<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
-----------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 001-35118
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CENTENNIAL HEALTHCARE CORPORATION
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(Exact name of registrant as specified in its charter)
Georgia 58-1839701
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) (identification No.)
400 Perimeter Center Terrace, Suite 650, Atlanta, Georgia 30346
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 770-698-9040
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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, and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
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<PAGE>
Indicated the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
There were 11,943,374 shares of Common Stock outstanding as of August 1,
1997.
PART I - FINANCIAL INFORMATION
PAGE
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ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,029,763 $ 13,532,778
Patient accounts receivable and third-party payor settlements, net
of allowance for doubtful accounts of approximately
$2,500,000 and $2,300,000 39,854,486 48,490,001
Other current assets 9,743,560 10,773,873
------------ ------------
Total current assets 55,627,809 72,796,652
Property and equipment, net 67,409,359 67,318,976
Restricted cash 6,045,035 1,364,724
Licenses and other intangible assets, including goodwill, net 36,297,113 43,728,181
Notes receivable and other assets 28,068,270 28,376,360
------------ ------------
Total assets $193,447,586 $213,584,893
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 37,991,634 $ 38,376,900
Other current liabilities 11,736,322 11,790,092
------------ ------------
Total current liabilities 49,727,956 50,166,992
Long-term debt, less current maturities 83,437,633 90,381,826
Subordinated debt, less current maturities 24,357,397 24,415,657
Other long-term liabilities 2,667,031 2,475,912
------------ ------------
160,190,017 167,440,387
Commitments and contingencies
Redeemable preferred stock 21,305,372 31,498,340
Shareholders' equity:
Common stock with par value of $.01; 50,000,000 shares
authorized; 2,044,306 and 2,108,152 shares issued;
1,804,446 and 1,868,292 shares outstanding 20,443 21,081
Special voting common stock with no par value; 5,000,000 shares
authorized; 2,941,325 and 2,942,520 shares issued and outstanding - -
Paid-in capital 5,707,467 6,494,883
Retained earnings 8,239,967 10,145,882
Treasury stock, at cost; 239,860 shares of common stock (1,487,200) (1,487,200)
------------ ------------
12,480,677 15,174,646
Note receivable from shareholder (528,480) (528,480)
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Net shareholders' equity 11,952,197 14,646,166
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Total liabilities and shareholders' equity $193,447,586 $213,584,893
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months Six months
Ended June 30, Ended June 30,
----------------------------- -------------------------------
1996 1997 1996 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Net patient service revenues $55,065,967 $70,201,695 $109,653,226 $132,573,258
Management fees and other revenues 1,279,332 1,737,160 2,626,600 3,600,436
----------- ----------- ------------ ------------
Total revenues 56,345,299 71,938,855 112,279,826 136,173,694
----------- ----------- ------------ ------------
Expenses:
Facility operating expenses:
Salaries, wages and benefits 30,752,848 34,988,182 59,384,045 68,260,967
Other operating expenses 13,108,981 20,472,803 29,666,133 36,871,359
Lease expense 4,614,914 5,268,882 9,147,587 10,352,288
Corporate administrative costs 2,604,360 3,845,874 5,671,324 7,214,107
Depreciation and amortization 1,206,482 1,612,721 2,363,991 3,133,866
----------- ----------- ------------ ------------
Total operating expenses 52,287,585 66,188,462 106,233,080 125,832,587
----------- ----------- ------------ ------------
4,057,714 5,750,393 6,046,746 10,341,107
----------- ----------- ------------ ------------
Other income (expense):
Interest income 177,506 167,209 343,815 316,148
Interest expense (2,434,981) (2,658,683) (4,689,186) (5,288,058)
Equity in income of unconsolidated
partnerships 36,250 - 36,250 -
----------- ----------- ------------ ------------
Total other expense (2,221,225) (2,491,474) (4,309,121) (4,971,910)
----------- ----------- ------------ ------------
1,836,489 3,258,919 1,737,625 5,369,197
Provision for income taxes 764,387 1,269,539 723,401 2,093,987
----------- ----------- ------------ ------------
Income before minority interest 1,072,102 1,989,380 1,014,224 3,275,210
Minority interest in net income of
subsidiary, net of income taxes (37,931) (105,456) (85,170) (150,674)
----------- ----------- ------------ ------------
Net income 1,034,171 1,883,924 929,054 3,124,536
Dividends and accretion on preferred stock 471,976 432,258 1,009,634 1,218,621
----------- ----------- ------------ ------------
Income (loss) applicable to common stock $ 562,195 $ 1,451,666 $ (80,580) $ 1,905,915
=========== =========== ============= ============
Net income (loss) per common
share (Note 3) $ 0.12 $ 0.30 $ (0.02) $ 0.39
=========== =========== ============= ============
Weighted average number of common stock
and common stock equivalents outstanding 4,784,254 4,827,682 4,784,254 4,827,141
=========== =========== ============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Special Voting
Common Stock Common Stock
----------------------- ---------------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings
