<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 16, 1997.
REGISTRATION NO. 333-24267
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
CENTENNIAL HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
GEORGIA 8051 58-1839701
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
400 Perimeter Center Terrace, Suite 650, Atlanta, Georgia 30346
(770) 698-9040
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------
Alan C. Dahl
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Centennial HealthCare Corporation
400 Perimeter Center Terrace, Suite 650
Atlanta, Georgia 30346
(770) 698-9040
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------
Copies of all communications, including copies of all communications sent to
agent for service, should be sent to:
<TABLE>
<S> <C>
Paul A. Quiros, Esq. J. Chase Cole, Esq.
Nelson Mullins Riley & Scarborough, L.L.P. Waller Lansden Dortch & Davis, P.L.L.C.
999 Peachtree Street, N.E., Suite 1400 511 Union Street, Suite 2100
Atlanta, Georgia 30309 Nashville, Tennessee 37219
(404) 817-6000 (615) 244-6380
(404) 817-6050 (Fax) (615) 244-5686 (Fax)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION
JUNE 16, 1997
4,000,000 SHARES
[LOGO]
COMMON STOCK
---------
All of the shares of Common Stock offered hereby are being sold by
Centennial HealthCare Corporation ("Centennial" or the "Company"). Prior to the
offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be between
$13.00 and $15.00 per share. See "Underwriting" for the factors to be considered
in determining the initial offering price. The Common Stock has been approved
for quotation on the Nasdaq National Market under the symbol CTEN.
--------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 HEREOF.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
<S> <C> <C> <C>
Per Share................................ $ $ $
Total(2)................................. $ $ $
</TABLE>
(1) Before deducting expenses of the offering estimated at $1,300,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
600,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about June ,
1997.
ALEX. BROWN & SONS
INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MORGAN STANLEY DEAN WITTER
EQUITABLE SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS JUNE , 1997.
<PAGE>
[MAP]
--------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
OVER-ALLOTMENT STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES
AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE OFFERING. SEE
"UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS.
THE COMPANY
Centennial HealthCare Corporation provides a broad range of long-term health
care services to meet the medical needs of elderly and post-acute patients. The
Company provides these services through geographically concentrated networks
located in metropolitan and secondary markets throughout the United States.
Centennial operates 84 owned, leased and managed skilled nursing facilities with
9,049 beds in 19 states, with its largest concentration of facilities in North
Carolina, Indiana and Michigan. The Company provides basic and specialty health
care services. Basic services include skilled nursing and support, housekeeping,
laundry, dietary, recreational and social services. Specialty services include
comprehensive rehabilitation therapy, respiratory therapy, ventilator care,
infusion therapy, wound care, home health care and other subacute and specialty
services. As components of its specialty services, Centennial provides
rehabilitation therapy services on a contract basis to third-party and Company-
operated skilled nursing facilities in 17 states pursuant to 70 contracts and,
including recently completed acquisitions, provides in excess of 380,000 home
health care visits annually.
In recent years, the long-term care industry has experienced significant
growth. Revenues in the long-term care industry have increased in the United
States from approximately $18 billion in 1980 to approximately $80 billion in
1995. The number of patients in long-term care facilities is expected to grow to
2.1 million by the year 2025, a significant increase from the current level of
1.5 million. Industry growth has been driven primarily by the following factors:
(i) aging of the population; (ii) cost-containment pressures that drive
post-acute patients from acute care hospitals to lower-cost settings; (iii)
advances in medical technology that enable sophisticated long-term care
providers to care for higher-acuity patients; and (iv) demand for post-acute and
specialty services in secondary markets. In addition, consolidation
opportunities in the long-term care industry have enabled leading providers to
build market share in order to compete more effectively. Ownership of long-term
care facilities is highly fragmented, with approximately 70% of all facilities
owned by independent providers or companies with less than 20 facilities. The
increasing medical complexity of long-term care patients, cost-containment
pressures and government regulation make it difficult for smaller providers
without access to capital, sophisticated information systems and economies of
scale to compete with larger regional and national providers. Long-term care
facilities are increasingly becoming an integral part of community-based,
vertically integrated health care delivery systems that are capable of providing
a full range of traditional basic services and specialty services.
Centennial's objective is to continue to enhance its market position as a
provider of long-term basic and specialty services in selected metropolitan and
secondary markets. The Company seeks to control significant components of the
non-acute health care system in its markets, thereby diversifying its sources of
revenue and positioning itself to respond to the requirements of a variety of
payors. In addition, the Company seeks to increase the range of services it
provides within its facilities and tailors its health care services to address
the specific needs within each of its markets. To meet its objective, the
Company is pursuing the following strategies: (i) achieve operating leverage
through the continued development of regionally concentrated networks; (ii)
implement market-specific business and network development plans in response to
the diverse needs of the Company's metropolitan and secondary markets; (iii)
continue to expand specialty services to enhance the Company's position as a
broad-based provider of health care services; (iv) manage operations through
sophisticated information systems that enhance efficiency; and (v) pursue
strategic acquisitions of long-term care facilities and related service
providers.
3
<PAGE>
Over the last three years, the Company has aggressively grown its operating
base through both acquisitions and internal growth. Total revenues increased
from $41.5 million for the fiscal year ended May 31, 1994 to $233.0 million for
the fiscal year ended December 31, 1996, representing a compounded annual growth
rate of 95.0%. Net income decreased from $5.4 million for the fiscal year ended
May 31, 1994 to $2.8 million for the fiscal year ended December 31, 1996,
representing a compounded annual rate of decrease of 22.5%. Licensed available
beds increased from 3,470 to 8,113 during the same period, representing a
compounded annual growth rate of 38.9%. The Company's revenue quality mix
(Medicare, private pay, management fees and other) improved from 41.9% for the
fiscal year ended December 31, 1995 to 57.2% for the fiscal year ended December
31, 1996, and the Company's revenues from specialty services increased from
14.4% for the fiscal year ended December 31, 1995 to 33.7% for the fiscal year
ended December 31, 1996, reflecting the Company's focus on providing specialty
services to higher-acuity patients.
As part of its growth strategy, the Company regularly reviews possible
acquisitions in the long-term care continuum. Effective December 31, 1995, the
Company completed an important strategic acquisition by merging with
Transitional Health Services, Inc. ("Transitional"), which operated 36 skilled
nursing facilities with 3,776 beds in Arkansas, North Carolina, Indiana,
Kentucky and Michigan and a contract rehabilitation therapy business (the
"Transitional Merger"). Since the Transitional Merger, the Company has expanded
its operations through the acquisition of a home health care provider (the "Home
Health Acquisition"), the addition of 16 long-term facility management contracts
and one management contract for a facility providing nursing home and long-term
acute care hospital services, the acquisition of two facilities previously
managed by the Company and the lease of a rural hospital with three home health
care offices. As a result of the Home Health Acquisition, the Company has
increased its home health care visits by over 340,000 annually.
Centennial is currently pursuing three strategic transactions in its
existing markets to: (i) acquire a rehabilitation therapy company (the "Therapy
Acquisition"); (ii) lease an additional rural hospital (the "Hospital
Acquisition"); and (iii) acquire a facility currently managed (the "Facility
Transaction") (collectively, the "Potential Transactions"). The Company has
entered into a non-binding letter of intent for the Therapy Acquisition, and
that transaction remains subject to the negotiation of a definitive agreement
and receipt of all necessary consents and approvals. The Company has negotiated
the lease with respect to the Hospital Acquisition, but the lease remains
subject to various governmental consents and approvals. The Company anticipates
closing the Facility Transaction on or around July 31, 1997. The Potential
Transactions, if consummated, will allow the Company to increase its range of
services in two markets in which the Company already has a strong operating
presence.
Centennial was incorporated in the State of Georgia in 1989. Unless the
context otherwise requires, all references in this Prospectus to Centennial or
the Company include Centennial HealthCare Corporation and its subsidiaries.
Centennial's principal executive office is located at 400 Perimeter Center
Terrace, Suite 650, Atlanta, Georgia 30346, and its telephone number is (770)
698-9040.
4
<PAGE>
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................. 4,000,000 shares
Common Stock to be outstanding after the offering... 11,525,122 shares(1)
Use of proceeds..................................... Repay the Subordinated Debt ($25.3
million); redeem the Company's Series E
Redeemable Preferred Stock ($5.1
million); and repay a portion of the
amounts outstanding under its Senior
Credit Facility ($20.4 million). WCAS
Capital Partners II, L.P. ("WCAS
Capital"), an existing shareholder of
the Company, holds approximately 96.2%
of the Subordinated Debt and 88.5% of
the Series E Redeemable Preferred
Stock. See "Use of Proceeds."
Nasdaq National Market symbol....................... CTEN
</TABLE>
- --------------
(1) Excludes 536,285 shares of Common Stock issuable upon exercise of
outstanding stock options, at a weighted average exercise price of $12.75
per share. See "Capitalization" and "Management -- Stock Plans."
EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES:
(I) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION; (II) A .6897-FOR-1.0
REVERSE STOCK SPLIT WITH RESPECT TO THE COMMON STOCK TO BE EFFECTED PRIOR TO THE
COMPLETION OF THE OFFERING; (III) THE CONVERSION INTO 2,942,520 SHARES OF COMMON
STOCK OF ALL OF THE COMPANY'S SPECIAL VOTING COMMON STOCK ON THE CLOSING OF THE
OFFERING; (IV) THE CONVERSION INTO 856,091 SHARES OF COMMON STOCK OF ALL OF THE
COMPANY'S SERIES A CONVERTIBLE PREFERRED STOCK (THE "SERIES A PREFERRED STOCK")
AND SERIES B CONVERTIBLE PREFERRED STOCK ("SERIES B PREFERRED STOCK") (TOGETHER,
THE "SERIES A AND B PREFERRED STOCK") ON THE CLOSING OF THE OFFERING; (V) THE
CONVERSION INTO 1,447,710 SHARES OF COMMON STOCK OF ALL OF THE COMPANY'S SERIES
C CONVERTIBLE PREFERRED STOCK (THE "SERIES C PREFERRED STOCK") ON THE CLOSING OF
THE OFFERING; AND (VI) THE CONVERSION INTO 410,529 SHARES OF COMMON STOCK OF ALL
OF THE COMPANY'S SERIES D CONVERTIBLE PREFERRED STOCK (THE "SERIES D PREFERRED
STOCK") ON THE CLOSING OF THE OFFERING. SEE "DESCRIPTION OF CAPITAL STOCK" AND
"UNDERWRITING." THE OFFERING OF THE SHARES OF COMMON STOCK HEREBY IS REFERRED TO
AS THE "OFFERING."
5
<PAGE>
SUMMARY FINANCIAL AND STATISTICAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE MONTHS ENDED
YEARS ENDED MAY 31, 31, MARCH 31,
------------------------------- ---------------------- --------------------
1993 1994 1995 1995 (1) 1996 1996 1997
--------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Total revenues.............................. $ 11,298 $ 41,499 $ 65,218 $ 75,226 $ 233,048 $ 55,935 $ 64,235
Operating income before net interest expense
and equity in income (loss) of
unconsolidated partnerships............... 1,988 4,157 5,758 3,194 14,535 1,989 4,591
Equity in income (loss) of unconsolidated
partnerships (2).......................... (2,765) 1,733 (28) 449 (108) -- --
Income (loss) before income taxes and
minority interest and extraordinary
item...................................... (746) 6,021 5,788 3,466 5,054 (105) 2,110
Income (loss) before extraordinary item..... (586) 3,791 3,475 3,466 5,054 (105) 2,110
Net income (loss)........................... $ (586) $ 5,389 $ 3,725 $ 1,876 $ 2,779 $ (86) $ 1,241
PER COMMON SHARE DATA:
Income (loss) before extraordinary item..... $ (0.26) $ 1.60 $ 1.35 $ 0.72 $ 0.12 $ (0.12) $ 0.09
Extraordinary item -- foregiveness of debt,
net of taxes.............................. -- 0.68 0.10 -- -- -- --
Net income (loss) (3)....................... $ (0.26) $ 2.28 $ 1.45 $ 0.72 $ 0.12 $ (0.12) $ 0.09
Weighted average number of common and common
stock equivalents outstanding............. 2,267 2,363 2,576 2,601 4,782 4,777 4,827
STATISTICAL DATA:
Facilities owned/leased..................... 1 14 17 18 54 52 54
Facilities managed.......................... 29 17 15 21 22 23 24
--------- --------- --------- ----------- --------- --------- ---------
Total facilities.......................... 30 31 32 39(4) 76 75 78
Number of beds owned/leased (5)............. 296 1,584 2,054 2,131 5,831 5,646 5,831
Number of beds managed (5).................. 3,050 1,886 1,603 2,171 2,282 2,344 2,538
--------- --------- --------- ----------- --------- --------- ---------
Total number of beds (5).................. 3,346 3,470 3,657 4,302 8,113 7,990 8,369
Percentage of total revenues from:
Medicare.................................. 6.8% 6.9% 15.0% 18.2% 25.4% 25.3% 26.8%
Private pay, management fees and other.... 40.5 19.4 20.5 23.7 31.8 31.0 31.5
--------- --------- --------- ----------- --------- --------- ---------
47.3% 26.3% 35.5% 41.9% 57.2% 56.3% 58.3%
Medicaid.................................. 52.7% 73.7% 64.5% 58.1% 42.8% 43.7% 41.7%
Percentage of total revenues from:
Basic services............................ -- -- -- 81.1% 63.8% 64.1% 63.4%
Specialty services........................ -- -- -- 14.4% 33.7% 33.4% 33.7%
Management fees........................... -- -- -- 4.5% 2.5% 2.5% 2.9%
Revenue per patient day (6)................. -- -- -- $ 100.30 $ 104.11 $ 102.98 $ 109.00
Occupancy rate (7).......................... 97.3% 96.2% 95.4% 95.0% 91.9% 91.5% 91.7%
Number of rehabilitation therapy contracts
(8)(9).................................... 18 22 35 38 58 43 59
Number of rehabilitation therapists
(8)(9).................................... 40 82 164 159 434 202 505
Average revenue per rehabilitation contract
per month (8)............................. $ 43,000 $ 53,200 $ 48,800 $ 50,400 $ 52,300 $ 53,600 $ 58,200
Number of home health care offices.......... -- -- 2 2 5 2 5
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA (10) ADJUSTED (10)(11)
------------ --------------- --------------------
<S> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Working capital........................................... $ 17,221 $ 17,221 $ 17,221
Total assets.............................................. 201,142 201,142 201,142
Long-term debt and subordinated debt, less current
maturities.............................................. 107,173 107,173 62,376
Preferred stock (12)...................................... 31,800 5,062 --
Net shareholders' equity.................................. 12,622 39,360 89,219
</TABLE>
See accompanying notes on following page.
6
<PAGE>
(1) During 1995, the Company changed its fiscal year-end from May 31 to December
31. Accordingly, the Company has restated its operating results for the year
ended December 31, 1995.
(2) Includes equity in income (loss) of unconsolidated partnerships for all
years. The Company's sale in January 1997 of certain subsidiaries serving as
general partners of the unconsolidated partnerships will eliminate this
income (loss) going forward. Without giving effect to this income (loss) and
its related tax effects, the Company's net income (loss) would have been
$1,585, $2,699 and $3,493 in years ended May 31, 1993, 1994 and 1995,
respectively, $1,607 and $2,842 in the years ended December 31, 1995 and
1996, respectively. See Notes 7 of the Notes to Consolidated Financial
Statements for the years ended December 31, 1995 and 1996 and May 31, 1994
and 1995 and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(3) Net income (loss) per common share for the fiscal year ended December 31,
1996 and fiscal quarters ended March 31, 1996 and 1997, excludes dividends
and accretion on preferred stock of $2,191,749, $471,976 and $786,363,
respectively.
(4) Excludes facilities acquired in the Transitional Merger on December 31,
1995.
(5) Represents licensed available beds.
(6) Calculated as net patient service revenues earned at the Company's leased
and owned facilities, divided by total patient days for those facilities.
(7) Occupancy is computed by dividing annual patient day census by annual
patient days available in licensed available operating beds. The occupancy
rate in 1996 fell primarily as a result of the Transitional Merger.
Transitional's facilities had an average occupancy rate of 87.6% at the time
of the Transitional Merger.
(8) Centennial acquired the rehabilitation therapy service provider that was a
party to these contracts and which employed these therapists in the
Transitional Merger, effective December 31, 1995.
(9) Represents therapists (includes licensed therapists and rehabilitation
technicians) employed by the Company. Of the 59 contracts at March 31, 1997,
25 were with the Company's leased and owned facilities.
(10) Pro forma to give effect to the conversion of the Special Voting Common
Stock, the Series A and B Preferred Stock, the Series C Preferred Stock and
the Series D Preferred Stock into shares of Common Stock. Net shareholders'
equity includes accrual of dividends on the Series C Preferred Stock through
June 30, 1997.
(11) As further adjusted to give effect to the sale by the Company of 4,000,000
shares of Common Stock offered hereby at an initial offering price of $14.00
per share, after deducting the underwriting discounts and commissions and
estimated offering expenses payable by the Company, the application of
estimated net proceeds therefrom, including the sale of 239,860 shares of
treasury stock.
(12) Upon the closing of the Offering, the Series C Preferred Stock, which is
held by Welsh, Carson, Anderson & Stowe VI, L.P. ("WCAS VI"), WCAS
Healthcare Partners, L.P. ("WCAS Healthcare"), CID Equity Capital III, L.P.
("CID Equity") and certain other shareholders, will convert into shares of
Common Stock based on the Price to Public. To the extent the Underwriters
exercise their over-allotment option, a portion of these shares of Common
Stock will be repurchased pro rata at the Price to Public by the Company
with the net proceeds from such exercise. See "Risk Factors -- Benefits of
the Offering to Certain Directors and Significant Shareholders."
