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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: November 30, 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
- ------------------------------- ---------------------------------------
(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 January 7, 2000.
Transitional Small Business Disclosure Format: Yes --- No -X-
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PERENNIAL HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
November 30 and May 31, 1999 November 30,
1999 May 31,
ASSETS (Unaudited) 1999
Current assets: ----------- -----------
Cash $ 9,608 $ 105,136
Accounts receivable, less allowance
for doubtful accounts of $641,000 and
$694,000 at November 30 and May 31, 1999,
respectively 3,040,419 2,945,043
Income tax receivable 4,732 1,000,420
Advances to related parties 68,967 64,000
Other current assets 185,084 182,623
----------- -----------
Total current assets 3,308,810 4,297,222
Property and equipment, at cost:
Land 50,000 50,000
Buildings and improvements 2,647,448 2,647,448
Equipment 780,071 760,867
Less accumulated depreciation (390,970) (268,199)
----------- -----------
Net property and equipment 3,086,549 3,190,116
Intangible assets, net of accumulated
amortization of $82,000 and $50,000
at November 30 and May 31, 1999, respectively 1,517,639 1,549,482
Other assets 312,899 170,120
----------- -----------
$ 8,225,897 $ 9,206,940
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term borrowings $ 1,512,449 $ 2,628,455
Notes payable 1,566,894 1,601,329
Current portion of long-term debt 89,488 89,633
Advances from stockholder 200,000 200,000
Accounts payable 1,120,466 651,331
Accrued expenses 1,754,178 1,574,112
----------- -----------
Total current liabilities 6,243,475 6,744,860
Long term debt:
Mortgage payable 3,227,297 3,280,029
Seller note payable 738,041 738,041
----------- -----------
Total long-term debt 3,965,338 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 November 30
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 (4,125,594) (3,698,668)
----------- -----------
Total stockholders' deficit (1,982,916) (1,555,990)
----------- -----------
$ 8,225,897 $ 9,206,940
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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Perennial Health Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended November 30, 1999 and 1998
(Unaudited)
Three Months Six Months
1999 1998 1999 1998
----------- ---------- ----------- ----------
Revenues:
Contract services $ 1,530,374 $3,008,216 $ 3,730,120 $6,330,848
Contract services-
related parties - 525,065 - 1,324,648
Nursing home 2,249,964 - 4,068,061 -
----------- ---------- ----------- ----------
Total revenues 3,780,338 3,533,281 7,798,182 7,655,496
Cost of services:
Salaries, wages and
benefits related to
contract services 1,002,416 2,287,285 2,365,715 4,609,161
Contract therapists 8,050 155,774 15,346 489,709
Nursing home 1,758,861 - 3,194,721 -
----------- ---------- ----------- ----------
Total cost of
services 2,769,326 2,443,059 5,575,782 5,098,870
----------- ---------- ----------- ----------
Gross profit 1,011,011 1,090,222 2,222,400 2,556,626
Selling, general and
administrative 816,663 1,476,154 1,835,871 2,782,643
Rental expense 175,333 80,112 302,964 146,047
Bad debt expense, net
of recovery (91,369) 69,421 (13,254) 159,213
Depreciation 61,669 20,129 122,772 36,725
Amortization 15,993 21,745 31,843 42,217
----------- ---------- ----------- ----------
Income (loss)
from operation 32,723 (577,339) (57,795) (610,219)
Interest expense 196,026 118,824 369,130 217,988
----------- ---------- ----------- ----------
Loss before
income taxes (163,303) (696,163) (426,926) (828,207)
Benefit from income
taxes - (257,000) - (315,000)
----------- ---------- ----------- ----------
Net loss $ (163,303) $ (439,163) $ (426,926) $ (513,207)
=========== ========== =========== ==========
Net loss per common
share - basic $ (0.01) $ (0.03) $ (0.03) $ (0.04)
=========== ========== =========== ==========
Net loss per common
share - assuming
dilution $ (0.01) $ (0.03) $ (0.02) $ (0.04)
=========== ========== =========== ==========
See accompanying notes to condensed consolidated financial statements.