--------- ------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996 1,804,446 $20,443 2,941,325 $ - $5,707,467 $ 8,239,967
Dividends paid on
Series A, B and E
preferred stock - - - - - (248,225)
Dividends accrued on
Series C preferred
stock - - - - - (864,517)
Issuance of common
shares 63,846 638 - - 776,790 -
Exercise of special
voting stock options - - 1,195 - 10,626 -
Accretion of preferred
stock to estimated
redemption value - - - - - (105,879)
Net income - - - - - 3,124,536
--------- ------- --------- -------- --------- -----------
Balance at June 30, 1997 1,868,292 $21,081 2,942,520 $ - $ 6,494,883 $10,145,882
========= ======= ========= ======== ============= ===========
Note
Receivable
Treasury From
Stock Shareholder Net
----------- ----------- -----------
Balance at December 31,
1996 $(1,487,200) $(528,480) $11,952,197
Dividends paid on
Series A, B and E
preferred stock - - (248,225)
Dividends accrued on
Series C preferred
stock - - (864,517)
Issuance of common
shares - - 777,428
Exercise of special
voting stock options - - 10,626
Accretion of preferred
stock to estimated
redemption value - - (105,879)
Net income - - 3,124,536
----------- --------- -----------
Balance at June 30, 1997 $(1,487,200) $(528,480) $14,646,166
=========== ========= ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-----------------------------------
1996 1997
------------ -----------
<S> <C> <C>
Operating Activities:
Net income $ 929,054 $ 3,124,536
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,363,991 3,133,866
Amortization of discount on subordinated debt 56,878 58,260
Deferred income taxes 728,468 1,739,000
Consulting fees offset against note receivable 62,500 62,500
Equity in income of unconsolidated partnerships (48,333) -
Minority interest 141,950 247,007
Provision for doubtful accounts 129,972 296,551
Change in assets and liabilities:
Accounts receivable (11,904,972) (8,932,065)
Prepaid expenses and other assets 1,150,765 (3,091,051)
Refundable deposits 178,367 160,992
Accounts payable, accrued liabilities and other current liabilities 6,621,107 168,359
------------ -----------
Cash provided by (used in) operating activities 409,747 (3,032,045)
------------ -----------
Investing Activities:
Purchases of property and equipment (3,790,015) (2,029,987)
Decrease in restricted cash 65,581 4,680,311
Advances to managed facilities, net of repayments (996,176) 114,160
Notes receivable from managed facilities (4,400,000) -
Deferred costs (696,852) (764,569)
Acquisitions, net of cash acquired - (6,000,000)
------------ -----------
Cash used in investing activities (9,817,462) (4,000,085)
------------ -----------
Financing Activities:
Distributions paid to minority partners (74,052) (148,104)
Proceeds from the exercise of stock options - 10,626
Proceeds from issuance of preferred stock - 10,000,000
Payments of dividends to preferred shareholders (170,448) (248,225)
Payments on amounts due to related party (45,181) (191,811)
Proceeds from borrowings 10,750,000 6,000,000
Principal payments on long-term debt (1,855,050) (887,341)
------------ -----------
Cash provided by financing activities 8,605,269 14,535,145
------------ -----------
Net increase (decrease) in cash and cash equivalents (802,446) 7,503,015
Cash and cash equivalents, beginning of period 4,894,448 6,029,763
------------ -----------
Cash and cash equivalents, end of period $4,092,002 $13,532,778
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
NOTE 1. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principals for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnote disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the financial statements reflect all adjustments considered
necessary for a fair statement of the results of operations and financial
position for the interim periods presented. All such adjustments are of a normal
recurring nature. These unaudited interim financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1996 and notes thereto contained in Centennial HealthCare
Corporation's registration statement on Form S-1 filed with the Securities and
Exchange Commission (Commission File No. 001-35118).
The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1997 or any interim period.
During 1997, the Board of Directors and Shareholders of Centennial
HealthCare Corporation, ("Centennial", or "the Company"), approved a .6897 for
one reverse stock split. All references to shares and weighted shares
outstanding used in the calculation of net income per share and per share
amounts have been retroactively adjusted to reflect this reverse stock split.
Certain amounts in the 1996 financial statements have been reclassified for
comparative purposes.
NOTE 2. On July 2, 1997, the Company completed an initial public offering
of 4,000,000 shares of the Company's Common Stock at a price of $16.00 per
share, (the "Offering"). In connection with the Offering, the Company granted
the underwriters an option to purchase up to 600,000 additional shares of the
Company's Common Stock at the Offering price of $16.00 per share. This option
was exercised and closed on July 31, 1997. Proceeds to the Company from the
Offering and the exercise of the underwriters' option totaled approximately
$67,148,000, net of underwriting discounts and commissions and Offering
expenses.
The Company used the proceeds of the Offering to repay two subordinated
promissory notes aggregating $25.3 million, which accrued interest at 10.8% and
11.7% per annum, to redeem the Series E Redeemable Preferred Stock for $5.1
million and to repay the amounts outstanding under the Company's Senior Credit
Facility with CoreStates Bank N.A. as agent (the "Senior Credit Facility").