7
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN SHARES OF
THE COMMON STOCK OFFERED BY THIS PROSPECTUS. THIS DISCUSSION ALSO IDENTIFIES
IMPORTANT CAUTIONARY FACTORS THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE DESCRIBED IN FORWARD-LOOKING STATEMENTS MADE BY, OR
ON BEHALF OF, THE COMPANY. IN PARTICULAR, THE COMPANY'S FORWARD-LOOKING
STATEMENTS, INCLUDING THOSE REGARDING THE ACQUISITION OF ADDITIONAL LONG-TERM
CARE FACILITIES AND RELATED OPERATING COMPANIES, THE ADEQUACY OF THE COMPANY'S
CAPITAL RESOURCES AND OTHER STATEMENTS REGARDING TRENDS, COULD BE AFFECTED BY A
NUMBER OF RISKS AND UNCERTAINTIES INCLUDING THOSE DESCRIBED BELOW.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY. The Company intends to expand
its business, in part, through the selective acquisition of additional long-term
care facility operations and related service providers. The Company's prospects
for growth are directly affected by its ability to acquire long-term care
facility operations. There can be no assurance that suitable acquisitions will
be identified, that acquisitions can be consummated, or that the acquired
facility operations can be integrated successfully into the Company's
operations. The Company's ability to acquire long-term care facilities will
depend, among other factors, upon its ability to obtain financing, government
licenses and approvals and upon the competitive environment for acquisitions.
The nature of such licenses and approvals, and the timing and likelihood of
obtaining them vary widely from state to state, depending upon the facility or
operation and the type of services provided. In making acquisitions, the Company
competes with other providers, some of which have greater financial resources
than the Company. The various risks associated with the Company's acquisition of
long-term care facility operations and uncertainties regarding the profitability
of such operations may affect the Company's financial performance in any given
period. Several of the leased or managed facilities that the Company acquired
through the Transitional Merger experienced operating losses in 1996. There can
be no assurance that such losses will not continue at some or all of these
facilities. Continued losses at these facilities could adversely affect the
Company's results of operation or financial condition. In addition, Centennial
is pursuing the Potential Transactions. No assurance can be given, however, that
the Company will complete any or all of the Potential Transactions or that it
will be able to integrate these operations successfully or that such operations
will not adversely affect the Company's profitability. See "Business --
Acquisitions and Potential Transactions," "-- Business Strategy," "--
Acquisition Opportunities" and "-- Government Regulation" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
IMPACT OF HEALTH CARE REFORM AND LIMITS ON GOVERNMENT REIMBURSEMENT AND
OTHER PAYMENTS. Both the federal government and various states are considering
proposals to limit the amounts of funding available for various health care
services. Proposals have been introduced in Congress to reduce the rate of
Medicare growth through cost saving measures, including proposals to pay
providers of home health care and long-term care services on a prospective
payment system similar to the DRG system under which hospitals are reimbursed
for acute care services. Proposals have also been made to limit Medicare
reimbursement for speech and occupational therapy services, which could have an
adverse effect on the Company. Proposals to fund the Medicaid program through
federal block grants, if adopted by Congress, would likely result in a revision
of existing state Medicaid programs resulting in new requirements and/or payment
rates. Medicare and Medicaid certification is a critical factor contributing to
the revenues and profitability of long-term care facilities and home health care
providers. Changes in certification and participation requirements of the
Medicare and Medicaid programs have restricted, and are likely to continue to
further restrict, eligibility for reimbursement under those programs. Failure to
obtain and maintain Medicare and Medicaid certification at the Company's current
and newly acquired facilities could result in significant loss of revenue. In
addition, private payors, including managed care payors, increasingly are
demanding that providers accept discounted fees or assume all or a portion of
the financial risk for the delivery of health care services. Such measures may
include capitated payments
8
<PAGE>
whereby the Company is responsible for providing, for a fixed fee, all services
needed by certain patients. Capitated payments can result in significant losses
if patients require expensive treatment not adequately covered by the capitated
rate. Efforts to impose reduced payments, greater discounts and more stringent
cost controls by government and other payors are expected to continue. The
President and Congress are currently negotiating a balanced budget plan pursuant
to which currently budgeted increases in Medicare spending would be reduced by
$115 billion over five years. Under the proposal recently approved by the House
Budget Committee, $105 billion of these reductions would come from providers and
managed care organizations. Although specifics of these reductions have not been
announced at the present time, there can be no assurance that such reductions,
if enacted as part of a balanced budget plan, would not have a material adverse
effect on the Company's operations. For the fiscal year ended December 31, 1996,
the Company derived 25.4% and 42.8% of its total revenues from the Medicare and
Medicaid programs, respectively. Any reforms that significantly limit rates of
reimbursement under the Medicare or Medicaid programs, including the balanced
budget plan, therefore, could have a material adverse effect on the Company's
profitability. The Company is unable to predict what reform proposals or
reimbursement limitations will be adopted in the future or the effect such
changes will have on its operations. No assurance can be given that such reforms
will not have a material adverse effect on the Company. See "Business -- Source
of Revenues and Payor Mix" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
GOVERNMENT REGULATION. The federal government and all states in which the
Company operates regulate various aspects of its business. Various federal and
state laws regulate relationships among providers of services, including
employment or service contracts and investment relationships. The operation of
home health care providers and long-term care facilities and the provision of
services are also subject to federal, state and local laws relating to, among
other things, the adequacy of medical care, distribution of pharmaceuticals,
equipment, personnel, operating policies, fire prevention and compliance with
building codes. Long-term care facilities are also subject to periodic
inspection to assure continued compliance with various standards and licensing
requirements under state law. The failure to obtain or renew any required
regulatory approvals or licenses could adversely affect the Company's growth and
could prevent it from offering its existing or additional services. In addition,
health care is an area of extensive and frequent regulatory change. Changes in
the laws or new interpretations of existing laws can have a significant effect
on methods and costs of doing business and amounts of payments received from
governmental and other payors. The Company's operations could be adversely
affected by, among other things, regulatory developments such as mandatory
increases in the scope and quality of care to be afforded patients and revisions
in licensing and certification standards. Government regulators recently
announced plans to impose new regulations on home health care providers and to
increase regulatory enforcement activities. The Company at all times attempts to
comply with all applicable laws; however, there can be no assurance that
administrative or judicial interpretation of existing laws or regulations will
not have a material adverse effect on the Company's operations or financial
condition. Also, there can be no assurance that federal, state or local laws or
regulatory procedures which might adversely affect the Company's business,
financial condition, results of operations or prospects will not be expanded or
imposed. Most states have adopted certificate of need ("CON") or similar laws
that generally require that the appropriate state agency approve certain
acquisitions and determine that a need exists for certain new services, the
addition of beds and capital expenditures or other changes. To the extent that
CON or other similar approvals are required for expansion of the Company's
operations, either through facility acquisitions or expansion or provision of
new services or other changes, such expansion could be adversely affected by the
failure or inability to obtain the necessary approvals, changes in standards
applicable to such approvals and possible delays and expenses associated with
obtaining such approvals. CON laws are also subject to being repealed or
modified which could increase competition by lowering competitors' barriers to
enter certain markets. Health care facilities receiving government reimbursement
are also subject to periodic audits of amounts received through such
reimbursement programs. There can be no assurance that any amounts required to
be repaid by the
9
<PAGE>
Company as a result of any such audit will not exceed reserves or provisions
established for such contingencies. See "Business -- Government Regulation."
CONCENTRATION OF FACILITIES IN CERTAIN STATES. At June 1, 1997, the Company
operated 33 owned or leased facilities with 3,341 beds and managed 17 facilities
with 1,840 beds in the states of North Carolina, Michigan and Indiana,
representing 57% of the Company's owned or leased beds and 60% of the Company's
managed beds, respectively. This concentration of facilities in these states
makes the Company vulnerable to changes in federal or state legislation or
budgetary controls that may negatively impact the amount and method of Medicaid
payments by such states and to increased competition. There can be no assurance
that increased competition, changes in the laws, regulations, agency procedures
or budgetary controls relating to the Medicaid program in such states, if
enacted or adopted, would not have a material adverse effect on the Company. See
"Business -- Facilities."
COMPETITION. The long-term care industry is highly competitive, and the
Company faces direct competition for the acquisition and/or management of
facilities. In turn, its facilities face competition for employees and patients.
Some of the Company's present and potential competitors are significantly larger
and have or may obtain greater financial and marketing resources than those of
the Company. The Company competes for patients with other long-term care
facilities and, to a lesser extent, with acute care hospitals, physician
practice groups, home health care providers, community-based service programs,
retirement communities and assisted living centers. In addition, competition may
increase from new market entrants, including companies focusing primarily on
specific components of the Company's various services. There can be no assurance
that the Company will not encounter increased competition in the future, which
could limit its ability to attract patients or expand its business and could
have a material adverse effect on its business or decrease its market share. See
"Business -- Competition."
LICENSING AND OTHER INTANGIBLES INCLUDING GOODWILL. Upon an acquisition by
the Company, the purchase price is allocated among the identifiable tangible and
intangible net assets. The Company's recent acquisition activity has resulted in
an increase in intangible assets over historical levels. Such intangible assets
are amortized over the estimated useful life of the related assets. If the value
of any such assets should be impaired, the Company may be required to write-down
the related intangible assets, which could have a material adverse effect on
earnings.
LEVERAGE. The Company's long-term debt obligations, after giving effect to
the use of proceeds from the Offering, will total approximately $62.4 million,
including the Senior Credit Facility, debt on facilities owned by the Company
(the "Facility Debt"), capital lease obligations and other debt characterized as
long-term. The Company is also the lessee under long-term operating leases for
long-term care facilities, equipment and office space which had aggregate rent
payments of $18.8 million in 1996 and which generally provide for annual rent
increases and payment by the Company of taxes, insurance and other obligations.
After giving effect to the use of proceeds from the Offering, the Company's
total shareholders' equity will be approximately $89.2 million. The degree to
which the Company is and will be leveraged and subject to significant lease
obligations could have important consequences to the Company, including limiting
the Company's ability to obtain additional financing in the future for working
capital, capital expenditures, facility acquisitions, expansions or developments
and/or the refinancing of existing debt. In addition, a substantial portion of
the Company's cash flows from operations may be dedicated to the payment of
principal and interest on its indebtedness and rent expense, thereby reducing
the funds available to the Company for its operations and to support its growth.
Certain of the Company's current debt and lease agreements contain
cross-collateral and cross-default provisions and financial and other
restrictive covenants, including restrictions on the incurrence of additional
indebtedness, the creation of liens, the payment of dividends and the sale of
assets. Certain lenders to lessors of the Company's leased facilities have
rights upon default in lease provisions that could adversely affect the
Company's rights to continue as lessee. There can be no assurance that the
Company's operating results will be sufficient to support the payment of the
Company's indebtedness
10
<PAGE>
and rent expense. See "Business -- Facilities" and "-- Office Leases" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "-- Summary of Facility Lease
Terms."
REVENUES FROM MANAGED FACILITIES. Income from managing long-term care
facilities pursuant to management agreements between the Company and certain
affiliated or third parties presently comprises a material portion of the
Company's net income. All management agreements may be terminated only for
cause, except for five agreements with public limited partnerships that may be
terminated upon sixty days notice. In most instances, management fees are
subordinate to debt service payments and the managed facilities could be subject
to foreclosure by lenders. The terms of these management agreements range from
five to 20 years, and contain renewal provisions. The loss of these management
agreements could have a material adverse effect on the Company. See "Business --
Facilities" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Summary of Management Agreement Terms."
POTENTIAL CONFLICTS OF INTEREST. Mr. Eaton owns all of the outstanding
stock of certain corporations, formerly indirect subsidiaries of the Company,
that serve as general partners of partnerships owning five facilities managed by
the Company. In this corporate general partner role, Mr. Eaton, acting on behalf
of such corporations, could have a conflict of interest with Centennial with
respect to these management agreements. See "Certain Transactions."
DEPENDENCE ON KEY PERSONNEL. The Company believes that it has benefited
substantially from the leadership of J. Stephen Eaton, the Company's Chairman of
the Board, Chief Executive Officer and President, and that the loss of his
services would have a material adverse effect on the Company's business and
future operations. The Company's success and its growth strategy also depend
upon the continued contributions of the Company's other executive management
including, Alan C. Dahl, Kent C. Fosha, Sr. and Randall J. Bufford. See
"Management -- Executive Officers, Key Employees and Directors."
STAFFING ISSUES. The Company's growth strategy is dependent in large part
on its ability to attract and retain management, marketing and other personnel
at its facilities. The Company competes with general acute care hospitals,
rehabilitation facilities, nursing homes, ambulatory care facilities and other
providers for the services of registered nurses, therapists and other
professional personnel. From time to time, there have been shortages in the
supply of available registered nurses, certified nursing assistants and various
types of therapists. There can be no assurance that the Company will be able to
attract and retain the qualified personnel necessary for its business and
planned growth. The long-term care industry is experiencing increased union
activities that could have a material adverse effect by requiring the Company to
negotiate higher wages and/or benefits for its employees. Any increases in the
minimum wage could also have a material adverse effect on the Company. See
"Business -- Personnel."
BENEFITS OF THE OFFERING TO CERTAIN DIRECTORS AND SIGNIFICANT
SHAREHOLDERS. WCAS VI, WCAS Healthcare and WCAS Capital, for which two of the
Company's directors, Andrew M. Paul and James B. Hoover, serve as general
partners of the sole general partner, hold approximately 96.2% of the
Subordinated Debt (as defined below), 82.3% of the Series C Preferred Stock and
88.5% of the Series E Redeemable Preferred Stock (as defined below). Messrs.
Paul and Hoover also hold in their individual capacities 716 shares of Series C
Preferred Stock which are convertible into 7,193 shares of Common Stock upon the
closing of the Offering. The Company plans to use a portion of the proceeds of
the Offering to repay the Subordinated Debt and redeem the Series E Redeemable
Preferred Stock and, to the extent that additional net proceeds attributable to
the sale of shares of Common Stock pursuant to the exercise of the Underwriters'
over-allotment option are realized, to acquire at the Price to Public shares of
Common Stock pro rata from certain former holders of the Series C Preferred
Stock in accordance with a stock repurchase agreement (the "Stock Repurchase
Agreement") among the Company and certain former holders of the Series C
Preferred Stock (the "Former Holders"). If the Underwriters exercise their
11
<PAGE>
over-allotment option in full, the Company will repurchase 558,000 shares of
Common Stock from the Former Holders. This contemplated use of proceeds will
directly benefit Messrs. Paul and Hoover individually, as well as WCAS VI, WCAS
Healthcare and WCAS Capital, and the two directors as general partners thereof,
through the repayment of debt of which one partnership holds approximately
96.2%, through the repurchase of certain shares of unregistered Common Stock
received by the partnerships and the two directors individually after conversion
of the Series C Preferred Stock and through the redemption of the Series E
Redeemable Preferred Stock. The proceeds used to accomplish these purposes will
not be available to the Company for other purposes. See "Use of Proceeds" and
"Certain Transactions."
LIABILITY AND INSURANCE. The provision of health care services entails an
inherent risk of liability. In recent years, long-term care providers have
become subject to an increasing number of lawsuits alleging medical malpractice,
wrongful death, wrongful termination of employment or other related legal
theories, many of which involve large claims and significant defense costs. It
is expected that the Company from time to time will be subject to such suits as
a result of the nature of its business. The Company currently maintains
liability insurance intended to cover such claims which it believes is in
keeping with industry standards. There can be no assurance, however, that claims
in excess of the Company's insurance coverage or claims not covered by the
Company's insurance coverage (e.g., claims for punitive damages) will not arise.
A successful claim against the Company in excess of the Company's insurance
coverage could have a material adverse effect upon the Company and its financial
condition. Claims against the Company, regardless of their merit or eventual
outcome, may also have a material adverse effect upon the Company's ability to
attract patients or expand its business. In addition, the Company's insurance
policies must be renewed annually. There can be no assurance that the Company
will be able to obtain liability insurance coverage in the future on acceptable
terms, if at all. See "Business -- Insurance."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of Common Stock
in the public market following the Offering could adversely affect prevailing
market prices. Several of the Company's principal shareholders hold a
significant portion of the Company's outstanding Common Stock and a decision by
one or more of these shareholders to sell their shares could adversely affect
the market price of the Common Stock. Holders of 7,419,096 shares of Common
Stock which will be outstanding upon the completion of the Offering have agreed
not to sell or otherwise dispose of any shares of Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
Alex. Brown & Sons Incorporated (the "Lock-up Agreements"). Subject to the
foregoing restrictions, commencing 90 days following the date of this
Prospectus, 6,991,582 shares of Common Stock will become eligible for sale
pursuant to Rule 144 promulgated under the Securities Act ("Rule 144"), subject
to compliance with the volume limitation and other requirements of Rule 144 or
compliance with Rule 701 promulgated under the Securities Act ("Rule 701") with
respect to shares issued in connection with the exercise of options. Additional
shares of Common Stock, including additional shares issuable upon the exercise
of options, will also become eligible for sale in the public market from time to
time in the future. In addition, the Company intends to register on Form S-8,
within 30 days after the date of this Prospectus or as soon as practicable, a
total of 986,621 shares of Common Stock which are subject to outstanding options
or reserved for issuance under Centennial's stock option plans. After 180 days
from the date of this Prospectus, certain shareholders, who hold approximately
6,953,236 shares of Common Stock, will be entitled to certain demand and
piggyback registration rights with respect to such shares. In addition, as part
of the consideration for the Home Health Acquisition, the sellers received a
note which may be converted into 142,857 shares of Common Stock after 180 days
after the closing of the Offering and will have piggyback registration rights.
If these shareholders, by exercising their registration rights, cause a large
number of shares to be registered and sold in the public market, such sales
could have a material adverse effect on the market price for the Common Stock.
See "Management -- Stock Plans," "Shares Eligible for Future Sale --
Registration Rights" and "Underwriting."
12
<PAGE>
DILUTION. The existing shareholders of the Company acquired their shares of
Common Stock at an average cost substantially below the offering price set forth
on the cover page of this Prospectus. Accordingly, purchasers of the shares of
Common Stock offered hereby will experience immediate and substantial dilution
in pro forma net tangible book value per share of approximately $9.39 (assuming
an initial public offering price of $14.00 per share). See "Dilution."
CONTROL BY EXECUTIVE OFFICERS AND DIRECTORS. Upon completion of the
Offering, the Company's executive officers and directors and their affiliates
will beneficially own approximately 48.3% of the outstanding shares of the
Common Stock and a right to purchase an additional 1.8 % of the outstanding
Common Stock through the exercise of currently exercisable options
(approximately 43.9% and 1.8%, respectively, if the Underwriters' over-allotment
option is exercised in full and reflecting the Stock Repurchase Agreement). As a
result, these shareholders, acting together, would be able to exert substantial
influence over the Company and matters requiring approval by the shareholders of
the Company, including the election of the directors. The voting power of these
shareholders under certain circumstances could have the effect of delaying or
preventing a change in control of the Company. See "Management" and "Principal
Shareholders."
