<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended: August 31, 1999
Commission File No. 0-22155
PERENNIAL HEALTH SYSTEMS, INC.
-----------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Colorado 84-0987697
- ------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
325 West Main Street, Suite 1400B, Louisville, Kentucky 40202
--------------------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(502) 568-8923
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
There were 13,395,072 shares of the Registrant's Common Stock outstanding as
of October 1, 1999.
Transitional Small Business Disclosure Format: Yes --- No -X-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PERENNIAL HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
August 31 and May 31, 1999
August 31,
1999 May 31,
ASSETS (Unaudited) 1999
----------- ----------
Current assets:
Cash $ 215,089 $ 105,136
Accounts receivable, less allowance for
doubtful accounts of $647,000 and
$694,000 at August 31 and May 31, 1999,
respectively 3,278,589 2,945,043
Income tax receivable 1,002,377 1,000,420
Advances to related parties 66,235 64,000
Other current assets 181,171 182,623
---------- ----------
Total current assets 4,743,461 4,297,222
Property and equipment, at cost:
Land 50,000 50,000
Buildings and improvements 2,647,448 2,647,448
Equipment 766,943 760,867
Less accumulated depreciation (329,301) (268,199)
---------- ----------
Net property and equipment 3,135,089 3,190,116
Intangible assets, net of accumulated
amortization of $66,000 and $50,000
at August 31 and May 31, 1999, respectively 1,533,632 1,549,482
Other assets 312,899 170,120
---------- ----------
$9,725,082 $9,206,940
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term borrowings $1,959,906 $2,628,455
Notes payable 2,800,000 1,601,329
Current portion of long term debt 89,900 89,633
Advances from stockholder 200,000 200,000
Accounts payable 891,264 651,331
Accrued expenses 1,614,867 1,574,112
---------- ----------
Total current liabilities 7,555,937 6,744,860
Long term debt:
Mortgage payable 3,250,679 3,280,029
Seller note payable 738,041 738,041
---------- ----------
Total long term debt 3,988,720 4,018,070
Stockholders' 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 shares
issued and outstanding at August 31 and
May 31, 1999 2,142,678 2,142,678
Subordinated convertible common stock,
no par value; 1,200,000 shares authorized;
no shares issued - -
Accumulated deficit (3,962,252) (3,698,668)
---------- ----------
Total stockholders' deficit (1,819,574) (1,555,990)
---------- ----------
$9,725,082 $9,206,940
========== ==========
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
PERENNIAL HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 31, 1999 AND 1998
(UNAUDITED)
1999 1998
---------- ----------
Revenues:
Contract services $2,199,747 $3,319,186
Contract services-related parties - 799,583
Nursing home 1,818,097 -
---------- ----------
Total revenues 4,017,844 4,118,769
Cost of services:
Salaries, wages and benefits related
to contract services 1,355,645 2,133,681
Contract therapists 14,950 328,504
Nursing home 1,435,824 -
---------- ----------
Total cost of services 2,806,419 2,462,185
---------- ----------
Gross profit 1,211,426 1,656,584
Selling, general and administrative expenses 1,026,206 1,520,301
Rental expense 120,631 65,935
Bad debt expense 78,116 58,268
Depreciation 61,103 16,603
Amortization 15,849 20,356
---------- ----------
Loss from operations (90,480) (24,879)
Interest expense 173,105 99,165
---------- ----------
Loss before income taxes (263,585) (124,044)
Benefit from income taxes - (50,000)
---------- ----------
Net loss $ (263,585) $ (74,044)
========== ==========
Net loss per common share - basic $ (0.02) $ (0.01)
========== ==========
Net loss per common share -
assuming dilution $ (0.02) $ (0.01)
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PERENNIAL HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 1999 AND 1998
(Unaudited)
1999 1998
---------- ----------
Cash flows from operating activities:
Net loss $ (263,585) $ (74,044)
Adjustments to reconcile net loss
to net cash used in operating
activities
Depreciation 61,103 16,563
Amortization 15,849 21,027
Provision for losses on accounts
receivable 78,116 50,362
Changes in assets and liabilities,
net of effects from acquisitions
Accounts receivable (411,662) 953,535
Other current assets (783) (68,861)
Other assets (142,779) 29,703
Accounts payable 239,933 140,024