Additionally, net proceeds of $8.9 million from the exercise of the
underwriters' option were available to repurchase certain shares of Common Stock
that were received by the former holders of the Company's Series C Preferred
Stock. Upon the conversion of the Series C Preferred Stock in Common Stock,
holders of approximately 84,000 shares of the approximately 1.3 million shares
available for pro-rata repurchase elected to seek repurchase by the Company. The
Company will repurchase these shares for approximately $1.3 million. The net
increase in proceeds to the Company due to the exercise of the underwriters'
option and the repurchase of the shares noted above will be approximately $7.6
million. The Company intends to use the $7.6 million and the remaining balance
of the net proceeds of the Offering to repay approximately $35.3 million of the
outstanding principal balance of its Senior Credit Facility, which accrues
interest at approximately 8.3%.
7
<PAGE>
Concurrently with the closing of the Offering, the Company's Series A, B, C
and D Preferred Stock were converted into approximately 2.4 million shares of
Common Stock, net of anticipated stock repurchase. The following table presents
pro forma earnings per share as if the Offering of Common Stock, the use of
proceeds described and the preferred stock conversions had taken place on
January 1, 1996.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1997 1996 1997
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Pro forma net income
applicable to Common Stock: $ 1,861,853 $ 2,756,554 $ 2,584,428 $ 4,869,796
=========== ============ =========== ===========
Pro forma weighted average
number of common shares
outstanding: 11,422,366 11,876,323 11,422,366 11,773,147
=========== ============ =========== ===========
Pro forma earnings per share: $ .16 $ .23 $ .23 $ .41
=========== ============ =========== ===========
</TABLE>
The pro forma amounts above reflect the estimated reduction in interest expense
(net of the related tax effect) of approximately $828,000 and $873,000 for the
three month period ended June 30, 1996 and 1997, respectively, and $1.7 million
for the six month periods ended June 30, 1996 and 1997. The above amounts also
reflect the reduction in preferred dividends and accretion of approximately
$472,000 and $432,000 for the three month period ended June 30, 1996 and 1997,
respectively, and $1.0 million and $1.2 million for the six month period ended
June 30, 1996 and 1997, respectively. As a result of the Offering, the
conversion of preferred stock and the repurchase of shares, pro forma Common
Stock increased by approximately 6.6 million and 7.0 million shares for the
three month period ended June 30, 1996 and 1997, respectively, and by
approximately 6.6 million and 6.9 million shares for the six month period ended
June 30, 1996 and 1997, respectively.
8
<PAGE>
NOTE 3. The following table presents adjusted earnings per share, which
assumes the conversion of the Company's A, B, C and D Preferred Stock at the
beginning of each period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1997 1996 1997
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net earnings per share, adjusted: $ 0.15 $ 0.26 $ 0.13 $ 0.43
=========== ============ ============ ============
Weighted average number of
common shares outstanding with
conversion of preferred to
common at beginning of period: 6,906,307 7,360,264 6,906,307 7,257,088
=========== ============ ============ ============
</TABLE>
Due to the large number of shares of Common Stock issued upon conversion of
all of the series of preferred stock, the Company believes that the adjusted
earnings per share calculation provides a more accurate reflection of earnings
than that of primary earnings per share, when comparing to pro forma earnings
per share (see Note 2).
NOTE 4. During the first six months of 1997, the Company entered into nine
additional management agreements, which have various terms ranging from five to
ten years and contain subsequent renewal options. All of these management
agreements provide the Company with a right of first refusal to purchase the
related facilities. In addition, the Company entered into a lease of a rural
hospital, having a term of ten years with two five-year renewal options.
9
<PAGE>
In May 1997, the Company acquired by merger Total Care Consolidated, Inc.,
("TCC"),a provider of home health services, with 25 home health offices located
primarily in North Carolina. Total consideration of $8.0 million consisted of
$6.0 million in cash, which was funded under the Senior Credit Facility, and
$2.0 million in the form of a convertible promissory note due April 30, 1999.
The transaction was accounted for under the purchase method and the Company's
Unaudited Condensed Consolidated Financial Statements include TCC from the
effective date of the merger.
In August 1997, Centennial acquired substantially all the business and
assets of Complex Care, Inc.,("CCI"),a provider of physical, occupational and
speech therapy services through approximately 45 contracts with long-term care
facilities in Connecticut and Rhode Island. The Company paid total consideration
of $7.0 million, utilizing borrowings under its Senior Credit Facility.
Additional consideration of up to $500,000 may be paid by the Company under an
earn-out agreement. The transaction will be accounted for under the purchase
method and the Company's fiscal results will include CCI from the effective date
of the acquisition.
NOTE 5. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share".
Statement No. 128 will replace APB Opinion No. 15 and is effective for periods
ending after December 15, 1997. Earlier application is not permitted. When
effective, Statement No. 128 will require restatement of all prior period
earnings per share ("EPS") data presented.
Statement No. 128 replaces the current earnings per share presentation with
a dual presentation of basic and diluted earnings per share for entities with
complex capital structures. Basic earnings per share includes no dilution and is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share reflects the potential dilution of securities, such as stock options,
that could share in the earnings of an entity.