POTENTIAL ANTI-TAKEOVER EFFECTS OF ARTICLES AND BYLAW PROVISIONS, THE
GEORGIA ACT AND EMPLOYMENT AGREEMENTS. Certain provisions of Georgia law and
certain provisions of the Company's Third Amended and Restated Articles of
Incorporation (the "Articles") and the Company's Bylaws (the "Bylaws") could
delay or impede the removal of incumbent directors and could make it more
difficult for a third-party to acquire, or could discourage a third-party from
attempting to acquire, control of the Company. Such provisions could limit the
price that certain investors might be willing to pay in the future for shares of
the Company's Common Stock. The Articles and Bylaws impose various procedural
and other requirements (including a staggered board of directors, a shareholder
rights plan and the issuance of preferred stock as described below) that could
make it more difficult for shareholders to effect certain corporate actions. The
Articles give the Company's Board of Directors the authority to issue up to 50
million shares of preferred stock and to determine the price, rights,
preferences and restrictions, including the voting rights of such shares,
without any further vote or action by the Company's shareholders. The rights of
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock issued in the future. The
Company has no current plans to issue such preferred stock. The "fair price" and
"business combinations" statutes under Georgia law may restrict certain business
combinations by interested shareholders. See "Description of Capital Stock --
Certain Provisions of the Articles, Bylaws and Georgia Law." The Company's
executive officers have entered into employment agreements with the Company
which contain change in control provisions. The change in control provisions may
hinder, delay, deter or prevent a tender offer, proxy contest or other attempted
takeover because the covered employees can terminate their employment and
receive payments for twelve to 24 months after termination pursuant to their
respective agreements. See "Management -- Employment Agreements and Change of
Control Arrangements."
ABSENCE OF PREVIOUS MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK
PRICES; OFFERING PRICE DETERMINED BY NEGOTIATION. Prior to the Offering, there
has been no public market for the Common Stock, and although the Common Stock
has been approved for quotation on the Nasdaq National Market, there can be no
assurance that an active trading market will develop or be sustained after the
Offering. After completion of the Offering, the market price of the Common Stock
could be subject to significant fluctuations in response to various factors and
events, including the depth and liquidity of the market for the Common Stock,
variations in the Company's operating results, litigation, new statutes or
regulations or changes in the interpretation of existing statutes or regulations
affecting the health care industry generally or the long-term care business in
particular or changes in general market conditions. The Company, in negotiation
with the representatives of the Underwriters, has determined the public offering
price based on the historical performance of the Company, its projected future
performance and the market conditions as they exist on the date of this
Prospectus. There may be no relationship between the offering price of the
Common Stock and the price at which the Common Stock will trade after completion
of the Offering. See "Underwriting."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered by the Company are estimated to be $50.8 million ($58.6
million if the Underwriters' over-allotment option is exercised in full),
assuming an initial offering price of $14.00 per share and after deducting
estimated underwriting discounts and commissions and Offering expenses.
The Company intends to use the net proceeds of the Offering to repay two
subordinated promissory notes accruing interest at 10.8% and 11.7% per annum
(the "Subordinated Debt") ($25.3 million); to redeem the Series E Redeemable
Preferred Stock (the "Series E Redeemable Preferred Stock") ($5.1 million); and
to repay a portion of the outstanding principal balance of its Senior Credit
Facility (as defined below) ($20.4 million). The Subordinated Debt is held by
WCAS Capital and CID Equity. The Series E Redeemable Preferred Stock is held by
WCAS Capital, South Atlantic Venture Fund II, Limited Partnership ("South
Atlantic II") and South Atlantic Venture Fund III, Limited Partnership ("South
Atlantic III"). Amounts repaid under the Company's Senior Credit Facility with
CoreStates Bank, N.A. ("CoreStates") as agent (the "Senior Credit Facility") are
available for reborrowing for acquisitions and general corporate purposes.
Upon the closing of the Offering, the Series C Preferred Stock, which is
held by WCAS VI, WCAS Healthcare, CID Equity and certain other shareholders,
will convert into shares of Common Stock based on the Price to Public. To the
extent the Underwriters exercise their over-allotment option, a portion of these
shares of Common Stock will be repurchased at the Price to Public by the Company
with the net proceeds from such exercise. Assuming exercise in full of the
Underwriters' over-allotment option, the net proceeds from such exercise ($7.8
million) will be used to repurchase at the Price to Public 558,000 shares of
Common Stock pro rata from the Former Holders. The stock repurchase with the net
proceeds to the Company from the exercise of the Underwriters' over-allotment
option, if any, has been offered to the Former Holders as consideration for
their agreement to convert the Series C Preferred Stock into shares of Common
Stock, at a conversion ratio based on the Price to Public in the Offering. The
Series C Preferred Stock did not previously allow or require conversion upon the
Offering. This Series C Preferred Stock previously accrued dividends at 12% a
year. Therefore, the conversion is beneficial to the Company by extinguishing
this dividend obligation.
The terms of the Senior Credit Facility require that the Company use 50% of
the net cash proceeds of the Offering, after the elimination of the Subordinated
Debt and the redemption of the Series E Redeemable Preferred Stock, to repay a
portion of the outstanding principal balance of the Senior Credit Facility. The
Senior Credit Facility provides for advances to the Company of up to a maximum
of $65.0 million and is repayable in 15 quarterly installments beginning on
March 15, 1999, with repayment in full on or before September 30, 2002, if not
earlier accelerated. Amounts outstanding under the Senior Credit Facility accrue
interest at varying rates applicable at the time of each advance. The Company
can elect a rate tied to either the prime rate of CoreStates or LIBOR, each
increased by the "applicable margin," as defined in the Senior Credit Facility,
which is dependent upon the ratio of debt to earnings before interest, taxes,
depreciation, amortization and operating lease expense. The Company has
approximately $53.0 million borrowed and currently outstanding under the Senior
Credit Facility (excluding letters of credit) bearing interest at a weighted
average rate of 8.3% per annum. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
14
<PAGE>
DIVIDEND POLICY
Since inception, the Company has not declared or paid any cash dividends on
its Common Stock. The Company has paid dividends on the Series A Preferred Stock
since April 1, 1993 and the Series B Preferred Stock since the third calendar
quarter of 1994. Dividends have accrued on the Series C Preferred Stock since
January 5, 1996 and dividends have accrued on the Series D Preferred Stock since
January 31, 1997. In addition, the Company has paid dividends on the Series E
Redeemable Preferred Stock since January 31, 1997. The Company will no longer
pay or accrue dividends to the holders of such Preferred Stock upon the
completion of the Offering as a result of the conversion of such Preferred Stock
into Common Stock or the redemption of such Preferred Stock. The Company issued
a stock dividend, effective January 6, 1996, to all of its shareholders and
optionholders as a condition to the Transitional Merger. In lieu of cash
dividends on its Common Stock, the Company intends to retain earnings to finance
operations and expand the Company's business. Additionally, the terms of certain
credit facilities the Company has with its lenders, including the Senior Credit
Facility, restrict the payment of cash dividends to the holders of Common Stock.
The payment of any cash dividends on the Common Stock is unlikely in the
foreseeable future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company: (i) as of
March 31, 1997; (ii) on a pro forma basis to give effect to the conversion of
the Special Voting Common Stock, Series A and B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock into Common Stock; and (iii) on an
as adjusted basis to reflect the sale by the Company of 4,000,000 shares of
Common Stock offered hereby at an initial offering price of $14.00 per share,
including the sale of 239,860 shares of treasury stock, and the application of
the estimated net proceeds therefrom as described in "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA (1) ADJUSTED (1)
------------ -------------- ------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
Current maturities of long-term debt................................ $ 1,879 $ 1,879 $ 1,879
------------ -------------- ------------
------------ -------------- ------------
Long-term debt, less current maturities:
Subordinated Debt (2)............................................... $ 24,379 $ 24,379 --
Senior Credit Facility.............................................. 47,000 47,000 $ 26,582
Facility Debt....................................................... 15,909 15,909 15,909
Obligations under capital leases.................................... 19,885 19,885 19,885
------------ -------------- ------------
Total long-term debt............................................ 107,173 107,173 62,376
------------ -------------- ------------
Preferred Stock:
Series A Preferred Stock, par value $11.0011 per share; 205,541
shares authorized and outstanding, actual; no shares outstanding,
pro forma and pro forma as adjusted................................ 2,182 -- --
Series B Preferred Stock, par value $8.7377 per share; 328,892
shares authorized and outstanding, actual; no shares outstanding,
pro forma and pro forma as adjusted................................ 3,413 -- --
Series C Preferred Stock, par value $1.00 per share; 144,086 shares
authorized and outstanding, actual; no shares outstanding, pro
forma and pro forma as adjusted.................................... 16,143 -- --
Series D Preferred Stock, par value $1.00 per share; 50,000 shares
authorized and outstanding, actual; no shares outstanding, pro
forma and pro forma as adjusted.................................... 5,000 -- --
Series E Redeemable Preferred Stock, par value $1.00 per share;
50,000 shares authorized and outstanding, actual; 50,000 shares
issued and outstanding, pro forma; no shares outstanding, pro forma
as adjusted........................................................ 5,062 5,062 --
------------ -------------- ------------
Total preferred stock......................................... 31,800 5,062 --
------------ -------------- ------------
Shareholders' equity:
Common Stock, $0.01 par value per share; 50,000,000 shares
authorized; 2,108,132 and 1,868,272 shares issued and outstanding,
respectively, actual; 7,764,982 and 7,525,122 shares issued and
outstanding, respectively, pro forma; 11,525,122 shares issued and
outstanding, pro forma as adjusted................................. 21 78 115
Special Voting Common Stock, no par value; 5,000,000 shares
authorized; 2,942,520 shares issued and outstanding actual; no
shares outstanding, pro forma and pro forma as adjusted............ -- -- --
Paid-in capital..................................................... 5,716 36,554 85,810
Retained earnings................................................... 8,900 4,743 3,822
Less: treasury stock (239,860 shares actual; none pro forma as
adjusted)....................................................... (1,487 ) (1,487 ) --
------------ -------------- ------------
13,150 39,888 89,747
Note receivable from shareholder................................ (528 ) (528 ) (528 )
------------ -------------- ------------
Net shareholders' equity...................................... 12,622 39,360 89,219
------------ -------------- ------------
Total capitalization........................................ $ 151,595 $ 151,595 $ 151,595
------------ -------------- ------------
------------ -------------- ------------
</TABLE>
- ------------------
(1) Includes accrual of dividends on the Series C Preferred Stock through June
30, 1997. The accrual of dividends has been included as a charge to Retained
Earnings.
(2) Subordinated Debt is shown net of a discount on issuance of $920,842.
16
<PAGE>
DILUTION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The historical net tangible book value of the Company at March 31, 1997 was
approximately $(23,418), or approximately $(4.87) per share of Common Stock and
Special Voting Common Stock. The pro forma net tangible book value of the
Company at March 31, 1997 was approximately $3,320, or approximately $0.44 per
share. Pro forma net tangible book value per share represents the amount of
total assets, excluding intangibles (excess of cost over fair value of net
assets acquired), less total liabilities, divided by the aggregate number of
shares of Common Stock outstanding as of March 31, 1997 (on a pro forma basis
after giving effect to the conversion of the Special Voting Common Stock, Series
A and B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
into 5,656,850 shares of Common Stock). Dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in the Offering and the pro forma net tangible book value per share of
Common Stock immediately after completion of the Offering. After giving effect
to the sale of 4,000,000 shares of Common Stock in the Offering and the
application of the net proceeds therefrom as described in "Use of Proceeds," and
after deducting the estimated underwriting discounts and offering expenses to be
paid by the Company, the pro forma net tangible book value of the Company at
March 31, 1997 would have been $53,179, or $4.61 per share of Common Stock. This
represents an immediate increase in net tangible book value per share of $9.48
to existing shareholders and an immediate dilution in net tangible book value of
$9.39 per share to new investors purchasing shares in the Offering. Investors
participating in the Offering will incur immediate dilution. The following table
illustrates the per share dilution at March 31, 1997:
<TABLE>
<S> <C> <C>
Initial public offering price per share (1)................................ $ 14.00
Historical net tangible book value per share............................. $ (4.87)
Pro forma net tangible book value per share.............................. .44
Increase per share attributable to new investors......................... 9.04
---------
Pro forma net tangible book value per share after the Offering............. 4.61
---------
Dilution per share to new investors........................................ $ 9.39
---------
---------
</TABLE>
The following table sets forth, on a pro forma basis, as of March 31, 1997
(giving pro forma effect to the conversion of the Special Voting Common Stock,
Series A and B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock into Common Stock), the number of shares of Common Stock purchased from
the Company, the total consideration paid to the Company and the average price
per share paid by existing shareholders and by the new investors purchasing
shares of Common Stock from the Company in the Offering (before deducting
underwriting discounts and commissions and estimated Offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED (2) TOTAL CONSIDERATION
----------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............................. 7,525 65% $ 36,315 39.3% $ 4.83
New investors..................................... 4,000 35% 56,000 60.7 14.00
----------- ----- ----------- -----
Total....................................... 11,525 100.0% $ 92,315 100.0%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
- ------------------
(1) Before deducting underwriting discounts and commissions and estimated
Offering expenses.
(2) The foregoing tables exclude shares issuable upon exercise of options
outstanding at March 31, 1997. As of March 31, 1997, there were outstanding
options to purchase 536,285 shares of Common Stock at a weighted average
exercise price of $12.75 per share. To the extent that outstanding options
are exercised in the future, there will be further dilution to new
investors. See "Management -- Stock Plans" and Note 11 to Consolidated
Financial Statements.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data
and is qualified by reference to and should be read in conjunction with the
Consolidated Financial Statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The selected consolidated financial data
for the three months ended March 31, 1996 and 1997, has been derived from the
Company's Condensed Consolidated Financial Statements, which are unaudited. The
selected consolidated financial data for the seven months ended December 31,
1995 and the years ended December 31, 1995 and December 31, 1996, has been
derived from the Company's Consolidated Financial Statements, which have been
audited by Coopers & Lybrand L.L.P., independent accountants. The selected
financial data for the years ended May 31, 1992, 1993, 1994 and 1995 has been
derived from the Company's Consolidated Financial Statements, which have been
audited by BDO Seidman, LLP, independent accountants.
<TABLE>
<CAPTION>
Three Months
Seven Months Years Ended
Years Ended May 31, Ended December 31, Ended March 31,
--------------------------------- December 31, ----------------- ----------------
1992 1993 1994 1995 1995 1995(1) 1996 1996 1997
------ ------- ------- ------- ------------ ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(unaudited)
(in thousands, except per share data)
Statement of Operations Data:
Net patient service revenues............ $ -- $ 6,863 $38,115 $61,856 $42,103 $71,862 $227,387 $54,587 $62,372
Management fee and other revenues....... 2,645 4,435 3,384 3,362 2,108 3,364 5,660 1,348 1,863
------ ------- ------- ------- ------------ ------- -------- ------- -------
Total revenues...................... 2,645 11,298 41,499 65,218 44,211 75,226 233,048 55,935 64,235
Facility operating expenses............. -- 5,331 29,510 48,872 35,262 58,566 183,324 45,188 49,671
Lease expense........................... 67 927 4,823 6,901 4,651 7,701 18,777 4,533 5,084
Corporate administrative costs.......... 1,561 3,004 2,927 3,396 3,526 5,027 11,400 3,067 3,368
Depreciation and amortization........... 28 48 82 290 429 738 5,012 1,158 1,521
------ ------- ------- ------- ------------ ------- -------- ------- -------
Operating income before net interest
expense and equity in income
(loss) of unconsolidated
partnerships...................... 989 1,988 4,157 5,759 343 3,194 14,535 1,989 4,591
Interest income (expense), net.......... (23) 32 131 57 (116) (177) (9,373) (2,088) (2,480)
Equity in income (loss) of
unconsolidated partnerships........... (403) (2,766) 1,733 (28) 25 449 (108) -- --
------ ------- ------- ------- ------------ ------- -------- ------- -------
Income (loss) before income taxes
and minority interest and
extraordinary item................ 563 (746) 6,021 5,788 252 3,466 5,054 (99) 2,111
Provision (benefit) for income taxes.... 233 (160) 2,230 2,106 328 1,389 2,092 (41) 796
------ ------- ------- ------- ------------ ------- -------- ------- -------
Income (loss) before minority interest
and extraordinary item................ 330 (586) 3,791 3,682 (76) 2,077 2,962 (58) 1,315
Minority interest in net income of
subsidiary, net of income taxes....... -- -- -- (207) (82) (201) (183) (47) (74)
------ ------- ------- ------- ------------ ------- -------- ------- -------
Net income (loss) before extraordinary
item.................................. 330 (586) 3,791 3,475 (158) 1,876 2,779 (105) 1,241
Extraordinary item--foregiveness of
debt, net of income taxes............. -- -- 1,598 250 -- -- -- -- --
------ ------- ------- ------- ------------ ------- -------- ------- -------
Net income (loss)....................... $ 330 $ (586) $ 5,389 $ 3,725 $ (158) $ 1,876 $ 2,779 $ (105) $ 1,241
------ ------- ------- ------- ------------ ------- -------- ------- -------
------ ------- ------- ------- ------------ ------- -------- ------- -------
Per common share data:
Income (loss) before extraordinary
item.................................. $ 0.11 $ (0.26) $ 1.60 $ 1.35 $ (0.06) $ 0.72 $ 0.12 $ (0.12) $ 0.09
Extraordinary item -- foregiveness of
debt, net of taxes.................... -- -- 0.68 0.10 -- -- -- -- --
------ ------- ------- ------- ------------ ------- -------- ------- -------
Net income (loss) (2)................... $ 0.11 $ (0.26) $ 2.28 $ 1.45 $ (0.06) $ 0.72 $ 0.12 $ (0.12) $ 0.09
------ ------- ------- ------- ------------ ------- -------- ------- -------
------ ------- ------- ------- ------------ ------- -------- ------- -------
Weighted average number of common and
common stock equivalents
outstanding........................... 2,959 2,267 2,363 2,576 2,601 2,601 4,782 4,777 4,827
------ ------- ------- ------- ------------ ------- -------- ------- -------
------ ------- ------- ------- ------------ ------- -------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
As of
As of May 31, December 31,
------------------------------------------ --------------------
1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Balance Sheet Data:
Working capital.................................... $ 724 $ 4,208 $ 5,540 $ 4,805 $ 3,984 $ 5,912
Total assets....................................... 1,722 4,392 14,172 25,499 155,018 193,448
Long-term debt and subordinated debt, less current
maturities....................................... 176 264 676 4,558 83,559 107,795
Preferred stock (3)................................ -- 1,650 4,300 9,187 19,455 21,305
Net shareholders' equity (deficit)................. 66 (1,051) 1,527 2,082 10,869 11,952
<CAPTION>
As of
March 31,
1997
------------
<S> <C>
(unaudited)
Balance Sheet Data:
Working capital.................................... $ 17,221
Total assets....................................... 201,142
Long-term debt and subordinated debt, less current
maturities....................................... 107,173
Preferred stock (3)................................ 31,800
Net shareholders' equity (deficit)................. 12,622
</TABLE>
- ------------------
(1) During 1995, the Company changed its fiscal year from May 31 to December 31
resulting in a seven month transition period ending December 31, 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Condensed Consolidated Financial Statements.