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Perennial Health Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended November 30, 1999 and 1998
(Unaudited)
1999 1998
---------- -----------
Cash flows from operating activities:
Net loss $ (426,926) $ (513,207)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation 122,772 36,725
Amortization 31,843 42,217
Provision for losses on accounts receivable (13,254) 159,213
Loss on sale of note receivable - 169,661
Changes in assets and liabilities, net of
effects from acquisitions
Accounts receivable (82,125) 2,158,925
Other current assets (7,428) (200,149)
Other assets (142,779) 31,256
Accounts payable 469,135 292,293
Accrued expenses 180,066 (31,901)
Income taxes 995,688 (315,000)
---------- -----------
Net cash provided by operating activities 1,126,992 1,830,033
Cash flows from investing activities:
Purchase of equipment (19,204) (82,594)
---------- -----------
Net cash used in investing activities (19,204) (82,594)
Cash flows from financing activities:
Issuance of short-term borrowings 7,661,172 8,149,941
Repayments of short-term borrowings (8,777,178) (9,894,977)
Issuance of term note payable 1,198,671 -
Repayments of term note payable (1,233,106) -
Repayments of long-term debt (52,876) -
Issuance of common stock - 6,094
---------- -----------
Net cash used in financing activities (1,203,316) (1,738,942)
---------- -----------
Net increase (decrease) in cash (95,528) 8,497
Beginning cash balance 105,136 358,230
---------- -----------
Ending cash balance $ 9,608 $ 366,727
========== ===========
Supplemental disclosures:
Cash paid for interest $ 350,050 $ 86,829
========== ===========
Cash paid for income taxes $ 37,418 $ 4,500
========== ===========
See accompanying notes to condensed consolidated financial statements.
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PERENNIAL HEALTH SYSTEMS, INC. AND SUBSIDIARIES
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 January 7, 2000, the Company owned or leased and
operated two long-term care facilities with 275 skilled long-term care beds.
These facilities are located in Indiana and Wisconsin. The Company manages a
70 bed skilled long-term care facility in North Carolina.
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
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 For the Six Months
November 30, Ended November 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net loss $ (163,303) $ (439,163) $ (426,926) $ (513,207)
=========== =========== =========== ===========
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Weighted average shares
outstanding:
Weighted average shares
outstanding - basic 13,395,072 13,395,072 13,395,072 13,392,936
Stock options and
warrants 4,735,099 159,422 3,684,725 207,672
----------- ----------- ----------- -----------
Weighted average shares
outstanding - assuming
dilution 18,130,171 13,554,494 17,079,797 13,600,608
=========== =========== =========== ===========
Net (loss) income per
share - basic $ (.01) $ (.03) $ (.03) $ (.04)
=========== =========== =========== ===========
Net (loss) income per
share - assuming
dilution $ (.01) $ (.03) $ (.02) $ (.04)
=========== =========== =========== ===========
The Company did not include warrants, equivalent to 300,000 and 360,000 shares
of common stock or options to purchase 711,000 and 840,000 shares of common
stock for the periods ended November 30, 1999 and 1998, respectively, because
their effects are antidilutive. There were no transactions that occurred
subsequent to November 30, 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 $2,123,000, or 27%, of all revenue for the six months ended
November 30, 1999, and approximately $810,000, or 22%, of the balance of
accounts receivable at November 30, 1999, related to one customer, Medilodge.
Approximately $1,325,000, or 17%, of all revenue for the six months ended
November 30, 1998, related to one customer, a related party. 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. In
November 1998, the Company accepted a note receivable from the customer and
subsequently sold the note, with recourse, to its primary lender. In June
1999, the customer filed for bankruptcy protection and the Company's primary
lender exercised its right to have the Company repurchase the note. The
Company effectuated the repurchase through accepting a term note with the
lender. 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.
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:
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* 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 six months ended November 30, 1999, the Company reported a net loss of
$427,000 and a working capital deficiency of $2,935,000 at November 30, 1999.
Furthermore, the Company was required to further supplement its short-term
working capital needs by entering into an additional term loan with its
primary lender effective January 3, 2000, for $300,000 secured by pending
payments from Medicare and Medicaid cost report filings. As consideration for
the additional term loan, the Company agreed to increase the percentage of the
Company's common stock that its primary lender can purchase at an aggregate
price of $1.00 from a maximum of 18% to a fixed percentage of 20%.
Considerable uncertainty remains with respect to whether the Company's
existing line of credit together with cash flows from operations and the
supplements 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.
Furthermore, the Company made a required $200,000 principal payment on
November 1, 1999 under the above term loan but did not make required $200,000
principal payments on December 1, 1999 and January 1, 2000. The Company can
not yet predict when such payments or subsequent required principal payments
will occur. The Company was notified by its primary lender on December 10,
1999 that, as a result of its failure to make such payment on December 1,
1999, certain default provisions would be applied effective December 2, 1999,
including an increase in the interest rate on all loans by four percent per
annum.
At the time the Company entered into a 20-year lease agreement on its nursing
home facility in Beloit, Wisconsin, effective July 1, 1999, it also entered
into an option with the lessor to purchase the facility. In exchange 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
and one half to be paid no later than July 1, 2000. The Company negotiated an
extension to make the initial $180,000 payment from October 1, 1999 to
December 15, 1999 and agreed to pay interest on the amount at the rate of 8-1/2%
effective October 1, 1999. The Company did not make the payment due on
December 15, 1999 and is negotiating with the lessor for a further extension
or other modification to the purchase option agreement. The purchase option
was executed in conjunction with the lease agreement and any breach of the
purchase option agreement is deemed to be a breach of the lease, entitling the
other party to all remedies provided in the lease. There can be no assurance
that the Company and the lessor will reach an agreement to extend or otherwise
modify the purchase option agreement.