The Company's net income per common share for the three months and six
months ended June 30, 1996 and 1997 is based on the weighted average number of
common and common equivalent shares (stock options) outstanding in each period
and is computed in accordance with APB Opinion No. 15. Upon adoption of SFAS No.
128 in December 1997, the Company does not believe that the EPS amounts
presented will be materially different than those previously presented in
accordance with Opinion 15.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income," and Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Both Statements are
effective for fiscal years beginning after December 15, 1997. The Company has
not yet determined the effect, if any, of these statements on its financial
statements.
10
<PAGE>
NOTE 6. The Company is a party to a lawsuit filed in October 1995, alleging
liability for various accounts receivable factoring transactions between the
prior owner of Transitional Health Services, Inc., which was acquired by the
Company effective December 31, 1995, and the finance company. It is the belief
of management that this lawsuit will be resolved without a material adverse
effect on the Company's financial position, results of operation or liquidity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
accompanying Unaudited Condensed Consolidated Statements of Operations for the
six-month period ended June 30, 1996 and 1997.
Certain statements in this Form 10-Q, including information set forth under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations", constitute "Forward-Looking Statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company
cautions investors that forward-looking statements included in this Form 10-Q,
or hereafter included in other publicly available documents filed with the
Securities and Exchange Commission, reports to the Company's stockholders and
other publicly available statements issued or released by the Company involve
significant risks, uncertainties, and other factors which could cause the
Company's actual results, performance (financial or operating) or achievements
to differ materially from the future results, performance (financial or
operating) or achievements expressed or implied by such forward-looking
statements. The Company believes that the important factors set forth in the
Company's cautionary statements at Exhibit 99.1 to this Form 10-Q could cause
such a material difference to occur and investors are referred to Exhibit 99 for
such cautionary statements.
RESULTS OF OPERATIONS
Centennial's revenues and earnings for both the three and six month periods
ended June 30, 1997 as compared to the same periods for 1996, continued to grow
from both expansion and increases in current operations and as a result of
strategic acquisitions.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Net patient service revenues. Net patient service revenues increased from
$55.1 million in 1996 to $70.2 million in 1997, an increase of $15.1 million or
27.5%, of which approximately $3.2 million was attributable to the addition of
the operations of three long-term care facilities. In addition, operations at
the Company's newly acquired home health agency and leased rural hospital added
revenues of approximately $4.3 million and $1.6 million, respectively, during
the second quarter of 1997. The remaining increase of $6.0 million was
attributable to growth in existing facility revenues and therapy contract
revenues. The increase in existing facility revenues during 1997 of
approximately $4.5 million resulted primarily from an increase in the quality
revenue mix of the facilities due to increasing admissions of higher acuity
patients and from the increase in the delivery of specialty services. The
Company also experienced general rate increases at its nursing facilities which
increased patient service revenues in the second quarter of 1997 compared to
1996. The increase in revenues at the Company's subsidiary providing therapy
services of approximately $1.5 million resulted from the net addition of 15
rehabilitation therapy services contracts subsequent to the second quarter of
1996 as well as an overall increase in such subsidiary's average revenue per
therapy contract during that time period.
11
<PAGE>
Management fees and other revenues. Management fees and other revenues
increased from $1.3 million in the second quarter of 1996 to $1.7 million in the
second quarter of 1997, an increase of approximately $458,000, or 35.8%, which
was attributable primarily to the Company's net addition of five facility
management agreements and one rural hospital management agreement subsequent to
the second quarter of 1996.
Facility operating expenses. Facility operating expenses increased from
$43.9 million in the second quarter of 1996 to $55.5 million in the second
quarter of 1997, an increase of $11.6 million or 26.4%, of which approximately
$2.6 was attributable to the addition of the operations of three long-term care
facilities. The Company's home health services and hospital operations added
approximately $3.9 million and $940,000, respectively, to operating expenses
during the second quarter of 1997. The remaining $4.1 million was attributable
primarily to an increase in costs at existing long-term care facilities, to
providing care for higher acuity patients and to costs related to growth of the
Company's contract therapy services.
Lease expense. Lease expense increased from $4.6 million in 1996 to $5.3
million in 1997, an increase of approximately $654,000, or 14.2%, of which
approximately $228,000 was attributable to the addition of one leased facility
previously identified for disposal which was not disposed of as of December 31,
1996. The remaining $426,000 increase was due primarily to an expansion of the
Company's corporate office lease and rent escalations in certain facility
leases.
Corporate administrative costs. Corporate administrative costs increased
from $2.6 million in 1996 to $3.8 million in 1997, an increase of $1.2 million,
or 47.7%, which was due primarily to additional overhead to accommodate the
expansion in therapy services contracts, the addition of managed facilities,
the Company's new home health and hospital operations, and the continued growth
of the Company's administrative costs following the Company's acquisition of
THS, which was effective December 31, 1995.
Depreciation and amortization. Depreciation and amortization increased from
$1.2 million in 1996 to $1.6 million in 1997, an increase of approximately
$406,000, or 33.7%, which was primarily attributable to the acquisition of two
facilities subsequent to the second quarter of 1996.