(2) Net income (loss) per common share for the fiscal year ended December 31,
1996 and fiscal quarters ended March 31, 1996 and 1997, excludes dividends
and accretion on preferred stock of $2,191,749, $471,976 and $786,363,
respectively.
(3) Carried at estimated redemption value with accretion of dividends charged
against shareholders' equity.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONNECTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THE PROSPECTUS.
DURING 1995, THE COMPANY CHANGED ITS FISCAL YEAR-END FROM MAY 31 TO DECEMBER 31.
ACCORDINGLY, THE COMPANY HAS RESTATED ITS OPERATING RESULTS FOR THE YEAR ENDED
DECEMBER 31, 1995 FOR PRESENTATION PURPOSES. REFERENCES TO FISCAL PERIODS FOR
THE COMPANY ARE FOR CALENDAR YEARS ENDING DECEMBER 31 UNLESS OTHERWISE NOTED.
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS."
OVERVIEW
COMPANY BACKGROUND
Prior to January 1993, the Company's primary growth strategy focused on
obtaining long-term management contracts for facilities, including, in some
cases, a right of first refusal to acquire the facilities. These management
contracts allowed the Company to establish a profitable base of operations
providing cash flow without requiring significant capital. The Company invested
its cash flow into developing its management infrastructure, including
attracting quality management personnel at the corporate and facility levels and
developing a sophisticated information system to support and enhance its growth.
In many cases, the Company assumed management responsibilities for facilities
that were producing operating losses or were generally underperforming and, in
some cases, had a history of licensure and regulatory problems. After assuming
management of these facilities, the Company improved financial performance and
facility operations, and enhanced the quality of patient care, thereby bringing
all of these facilities into regulatory compliance.
TRANSITION TO OWNER/OPERATOR
In 1993, the Company expanded its strategy to include the acquisition of
facilities and their operations through direct ownership or facility leases. The
Company's managed facilities represented strong candidates for acquisition by
Centennial, because the Company's information systems and management strategies
had already been implemented at these facilities.
The following table illustrates the Company's shift from managed toward
owned and leased facilities:
<TABLE>
<CAPTION>
AT MAY 31, AT DECEMBER 31, AT MARCH 31,
------------------------------- -------------------- ---------------
1993 1994 1995 1995 1996 1997
--------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Number of facilities:
Owned................................ 0 0 1 2 8 8
Leased............................... 1 14 16 16 46 46
--------- --------- --------- --------- --------- -----
Subtotal........................... 1 14 17 18 54 54
Managed.............................. 29 17 15 21 22 24
--------- --------- --------- --------- --------- -----
Total.............................. 30 31 32 39 76 78
--------- --------- --------- --------- --------- -----
--------- --------- --------- --------- --------- -----
Number of licensed available beds:
Owned................................ 0 0 154 231 837 837
Leased............................... 296 1,584 1,900 1,900 4,994 4,994
--------- --------- --------- --------- --------- -----
Subtotal........................... 296 1,584 2,054 2,131 5,831 5,831
Managed.............................. 3,050 1,886 1,603 2,171 2,282 2,538
--------- --------- --------- --------- --------- -----
Total.............................. 3,346 3,470 3,657 4,302 8,113 8,369
--------- --------- --------- --------- --------- -----
--------- --------- --------- --------- --------- -----
</TABLE>
19
<PAGE>
The operation of facilities through direct ownership or facility leases
provides greater financial rewards and risks than does the operation of
facilities through long-term management contracts. Under its management
contracts, the Company generally receives a monthly fee ranging from six to
seven percent of net revenues, regardless of facility performance, except for
three facilities where monthly fees equal the adjusted net income of each such
facility. With respect to owned or leased facilities, the Company receives the
entire financial benefit from operation of the facilities, as well as all of the
financial risks. The Company, through its management contracts, exercises
control of the day-to-day operations at managed facilities. At its leased and
owned facilities, however, the Company controls long-term operational decisions,
such as capital expenditures, in addition to the day-to-day operations.
INCREASED EMPHASIS ON SPECIALTY SERVICES
The Company seeks to expand the provision of specialty services at its
facilities in order to serve higher-acuity patients. Historically, many of the
Company's facilities provided only basic services and a limited number of
specialty services to their patients. Beginning in 1993, the Company emphasized
new specialty services and expanded existing services.
Centennial's revenues are derived primarily from providing basic and
specialty services through local health care delivery networks and management of
these networks. The Company's basic services include skilled nursing and
support, housekeeping, laundry, dietary, recreational and social services.
Specialty services include comprehensive rehabilitation therapy (including
physical, occupational and speech therapy), respiratory therapy, ventilator
care, infusion therapy, wound care, home health care and other subacute and
specialty services. The Company's growth in total revenues is attributable to
three principal factors: (i) expansion of specialty services in markets served
by the Company's owned, leased and managed facilities; (ii) improved payor mix
and operational performance; and (iii) the strategic acquisitions of long-term
health care facilities and related health care businesses. As a result of the
Transitional Merger and these efforts, the Company has significantly increased
its total revenues from specialty services:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ ------------------------------------------
1995 1996 1996 1997
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues:
Basic services...... $ 61,036 81.1% $ 148,753 63.8% $ 35,881 64.1% $ 40,722 63.4%
Specialty
services.......... 10,826 14.4 78,635 33.7 18,706 33.4 21,649 33.7
Management fees..... 3,364 4.5 5,660 2.5 1,347 2.5 1,864 2.9
--------- --------- --------- --------- --------- --------- --------- ---------
Total............. $ 75,226 100.0% $ 233,048 100.0% $ 55,934 100.0% $ 64,235 100.0%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
IMPROVEMENT IN PAYOR MIX AND OPERATIONAL PERFORMANCE
The Company's focus on higher-acuity patients and increased emphasis on
providing specialty services has enabled the Company to improve its payor mix.
In particular, the percentage of total revenues from Medicare has increased from
6.8% for the fiscal year ended May 31, 1993 to 25.4% for the
20
<PAGE>
fiscal year ended December 31, 1996. The Company's percentages of total revenues
from various payors are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE MONTHS
YEARS ENDED MAY 31, 31, ENDED MARCH 31,
---------------------------------- ---------------------- ----------------------
1993 1994 1995 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Percentage of total revenues:
Medicare........................... 6.8% 6.9% 15.0% 18.2% 25.4% 25.3% 26.8%
Private pay, management fees and
other(1)......................... 40.5 19.4 20.5 23.7 31.8 31.0 31.5
----- ----- ----- ----- ----- ----- -----
47.3 26.3 35.5 41.9 57.2 56.3 58.3
Medicaid........................... 52.7 73.7 64.5 58.1 42.8 43.7 41.7
----- ----- ----- ----- ----- ----- -----
Total............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
</TABLE>
- ------------------
(1) Private pay includes payments from third parties pursuant to contract
rehabilitation therapy services.
The Company's percentages of census from various payors are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ --------------------
1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Census by payor type (1):
Medicare................................. 2.4% 3.5% 6.8% 8.6% 8.8% 9.3%
Private pay, other....................... 9.8 14.0 20.8 23.8 24.2 25.5
--------- --------- --------- --------- --------- ---------
12.2% 17.5% 27.6% 32.4% 33.0% 34.8%
Medicaid................................. 87.8% 82.5% 72.4% 67.6% 67.0% 65.2%
</TABLE>
- ------------------
(1) Census data is computed by dividing total patient days by particular payor
type by total patient days for all payor types.
The Company closely monitors the following additional key measures of
operational performance at its leased and owned facilities:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ --------------------
1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue per patient day (1)................ -- $87.35 $ 100.30 $ 104.11 $ 102.98 $ 109.00
Occupancy rate (2)......................... 96.8% 95.6% 95.0% 91.9% 91.5% 91.7%
Number of rehabilitation therapy contracts
(3)(4)................................... 20 25 38 58 43 59
Number of rehabilitation therapists
(3)(4)................................... 53 94 159 434 202 505
Average revenue per rehabilitation contract
per month (3)............................ $ 57,900 $ 46,600 $ 50,400 $ 52,300 $ 53,600 $ 58,200
Number of home health care offices......... -- -- 2 5 2 5
Number of home health care visits(5)....... -- -- 42,000 294 9,110
</TABLE>
- ------------------
(1) Calculated as net patient service revenues earned at the Company's leased
and owned facilities, divided by total patient days for those facilities.
During the first nine months of 1993, Centennial had only one leased
facility and that facility was located in the District of Columbia. The
District of Columbia's Medicaid reimbursement rate greatly exceeds the
national average.
(2) Occupancy is computed by dividing annual patient day census by annual
patient days available in licensed available operating beds.
(3) Centennial acquired the rehabilitation therapy service provider that was a
party to these contracts and which employed these therapists in the
Transitional Merger, effective December 31, 1995.
(4) Represents therapists (includes licensed therapists and rehabilitation
technicians) employed by the Company. Of the 59 contracts at March 31, 1997,
25 were with the Company's leased and owned facilities.
(5) The Company acquired the operations of three home health offices in October
1996. The visits for 1996 include total visits for these offices for the
entire 1996 calendar year.
21
<PAGE>
STRATEGIC ACQUISITIONS
Effective December 31, 1995, the Company acquired all of the issued and
outstanding capital stock of Transitional through the Transitional Merger for
total consideration of approximately $96.8 million, including assumed long-term
debt of approximately $73.8 million. Through the Transitional Merger, the
Company added to its operations 36 skilled nursing facilities with 3,776 beds
located in Arkansas, North Carolina, Indiana, Kentucky and Michigan. Of these 36
facilities, four were owned, 31 were leased and one was managed. In the
Transitional Merger, the Company acquired a contract rehabilitation therapy
business that provided physical, occupational and speech therapy to 38 skilled
nursing facilities in 12 states. The transaction was accounted for as a purchase
and the Company's financial results include Transitional's results since the
date of the Transitional Merger.
At the time of the Transitional Merger, some of Transitional's facilities
were underperforming. During 1995, Transitional's facility operations suffered a
downturn while Transitional was for sale. In conjunction with the Transitional
Merger, the Company closed Transitional's corporate offices, initiated plans to
dispose of two of Transitional's leased facilities, integrated the Company's and
Transitional's information systems, implemented the Company's management plan
and objectives, realigned the Company's operational structure and regions to
complement the additional facilities and assimilated certain key personnel of
Transitional into the Company's management team. As a result, during the second
quarter of 1996, Transitional's facility operations began to stabilize.
Since the Transitional Merger, the Company has expanded its operations
through the Home Health Acquisition, the addition of three long-term facility
management agreements, the conversion of eight interim management agreements
into long-term management agreements, the addition of one management agreement
for a facility providing nursing home and long-term acute care hospital
services, the acquisition of two facilities previously managed by the Company
and the lease of a rural hospital with three home health care offices. Each of
these transactions has strengthened the Company's position in its regional
markets.
In March 1996, the Company entered into long-term management agreements with
NCHC, Inc. ("NCHC") to manage four of its leased North Carolina facilities with
a total of 480 beds. One of the four facilities, the Oaks at Sweeten Creek
("Sweeten Creek") was under construction and opened in July 1996. The Company
initially began managing these facilities under interim management agreements in
November 1995 for the then lessee, Evangeline Health Care, Inc. ("Evangeline").
Centennial has made certain advances to NCHC totaling approximately $1.1 million
pursuant to long-term notes receivable, which were used to fund NCHC's purchase
of leasehold interests of and working capital requirements for these facilities.
The acquisition loan to NCHC is evidenced by a promissory note in the
approximate principal amount of $4.6 million payable to the Company. Interest is
payable monthly on this note at a per annum rate equal to a specified prime
rate, plus three percent, not to exceed 12 percent, and the principal amount of
this note is due on December 31, 2006. The loan evidenced by this note was
funded through the Prior CoreStates Credit Facility (as defined below), and the
note is pledged to CoreStates. Under the Company's management agreements with
NCHC, while the Company is not obligated to provide working capital advances to
the facilities, to the extent that the Company funds operations at these
facilities, it is repaid from the revenue of the facilities, with interest at a
per annum rate equal to a specified prime rate, plus two percent. The effect of
this financing on the Company's on-going cash flows is not material. To the
extent the Company funds working capital advances at these facilities, it does
so with cash flow from operations or borrowings from its Senior Credit Facility
which either reduces Centennial's working capital or increases its borrowings
under its Senior Credit Facility.
In July 1996, the Company entered into long-term management agreements with
NC Health Care, Inc. ("NCI") to manage four of its North Carolina facilities
with a total of 328 beds (the "NCI Transaction"). The Company initially began
managing these facilities under interim management agreements in November 1995
for the then owner, Evangeline. In connection with these agreements, the Company
advanced Evangeline $1.2 million, which was repaid in connection with the NCI
Transaction.
22
<PAGE>
Centennial has made certain advances to NCI totalling approximately $957,000
pursuant to long-term notes receivable, which were used to fund NCI's purchase
of and working capital for these facilities. The acquisition loan to NCI is
evidenced by a promissory note in the approximate principal amount of $5.5
million payable to the Company. In addition, certain working capital advances to
NCI are evidenced by four promissory notes in the aggregate principal amount of
$500,000 payable to the Company. Interest is payable monthly on each of these
notes at a per annum rate equal to a specified prime rate, plus three percent,
not to exceed 12 percent and the principal amounts of these notes are due on
December 31, 2006. The acquisition loan and working capital advances were funded
through the Prior CoreStates Credit Facility, and the notes are pledged to
CoreStates. Under the Company's management agreements with NCI, while the
Company is not obligated to provide additional working capital advances to the
facilities, to the extent that the Company funds operations at these facilities,
it is repaid from the revenues of the facilities, with interest at a per annum
rate equal to a specified prime rate, plus two percent. The effect of this
financing on the Company's on-going cash flows is not material. To the extent
the Company funds operations at these facilities, it does so with cash flow from
operations or borrowings from its Senior Credit Facility which either reduces
Centennial's working capital or increases its borrowings under its Senior Credit
Facility.
In October 1996, the Company acquired substantially all of the assets of a
63 bed long-term health care facility located in Hancock, Michigan ("Cypress")
and a 122 bed long-term health care facility located in Ishpeming, Michigan
("Mather") for approximately $9.1 million. The Company had managed these
facilities under long-term management contracts for the seller since 1991. These
acquisitions were financed with borrowings under the Prior CoreStates Credit
Facility.
In October 1996, the Company entered into a long-term lease agreement for a
36 bed hospital with three licensed home health care offices based in
Blountstown, Florida ("Calhoun"). Calhoun is located in close proximity to a
newly constructed 81 bed long-term care facility managed by the Company. The
Calhoun transaction allows the Company to strategically leverage its existing
operations and create a continuum of care in the Blountstown community. The
lease agreement for Calhoun is not effective until the license for the facility
is transferred and the Company receives the necessary consents and approvals. In
the interim, the Company has entered into a management agreement under which the
Company receives a management fee equal to the pre-tax income of Calhoun. Under
the interim management agreement, the Company is not obligated to, but may,
provide working capital, and any such advances are repaid from operating cash
flow of the facility. Under the lease agreement, the Company will be obligated
to fund working capital. The effect of these working capital advances on the
Company's on-going cash flows is not material. To the extent the Company funds
operations at Calhoun, it does so with cash flow from operations or borrowings
from its Senior Credit Facility which either reduces Centennial's working
capital or increases its borrowings under its Senior Credit Facility.
Effective February 1, 1997, the Company assumed the management of a 112 bed
facility located in Farmington Hills, Michigan and a 144 bed facility located in
Novi, Michigan. The management agreements expire on January 31, 2017, with two
ten year renewal options. In addition, the Company has a right of first refusal
to purchase these facilities.
Effective May 1, 1997, the Company consummated the Home Health Acquisition
in which it acquired by merger Total Care Consolidated, Inc. ("TCC"), a provider
of home health services in North Carolina, South Carolina and Louisiana. Total
consideration of $8.0 million consisted of $6.0 million in cash which was
borrowed under the Senior Credit Facility and $2.0 million in the form of a
convertible promissory note bearing interest at 8.0% per annum. The note is
payable in quarterly installments of interest only, with the full principal
amount and all accrued and unpaid interest due on April 30, 1999. The note may
be converted at the option of its holder into shares of Common Stock at a
conversion price equal to the Price to Public at any time after 180 days
following the Offering. The transaction was accounted for as a purchase and the
Company's financial results will include TCC from the effective date of the
merger.
23
<PAGE>
Effective May 1, 1997, the Company assumed the management of Med-Link
Hospital and Capitol Hill Nursing Center, a facility which contains 23 long-term
acute care hospital beds and 152 skilled nursing beds located in the District of
Columbia. The management agreement has an initial term of five years, with two
five year renewal options. In connection with the management agreement, the
Company has also agreed to provide from its cash reserves an initial working
capital line of credit totaling $2.0 million to be used for operations. The
Company also obtained a first right of refusal to purchase the facility.
On June 1, 1997, Centennial entered into management agreements for five
long-term care facilities located in North Carolina. These management agreements
have initial terms of five years. In connection with these management
agreements, the Company also agreed to provide from its cash reserves a working
capital line of credit totaling $1.0 million to be used for operations. The
Company also obtained a right of first refusal to purchase these facilities.
In December 1996, Centennial assigned its lease of a 130 bed facility
located in Charlotte, North Carolina to an unaffiliated party and entered into a
long-term management agreement with this new lessee. The Company had identified
this facility as a facility held for disposition in connection with the
Transitional Merger. Beginning in January 1997, only management fees for this
facility will be included in the Company's financial statements.
