any time while this Warrant or any portion thereof remains outstanding and
unexpired, shall split, subdivide or combine the securities as to which
purchase rights under this Warrant exist, into a different number of
securities of the same class, the Base Price for such securities shall be
proportionately decreased in the case of a split or subdivision or
proportionately increased in the case of a combination, and the number of
shares of Common Stock for which this Warrant is exercisable shall be
proportionately increased in the case of a split or subdivision or
proportionately decreased in the case of a combination.
6.4. Adjustment for Dividends in Stock or Other Securities or
Property. If, while this Warrant or any portion hereof remains outstanding and
unexpired, the holders of the securities as to which purchase rights under
this Warrant exist at the time shall have received, or, on or after the record
date fixed for the determination of eligible shareholders, shall have become
entitled to receive, without payment therefor, other or additional stock or
other securities or property (other than cash) of the Company by way of
dividend, then, and in each case, this Warrant shall represent the right to
acquire, in addition to the number of shares of the security receivable upon
exercise of this Warrant, and without payment of any additional consideration
therefor, the amount of such other or additional stock or other security or
property (other than cash) of the Company that such holder would hold on the
date of such exercise had it been the holder of record of the security
receivable upon exercise of this Warrant on the date hereof and had
thereafter, during the period from the date hereof to and including the date
of such exercise, retained such shares and/or all other additional stock
available by it as aforesaid during such period, giving effect to all
adjustments called for during such period by the provisions of this Section 6.
6.5. Certificate as to Adjustments. Upon the occurrence of each
adjustment pursuant to this Section 6, the Company at its expense shall
promptly compute such adjustment in accordance with the terms hereof and
furnish to the Holder a certificate setting forth such adjustment and showing
in detail the facts upon which such adjustment is based, and the Exercise
Price before and after the adjustment. The Company shall, at any time upon the
written request of any Holder, furnish to such Holder a certificate setting
forth: (a) such adjustments; (b) the Exercise Price then in effect; and (c)
the number of shares and the amount, if any, of other property that at the
time would be received upon the exercise of the warrant.
6.6. No Impairment. The Company will not, by any voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all the provisions of this Section 6 and
in the taking of all such actions as may be necessary or appropriate in order
to protect the rights of the Holder of this Warrant against impairment.
<PAGE>
7. Amendments. This Warrant may not be amended without the prior
written consent of the Holder.
8. Notices. Any notice, certificate or other communication which is
required or convenient under the terms of this Warrant shall be duly given if
it is in writing and delivered in person or mailed by first class mail,
postage prepaid, and directed to the Holder of the Warrant at its address as
it appears on the Register, or, if to the Company, to its principal executive
offices. The time when such notice is sent shall be the time of the giving of
the notice.
9. Time. Where this Warrant provides for a payment or performance on
a Saturday or Sunday or a public holiday in the State of Kentucky, such
payment or performance may be made on the next succeeding business day.
10. Rules of Construction. In this Warrant, unless the context
otherwise requires, words in the singular number include the plural, and in
the plural include the singular, and words of the masculine gender include the
feminine and the neuter, and when the sense so indicates, words of the neuter
gender may refer to any gender. The numbers and titles of sections contained
in this Warrant are inserted for convenience of reference only, and they
neither form a part of this Warrant nor are they to be used in the
construction or interpretation hereof.
11. Governing Law. The validity, terms, performance and enforcement
of this Warrant shall be governed by those laws of the Commonwealth of
Kentucky that are applicable to agreements that are negotiated, executed,
delivered and performed solely in the Commonwealth of Kentucky
IN WITNESS WHEREOF, Perennial Health Systems, Inc. has caused this
Warrant to be executed by its officer thereto duly authorized.
PERENNIAL HEALTH SYSTEMS, INC.
BY:_______________________________
TITLE:_____________________________
<PAGE>
Notice of Exercise
(To be completed and signed only upon exercise of Warrant]
The undersigned, the Holder of this Warrant, hereby irrevocably elects to
exercise the right to purchase Common Stock without par value, of Perennial
Health Systems, Inc. as follows:
___________________________________________________
(whole number of Warrants exercised)
___________________________________________________
(Dollars $)
___________________________________________________
(number of warrants exercised times Exercise Price)
___________________________________________________
(name of holder of shares if different than
Holder of Warrant)
___________________________________________________
(address of holder of shares if different than
address of Holder of Warrant)
__________________________________________________
(Social Security or TIN of holder of shares if
different than Holder of Warrant)
Date:___________ Sign: _____________________________________________
(Signature must conform in all respects to
name of Holder shown on face of this Warrant)
Signature Guaranteed: (Signature must be guaranteed if name of holder of
shares differs from registered Holder of Warrant)
<PAGE>
Assignment of Warrant
The undersigned hereby sell(s) and assign(s) and transfer(s) unto
________________________________________________________________
(name, address and SSN or TIN of assignee)
_____________________________________ of this Warrant.
(portion of Warrant)
Date:
Sign:
(Signature must conform in all respects to name of Holder shown on face of
Warrant)
Signature Guaranteed:
SUBSIDIARIES OF THE REGISTRANT
Other Names
State of Incorporation used in
Name or Organization Business
- ------------------------------- ---------------------- -----------
In-House Rehab, Inc. Kentucky None
Daily Rehabilitation Florida None
Institute of Ponte Vedra, Inc.
In-House Medical Resources, Inc. Kentucky None
RT Group, Inc. Indiana None
In-House Rehab Partners, LLC Kentucky None
Rehab Tools, Inc. Delaware None
Doctors Rehab & Therapy, Inc. Kentucky None
Gateway Rehabilitation, Inc. Illinois None
Perennial Health Management, Inc. Kentucky None
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Perennial Health Systems, Inc. on Form S-8 of our report dated September 14,
1999 on our audits of the consolidated financial statements of Perennial
Health Systems, Inc. as of and for the years May 31, 1999 and 1998, included
in the Annual Report on Form 10-KSB for the fiscal year ended May 31, 1999.
/s/ Strothman & Company PSC
Strothman & Company PSC
Louisville, Kentucky
September 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statements of operations found on pages F-2 and F-3 of the
Company's Form 10-KSB for the fiscal year ended May 31, 1999, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> MAY-31-1999
<CASH> 105,136
<SECURITIES> 0
<RECEIVABLES> 4,703,960
<ALLOWANCES> 694,497
<INVENTORY> 0
<CURRENT-ASSETS> 4,297,222
<PP&E> 3,458,315
<DEPRECIATION> 268,199
<TOTAL-ASSETS> 9,206,940
<CURRENT-LIABILITIES> 6,744,860
<BONDS> 0
0
0
<COMMON> 2,142,678
<OTHER-SE> (3,698,668)
<TOTAL-LIABILITY-AND-EQUITY> 9,206,940
<SALES> 13,693,453
<TOTAL-REVENUES> 13,693,453
<CGS> 8,136,821
<TOTAL-COSTS> 8,136,821
<OTHER-EXPENSES> 11,580,406
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 508,377
<INCOME-PRETAX> (6,532,151)
<INCOME-TAX> (818,292)
<INCOME-CONTINUING> (5,713,859)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,713,859)
<EPS-BASIC> (.43)
<EPS-DILUTED> (.42)
</TABLE>