Accrued expenses 40,755 (412,479)
Income taxes (1,957) -
---------- ----------
Net cash provided by (used in)
operating activities (385,010) 655,830
Cash flows from investing activities:
Purchase of equipment (6,076) (69,082)
---------- ----------
Net cash used in investing activities (6,076) (69,082)
Cash flows from financing activities:
Issuance of short-term borrowings 2,668,000 1,208,678
Repayments of short-term borrowings (3,336,549) (1,694,587)
Issuance of term note payable 1,198,671 -
Repayments of long-term debt (29,083) -
Issuance of common stock - 1,219
---------- ----------
Net cash provided by (used in)
financing activities 501,039 (484,690)
---------- ----------
Net increase in cash 109,953 102,058
Beginning cash balance 105,136 358,230
---------- ----------
Ending cash balance $ 215,089 $ 460,288
========== ==========
Supplemental disclosures:
Cash paid for interest $ 125,801 $ 128,003
========== ==========
Cash paid for income taxes $ 2,392 $ -
========== ==========
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PERENNIAL HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
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. As of October 1, 1999, the Company owned or leased and
operated two long-term care facilities with 327 skilled long-term care beds.
These facilities are located in Indiana and Wisconsin.
The accompanying unaudited condensed consolidated financial statements do not
include all of the disclosures normally required by generally accepted
accounting principles or those normally required in annual reports on Form 10-
KSB. Accordingly, these statements should be read in conjunction with the
audited consolidated financial statements of the Company for the year ended
May 31, 1999 filed with the Securities and Exchange Commission on Form 10-KSB.
The accompanying condensed consolidated financial statements have been
prepared in accordance with the Company's customary accounting practices and
have not been audited. Management believes that the financial information
included herein reflects all adjustments necessary for a fair presentation of
interim results and all such adjustments are of a normal and recurring nature.
The accompanying condensed consolidated financial statements have been
prepared on the basis of accounting principles applicable to going concerns
and contemplate the realization of assets and the settlement of liabilities
and commitments in the normal course of business. The financial statements do
not include further adjustments, if any, reflecting the possible future
effects on the recoverability and classification of assets or the amount and
classification of liabilities that may result from the outcome of
uncertainties discussed herein.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
2. NET INCOME 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.
5
<PAGE>
In accordance with this statement, the Company has replaced its disclosure of
primary net income per share with net income per share-basic and net income
per share-assuming dilution.
The following table sets forth the computation and reconciliation of net
income per share-basic and net income per share-assuming dilution:
For the Three Months
Ended August 31,
--------------------------
1999 1998
------------ -----------
Net loss $ (263,585) $ (74,044)
=========== ===========
Weighted average shares outstanding:
Weighted average shares outstanding -
basic 13,395,072 13,390,800
Stock options and warrants 2,634,351 255,922
----------- -----------
Weighted average shares outstanding -
assuming dilution 16,029,423 13,646,722
=========== ===========
Net loss per share - basic $ (0.02) $ (0.01)
=========== ===========
Net loss per share - assuming
dilution $ (0.02) $ (0.01)
=========== ===========
The Company did not include warrants equivalent to 300,000 and 360,000 shares
of common stock or options to purchase 869,000 and 474,000 shares of common
stock for the three months ended August 31, 1999 and 1998, respectively,
because their effects are antidilutive. There were no transactions that
occurred subsequent to August 31, 1999 that would have materially changed the
number of shares used in computing net income per share-basic or net income
per share-assuming dilution.
3. MAJOR CUSTOMERS
Approximately $1,547,000, or 39% of all revenue for the three months ended
August 31, 1999, and approximately $990,000, or 30% of the balance of accounts
receivable at August 31, 1999, related to two customers.