SUMMARY OF FACILITY LEASE TERMS
The Company leases 46 facilities pursuant to long-term leases with various
lessors. The Company's lease arrangements are "triple net" leases, requiring the
Company, at its own expense, to maintain the premises and pay taxes, utilities
and insurance. In most cases, the leases are subordinate to certain security
interests in the facilities granted by the lessors to third-party lenders, but
the Company makes the debt repayments collateralized by such security interests
directly to the lenders and deducts it from the lease payments made to the
lessors.
Thirteen leases with one lessor have initial terms ranging from ten to 14
years and include options for two additional five-year terms. Six of these
leases have fixed payments, with the rest varying indirectly with changes in a
specified prime rate. The Company leases an additional 15 facilities from
various lessors with terms ranging from five to 27 years and lease payments with
annual increases based on the Consumer Price Index, revenue growth and/or fixed
formulas.
Eight leases with one lessor have 20-year initial terms, with options to
renew for five additional years. These leases average 15-year remaining terms.
These leases provide for minimum rents with annual increases. Six additional
leases with another lessor provide for initial terms of 20 years with options to
renew for two successive five-year terms. These leases provide for base rent and
additional rent based on a percentage of any increase in each facility's gross
revenues over the prior year, or the increase in the Consumer Price Index. Five
leases with another lessor provide for initial terms of ten years and options to
renew for two successive five-year terms, with a base rent plus additional rent
equal to the greater of 5% of the increase in each facility's revenue over the
prior year's revenues, or 3% of the prior year's total base rent and additional
rent.
SUMMARY OF MANAGEMENT AGREEMENT TERMS
The Company currently operates 30 facilities under long-term management
contracts. Under these management contracts, the Company performs day-to-day
management functions and provides certain corporate services, including group
contract purchasing, employee training and development, quality assurance
audits, human resource management, assistance in obtaining third-party
reimbursement, financial and accounting functions, policy development, system
design and development, and marketing support. The Company's information system
monitors certain key data for each managed facility, such as payroll, admissions
and discharges, cash collections, net patient care revenues, rental revenues,
staff trend analysis, and measurement of operational data on a per patient day
basis. The Company manages 25 facilities pursuant to management contracts with
independent third parties, with initial terms ranging
24
<PAGE>
from five to 20 years and that can be terminated only for cause. These 25
management contracts provide for monthly fees generally ranging from six to
seven percent of gross revenue, except for three facilities where monthly fees
equal the adjusted net income from the facility. The Company also manages five
facilities for three public limited partnerships. These five management
contracts provide for monthly management fees of six percent of net revenues and
have initial terms of 20 years and are subject to termination without cause upon
60 days notice. Certain of the management contracts provide for the
subordination of the management fees to the payment of the owner's debt service.
ACCOUNTING FOR INCOME/LOSS FROM UNCONSOLIDATED PARTNERSHIPS
Certain former indirect subsidiaries of the Company served as a general
partner of certain unconsolidated partnerships and recorded their share of the
net liabilities of these partnerships at an amount greater than the Company's
proportional ownership interest. The income or loss from the changes in the
partnerships' net liabilities from period to period generated significant
changes in the Company's net income or loss not related to the principal
operations of the Company. Income and losses from these changes in net
liabilities are included in other income (loss) in the Company's Statement of
Operations. The Company's sale of these corporate general partners in January
1997 will eliminate this income and loss going forward. The following pro forma
information excludes the effects of these losses:
<TABLE>
<CAPTION>
YEARS ENDED YEARS ENDED
MAY 31, DECEMBER 31,
-------------------- --------------------
<S> <C> <C> <C> <C>
1994 1995 1995 1996
--------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
As reported:
Income before income taxes and minority interest and
extraordinary item...................................... $ 6,021 $ 5,788 $ 3,466 $ 5,054
Net income................................................ 5,389 3,725 1,876 2,779
Equity in income (loss) of unconsolidated partnerships...... 1,733 (28) 449 (108)
Extraordinary item-forgiveness of debt,
net of taxes.............................................. 1,598 250 -- --
Pro forma:
Income before income taxes and minority interest.......... 4,288 5,816 3,017 5,162
Net income................................................ $ 2,699 $ 3,493 $ 1,607 $ 2,842
</TABLE>
In January 1997, the Company sold the stock of these former indirect
subsidiaries that served as general partners and recognized a net pre-tax loss
of approximately $253,000 on these sales in 1996 for financial statement
purposes.
CERTAIN UNUSUAL CHARGES
In 1995, the Company wrote-off approximately $670,000 in uncollectible 1995
and prior year advances to a facility no longer managed by the Company which was
foreclosed on by lenders of its third-party owner. Also in 1995, the Company
increased its reserves for patient accounts receivable by $600,000 to reflect a
more conservative balance, incurred transactional costs of approximately
$350,000 related to proposed financing activities and increased certain accrued
expenses by $300,000 for employee benefit costs to properly reflect the balance
of these liabilities on December 31, 1995.
In December 1996, the Company replaced its Prior CoreStates Credit Facility
with an expanded $65.0 million Senior Credit Facility placed with multiple
lenders whose senior coordinating syndicate bank is CoreStates. With a portion
of the proceeds of the Senior Credit Facility, the Company repaid both its
existing borrowings outstanding under its Prior CoreStates Credit Facility and
the medical claims
25
<PAGE>
facility and term loan with Heller Financial, Inc. assumed in connection with
the Transitional Merger (the "Heller Line"). The repayment of the Heller Line
resulted in a one-time charge of approximately $110,000 related to the write-off
of loan closing costs.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data included
in the Company's consolidated statements of income, as a percentage of total net
revenues for the two years ended May 31, 1994 and 1995 and the two years ended
December 31, 1995 and 1996.
<TABLE>
<CAPTION>
YEARS ENDED YEARS ENDED THREE MONTHS
MAY 31, DECEMBER 31, ENDED MARCH 31,
-------------------- -------------------- --------------------
STATEMENT OF OPERATIONS DATA: 1994 1995 1995 1996 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net patient service revenues........................... 91.8% 94.8% 95.5% 97.6% 97.6% 97.1%
Management fees and other revenues..................... 8.2 5.2 4.5 2.4 2.4 2.9
--------- --------- --------- --------- --------- ---------
Total revenues....................................... 100.0 100.0 100.0 100.0 100.0 100.0
Facility operating expenses............................ 71.1 74.9 77.9 78.7 80.7 77.4
Lease expense.......................................... 11.6 10.6 10.2 8.1 8.1 7.9
Corporate administrative costs......................... 7.1 5.2 6.7 4.9 5.5 5.2
Depreciation and amortization.......................... * * 1.0 2.1 2.1 2.4
--------- --------- --------- --------- --------- ---------
Operating income before net interest expense and
equity in income (loss) of unconsolidated
partnerships....................................... 10.0 8.8 4.2 6.2 3.6 7.1
Interest income (expense), net......................... * * * (4.0) (3.7) (3.9)
Equity in income (loss) of unconsolidated
partnerships......................................... 4.2 * * * * *
--------- --------- --------- --------- --------- ---------
Income before income taxes, minority interest and
extraordinary item................................. 14.5 8.9 4.6 2.2 * 3.3
Provision for income taxes............................. 5.4 3.2 1.8 * * 1.2
--------- --------- --------- --------- --------- ---------
Income (loss) before minority interest and
extraordinary item................................... 9.1 5.7 2.8 1.3 * 2.1
Minority interest in net income of subsidiary.......... * * * * * *
Net income before extraordinary item................... 9.1 5.3 2.5 1.2 * 1.9
Extraordinary item..................................... 3.9 * * * * *
--------- --------- --------- --------- --------- ---------
Net income............................................. 13.0% 5.7% 2.5% 1.2% *% 1.9%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- --------------
* Less than 1.0%
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NET PATIENT SERVICE REVENUES. Net patient service revenues increased from
$54.6 million in 1996 to $62.4 million in 1997, an increase of $7.8 million or
14.3%, of which approximately $4.6 million was attributable to the addition of
the operations of three long-term care facilities and the net addition of 16
rehabilitation therapy contracts. The remaining increase of $3.2 million was
attributable to growth in existing facility revenues that resulted primarily
from a shift in payor mix from Medicaid to Medicare and general rate increases.
MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues
increased from $1.3 million in 1996 to $1.9 million in 1997, an increase of
$600,000 or 46.2%, which was primarily attributable to the Company's net
addition of three facility management agreements during 1997 and the management
of Calhoun.
FACILITY OPERATING EXPENSES. Facility operating expenses increased from
$45.2 million in 1996 to $49.7 million in 1997, an increase of $4.5 million or
10.0%, of which approximately $2.6 million was
26
<PAGE>
attributable to the addition of the operations of three long-term care
facilities. The remaining $1.9 million was attributable to an increase in costs
at existing facilities, providing care for higher acuity patients and costs
related to the net addition of 16 rehabilitation therapy contracts during 1997.
CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased
from $3.1 million in 1996 to $3.4 million in 1997, an increase of $300,000 or
9.7%, which was due primarily to additional overhead to accommodate the
expansion in therapy contracts, and the addition of three facilities subsequent
to the first quarter of 1996 not previously operated by the Company.
LEASE EXPENSE. Lease expense increased from $4.5 million in 1996 to $5.1
million in 1997, an increase of $600,000 or 13.3%, of which approximately
$200,000 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 $400,000 increase was due primarily to an expansion of the Company's
corporate office lease along with rent escalations in certain facility leases.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased from $1.2 million in 1996 to $1.5 million in 1997, an increase of
$300,000 or 25.0%, which has due primarily to the facility acquisitions during
the fourth quarter of 1996.
INTEREST EXPENSE. Interest expense increased from $2.3 million in 1996 to
$2.6 million in 1997, an increase of $300,000 or 13.0%, which was attributable
to a net increase in the Company's total indebtedness by approximately $13.5
million.
PROVISION FOR INCOME TAXES. The Company's effective tax rate decreased from
41.4% in 1996 to 37.7% in 1997, a decrease of 3.7%. This increase was primarily
attributable to the Transitional Merger and permanent differences relating to
the amortization of goodwill. These permanent differences will not change in
future periods but will vary as a percentage of pre-tax income or loss.
YEARS ENDED DECEMBER 31, 1996 AND 1995
NET PATIENT SERVICE REVENUES. Net patient service revenues increased from
$71.9 million in 1995 to $227.4 million in 1996, an increase of $155.5 million
or 216.3%, of which $148.3 million was attributable to the Transitional Merger,
$4.0 million was attributable to other facility acquisitions, and $3.2 million
was attributable to growth in existing facility revenues that resulted primarily
from a shift in payor mix from Medicaid to Medicare and general rate increases.
Occupancy levels at the Company's facilities decreased from 95.0% at December
31, 1995 to 92.7% at December 31, 1996 primarily as a result of the Transitional
Merger. Occupancy rates, excluding Transitional's facilities, were 95.0% at
December 31, 1995 versus 94.0% at December 31, 1996.
MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues
increased from $3.4 million in 1995 to $5.7 million in 1996, an increase of $2.3
million or 67.6%, of which approximately $500,000 was attributable to the
addition of two facility management agreements in 1996, one of which was
acquired in the Transitional Merger, and the addition of a management agreement
for Calhoun, and $1.4 million was attributable to the recognition of management
fees for a portion of 1996 for seven facilities, as compared to only two months
of recognized management fees in 1995 for those facilities. The remaining
$400,000 increase resulted from increased revenues over the prior year in the
Company's existing managed facilities.
FACILITY OPERATING EXPENSES. Facility operating expenses increased from
$58.6 million in 1995 to $183.3 million in 1996, an increase of $124.7 million
or 212.8%, of which approximately $121.9 million was attributable to the
facilities added through the Transitional Merger, $3.1 million was attributable
to other facility acquisitions and $600,000 was attributable to an increase in
expenses at existing facilities. The increase in operating expenses was offset
in part by a $900,000 decrease in expenses attributable to certain unusual
charges related to reserves for patient accounts receivable and accrued expenses
related to employee benefits included in 1995.
27
<PAGE>
CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased
from $5.0 million in 1995 to $11.4 million in 1996, an increase of $6.4 million
or 128.0%, of which approximately $3.5 million resulted from overhead related to
the Company's acquired rehabilitation contract therapy business and $3.9 million
was primarily attributable to the integration of Transitional and the addition
of corporate personnel. The increase in these costs was offset in part by a $1.0
million decrease attributable to certain unusual charges related to the
write-off of advances to a facility no longer managed by the Company and certain
transactional costs related to proposed financing activities during 1995.
LEASE EXPENSE. Lease expense increased from $7.7 million in 1995 to $18.8
million in 1996, an increase of $11.1 million or 144.2%, of which approximately
$10.3 million was attributable to the Transitional Merger, and a portion of the
remaining increase was attributable to the Company's relocation and expansion to
its new corporate offices and the net sublease cost of its previous space.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased from $738,000 in 1995 to $5.0 million in 1996, an increase of $4.3
million, of which approximately $3.9 million was attributable to an increase in
depreciation and goodwill associated with the Transitional Merger and the
remaining amount was attributable to other acquisitions.
INTEREST EXPENSE. Interest expense increased from $590,000 in 1995 to $10.1
million in 1996, an increase of $9.5 million, of which approximately $8.4
million was attributable to the Transitional Merger (whereby the Company assumed
approximately $73.8 million in debt), and the remainder was attributable to
additional borrowings.
PROVISION FOR INCOME TAXES. The Company's effective tax rate increased from
40.1% in 1995 to 41.4% in 1996, an increase of 1.3%. This increase was primarily
attributable to the Transitional Merger and permanent differences relating to
the amortization of goodwill. These permanent differences will not change in
future periods but will vary as a percentage of pre-tax income or loss.
SEVEN MONTHS ENDED DECEMBER 31, 1995 AND 1994.
As previously discussed, the Company changed its fiscal year from May 31 to
December 31 resulting in a seven month transition period ending December 31,
1995. The Company has presented summarized information for the comparative seven
month period ended December 31, 1994 in Note 1 to the Consolidated Financial
Statements at page F-10.
TOTAL REVENUES. Total revenues increased from $34.2 million in 1994 to
$44.2 million in 1995, an increase of $10.0 million or 29.2%, of which $7.9
million was attributable to five facility acquisitions. The remaining $2.1
million was primarily attributable to revenue growth at existing facilities and
the addition of seven management agreements.
EXPENSES. Expenses increased from $31.3 million in 1994 to $43.9 million in
1995, an increase of $12.6 million or 40.3%, of which $9.9 million was
attributable to five facility acquisitions and $1.9 million was attributable to
certain unusual charges related to uncollectible advances to a managed facility
and an increase in reserves for patient accounts receivable and accrued
expenses. The remaining increase of $800,000 was attributable to increases in
expenses at existing facilities.
PROVISION FOR INCOME TAXES. The Company's effective tax rate increased from
42.8% in 1994 to 130.2% in 1995, an increase of 87.4%. This increase was
attributable to a decrease in pre-tax income and the corresponding effect of
permanent differences which do not vary as a percentage of pre-tax income.
28
<PAGE>
YEARS ENDED MAY 31, 1995 AND 1994
NET PATIENT SERVICE REVENUES. Net patient service revenues increased from
$38.1 million in 1994 to $61.9 million in 1995, an increase of $23.8 million or
62.5%, of which $9.5 million was attributable to the addition during 1995 of two
leased facilities and one owned facility. The remaining $14.3 million increase
was primarily due to the addition during 1994 of 13 leased facilities having
only a partial year of revenue in 1994, growth in existing facility revenues
that resulted primarily from a shift in payor mix from Medicaid to Medicare and
general rate increases. Census levels in the Company's existing facilities in
1995 experienced no significant changes as compared to 1994.
MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues
remained substantially unchanged at $3.4 million.
FACILITY OPERATING EXPENSES. Facility operating expenses increased from
$29.5 million in 1994 to $48.9 million in 1995, an increase of $19.4 million or
65.8%, of which $7.3 million was attributable to the addition of two leased
facilities and one owned facility. The remaining $12.1 million of this increase
was primarily attributable to the addition of 13 leased facilities having only a
partial year of operating expense in 1994 and additional facility operating
expenses associated with increased Medicare census.
CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased
from $2.9 million in 1994 to $3.4 million in 1995, an increase of approximately
$500,000 or 17.2%, which was attributable to an increase in corporate staffing,
increased acquisition expenses and inflationary increases.
LEASE EXPENSE. Lease expense increased from $4.8 million in 1994 to $6.9
million in 1995, an increase of $2.1 million or 43.8%, of which $900,000 was
attributable to the addition during 1995 of two leased facilities. Approximately
$1.2 million of this increase was attributable to the addition of 13 leased
facilities which had only a partial year of lease expense in 1994.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased from $82,000 in 1994 to $290,000 in 1995, an increase of $208,000
which was attributable primarily to the Company's acquisition of a facility in
December 1994.
INTEREST EXPENSE. Interest expense increased from $32,000 in 1994 to
$325,000 in 1995, an increase of $293,000, which was attributable to the
Company's acquisition of a facility in December 1994.
PROVISION FOR INCOME TAXES. The Company's effective tax rate decreased to
36.4% in 1995 from 37.1% in 1994. This decrease was due primarily to a decrease
in state taxes attributable to changes in the allocation of the Company's income
amount in certain states in which it operates.
EXTRAORDINARY ITEM. The extraordinary item resulted from the Company's
share of income from the foregiveness of debt recognized by certain
unconsolidated partnerships for which certain former indirect subsidiaries of
the Company served as a general partner. The foregiveness of debt, net of tax,
decreased from $1.6 million in 1994 to $250,000 in 1995, a decrease of
approximately $1.4 million.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited quarterly operating results
for 1995, 1996 and 1997. The Company believes that this unaudited information
has been prepared on the same basis as the annual financial statements and
includes all adjustments necessary for a fair presentation of the information
for the quarters presented when read in conjunction with the Consolidated
Financial Statements included elsewhere in this Prospectus. The operating
results for any quarter are not necessarily indicative of results for any
subsequent quarter. The Company's results of operations are not significantly
affected
29
<PAGE>
by seasonality factors. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or any other
quarter.