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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 Company is seeking to raise approximately $2.5 million
in equity capital to assist in meeting the above and other obligations until
it can achieve a positive cash flow. The Company estimates that it can
achieve a positive cash flow within 90 to 120 days of completing its announced
Medilodge transaction. There can be no assurance, however, that the equity
capital being sought will be raised or that the Medilodge transaction will be
completed.
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
THREE MONTHS ENDED NOVEMBER 30, 1999 AND 1998
The Company generated approximately $3,780,000 in gross revenues for the three
months ended November 30, 1999, compared to $3,533,000 during the same period
last year, a 7% increase. The increase was due to the addition of two new
nursing homes. Scott County Healthcare was acquired on December 4, 1998 and a
new lease was entered into effective July 1, 1999 on a nursing home facility
in Beloit, Wisconsin. Without these nursing home additions, revenues would
have declined by 57%. The significant reduction in therapy services revenues
was primarily due to the sale of the Company's rights in contracts with
Central Arkansas Nursing Centers effective September 1, 1999, the
implementation of Medicare's Prospective Payment System (PPS) and a reduction
in unprofitable therapy contracts.
Cost of services as a percentage of revenue for the three months ended
November 30, 1999 was 73% as compared with 69% 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)
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
November 30, 1999, were 22% of revenues versus 42% for the same period last
year. The reduction is primarily the result of an increase in nursing home
revenues as discussed under cost of services and the reduction in revenues as
a result of the implementation of PPS and the reduction in unprofitable
contracts as discussed above.
Bad debt expense for the three months ended November 30, 1999, reflected the
recovery of $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.
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SIX MONTHS ENDED NOMEMBER 30, 1999 AND 1998
The Company generated approximately $7,798,000 in gross revenues for the six
months ended November 30, 1999 compared with $7,655,000 for the same period
last year, a 2% increase. The increase was due to the addition of two new
nursing homes. Scott County Healthcare was acquired on December 4, 1998 and a
new lease was entered into effective July 1, 1999 on a nursing home facility
in Beloit, Wisconsin. Without these nursing home additions, revenues would
have declined by 51%. The significant reduction in therapy services revenues
was primarily due to the sale of the Company's rights in contracts with
Central Arkansas Nursing Centers effective September 1, 1999, the
implementation of Medicare's Prospective Payment System (PPS) and a reduction
in unprofitable therapy contracts.
The cost of services as a percentage of revenue for the six months ended
November 30, 1999 was 72% as compared to 67% 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.
Selling, general and administrative expenses for the six months ended November
30, 1999 were 24% of revenue versus 36% for the six months ended November 30,
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.
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 1999, the Company had a working capital deficit of
approximately $2,935,000 versus a deficit of approximately $2,448,000 at May
31, 1999. The decrease resulted primarily from the Company's efforts to
supplement its working capital needs through additional short-term borrowings
(see Note 4 to the Financial Statements "ISSUES AFFECTING LIQUIDITY") and an
increase in vendor obligations primarily resulting from the addition of the
nursing home facility in Beloit, Wisconsin effective July 1, 1999.
Net cash provided by operating activities was approximately $1,127,000 for the
six months ended November 30, 1999 compared to approximately $1,830,000 for
the same period in the prior year. The decrease is primarily attributable to
the collection in full of a sizable customer account in the prior year. Cash
provided by operating activities in the current year was significantly
enhanced by the collection of approximately $1,000,000 from income tax
refunds.
Net cash used in investing activities for the six month period ended November
30, 1999 was approximately $19,000 compared to approximately $83,000 for the
same period in the prior year.
The Company had approximately $1,203,000 used in financing activities for the
six months ended November 30, 1999 compared to approximately $1,739,000 for
the same period in the prior year. The decrease was primarily attributable to
a lower level of repayments of short term borrowings in the current year as
compared to the same period in the prior year.
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During the three months ended November 30, 1999, the Company repaid $700,000
in principal against its term loan with its primary lender and $500,000 in
principal against the promissory notes with five private investors. The
payments were primarily made from receipts of approximately $1,000,000 in tax
refunds received.
Considerable uncertainty remains with respect to whether the Company's
existing line of credit together with cash flows from operations and the
supplements to short term working capital described above (see Note 4 to the
Financial Statements "ISSUES AFFECTING LIQUIDITY") 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. Furthermore, the
Company made a required $200,000 principal payment on November 1, 1999 under
the above term loan but did not make required $200,000 principal payments on
December 1, 1999 and January 1, 2000. The Company can not yet predict when
such payments or subsequent required principal payments will occur. The
Company was notified by its primary lender on December 10, 1999 that, as a
result of its failure to make such payment on December 1, 1999, certain
default provisions would be applied effective December 2, 1999, including an
increase in the interest rate on all loans by four percent per annum.