12
<PAGE>
Interest expense. Interest expense increased from $2.4 million in 1996 to
$2.7 million in 1997, an increase of approximately $224,000, or 9.2%, which was
primarily attributable to the acquisition of two facilities financed through
borrowings under the Company's Senior Credit Facility.
Provision for income taxes. The Company's effective tax rate decreased from
41.6% in 1996 to 39.0% in 1997, a decrease in the rate of 2.6%. This decrease
was primarily attributable to an anticipated decline in the Company's average
state tax rate and a proportional decrease in non-deductible expenses for
federal tax purposes.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net patient service revenues. Net patient service revenues increased from
$109.7 million in 1996 to $132.6 million in 1997, an increase of $22.9 million
or 20.9%, of which approximately $6.6 million was attributable to the addition
of the operations of three long-term care facilities. In addition, operations at
the Company's newly acquired home health agency and leased rural hospital added
revenues of approximately $4.3 million and $1.6 million, respectively. The
remaining increase of $10.4 million was attributable to growth in existing
facility revenues and therapy services contract revenues. The increase in
existing facility revenues during 1997 of approximately $7.6 million resulted
primarily from an increase in the quality revenue mix of the facilities due to
increasing admissions of higher acuity patients and from the increase in the
delivery of specialty services. The Company also experienced general rate
increases at its nursing facilities which increased patient service revenues in
1997 compared to 1996. The increase in revenues at the Company's subsidiary
providing therapy services of $2.8 million resulted from the net addition of 15
rehabilitation therapy services contracts subsequent to the second quarter of
1996 as well as an overall increase in such subsidiary's average revenue per
therapy services contract during that time period.
Management fees and other revenues. Management fees and other revenues
increased from $2.6 million in 1996 to $3.6 million in 1997, an increase of
approximately $974,000, or 37.1%, which was primarily attributable to the
Company's net addition of five facility management agreements and one rural
hospital management agreement subsequent to the second quarter of 1996.
13
<PAGE>
Facility operating expenses. Facility operating expenses increased from
$89.1 million in 1996 to $105.1 million in 1997, an increase of $16.1 million or
18.1%, of which approximately $5.4 million was attributable to the addition of
the operations of three long-term care facilities. The Company's home health and
hospital operations added approximately $3.9 million and $940,000, respectively
to operating expenses during the period. The remaining $5.8 million was
attributable to an increase in costs at existing facilities, to providing care
for higher acuity patients and to costs related to the growth of the Company's
contract therapy services during 1997.
Lease expense. Lease expense increased from $9.1 million in 1996 to $10.4
million in 1997, an increase of $1.2 million, or 13.2%, of which approximately
$445,000 was attributable to the addition of one leased facility previously
identified for disposal which was not disposed of as of December 31, 1996. The
remaining $755,000 increase was due primarily to an expansion of the Company's
corporate office lease and rent escalations in certain facility leases.
Corporate administrative costs. Corporate administrative costs increased
from $5.7 million in 1996 to $7.2 million in 1997, an increase of $1.5 million,
or 27.2%, which was primarily attributable to additional overhead to accommodate
the expansion in therapy services contracts, the addition of managed facilities,
the Company's new home health and hospital operations, and the continued growth
of the Company's administrative costs following the Company's acquisition of
THS, which was effective December 31, 1995.
Depreciation and amortization. Depreciation and amortization increased from
$2.4 million in 1996 to $3.1 million in 1997, an increase of approximately
$770,000, or 32.6%, which was primarily attributable to the facility
acquisitions subsequent to the second quarter of 1996.
Interest expense. Interest expense increased from $4.7 million in 1996 to
$5.3 million in 1997, an increase of approximately $599,000, or 12.8%, which was
attributable primarily to the acquisition of two facilities financed through
borrowings under the Company's Senior Credit Facility.
Provision for income taxes. The Company's effective tax rate decreased from
41.6% in 1996 to 39.0% in 1997, a decrease in the rate of 2.6%. This decrease
was attributable primarily to an anticipated decline in the Company's average
state tax rate and a proportional decrease in non-deductible expenses for
federal tax purposes.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash have been cash flow from
operations, proceeds from the sales of its preferred stock and borrowings under
its Senior Credit Facility. Cash has been used by the Company for acquisitions,
capital improvements at several existing facilities and the day-to-day
operations of the Company's business. The Company anticipates using cash from
operations and borrowings under the Senior Credit Facility to fund the growth
from the continued improvement in operations of its existing facilities and the
expansion and development of specialty services, as well as from the acquisition
or management of additional long-term care facilities and related service
providers.
Working capital increased from $5.9 million at December 31, 1996, to $22.6
million at June 30, 1997 primarily attributable to increases in patient accounts
receivable and cash. Patient accounts receivable increased from $39.9 million at
December 31, 1996 to $48.5 million at June 30, 1997, primarily attributable to
the addition of the operations of three long-term care facilities, the net
addition of 15 rehabilitation therapy services contracts, the Company's newly-
acquired home health agency and leased rural hospital and growth in existing
facility revenues. Cash increased from $6.0 million at December 31, 1996 to
$13.5 million at June 30, 1997, primarily attributable to the release of
restricted cash and the collection of 1996 Medicare cost report receivables.