<TABLE>
<CAPTION>
1995 1996
------------------------------------------ ------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Total revenues............................ $ 18,198 $ 18,778 $ 19,084 $ 19,166 $ 55,935 $ 56,345 $ 58,341 $ 62,427
Operating income before net interest
expense and equity in income (loss) of
unconsolidated partnerships.............. 1,559 1,329 1,379 (1,073) 1,989 4,058 3,681 4,807
Income (loss) before income taxes and
minority interest........................ 1,956 1,305 1,348 (1,143) (99) 1,836 1,344 1,973
Net income (loss)......................... $ 1,128 $ 718 $ 747 $ (717) $ (105) $ 1,034 $ 744 $ 1,106
<CAPTION>
1997
---------
Q1
---------
<S> <C>
Total revenues............................ $ 64,235
Operating income before net interest
expense and equity in income (loss) of
unconsolidated partnerships.............. 4,591
Income (loss) before income taxes and
minority interest........................ 2,110
Net income (loss)......................... $ 1,241
</TABLE>
The Company's operating results were positively impacted during the quarter
ended March 31, 1995 as a result of the Company's share of income from the
forgiveness of debt of approximately $250,000 recognized by certain
unconsolidated partnerships for which certain former indirect subsidiaries of
the Company served as a general partner.
The Company's operating results were negatively reflected during the quarter
ended December 31, 1995 as a result of certain unusual charges related to
uncollectable advances to a managed facility, an increase in reserves for
patients accounts receivable, transactional costs of financing activities and
increases in accrued expenses.
During the first quarter of 1996, the Company's total revenues were
positively impacted as a result of the Transitional Merger, which added 35 owned
or leased facilities and one managed facility to the Company's operations. As a
result, total revenues increased from $19.2 million for the quarter ended
December 31, 1995 to $55.9 million for the quarter ended March 31,1996. Some of
the Transitional facilities were experiencing losses, net of associated interest
expense, at the time of the Transitional Merger and, as a result, income before
income taxes and minority interest was adversely affected during the quarter
ended March 31, 1996. By the end of the quarter ended June 30, 1996, the
operations of the facilities added in the Transitional Merger began to
stabilize.
During the quarter ended December 31, 1996, the Company acquired two
long-term care facilities, previously managed by the Company and assumed the
management of a rural hospital with home health care offices. As a result, total
revenues increased from $58.3 million for the quarter ended September 30, 1996
to $62.4 million for the quarter ended December 31, 1996 and operating income
before income taxes and minority interest and net income increased
significantly.
During the quarter ended March 31, 1997, the Company added two facility
management agreements and included the operations of one facility acquired
through the Transitional Merger which had been identified for disposal and
excluded from operations in 1996. As a result, total revenues increased from
$62.4 million for the quarter ended December 31, 1996 to $64.2 million for the
quarter ended March 31, 1997.
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 credit
facilities, including the Senior Credit Facility. Cash has been used by the
Company for the acquisition of long-term facilities, capital improvements at
several existing facilities and the day-to-day operations of the Company's
business. The Company anticipates that continued growth will be accomplished
through the operation of additional long-term care facilities, the acquisition
of related service providers, the improved operations of its existing facilities
and the development of specialty services in certain metropolitan and secondary
markets served by its facilities.
30
<PAGE>
The Company believes its operating cash flows should be sufficient to fund
its operations during the next year, however, the impact of acquisitions,
expansion of specialty services and reimbursement policy changes made by federal
and state programs could have a significant impact on the Company's operating
cash flows.
As of December 31, 1996, the Company had future minimum annual operating
commitments under existing facility leases and related equipment and office
leases of approximately $200.5 million over the next 15 years, including
approximately $20.6 million for 1997. The Company expects to satisfy these
commitments with funds generated by the operations of its leased facilities.
During the next 12 months, the Company plans to perform capital improvements
at some of its owned and leased facilities for expansion of specialty services
and general improvements to its existing facilities. These improvement projects
will be funded from cash flow from operations, cash reserves, restricted cash
and borrowings under the Senior Credit Facility.
On December 18, 1996, Centennial entered into the Senior Credit Facility
with certain lenders and CoreStates, as agent for the lenders. This Senior
Credit Facility provides for advances to the Company up to a maximum of $65.0
million evidenced by promissory notes from the Company, which replaced and
superceded the notes relating to Centennial's prior $25.0 million secured
revolving credit facility with CoreStates (the "Prior CoreStates Credit
Facility"). Subject to certain restrictions, advances may be used solely for (i)
working capital needs, (ii) capital expenditures and general corporate purposes,
(iii) reimbursement of draws under letters of credit subject to the Senior
Credit Facility, (iv) financing permitted acquisitions, (v) advancing working
capital financing to parties to management agreements with the Company, (vi)
repaying the Heller Line, and (vii) refinancing the Company's Prior CoreStates
Credit Facility. The Senior Credit Facility is payable in 15 quarterly payments
commencing on March 31, 1999, with the balance payable in full on or before
September 30, 2002, if not earlier accelerated. The Senior Credit Facility
provides for varying interest rates applicable at the time of each advance. The
Company can elect a rate tied to either the prime rate of CoreStates or LIBOR,
increased in each case by the "applicable margin," as defined in the Senior
Credit Facility, which is dependent upon the ratio of debt to earnings before
interest, taxes, depreciation, amortization and operating lease expense. The
Company has approximately $53.0 million currently outstanding under the Senior
Credit Facility bearing interest at a weighted average rate of 8.3% per annum.
In addition, CoreStates has issued approximately $7.0 million in letters of
credit under the Senior Credit Facility which the Company was required to
provide pursuant to various facility lease agreements and a workers compensation
insurance program, bringing the Company's total utilization of the Senior Credit
Facility to approximately $60.0 million at May 22, 1997. The Company has
initiated discussions with CoreStates to increase the maximum amount the Company
may borrow under the Senior Credit Facility and the Company anticipates that any
increases in the Senior Credit Facility would occur during the third quarter of
1997. There can be no assurance, however, that the Company will be able to
negotiate an increase in the maximum amount it may borrow under the Senior
Credit Facility. Certain events, including the Offering, require mandatory
repayments, however, amounts repaid before December 18, 1998 may be reborrowed.
See "Use of Proceeds." The Senior Credit Facility is subject to customary
covenants and restrictions including requirements that the Company continue to
meet certain financial ratios. Failure to meet such ratios would limit the
availability of the proceeds of the Senior Credit Facility for the Company's
use. In addition, an event of default occurs if Mr. Eaton ceases to own at least
10.0% of the outstanding Common Stock or ceases to serve as the Company's Chief
Executive Officer or if any person other than Mr. Eaton, South Atlantic II,
South Atlantic III, or WCAS VI or its affiliates or related entities owns more
than 10.0% of the outstanding Common Stock.
In certain instances, Centennial provides advances for working capital to
the owners or lessees of facilities that it manages. These advances are
generally subordinate to the repayment of debt on the facilities and therefore
the Company is at risk for the amounts advanced. The Company utilizes operating
cash flow and the Senior Credit Facility to fund such advances. These advances
are generally evidenced by
31
<PAGE>
term notes which may be secured by the facility's accounts receivable. Interest
on such notes generally accrues at rates in excess of the Company's borrowing
rate under the Senior Credit Facility and such notes generally provide for
payments of interest and principal based on a set payment schedule with
provisions for prepayment and reborrowing. The Company assesses the
collectability of these advances based on anticipated future cash flows, the
value of any underlying collateral and the value of the managed facility.
As discussed above, the Company has notes and advances due from NCHC and
NCI, the owners or lessees of eight of Centennial's managed facilities, totaling
approximately $8.1 million and $6.6 million, respectively, at March 31, 1997.
These notes were used by NCHC and NCI primarily to fund the acquisition of
either facilities or leasehold interests. These advances were used by NCHC and
NCI to fund mortgage and lease payments, and operating costs, including
management fees and therapy services provided by the Company, and were necessary
due to the early stage of development of the facilities. The Company anticipates
that these notes and advances will be paid from cash available after all
operating costs and debt service payments to unaffiliated vendors, mortgage
holders, or lessors are paid by NCHC and NCI. Through its management of the NCHC
and NCI facilities, the Company has the ability to impact the collectibility of
these notes and advances. To secure the payment of these notes and advances, the
Company has security interests in certain assets of NCHC and NCI and in the
stock of these entities. In assessing the realization of the amounts due, the
Company considers the projected future cash flows which will be provided by
these facilities. The Company believes, based on current operating trends and
projections, that these facilities will provide future cash flows which will be
sufficient to pay all obligations, including the notes due to the Company.
Advances made by the Company to NCHC and NCI will be repaid primarily from
Medicare receivables that have been billed by NCHC and NCI but have not yet been
collected. Because of the uncertainties relating to an NCHC facility in its
development stage and the collectibility of the Medicare receivables of all of
the NCHC and NCI facilities, the Company has reserved $600,000 in connection
with the advances due from NCHC and NCI. These notes and advances are material
to the operations of the Company and exceed the Company's stockholders' equity
at March 31, 1997.
During the 12 months ended December 31, 1996, the Company generated $8.1
million in cash from operating activities. During the year, accounts payable and
accrued expenses increased by approximately $11.3 million, which was
attributable to the start-up of a facility in its development stage, the
addition of two acquired facilities, increases in therapy expense at the
Company's facilities, increases associated with increasing patient acuity and an
increase in the accounts payable aging. During the year, accounts receivable
increased by $15.7 million attributable to an increase in census at the
development stage facility, an increase in average revenue per patient day
attributable to the increase in the general acuity level of the patients, an
increase in days outstanding in patient accounts receivable and acquisitions of
two facilities during 1996. In addition, the Company made facility acquisitions,
leasehold improvements and purchases of equipment totaling approximately $15.8
million in 1996. In order to accommodate these acquisitions, improvements and
purchases, the Company increased its borrowings under the Senior Credit Facility
by approximately $9.4 million. The remaining amounts were provided by cash flows
available from operations and by cash reserved for such purposes.
The allowance for doubtful accounts was reduced in 1996 to $2.5 million from
its 1995 level of $5.9 million. This decrease is due primarily to the direct
write-off of approximately $3.0 million in specific accounts receivable acquired
through the Transitional Merger. The Company believes that its realization is
adequately reflected in its current allowance for doubtful accounts.
At December 31, 1996, the Company had $18.1 million of Facility Debt
outstanding on five of its owned facilities. This Facility Debt requires monthly
payments of principal and interest of approximately $170,000. Remaining terms of
these debt agreements range from two to 25 years with amortization periods of 20
to 25 years. Interest rates on the Facility Debt ranged from 8.8% to 10.5% as of
December 31, 1996. Approximately $4.0 million of the Facility Debt matures in
1997 and the Company expects
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<PAGE>
to refinance this debt at or before maturity. The Company believes it will be
able to repay or refinance this and other mortgage obligations on its facilities
as they come due, however, there can be no assurance that the Company will be
able to repay such amounts or be successful with respect to any such
refinancing.
In January 1997, the Company received $10.0 million as proceeds from the
issuance of the Series D Preferred Stock and units of Series E Redeemable
Preferred Stock and Common Stock. These proceeds are available to the Company
for acquisitions and working capital. The Company plans to use a portion of the
proceeds of the Offering to redeem the Series E Redeemable Preferred Stock and
the Series D Preferred Stock will be converted into Common Stock on the closing
of the Offering. The Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock and Series D Preferred Stock will automatically convert by
their terms into 604,053, 252,038, 1,447,710 and 410,529 shares of Common Stock,
respectively, upon completion of the Offering. To the extent the Underwriters
exercise their over-allotment option, a portion of the shares of Common Stock
issued upon the conversion of the Series C Preferred Stock will be repurchased
at the Price to Public by the Company with the net proceeds from such exercise
pursuant to the Stock Repurchase Agreement.
In May 1997, the Company acquired TCC by merger and paid $6.0 million in
cash, which was borrowed under its Senior Credit Facility, and gave the seller a
$2.0 million convertible promissory note due April 30, 1999. Interest payments
on this note commence August 1, 1997 and continue on a quarterly basis until
maturity. The Company anticipates that the holder of the note will exercise its
option to convert the note into shares of Common Stock 180 days following the
Offering. Management anticipates that $500,000 will be needed to fund the
initial working capital requirements of TCC during the first six months of its
operations following the acquisition. After the first six months of operations,
TCC's cash flows from its operations should be adequate to repay the initial
capital requirement of $500,000, as well as the debt service requirements for
the $8.0 million in total debt.
Effective May 1, 1997, the Company assumed the management of a combined
skilled nursing facility and long-term acute care hospital in the District of
Columbia and, effective June 1, 1997, the Company assumed the management of five
skilled nursing facilities located in North Carolina. In connection with these
management agreements, the Company also agreed to provide initial working
capital lines of credit of $2.0 million and $1.0 million, respectively, to be
used for operations at these facilities. The Company anticipates that funds for
working capital advances will be provided by the Company's cash flows from
operations and cash reserves. Interest on the lines of credit is due on a
monthly basis. The Company anticipates that any advances made under the lines of
credit would be repayable from the cash flows from operations generated by these
facilities.
The aggregate consideration for the Potential Transactions, if any, will be
funded by cash reserves and borrowings under the Senior Credit Facility.
Centennial believes that the net proceeds from the Offering, together with
the funds available under the Senior Credit Facility, cash on hand and cash flow
from its operations, will be sufficient to meet its working capital needs and to
finance anticipated growth over the next 12 months.
INFLATION
The health care industry is labor intensive, with wages and other labor
related costs especially sensitive to inflation. Certain of Centennial's other
expense items, such as supplies and real estate costs, are also sensitive to
inflationary pressures. Shortages in the labor market or general inflationary
pressure could have a material adverse effect on the Company. In addition,
suppliers generally pass along rising costs to the Company in the form of higher
prices. When faced with increases in operating costs, the Company seeks to
increase its charges for services and its requests for reimbursement from
government programs. In certain markets, Centennial's private pay customers and
third-party reimbursement sources may be less able to absorb increased prices
for the Company's services. As a result, the Company's operations could be
adversely affected if it is unable to recover future cost increases or
experiences significant delays in increasing rates of reimbursement of its labor
or other costs from Medicare and Medicaid revenue sources.
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<PAGE>
BUSINESS
THE COMPANY
Centennial HealthCare Corporation provides a broad range of long-term health
care services to meet the medical needs of elderly and post-acute patients. The
Company provides these services through geographically concentrated networks
located in metropolitan and secondary markets throughout the United States.
Centennial operates 84 owned, leased and managed skilled nursing facilities with
9,049 beds in 19 states, with its largest concentration of facilities in North
Carolina, Indiana and Michigan. The Company provides basic and specialty health
care services. Basic services include skilled nursing and support, housekeeping,
laundry, dietary, recreational and social services. Specialty services include
comprehensive rehabilitation therapy, respiratory therapy, ventilator care,
infusion therapy, wound care, home health care and other subacute and specialty
services. As components of its specialty services, Centennial provides
rehabilitation therapy services on a contract basis to third-party and Company-
operated skilled nursing facilities in 17 states pursuant to 70 contracts and,
including recently completed acquisitions, provides in excess of 380,000 home
health care visits annually.
Centennial's objective is to continue to enhance its market position as a
provider of long-term basic and specialty services in selected metropolitan and
secondary markets. The Company seeks to control significant components of the
non-acute health care system in its markets, thereby diversifying its sources of
revenue and positioning itself to respond to the requirements of a variety of
payors. In addition, the Company seeks to increase the range of services it
provides within its facilities and tailors its health care services to address
the specific needs within each of its markets. To meet its objective, the
Company is pursuing the following strategies: (i) achieve operating leverage
through the continued development of regionally concentrated networks; (ii)
implement market-specific business and network development plans in response to
the diverse needs of the Company's metropolitan and secondary markets; (iii)
continue to expand specialty services to enhance the Company's position as a
broad-based provider of health care services; (iv) manage operations through
sophisticated information systems that enhance efficiency; and (v) pursue
strategic acquisitions of long-term care facilities and related service
providers.
Over the last three years, the Company has aggressively grown its operating
base both through acquisitions and internal growth. Total revenues increased
from $41.5 million for the fiscal year ended May 31, 1994 to $233.0 million for
the fiscal year ended December 31, 1996, representing a compounded annual growth
rate of 95.0%. Licensed available beds increased from 3,470 to 8,113 during the
same period, representing a compounded annual growth rate of 38.9%. The
Company's revenue quality mix (Medicare, private pay, management fees and other)
improved from 41.9% for the fiscal year ended December 31, 1995 to 57.2% for the
fiscal year ended December 31, 1996, and the Company's revenues from specialty
services increased from 14.4% for the fiscal year ended December 31, 1995 to
33.7% for the fiscal year ended December 31, 1996, reflecting the Company's
focus on providing specialty services to higher acuity patients.
ACQUISITIONS AND POTENTIAL TRANSACTIONS
As part of its growth strategy, the Company regularly reviews possible
acquisitions in the long-term care continuum. Effective December 31, 1995, the
Company completed an important strategic acquisition by merging with
Transitional. Since the Transitional Merger, the Company has expanded its
operations through the Home Health Acquisition, the addition of 16 long-term
facility management contracts and one management contract for a facility
providing nursing home and long-term acute care hospital services, the
acquisition of two facilities previously managed by the Company and the lease of
a rural hospital with three home health care offices. Each of these transactions
has strengthened the Company's position in its regional markets.
In the Home Health Acquisition, effective May 1, 1997, the Company acquired
TCC, a provider of home health care services in North Carolina, where the
Company currently operates 19 facilities, as well
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as South Carolina and Louisiana. This acquisition has increased Centennial's
home health care visits by over 340,000 annually from its current level of
approximately 42,000 annualized visits. The Company also entered into a
management agreement, effective May 1, 1997, to manage a facility providing
nursing home and long-term acute care hospital services that is located in the
District of Columbia, where Centennial leases a long-term care facility.
Centennial will receive a management fee of 6% of the facility's gross revenues
and will provide an initial working capital line of credit of $2.0 million. In
addition, on June 1, 1997, the Company entered into management agreements for
five skilled-nursing facilities located in North Carolina with a total of 528
beds. Centennial will receive management fees of 6.5% of each facility's gross
revenues and will provide a working capital line of credit of $1.0 million.