At the time the Company entered into a 20-year lease agreement on its nursing
home facility in Beloit, Wisconsin, effective July 1, 1999, it also entered
into an option with the lessor to purchase the facility. In exchange 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
and one half to be paid no later than July 1, 2000. The Company negotiated an
extension to make the initial $180,000 payment from October 1, 1999 to
December 15, 1999 and agreed to pay interest on the amount at the rate of 8-1/2%
effective October 1, 1999. The Company did not make the payment due on
December 15, 1999 and is negotiating with the lessor for a further extension
or other modification to the purchase option agreement. The purchase option
was executed in conjunction with the lease agreement and any breach of the
purchase option agreement is deemed to be a breach of the lease, entitling the
other party to all remedies provided in the lease. There can be no assurance
that the Company and the lessor will reach an agreement to extend or otherwise
modify the purchase option agreement.
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 Company is seeking to raise approximately $2.5 million
in equity capital to assist in meeting the above and other obligations until
it can achieve a positive cash flow. The Company estimates that it can
achieve a positive cash flow within 90 to 120 days of completing the Medilodge
transaction described below. There can be no assurance, however, that the
equity capital being sought will be raised or that the Medilodge transaction
will be completed.
The Company previously reported that it had an agreement in principle with The
Medilodge Group, Inc. (Medilodge), based in Detroit, Michigan, to acquire
eight skilled nursing facilities and one assisted living facility for
approximately $79 million. The Company is negotiating with a real estate
investment trust (REIT) and Medilodge to execute a transaction whereby the
REIT would purchase the facilities from Medilodge and lease the facilities to
the Company. The completion of this transaction is contingent upon the
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satisfactory completion of these negotiations; the completion of the REIT's
and the Company's due diligence review; the receipt of 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 1999, the Year 2000-compliance assessment for corporate operations
was complete. All hardware systems were evaluated to ensure that their
internal processors are compliant. Non-compliant systems were either replaced
or updated to conform to compliance.
The Company converted to a new financial and clinical package that conforms to
Year 2000 requirements. The corporate office and facilities owned or leased
by the Company were converted by December 31, 1999.
The Company completed an evaluation of the risks of non-information technology
problems connected to Y2K. Areas of potential exposure to risk were
identified as of May 31, 1999, and were resolved.
As of January 7, 2000, only minor Year 2000 issues were encountered by the
Company. All such issues identified have been resolved at little or no cost
to the Company and have had no significant impact on Company operations.
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
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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
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 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 November 30, 1999, the Company entered into a
Settlement Agreement and Agreed Judgement 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.
12
<PAGE>
Item 3. Defaults Upon Senior Securities.
The Company made a required $200,000 principal payment on November 1, 1999
under a term loan entered into with its primary lender on July 16, 1999, but
did not make required $200,000 principal payments on December 1, 1999 and
January 1, 2000. The Company can not yet predict when such payments or
subsequent required principal payments will occur. The Company was notified
by its primary lender on December 10, 1999 that, as a result of its failure to
make such payment on December 1, 1999, certain default provisions would be
applied effective December 2, 1999, including an increase in the interest rate
on all loans by four percent per annum.
The Company's primary lender agreed to enter into an additional term loan with
the Company effective January 3, 2000, for $300,000 secured by pending
payments from Medicare and Medicaid cost report filings.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
Item 5. Other Events.
None.
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 November 30, 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: January 13, 2000 By: /s/ David V. Hall
David V. Hall, President
By: /s/ David W. Lester
David W. Lester, Chief Financial
Officer and Treasurer
13
<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 six months ended November 30, 1999, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> NOV-30-1999
<CASH> 9,608
<SECURITIES> 0
<RECEIVABLES> 3,681,419
<ALLOWANCES> 641,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,308,810
<PP&E> 3,477,519
<DEPRECIATION> (390,970)
<TOTAL-ASSETS> 8,225,897
<CURRENT-LIABILITIES> 6,243,475
<BONDS> 0
0
0
<COMMON> 2,142,678
<OTHER-SE> (4,125,594)
<TOTAL-LIABILITY-AND-EQUITY> 8,225,897
<SALES> 7,798,182
<TOTAL-REVENUES> 7,798,182
<CGS> 5,575,782
<TOTAL-COSTS> 5,575,782
<OTHER-EXPENSES> 2,293,450
<LOSS-PROVISION> (13,254)
<INTEREST-EXPENSE> 369,130
<INCOME-PRETAX> (426,926)
<INCOME-TAX> 0
<INCOME-CONTINUING> (426,926)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (426,926)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.02)
</TABLE>