Restricted cash at December 31, 1996 included certain certificates of deposit
that were pledged for letters of credit issued by banks in connection with
various lease agreements. Approximately $4.1 million of the certificates of
deposit were unencumbered during the period. The Company used a net $3.0 million
in its operating activities due primarily to customary delays in reimbursement
for new operations.
The Company continued to invest in its leased and owned facilities through
capital expenditures of approximately $2.0 million or approximately $350 per bed
for the six month period. During the second quarter, the Company entered into
contracts to manage six facilities in North Carolina and a joint nursing
facility and long-term care hospital in Washington D.C. As part of these
agreements, the Company agreed to provide working capital. In addition, the
Company acquired TCC, a home health provider operating 25 offices, for $8.0
million, consisting of $6.0 million in cash and $2.0 million in the form of a
convertible promissory note.
In addition to cash from operations, the Company financed its activities
during the first six months of 1997 with $10.0 million in proceeds from the
issuance of preferred stock and $8.0 million in borrowings for the TCC
acquisition, consisting of $6.0 million in borrowings under the Senior Credit
Facility and $2.0 million in the form of a convertible promissory note. During
the first half of 1997, the Company repaid approximately $887,000 of its long-
term debt, and paid approximately $248,000 in dividends to preferred
shareholders.
15
<PAGE>
As of June 30, 1997, the Company had $53.0 million outstanding under its
Senior Credit Facility. Giving effect to the Offering, including the
underwriters' exercise of the overallotment option, and the Complex Care
acquisition noted below, the Company will have $24.7 million outstanding under
the Senior Credit Facility. The Company has initiated discussions for the
expansion of the Senior Credit Facility, and anticipates the closing of the
amended agreement during the fourth quarter of 1997.
In August 1997, Centennial acquired substantially all the business and
assets of CCI, a provider of physical, occupational and speech therapy services
through approximately 45 contracts with long-term care facilities in Connecticut
and Rhode Island. The Company paid total consideration of $7.0 million,
utilizing borrowings under its Senior Credit Facility. Additional consideration
of up to $500,000 may be paid by the Company under an earn-out agreement.
Centennial's current working capital and amounts available under its Senior
Credit Facility should provide adequate liquidity and capital for the operation
and growth of the Company.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 6, 1995, NPF IV, Inc. ("NPF"), an accounts receivable factoring firm,
filed a complaint against Transitional Health Services, Inc. ("THS"), Cardinal
Development Co., Inc. and its related entities ("Cardinal") and certain other
parties in the United States District Court, Southern District of Ohio, Eastern
Division, alleging successor liability for various accounts receivable factoring
transactions between Cardinal and NPF. NPF seeks repayment, along with interest
and fees, of approximately $1,430,000 allegedly overpaid to Cardinal in 1993.
THS bought certain assets of Cardinal in November 1993 and the Company merged
with THS effective December 31, 1995. The Company is actively defending against
these claims. It is management's belief that this lawsuit as well as other
claims and legal actions that the Company is subject to in the ordinary course
of its business are either adequately covered by insurance or will be resolved
without material adverse effect on the Company's financial condition, although
there can be no assurance that such amounts will be adequate or such results
achieved.
ITEM 2. CHANGES IN SECURITIES
On July 1, 1997, the Company filed an amendment to its Second Amended and
Restated Articles of Incorporation to provide for the conversion of its Series C
Preferred Stock upon the closing of an initial public offering by the Company
(the "Conversion Amendment"). Also on July 1, 1997, subsequent to filing the
Conversion Amendment, the Company filed its Third Amended and Restated Articles
of Incorporation (the "Articles"). Under the Articles, the Board of Directors
has authority to issue up to 50,000,000 shares of Common Stock, par value $.01
per share (the "Common Stock"), and up to 50,000,000 shares of Preferred Stock,
par value $.01 per share (the "Blank Check Preferred Stock"), in one or more
classes or series.
Under the Articles, holders of Common Stock are entitled to receive such
dividends as may be legally declared by the Board of Directors. However, the
Company does not expect to pay dividends in the foreseeable future and the
payment of cash dividends is restricted under the Senior Credit Facility. Each
shareholder is entitled to one vote per share on all matters to be voted upon
and is not entitled to cumulate votes for the election of directors. Holders of
Common Stock do not have preemptive, redemption or conversion rights and, upon
liquidation, dissolution or winding up of the Company, are entitled to share
ratably in the net assets of the Company available for distribution to common
shareholders. The rights, preferences and privileges of holders of Common Stock
are subject to any classes or series of Blank Check Preferred Stock that the
Company may issue in the future.
17
<PAGE>
The Articles authorize the Board of Directors, without further action by the
holders of the Common Stock, to issue up to 50,000,000 shares of Blank Check
Preferred Stock in one or more classes or series, and, within certain
limitations, to fix the designations, powers, preferences and relative,
participating, optional and other rights, qualifications, limitations and
restrictions thereof, including the dividend rate, conversion rights, voting
rights, redemption price and liquidation preference, and to fix the number of
shares to be included in any such classes or series. Any Blank Check Preferred
Stock so issued may rank senior to the Common Stock with respect to the payment
of dividends or amounts upon liquidation, dissolution or winding up, or both.