Centennial is currently pursuing the Potential Transactions. In connection
with the Therapy Acquisition, Centennial entered into a letter of intent on
February 15, 1997 to acquire the assets of a rehabilitation therapy company
providing physical, occupational and speech therapy services. Centennial is in
the final stages of its due diligence and anticipates closing the acquisition
shortly after the Offering. The final purchase price and the type of
consideration to be paid has not yet been determined. If this acquisition is
completed, Centennial will add approximately 45 therapy contracts. With respect
to the Hospital Acquisition, the Company has negotiated the lease of a rural
hospital in northern Florida where the Company currently operates a nursing home
facility and another rural hospital. The lease is subject to various consents
and approvals before it becomes effective. The Company has been managing the
hospital pursuant to an emergency management contract since March 14, 1997, and
the term of the lease, once approved, is expected to be effective as of that
date. With respect to the Facility Transaction, the Company is negotiating to
acquire a long-term care facility in Florida that it currently manages. If this
transaction is completed, Centennial will own the facility and receive the net
cash from operations from this facility rather than the current management fee.
The Potential Acquisitions, if consummated, will allow the Company to increase
its range of services in two markets in which the Company already has a strong
operating presence. There can be no assurance, however, that the parties will
negotiate definitive agreements or receive the consents or approvals necessary
for any of these transactions to be completed. See "Risk Factors -- Risks
Associated with Acquisition Strategy."
THE LONG-TERM CARE INDUSTRY
The long-term care industry provides a broad range of services to post-acute
patients and patients with medically complex and special needs who do not
require treatment in an acute care hospital setting. Long-term care facilities
offer basic services, which include skilled nursing and support, housekeeping,
laundry, dietary, recreational and social services. In addition, long-term care
facilities may provide a broad range of specialty services such as comprehensive
rehabilitation therapy (including physical, occupational and speech therapy),
respiratory therapy, ventilator care, infusion therapy, wound care, home
healthcare, tracheostomy care, pharmaceutical services, Alzheimer's care and
other specialty services. Long-term care facilities are increasingly becoming an
integral part of community-based, vertically-integrated, extended care delivery
systems that are capable of providing a full range of traditional basic and
specialty services.
In recent years, long-term care services have experienced significant
growth. According to industry sources, revenues in the long-term care industry
have increased from approximately $18 billion in 1980 to approximately $80
billion in 1995. Continuing growth of the industry has been driven by a number
of factors, including: (i) aging of the population; (ii) cost-containment
pressures that are driving post-acute patients from acute care hospitals to
lower-cost settings such as long-term care facilities; (iii) advances in medical
technology enabling sophisticated long-term care providers to care for
higher-acuity patients; and (iv) demand for post-acute and specialty services in
secondary markets.
The Company believes that the following industry trends will continue to
provide opportunities for the Company to grow and enhance its profitability:
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<PAGE>
AGING POPULATION. According to the U.S. Bureau of the Census, approximately
90% of all patients in long-term care facilities are persons over 65 years of
age, and this age group has been growing significantly faster than the overall
population. The over 65 age group experiences a greater incidence of chronic
illness and disabilities than other age groups and currently accounts for more
than two-thirds of total health care expenditures in the United States. As the
number of Americans over age 65 increases, the need for long-term care services
is also expected to increase. The U.S. Bureau of the Census estimates that the
U.S. population over age 65 will increase from approximately 31 million in 1990
to approximately 35 million in 2000. In particular, the segment of the U.S.
population over 85 years of age, which comprises 45% to 53% of residents at
long-term care facilities nationwide, is projected to increase by more than 33%,
from approximately 3 million in 1990, to more than 4 million in 2000.
COST-CONTAINMENT PRESSURES. In response to rising costs, government and
private pay sources have implemented cost-containment measures designed to
reduce lengths of stay in acute care hospitals. As a result, the average length
of hospital stays has been decreased, thereby increasing the number of patients
discharged from acute care hospital settings who require continuing medical
care. Long-term care facilities represent an attractive alternative setting for
these discharged patients because many of the post-acute services required by
patients can be provided on a cost-effective basis by clinically sophisticated
long-term care providers.
ADVANCES IN MEDICAL TECHNOLOGY. The increasing availability of advanced
medical technology has increased life expectancies and enhanced the ability of
long-term providers to offer, on a cost-effective basis, quality services
previously provided only by acute care hospitals. As a result, a growing number
of higher-acuity patients with specialized needs can be treated in long-term
care settings.
DEMAND FOR POST-ACUTE AND SPECIALTY SERVICES IN SECONDARY MARKETS. A major
challenge for persons requiring medical care in secondary markets is the
distance that often exists between a patient's home and regional centers that
offer primary care, rehabilitation therapy and other specialty services.
Individuals residing in secondary markets in need of services are often left
with the choice of temporarily or permanently relocating, spending extended
periods of time away from their families or commuting significant distances. As
a result, the provision of post-acute and specialty services in secondary
markets represents a significant opportunity for the long-term care industry to
grow and enhance profitability.
INDUSTRY CONSOLIDATION
The long-term care industry is undergoing consolidation as providers seek to
build market share and compete more effectively. Current ownership of long-term
care facilities is highly fragmented, with approximately 70% of all facilities
owned by independent providers or companies operating less than 20 facilities.
The increased burdens of various cost-containment measures, increasing acuity of
long-term care patients and increasing complexity of government regulation pose
significant challenges to long-term care providers that lack sophisticated
information systems, breadth of management experience and economies-of-scale.
Small providers with limited access to capital and an inability to provide
specialty services to higher acuity patients are finding it difficult to compete
against larger regional and national providers. In addition, there is a limited
supply of long-term care facilities due to the following factors: (i) state CON
legislation, which restricts the number of facilities that can be constructed
within a market; (ii) high construction costs; (iii) limitations on government
reimbursement for the full cost of construction; and (iv) extensive start-up
expenses. As a result of these factors, providers that have a strong reputation
within the community for providing high quality service have become attractive
acquisition targets for providers seeking to reach critical mass.
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BUSINESS STRATEGY
Centennial's objective is to continue to enhance its position as a quality
provider of basic and specialty services in both metropolitan and secondary
markets within its established regions. To achieve this objective, the Company
will focus on the following strategies:
- Achieve Operating Leverage Through Regional Development
- Implement Market-Specific Business and Network Development Plans
- Continue to Expand Specialty Services
- Enhance Operations Through Use of Information Technology
- Pursue Strategic Acquisitions
ACHIEVE OPERATING LEVERAGE THROUGH REGIONAL DEVELOPMENT. The Company's
expansion efforts to date have been structured to integrate additional
facilities and services within nine regions. By focusing on regional
development, the Company is well-positioned to manage facility operations,
allocate managerial and administrative costs over a larger revenue base,
capitalize on its reputation in existing markets, provide more effective
training of facility personnel and closely monitor the implementation of
facility specific operating plans. The Company's regional structure allows it to
successfully build the critical mass necessary to create networks for providing
specialty services on a direct basis and successfully contract with managed care
and other third-party payors.
IMPLEMENT MARKET-SPECIFIC BUSINESS AND NETWORK DEVELOPMENT PLANS. The
Company tailors its services based on the needs of each market. In its
metropolitan markets, the Company generally focuses on providing a specific
range of services and enhances market share by integrating its operations with
those of recognized delivery networks and other providers. In secondary markets,
the Company's goal is to play a leading role in local delivery of health care by
providing a broader range of services. In order to adapt to potential changes in
third-party payment methodologies and the growth of various forms of prospective
payment systems, the Company seeks, in certain secondary markets, to provide
many significant components of care within integrated health care networks and
to manage the flow of patients to the most appropriate, cost-effective site of
care. The continued formation of these integrated health care networks will
position the Company to respond to prospective payment systems or other managed
care systems.
CONTINUE TO EXPAND SPECIALTY SERVICES. The Company provides a broad range
of specialty services including comprehensive rehabilitation therapy (including
physical, occupational and speech therapy), respiratory therapy, ventilator
care, infusion therapy, wound care, home health care and other subacute and
specialty services at certain of its facilities and continues to expand its
program of outpatient and home health care services. In addition, the Company
intends to emphasize growth and expansion of its third-party physical,
occupational and speech therapy services. The Company believes the
implementation and expansion of such services will allow the Company's
facilities to serve as full-service providers of specialty services to patients
in its markets.
ENHANCE OPERATIONS THROUGH THE USE OF INFORMATION TECHNOLOGY. The Company
believes its management information systems distinguish it from its competitors
and enable it to gain significant operational efficiency. The ability to
generate "real-time" operating data is becoming increasingly critical for
success in the long-term care industry. The Company has expended significant
resources in the development of these information tools and has placed a high
priority on developing systems to assess patient care, track financial and
operational controls, analyze labor utilization and monitor reimbursement. In
addition, the Company's information technology enables it to integrate acquired
facilities or operations on a timely and cost-effective basis with minimal
disruption to operations and positions the Company to efficiently operate in a
managed care environment. See "Business -- Management Information Systems."
PURSUE STRATEGIC ACQUISITIONS. The Company targets for acquisition
facilities, operating companies and related businesses that have the capacity to
be leading providers of health care services to higher-
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acuity patients in their respective markets and that represent opportunities for
the Company to realize additional operating leverage through regional operating
efficiencies. In addition to outright purchases, the Company enters into lease
or management agreements with certain facilities which generally include a right
of first refusal to purchase the facilities. In many cases, these arrangements
present the Company with excellent acquisition opportunities following the
implementation of the Company's operating strategies which enhance facility
profitability. In addition to facility acquisitions, the Company seeks to expand
the rehabilitation therapy services, pharmacy and home health care segments of
its operations through the purchase of businesses offering such specialty
services. See "Business -- Acquisition Opportunities."
PATIENT SERVICES
BASIC SERVICES
Basic services are those traditionally provided to elderly patients in
long-term care facilities, including skilled nursing and support, housekeeping,
laundry, dietary, recreational and social services. The Company provides 24-hour
skilled nursing care by registered nurses, licensed practical nurses and
certified nursing aides in all of its facilities. Each facility is managed by a
licensed administrator who is responsible for the day-to-day operation of the
facility. Although treatment of patients is the responsibility of their own
attending physicians, who are not employed by the Company, each facility engages
a physician medical director who monitors all aspects of the delivery of care.
In addition, each facility offers a number of individualized therapeutic
activities designed to enhance the quality of life of its patients. These
activities include entertainment events, musical productions, trips, arts and
crafts, volunteer and other programs that encourage social interaction among
patients as well as community involvement.
SPECIALTY SERVICES
Specialty services are those provided to patients with medically complex
needs, who generally require more complex treatment and a higher level of
skilled nursing care. These services typically generate higher revenues per
patient day than basic services as a result of the higher cost associated with
treating a higher-acuity patient. The Company intends to expand the scope and
range of its specialty services in order to further enhance revenues,
profitability and the reputation of its facilities for providing comprehensive
quality care. Set forth below are descriptions of the specialty services offered
by the Company.
REHABILITATION THERAPY. The Company provides a broad range of
rehabilitation therapy services to its facilities and other third-party
providers. These services include physical, occupational and speech therapy in
the long-term care facility setting. The Company has contracted to provide
rehabilitation therapy services to patients in 25 of its owned or leased
facilities, six of its managed facilities and 39 non-affiliated long-term care
facilities.
SUBACUTE CARE. Since 1993, the Company has developed its subacute care
program in which distinct units within certain of its long-term care facilities
are dedicated to the care of medically complex patients who do not require the
services of an acute care hospital. Subacute services provided or arranged by
the Company's facilities include, but are not limited to, ventilator care,
respiratory care, traumatic injury recuperation, post-cardiac rehabilitation,
HIV care, IV therapy, wound care, post-stroke care, hospice care, post-surgical
orthopedic rehabilitation and peritoneal dialysis services. An important aspect
of providing these services is the establishment of relationships with local
health care providers, including hospitals, physicians and other acute care
providers in order to strategically position the Company's facilities in their
markets. The Company believes that there is significant demand for subacute care
and that this segment of the market offers continued opportunities for
integrating services.
HOME HEALTH CARE. Including recently completed acquisitions, Centennial
operates 30 home health care offices, affording the recipients of such care an
alternative to a hospital or long-term care
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facility setting. Such services delivered into the home setting include skilled
nursing, physical, occupational and speech therapy and subacute care. In
addition, personal care services are available from home health care aides who
assist patients with their activities of daily living.
OPERATIONS
GENERAL. The Company's facilities are organized into nine operating regions
and the Company's organizational structure and operations support staff provide
its facilities with the resources needed to operate effectively in these
regions. The operations of the facilities in each region are directed by a
regional director who reports directly to one of two Divisional Vice Presidents
who in turn report to the Executive Vice President of Operations. Each region
has a nurse consultant with responsibility for providing guidance on patient
care issues, conducting quality assurance audits, training in clinical software
and assuring compliance with applicable state and federal regulations. The
Company provides additional operational support through a corporate team of
professionals in financial accounting, reimbursement, managed care pricing,
quality assurance, human resources, regulatory compliance, marketing, health
systems development and other areas. This support allows each facility to
deliver quality nursing care and specialty services, attain and retain quality
skilled employees, maximize reimbursement from third-party payors, market
expanded services, and maximize operating results.
For all of its facilities, the Company actively manages personnel costs,
which represent the largest expense incurred in the operation of a long-term
care facility. The Company emphasizes attracting and retaining quality
personnel, including administrators and skilled nursing staff, through a number
of programs which include on-going training and education classes, employee
recognition programs, and competitive wages and benefits. In addition, the
Company has an incentive program for administrators based on the achievement of
certain Company goals related to quality of care and financial performance. As
the trend of nursing facilities accepting patients with medically complex care
issues continues, on-going training and other programs designed to enhance
employee skills and retention will prove increasingly important in allowing the
Company's facilities to provide for these types of patients.
QUALITY ASSURANCE AND REGULATORY COMPLIANCE. The Company has developed a
comprehensive quality assurance program that is designed to monitor, evaluate
and improve the delivery of patient care. This program is supervised by a
registered nurse, who serves as the Company's director of professional services.
Pursuant to its quality control system, the Company routinely collects
information from patients, family members, employees and state survey agencies
that is then compiled, analyzed and distributed throughout the Company in order
to monitor the quality of care and services provided and the satisfaction of the
residents and their families with such services.
MARKETING. The Company's in-house marketing department works directly with
its facilities in their efforts to market services in their respective
communities. The emphasis of the Company's marketing department is to assist
each facility in achieving a desired quality mix of revenues through increased
Medicare, private and managed care census. The Company works with each facility
to establish monthly, quarterly and annual census and payor mix goals and each
facility is responsible for an on-going marketing plan. The Company's Vice
President of Marketing directs the efforts of its marketing support team, which
provides guidance in conducting competitive positioning assessments and needs
analyses, and developing goal-oriented marketing plans, as well as providing
assistance with media relations.
The Company's marketing efforts are concentrated at the local level to allow
each facility to promote its specific services as related to the needs of its
community. At most of the Company's facilities, the admissions staff is
responsible for marketing the facility's services to physicians, discharge
planners, individual patients and their families, and community referral
sources. Based on the market and patient acuity mix, a facility may employ a
case manager or marketing director to assist in the promotion of services to
managed care organizations, as well as other referral sources.
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The Company focuses on securing relationships with managed care
organizations and insurance carriers in the markets served by its facilities. At
present, many of the Company's facilities have contractual relationships with
such organizations. The Company's emphasis on attracting and securing such
relationships with these network providers will continue to be an important part
of its growth strategy.
MANAGEMENT INFORMATION SYSTEMS
The Company's Chief Information Officer develops, implements and maintains a
comprehensive system of management and financial controls which is designed to
enable the Company to closely monitor operating costs and quickly distribute
financial and other operational information to appropriate levels of management.
Each facility utilizes PC-based, networked computer systems for processing
operating data on a "real-time" basis as well as financial and patient care
data. The Company has established an internal network linking its facilities,
operating subsidiaries, regional managers and nurse consultants with its
corporate computer network.
The Company utilizes commercially available as well as internally developed
software in its information systems. The Company has established on-line
electronic billing with Medicare as well as with several state Medicaid programs
and produces interim cost reports for Medicare and certain state Medicaid
programs. In addition, at each facility, the system generates computer-assisted
medical records that allow for the creation of individualized care plans,
physician orders and administrative and observation records.
The Company's information systems are easily adaptable to newly acquired
facilities and related companies. The Company was able to fully integrate its
financial information systems into the 36 facilities acquired through the
Transitional Merger and to expand each facility's management information system
through training and program implementation over a six-month period. The
Company's ability to convert acquired facilities quickly to its management
information system enables management to significantly impact each facility's
financial and operating performance within a short period of time.
ACQUISITION OPPORTUNITIES
The Company maintains an active acquisition program in order to increase its
penetration of existing regions and to capitalize on the consolidation trends in
the long-term care industry. The Company pursues the acquisition and development
of long-term care facilities and specialty services providers that complement
and expand the ongoing operations of the Company. The Company evaluates
potential acquisitions on the basis of existing profitability, long-term profit
potential, specialty services opportunities, facility location, payor mix and
patient census. Specifically, the Company targets facilities that have the
capacity to be leading providers of higher-acuity services in their respective
markets and that represent opportunities for the Company to realize additional
operating leverage through regional economies of scale and provide more
profitable specialty services. In addition, the Company enters into lease or
management agreements with certain facilities that generally include a right of
first refusal. In many cases these lease or management arrangements present
acquisition opportunities following the implementation of the Company's
operating strategies while enhancing facility profitability. As evidence of its
ability to acquire previously managed facilities, the Company currently leases
or owns seventeen facilities that it previously managed.
The Company's internal acquisition team consists of several members of
management who meet on a weekly basis to evaluate potential acquisition
candidates. This team identifies long-term facilities and related service
providers that will integrate efficiently into the Company's existing operations
and complement the Company's strategy of providing additional specialty services
and enhancing the Company's operational and financial growth. Utilizing the
Company's in-house team of professionals in the areas of human resources,
nursing, regulatory compliance and management information systems, a detailed
due diligence review is conducted on each potential acquisition. Acquisitions
are integrated efficiently into the Company's operations through the Company's
business integration procedures. Centennial's management believes that this team
will continue to be successful in the identification and
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acquisition of additional long-term care facilities and related specialty
service providers. See "Risk Factors -- Risks Associated with Acquisition
Strategy."
FACILITIES
Centennial currently operates 84 owned, leased and managed skilled nursing
facilities with 9,049 beds in 19 states and the District of Columbia. Of this
number, Centennial owns eight facilities with 837 beds, leases 46 facilities
with 4,994 beds and manages 30 facilities with 3,218 beds. Since March 31, 1997,
the Company has added six managed facilities with 680 beds. As of March 31,
1997, the Company's 78 owned, leased and managed facilities had an average of
107 beds and an occupancy rate of 90.5%.