Approximately $800,000 or 19% of all revenue for the three months ended August
31, 1998, and approximately $1,453,000, or 22% of the balance of accounts
receivable at August 31, 1998, related to one customer, a related party.
4. ISSUES AFFECTING LIQUIDITY
The Company reported a net loss for the year ended May 31, 1999, of $5,714,000
and a working capital deficiency at May 31, 1999, of $2,448,000. Such results
made it necessary for the Company to supplement its short-term working capital
needs through the following steps:
6
<PAGE>
* 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 entered into promissory notes and
received $500,000 from five private investors.
* 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.
For the three months ended August 31, 1999, the Company reported a net loss of
$264,000 and a working capital deficiency of $2,813,000 at August 31, 1999.
Considerable uncertainty remains with respect to whether the Company's
existing line of credit together with cash flows 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 was not in compliance with certain financial ratios and covenants
contained in its line of credit agreement with its primary lender. Also,
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 financial statements do not include further adjustments, if any,
reflecting the possible future effects on the recoverability and
classification of assets or the amount and classification of liabilities that
may result from the outcome of these uncertainties.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
RESULTS OF OPERATIONS
The Company generated approximately $4,018,000 in revenues for the three
months ended August 31, 1999 compared to $4,119,000 for the three months ended
August 31, 1998, a 3% decrease. Without new nursing home revenues of
$1,818,000, pertaining to the acquisition of Scott County Healthcare on
December 4, 1998 and a new lease, effective July 1, 1999, of a nursing home
facility in Beloit, Wisconsin, revenues would have declined by 47%. 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. The Company's focus on acquiring,
operating and managing profitable nursing home properties has helped to
substantially offset the negative impact of PPS on therapy services revenues.
Cost of services as a percentage of revenue for the three months ended August
31, 1999, were 70% as compared to 60% for the same period of the prior year.
The increase is primarily attributable to the increase in nursing home
revenues and the reduction in therapy revenues as a result of the
implementation of PPS as discussed above. Direct expenses (cost of services)
7
<PAGE>
related to the operation of nursing home facilities tend to be greater as a
percentage of revenues than for therapy services. However, indirect expenses
(selling, general and administrative expenses) related to the operation of
nursing home facilities tend to be less as a percentage of revenues than for
therapy services.
Selling, general and administrative expenses for the three months ended August
31, 1999, were 26% of revenue versus 37% in the three months ended August 31,
1998. The reduction is primarily the result of an increase in nursing home
revenues as discussed under cost of services, reductions in therapy management
and corporate office staff, and the reduction in revenues as a result of the
implementation of PPS and the reduction in unprofitable contracts as discussed
above. The reduction was partially offset by a $50,000 fee charged by the
Company's primary lender when the Company did not repay a $500,000 temporary
loan by June 18, 1999. The Company repaid the lender on July 9, 1999 and the
lender charged the fee, but is considering the Company's request to waive the
fee.
The Company's net loss as a percentage of revenue was 7% for the three months
ended August 31, 1999, as compared to a net loss of 2% of revenues for the
three months ended August 31, 1998. The decline is principally due to the
reduction in revenues as a result of the implementation of PPS as discussed
above. The decrease was substantially offset by the addition of two new
profitable nursing home facilities since August 31, 1998 and reductions in
therapy management and corporate office staff.
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 1999, the Company had working a capital deficit of $2,813,000
versus a deficit of $2,448,000 at May 31, 1999. The decrease resulted
primarily from the Company's efforts to supplement it's working capital needs
through additional short-term borrowings (see Note 4 to the Financial
Statements "ISSUES AFFECTING LIQUIDITY").
Net cash used in operating activities was approximately $385,000 for the three
months ended August 31, 1999 compared to approximately $656,000 provided by
operating activities for the same period in the prior year. The decrease is
primarily attributable to the net loss and an increase in accounts receivable
when the Company began leasing a new nursing home facility in Beloit,
Wisconsin effective July 1, 1999.