In addition, any such shares of Blank Check Preferred Stock may have class or
series voting rights.
As disclosed in the Company's Registration Statement on Form S-1 (Registration
No. 333-24267), as amended (the "Registration Statement"), all shares of the
Company's Series A Preferred Stock and Series B Preferred Stock converted
automatically into 856,091 shares of Common Stock, all shares of the Company's
Series C Preferred Stock converted automatically into 1,265,962 shares of Common
Stock, and all shares of the Company's Series D Preferred Stock converted
automatically into 410,529 shares of Common Stock on July 8, 1997, and all
shares of the Company's Special Voting Common Stock converted automatically into
2,942,520 shares of Common Stock on July 2, 1997. In addition, all of the
Company's shares of Series E Preferred Stock were automatically redeemed on July
8, 1997, for $100 per share, plus any accrued but unpaid dividends.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the shareholders of the Company was held on June 23, 1997,
for the following purposes:
(i) to consider and act upon the Conversion Amendment;
(ii) to consider and act upon the Articles;
(iii) to consider and act upon amendments to the Company's Amended and
Restated Bylaws;
18
<PAGE>
(iv) to consider and act upon a stock repurchase agreement to be
entered into between the Company and the holders of the Series C
Preferred Stock;
(v) to consider and act upon the Company's 1997 Stock Plan; and
(vi) to consider and act upon a reverse stock split.
Proxies for the meeting were solicited pursuant to the Georgia Business
Corporation Code, and there was no solicitation in opposition to management's
solicitation. The Company was not subject to the proxy requirements of the
Securities and Exchange Act of 1934, as amended, at the time.
The shareholders approved the following matters with the number of votes for,
against and withheld as indicated below:
<TABLE>
<CAPTION>
For Against Withheld
--------- ------- --------
<S> <C> <C> <C>
Conversion Amendment(1)(2) 7,484,346 24,862 166,712
Third Amended and Restated 7,484,346 24,862 166,712
Articles(1)
Amendments to Bylaws(1) 7,484,346 24,862 166,712
Stock Repurchase Offer(1) 7,484,346 24,862 166,712
1997 Stock Plan(1) 7,484,346 24,862 166,712
Reverse Stock Split(1) 7,484,346 24,862 166,712
</TABLE>
- ---------------
(1) Holders of Common Stock, Special Voting Common Stock, Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock voted together, on a fully converted basis, as a single
class. Special Voting Common Stock had 0.7 votes per share. The Series E
Preferred Stock had no voting rights.
(2) Series C Preferred Stock voted separately as a single class, as follows:
140,485 For, 372 Against and 3,229 Withheld.
There were no broker non-votes with respect to any of the foregoing matters.
ITEM 5. OTHER INFORMATION
None.
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit
No. Description
------- ------------------------------------------------------
3.1 Third Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1, as
amended, Registration No. 333-24267)
3.2 Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.2 of the Company's
Registration Statement on Form S-1, as amended,
Registration No. 333-24267)
4.1 See Exhibits 3.1 and 3.2 for provisions of the Third
Amended and Restated Articles of Incorporation and
Amended and Restated Bylaws defining the rights of
holders of Common Stock (incorporated by reference to
Exhibits 3.1 and 3.2 of the Company's Registration
Statement on Form S-1, as amended, Registration
No. 333-24267)
11.1 Statement re Computation of Per Share Earnings
27.1 Financial Data Schedule (for SEC use only)
99.1 Cautionary Statements
b) Reports on Form 8-K
None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CENTENNIAL HEALTHCARE CORPORATION
Date: August 14, 1997 By: /s/ J. Stephen Eaton
- --------------------- -------------------------------
J. Stephen Eaton,
Chairman of the Board,
President and Chief
Executive Officer
Date: August 14, 1997 By: /s/ Alan C. Dahl
- --------------------- -------------------------------
Alan C. Dahl,
Senior Vice President and
Chief Financial Officer
21
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
No. Description Page
- ------- -------------------------------------------- ----
<S> <C> <C>
3.1 Third Amended and Restated Articles of
Incorporation (incorporated by reference to
Exhibit 3.1 of the Company's Registration
Statement on Form S-1, as amended,
Registration No. 333-24267)
3.2 Amended and Restated Bylaws (incorporated
by reference to Exhibit 3.2 of the Company's
Registration Statement on Form S-1, as
amended, Registration No. 333-24267)
4.1 See Exhibits 3.1 and 3.2 for provisions of
the Third Amended and Restated Articles of
Incorporation and Amended and Restated
Bylaws defining the rights of holders of
Common Stock (incorporated by reference to
Exhibits 3.1 and 3.2 of the Company's
Registration Statement on Form S-1, as
amended, Registration No. 333-24267)
11.1 Statement re Computation of Per Share
Earnings
27.1 Financial Data Schedule (for SEC use only)
99.1 Cautionary Statements
</TABLE>
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------------------------------------
1996 1997 1996 1997
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Average outstanding shares used in the
computation of per share earnings
Common stock issued 2,044,320 2,086,875 2,044,320 2,086,875
Common stock in treasury (239,860) (239,860) (239,860) (239,860)
Special voting common stock 2,941,325 2,942,818 2,941,325 2,942,277
Stock option common stock equivalents 38,469 37,849 38,469 37,849
----------- ----------- ---------- ----------