Net cash used in investing activities for the three month period ending August
31, 1999 was approximately $6,000 compared to approximately $69,000 for the
same period in the prior year.
The Company had approximately $501,000 provided by financing activities
compared to approximately $485,000 used in financing activities for the same
period in the prior year. The increase was primarily attributable to the
Company's efforts to supplement it's working capital needs through additional
short-term borrowings (see Note 4 to the Financial Statements "ISSUES
AFFECTING LIQUIDITY").
Subsequent to the quarter ended August 31, 1999, the Company recovered
$150,000 from a customer whose balance had been previously written off. The
proceeds were used to extinguish the Company's remaining debt under a
terminated bank line of credit of its Gateway subsidiary.
8
<PAGE>
Through October 12, 1999, approximately $940,000 in income tax refunds related
to the Company's fiscal year ended May 31, 1999, had been received of total
expected refunds of approximately $1,000,000. From these refunds, $500,000
was used to pay down the Company's term loan with its primary lender and
$125,000 was used to partially repay the Company's obligation to five private
lenders.
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 1999, the Year 2000-compliance assessment for corporate operations
was complete. All hardware systems have been evaluated to ensure 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 November 1, 1999. Facilities owned
or managed by the Company as of October 1, 1999 are also planned to be fully
converted by November 1, 1999.
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.
CAUTIONARY STATEMENT
Certain statements made in this Form 10-QSB, including, but not limited to,
statements containing the words "anticipates," "believes," "expects,"
"intends," "will," "may" and similar words constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are based on management's current
expectations and include known and unknown risks, uncertainties and other
factors, many of which the Company is unable to predict or control, that may
cause the Company's actual results or performance to differ materially from
9
<PAGE>
any future results or performance expressed or implied by such forward-looking
statements. These statements involve risks, uncertainties and other factors
detailed from time to time in the Company's filings with the Securities and
Exchange Commission.
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 Form 10-QSB. 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 acquire,
lease, manage and operate its properties, (v) the ability of the Company to
have access to additional working capital and additional funding for growth,
if needed, (vi) 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 (vii) changes in the general
economic conditions and/or in the markets in which the Company competes. Many
of these factors are beyond the control of the Company and its management.
The Company cautions investors that any forward-looking statements made by the
Company are not guarantees of future performance. The Company disclaims any
obligation to update any such factors or to announce publicly the results of
any revisions to any of the forward-looking statements included herein to
reflect future events or developments.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 damages. 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.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
ITEM 5. OTHER EVENTS.
None.
10
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
27 Financial Data Schedule Filed herewith electronically
(b) Reports on Form 8-K. No reports on Form 8-K were filed
during the quarter ended August 31, 1999.
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: October 15, 1999 By:/s/ David V. Hall
David V. Hall, President
By:/s/ David W. Lester
David W. Lester, Chief Financial
Officer and Treasurer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statements of operations found on pages 2 and 3 of the
Company's Form 10-QSB for the quarter ended August 31, 1999, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> AUG-31-1999
<CASH> 215,089
<SECURITIES> 0
<RECEIVABLES> 3,925,589
<ALLOWANCES> 647,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,743,461
<PP&E> 3,464,390
<DEPRECIATION> (329,301)
<TOTAL-ASSETS> 9,725,082
<CURRENT-LIABILITIES> 7,555,937
<BONDS> 0
0
0
<COMMON> 2,142,678
<OTHER-SE> (3,962,252)
<TOTAL-LIABILITY-AND-EQUITY> 9,725,082
<SALES> 4,017,844
<TOTAL-REVENUES> 4,017,844
<CGS> 2,806,419
<TOTAL-COSTS> 2,806,419
<OTHER-EXPENSES> 1,223,789
<LOSS-PROVISION> 78,116
<INTEREST-EXPENSE> 173,105
<INCOME-PRETAX> (263,585)
<INCOME-TAX> 0
<INCOME-CONTINUING> (263,585)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (263,585)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