Average shares outstanding 4,784,254 4,827,682 4,784,254 4,827,141
=========== =========== ========== ==========
Income before accretion and dividends
on preferred stock 1,034,171 1,883,924 929,054 3,124,536
Accretion and dividends on preferred stock(a) (471,976) (432,258) (1,009,634) (1,218,621)
----------- ----------- ---------- ----------
Income (loss) applicable to common stock $ 562,195 $ 1,451,666 $ (80,580) $1,905,915
=========== =========== ========== ==========
Earnings per share $ 0.12 $ 0.30 $ (0.02) $ 0.39
=========== =========== ========== ==========
- ---------
(a) For the quarters ended June 30, 1996 and 1997 and the six month period
ended June 30, 1996 and 1997, the assumed conversion of Series A and B was
antidilutive, thus the conversion of these shares was not included in the
average outstanding shares used in the computation of per share earnings
and the dividends and accretion associated with these shares was deducted
from net earnings applicable to common stock.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10Q PERIOD
ENDING JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 13,532,778 13,532,778
<SECURITIES> 0 0
<RECEIVABLES> 50,790,001 50,790,001
<ALLOWANCES> 2,300,000 2,300,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 72,796,652 72,796,652
<PP&E> 75,818,387 75,818,387
<DEPRECIATION> (8,499,411) (8,499,411)
<TOTAL-ASSETS> 213,584,893 213,584,893
<CURRENT-LIABILITIES> (50,166,992) (50,166,992)
<BONDS> 0 0
(21,435,840) (21,435,840)
(10,062,500) (10,062,500)
<COMMON> (21,081) (21,081)
<OTHER-SE> (14,625,085) (14,625,085)
<TOTAL-LIABILITY-AND-EQUITY> (213,584,893) (213,584,893)
<SALES> 0 0
<TOTAL-REVENUES> (71,938,855) (136,173,694)
<CGS> 0 0
<TOTAL-COSTS> 66,038,285 125,536,036
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 150,177 296,551
<INTEREST-EXPENSE> 2,658,683 5,288,058
<INCOME-PRETAX> (3,258,919) (5,369,197)
<INCOME-TAX> 1,269,539 2,093,987
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,883,924) (3,124,536)
<EPS-PRIMARY> (0.30) (0.39)
<EPS-DILUTED> 0 0
</TABLE>
<PAGE>
EXHIBIT 99.1
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q, including information set forth under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations", constitute "Forward-Looking Statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The
Company desires to take advantage of certain "safe harbor" provisions of the
Reform Act and is including this special note to enable the Company to do so.
Forward-looking statements included in this Form 10-Q, or hereafter included in
other publicly available documents filed with the Securities and Exchange
Commission, reports to the Company's stockholders and other publicly available
statements issued or released by the Company involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ materially from
the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. The Company believes
the following risks, uncertainties and other factors could cause such material
differences to occur:
1. The Company's ability to grow through the acquisition and development of
long-term care facilities or the acquisition of ancillary businesses.
2. The Company's ability to identify suitable acquisition candidates or to
profitably operate or successfully integrate acquired operations into the
Company's other operations.
3. The occurrence of changes in the mix of payment sources utilized by the
Company's patients to pay for the Company's services.
4. The adoption of cost containment measures by private pay sources such as
commercial insurers and managed care organizations, as well as efforts by
governmental reimbursement sources to impose cost containment measures.
5. Changes in the United States health care system, including changes in
reimbursement levels under Medicaid and Medicare, and other changes in
applicable government regulations that might affect the profitability of the
Company.
6. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a number
of potentially adverse consequences, such as the imposition of fines,
temporary suspension of admission of patients, restrictions on the
<PAGE>
ability to acquire new facilities, suspension or decertification from
Medicaid or Medicare programs, and in extreme cases, revocation of a
facility's license or the closure of a facility, including as a result of
unauthorized activities by employees.
7. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
8. Changes in certificate of need laws that might increase competition in the
Company's industry, including, particularly, in the states in which the
Company currently operates or anticipates operating in the future.
9. The Company's ability to staff its facilities appropriately with qualified
health care personnel (including administrators), including in times of
shortages of such personnel and to maintain a satisfactory relationship with
labor unions.
10. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers of
assisted and independent living and providers of home health care and
changes in the regulatory system in the states in which the Company operates
that facilitate such competition.
11. The continued availability of insurance for the inherent risks of liability
of providing services in the health care industry.
12. Price increases in medical supplies, durable medical equipment and other
items.
13. The Company's reputation for delivering high-quality care and its ability to
attract and retain patients, including patients with relatively high acuity
levels.
14. Changes in general economic conditions, including changes that pressure
governmental reimbursement sources to reduce the amount and scope of health
care coverage.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company.
2