The following table lists the Company's owned, leased and managed facilities
by location, including the number of licensed available beds and the occupancy
rate as of March 31, 1997:
<TABLE>
<CAPTION>
FACILITIES
NUMBER OF ------------------------------------------------------
STATE BEDS OWNED LEASED MANAGED TOTAL
- ------------------------------------------------ ----------- ------------- ----------- ------------- -----
<S> <C> <C> <C> <C> <C>
North Carolina.................................. 1,988 2 8 9 19
Indiana......................................... 1,381 -- 13 -- 13
Michigan........................................ 1,284 3 7 3 13
Mississippi..................................... 540 -- 5 -- 5
Louisiana....................................... 507 1 3 1 5
Kansas.......................................... 377 -- 2 2 4
Kentucky........................................ 356 1 2 -- 3
Florida......................................... 139 -- -- 2 2
Idaho........................................... 170 -- 2 -- 2
Texas........................................... 227 -- 1 1 2
Arkansas........................................ 70 -- -- 1 1
Georgia......................................... 157 -- 1 -- 1
Illinois........................................ 108 -- -- 1 1
Montana......................................... 100 -- 1 -- 1
Nebraska........................................ 154 1 -- -- 1
New Mexico...................................... 96 -- -- 1 1
Tennessee....................................... 119 -- -- 1 1
Washington...................................... 104 -- -- 1 1
Wisconsin....................................... 196 -- -- 1 1
Washington, D.C................................. 296 -- 1 -- 1
-- -- -- --
-----
Totals........................................ 8,369 8 46 24 78
-- -- -- --
-- -- -- --
-----
-----
<CAPTION>
STATE OCCUPANCY (1)
- ------------------------------------------------ -----------------
<S> <C>
North Carolina.................................. 94.0%
Indiana......................................... 85.5
Michigan........................................ 91.8
Mississippi..................................... 98.9
Louisiana....................................... 89.0
Kansas.......................................... 80.6
Kentucky........................................ 94.1
Florida......................................... 89.7
Idaho........................................... 87.1
Texas........................................... 83.3
Arkansas........................................ --
Georgia......................................... 96.2
Illinois........................................ 77.8
Montana......................................... 94.0
Nebraska........................................ 90.9
New Mexico...................................... 90.5(2)
Tennessee....................................... 91.6
Washington...................................... 72.1
Wisconsin....................................... 88.8
Washington, D.C................................. 98.3
---
Totals........................................ 90.5%
---
---
</TABLE>
- ------------------
(1) Occupancy is computed by dividing annual patient day census by annual
patient days available in licensed available operating beds. Does not
include facilities in the start-up phase during 1996 (The Oaks at Sweeten
Creek (North Carolina), Blountstown Health & Rehabilitation Center (Florida)
and Chenal Rehabilitation and Healthcare Center (Arkansas)).
(2) Facility under construction for expansion and renovation resulting in 12
temporarily out of service beds.
LEASED FACILITIES. The Company leases 46 facilities pursuant to long-term
leases with various lessors, thirty-two of which are with four lessors. The
Company's lease arrangements are "triple net" leases, requiring the Company, at
its own expense, to maintain the premises and pay taxes, utilities and
insurance. In most cases, the leases are subordinate to certain security
interests in the facilities granted by the lessors to third-party lenders, but
the Company makes the debt repayments collateralized by such security interests
directly to the lenders and deducts it from the lease payments made to the
lessors. Centennial has a right of first refusal to purchase most of the leased
facilities.
Thirteen leases with one lessor have initial terms ranging from ten to 14
years and include options for two additional five-year terms. Six of these
leases have fixed payments, with the rest varying indirectly with changes in the
prime rate. The Company leases an additional 15 facilities from various lessors
with
41
<PAGE>
terms ranging from five to 27 years and lease payments with annual increases
based on the Consumer Price Index, revenue growth and/or fixed formulas.
Eight leases have 20-year initial terms, with options to renew for five
additional years. These leases average 15-year remaining terms. These leases
provide for minimum rents with annual increases. Six additional leases with
another lessor provide for initial terms of 20 years with options to renew for
two successive five-year terms. These leases provide for base rent and
additional rent based on a percentage of any increase in each facility's gross
revenues over the prior year, or the increase in the Consumer Price Index. Five
leases with another lessor provide for initial terms of ten years and options to
renew for two successive five-year terms, with a base rent plus additional rent
equal to the greater of 5% of the increase in each facility's net revenue over
the prior year's net revenues, or 3% of the prior year's total base rent and
additional rent.
In connection with the leasing of eight facilities located in Louisiana and
Mississippi, Magnolia Management Corporation ("Magnolia"), a former owner and an
unaffiliated nursing home provider, provides local consulting and field
supervision services to such facilities pursuant to certain agreements that
terminate in 2007 and were entered into by the prior owners of these facilities
in 1987. Services provided by Magnolia include expertise in employee matters and
local reimbursement and regulatory issues at a cost to the Company of three
percent of the gross revenues of these facilities. The Company paid Magnolia
$628,751 for these services in 1996.
MANAGED FACILITIES. The Company operates 30 facilities under long-term
management contracts. Revenues from management contracts account for
approximately 2.5% of the Company's total revenues for the fiscal year ended
December 31, 1996. Pursuant to these management contracts, the Company performs
day-to-day management functions and provides certain corporate services,
including group contract purchasing, employee training and development, quality
assurance audits, human resource management, assistance in obtaining third-party
reimbursement, financial and accounting functions, policy development, system
design and development, and marketing support. The Company's information system
monitors certain key data for each managed facility, such as payroll, admissions
and discharges, cash collections, net patient service revenues, staff trend
analysis, and measurement of operational data on a per patient day basis. The
Company manages five facilities for three public limited partnerships. See
"Certain Transactions." These five management contracts provide for monthly
management fees of six percent of gross revenues, have initial terms of 20 years
and are subject to termination without cause upon 60 days notice. The Company
also manages 25 facilities pursuant to management contracts with independent
third parties, with initial terms ranging from five to 20 years and that can be
terminated only for cause. Each such management contract provides for monthly
fees generally ranging from six to seven percent of gross revenues, except for
three facilities for which monthly fees equal the adjusted net income from the
facility. Certain of the agreements provide for the subordination of the
management fees to the payment of the owner's debt service. The Company has a
right of first refusal to acquire certain of these managed facilities.
CONTRACT REHABILITATION SERVICES. Centennial currently provides contract
rehabilitation services under 70 contracts in facilities in 17 states, including
19 facilities in North Carolina, 11 facilities in Florida and nine facilities in
Arkansas. Twenty-five of the agreements are with the Company's owned or leased
facilities, 11 are with the Company's managed facilities and 39 are with
unaffiliated third-parties. Most of these agreements have initial terms of five
years with automatic renewal provisions for five successive additional terms of
five years each, unless terminated earlier upon 90 days prior notice, and are
subject to termination without cause upon 60 days prior written notice. Pursuant
to these agreements, the Company provides comprehensive rehabilitation services,
including physical, occupational and speech therapy. In addition, the Company
provides administrative services including policy formulation, licensure
compliance, training, staffing, quality control, financial report preparation
and patient census preparation. Therapy services, except for physical therapy
services, are billed per unit of therapy service provided at rates set forth in
the therapy service agreement. Physical therapy services are billed at the
current
42
<PAGE>
Medicare published salary equivalency rate. Non-therapy services are either
billed per unit of service provided or at a flat monthly rate set forth in the
individual therapy service agreement.
OFFICE LEASES
Centennial's corporate headquarters occupy approximately 35,000 square feet
of office space in a commercial building located in Atlanta, Georgia, under a
lease agreement which terminates on September 30, 2001 and allows one five-year
renewal option. The Company believes that such offices are adequate for its
current requirements.
Centennial also leases approximately 12,800 square feet of office space in
Atlanta, Georgia, which was the previous location of its corporate headquarters.
Centennial subleases the entire space to a subtenant and both the primary lease
and the sublease terminate on November 30, 1999. Transitional leases
approximately 18,000 square feet of office space in Louisville, Kentucky, which
was Transitional's corporate headquarters prior to the Transitional Merger. The
lease term expires January 31, 2002. The Company has entered into a sublease for
6,350 square feet of this space for the remaining term of the primary lease and
is seeking a subtenant for the balance of the space.
COMPETITION
The Company expects that it will face increasing levels of competition with
respect to its operations and the services it provides. The Company competes for
patients with other long-term care facilities and, to a lesser extent, with
acute care hospitals, physician practice groups, home health care providers,
community-based service programs, retirement communities and assisted living
centers. In addition, competition may grow from new market entrants, including
companies focusing primarily on specific components of the Company's various
services. Many states require a CON or impose similar restrictions before a new
long-term care facility can be constructed or additional beds can be added to
existing facilities. The Company believes that these regulations reduce the
possibility of over-building and promote higher utilization. Certain competing
companies have greater financial and other resources and may be more established
in their respective communities than the Company.
In competing for patients, a facility's local reputation is important.
Referrals typically come from acute care hospitals, physicians, religious
groups, health maintenance organizations, patients' families and friends and
other community organizations. Other factors which affect a facility's ability
to attract patients include the physical plant condition, the ability to
identify and meet particular needs in the community, the rates charged for
services and the availability of personnel to provide the appropriate levels of
care.
Competition for subacute care patients is increasing by virtue of market
entry of other health care providers, such as acute care hospitals,
rehabilitation hospitals and other specialty service providers. The competitive
factors that distinguish subacute providers include the degree of acuity for
which care can be provided. The Company believes that its subacute care
facilities are characterized by a high level of acuity in patient care provided.
Other important competitive factors include the reputation of the facility in
the community, the services offered, the availability of qualified nurses, local
physicians, hospital support, rehabilitation therapists and other personnel, the
appearance of the facility and the cost of services.
SOURCE OF REVENUES AND PAYOR MIX
The Company derives its revenues primarily from various state Medicaid
programs for indigent patients, the Medicare program for certain elderly and
disabled patients, private pay sources, rehabilitation therapy services offered
to third-party long-term care facilities and management fees. The Company
employs reimbursement specialists and retains outside reimbursement consultants
to monitor reimbursement rules, policies and related developments in order to
comply with reporting requirements and to assist the Company in receiving
reimbursements.
43
<PAGE>
The following table sets forth the percentage of total revenues by payor
source for the Company for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE MONTHS
YEARS ENDED MAY 31, 31, ENDED MARCH 31,
---------------------------------- ---------------------- ----------------------
1993 1994 1995 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Percentage of total revenues:
Medicare........................... 6.8% 6.9% 15.0% 18.2% 25.4% 25.3% 26.8%
Private pay, management fees and
other(1)......................... 40.5 19.4 20.5 23.7 31.8 31.0 31.5
----- ----- ----- ----- ----- ----- -----
47.3 26.3 35.5 41.9 57.2 56.3 58.3
Medicaid........................... 52.7 73.7 64.5 58.1 42.8 43.7 41.7
----- ----- ----- ----- ----- ----- -----
Total............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
</TABLE>
- ------------------
(1) Private pay includes payments from third parties pursuant to contract
rehabilitation therapy services.
MEDICARE. All of the Company's facilities are certified Medicare providers.
The Medicare program consists of two parts. Part A covers inpatient hospital
services and certain services furnished by other institutional providers, such
as skilled nursing and long-term acute care facilities. Part B covers the
services of doctors, suppliers of medical items, various types of outpatient
services including physical, speech and occupational therapy, pharmaceuticals
and medical supplies, certain intensive rehabilitation and psychiatric services
and ancillary services of the type provided by long-term care or acute care
facilities. Medicare does not provide reimbursement for community-based,
intermediate-care nursing facilities.
Under the Medicare Part A program, the Company is reimbursed for its direct
costs plus an allocation of indirect costs up to a facility specific limit (the
"routine cost limit"). As the Company has expanded its post-acute care and other
specialty services, the costs of care for these patients have exceeded and are
expected to continue to exceed the reimbursement routine cost limits. Under
current regulations, new long-term care facilities are, in certain limited
circumstances, able to apply for a three year exemption from routine cost
limits. Unless and until such exemptions are granted, these facilities can
recover excess costs only through routine cost limit exception requests. There
can be no assurance that the Company will be able to recover such excess costs
under any pending or future requests. Payment for Medicare Part B services
depends on the nature of the services provided. Some services are reimbursed at
cost, much like Part A services. Other services, particularly parenteral and
enteral nutrition therapy, are reimbursed on a fee schedule.
PRIVATE PAY, MANAGEMENT FEES AND OTHER. Private pay and other revenues
include payments from individuals who pay directly for services without
governmental assistance and payments from commercial insurers, HMOs, PPOs,
insurance organizations, workers' compensation programs, hospice programs and
other similar payment sources. The Company's rates for private pay patients are
typically higher than rates for patients eligible for assistance under state
Medicaid programs. These private pay rates are established on a
facility-specific basis in accordance with market factors, including rates
charged by other providers in the local market.
MEDICAID. Medicaid includes the various state-administered reimbursement
programs for indigent patients created by federal law. Although reimbursement
rates vary from state to state, the federal government retains the right to
approve or disapprove individual state plans. Providers must accept
reimbursement from Medicaid as payment in full for the services rendered,
because the provider may not bill the patient for more than the amount of the
Medicaid payment received. Criteria for Medicaid eligibility varies from state
to state, subject to guidelines from the federal government for determination
whether a person qualifies as medically indigent and subject to changes in state
and federal regulations.
44
<PAGE>
Many of the residents at the Company's facilities who initially enter the
facilities as private pay or insurance patients are later covered by Medicaid as
their financial resources are depleted to a level of financial net worth and
income which makes them eligible for Medicaid.
With the exception of two facilities, all of the facilities operated by the
Company participate in state Medicaid programs. Basic long-term care services
are provided to Medicaid patients, including nursing, dietary, housekeeping and
laundry and restorative health care services, room and board and medications.
Medicaid does not cover the cost of private rooms, private-duty nurses and other
costs, or amounts in excess of the Medicaid reimbursement rates. Under the
federal Medicaid statute and regulations, state Medicaid programs must provide
reimbursement rates that are reasonable and adequate to cover the costs that
would be incurred by efficiently and economically operated facilities in
providing services in conformity with state and federal laws, regulations and
quality and safety standards. Furthermore, payments must be sufficient to enlist
enough providers so that services under the state's Medicaid plan are available
to recipients at least to the extent that those services are available to the
general population. Reimbursement rates generally are determined by the state
from "cost reports" filed annually by each facility, on both a prospective and
retrospective basis. There can be no assurance, however, that payments under
Medicaid programs will be sufficient to cover the costs allocable to patients
eligible for reimbursement pursuant to such programs.
The Medicare and Medicaid programs are subject to various statutory and
regulatory changes which may adversely affect the Company's business. There can
be no assurance that payments for services and supplies under governmental
reimbursement programs will remain comparable to present levels. The Company may
be subject to rate reductions as a result of federal budgetary legislation. The
President and Congress are currently negotiating a balanced budget plan pursuant
to which currently budgeted increases in Medicare spending would be reduced by
$115 billion over five years. Under the proposal recently approved by the House
Budget Committee, $105 billion of these reductions would come from providers and
managed care organizations. Although specifics of these reductions have not been
announced at the present time, there can be no assurance that such reductions,
if enacted as part of a balanced budget plan, would not have a material adverse
effect on the Company's operations. Various state Medicaid programs periodically
experience budgetary shortfalls which may result in Medicaid payment delays to
the Company. In addition, the failure, even inadvertent, of the Company to
comply with applicable reimbursement regulations could adversely affect the
Company's business. Although there can be no assurance that future adjustments
will not have a material adverse effect on the Company, the Company believes
that it has properly applied the various payment formulas and that it is not
likely that audit adjustments would have a material adverse effect on the
Company.
Cost reports are subject to routine audits by government regulatory bodies
on an annual or periodic basis and several of the Company's facilities are
currently involved in the audit process. In the event of a determination by such
a regulatory body that the amount of reimbursement exceeded allowable
reimbursement levels, the Company may be required to repay any excess amount.
Although the Company believes it has adequately provided for any repayment
obligations, there can be no assurance that such provisions will be adequate.
CONTRACT REHABILITATION SERVICES. In general, the Company classifies
payments for rehabilitation therapy services received directly from third-party
long-term care facilities as private pay. Revenues from rehabilitation therapy
services provided to Company-operated facilities are included in the Medicare,
Medicaid and private pay sources of revenues of the Company. The Company's
charges to non-affiliates, though not directly regulated, are effectively
limited by regulatory reimbursement policies imposed on the long-term care
facilities that receive these services, as well as competitive market factors.
45
<PAGE>
GOVERNMENT REGULATION
The federal government and all states in which the Company operates regulate
various aspects of the Company's business. In addition to the regulation of
rates by governmental payor sources, the development and operation of long-term
care facilities and the provision of long-term care services are subject to
federal, state and local licensure and certification laws which regulate with
respect to a facility, among other matters, the number of beds, the services
provided, the distribution of pharmaceuticals, equipment, staffing requirements,
patients' rights, operating policies and procedures, fire prevention measures,
environmental matters and compliance with building and safety codes. Home health
care providers are also subject to extensive government regulations. Regulators
recently announced plans to impose new regulations and to increase regulatory
enforcement activities. There can be no assurance that federal, state or local
governmental regulations will not change or be subjected to new interpretations
that impose additional restrictions which might adversely affect the Company's
business. See "Risk Factors -- Impact of Health Care Reform and Limits on
Government Reimbursement and Other Payments."
Licensing, certification and other applicable standards vary from
jurisdiction to jurisdiction and are revised periodically. State agencies survey
or inspect all long-term care facilities on a regular basis to determine whether
such facilities are in compliance with the requirements for participation in
government-sponsored third-party payor programs. In some cases or upon repeat
violations, the reviewing agency has the authority to take various adverse
actions against a facility, including the imposition of fines, temporary
suspension of admission of new patients to the facility, suspension or
decertification from participation in the state Medicaid or the Medicare
program, offset of amounts due against future billings to the Medicare or
Medicaid programs, denial of payments under Medicaid for new admissions,
reduction of payments, restrictions on the ability to acquire new facilities
and, in extreme circumstances, revocation of a facility's license or closure of
a facility. The compliance history of a prior provider may be used by state or
federal regulators in determining possible action against a successor provider.
The Company believes that its facilities are in substantial compliance with
all statutes, regulations, standards and requirements applicable to its
business, including applicable Medicaid and Medicare regulatory requirements. In
the ordinary course of its business, however, the Company from time to time
receives notices of deficiencies for failure to comply with various regulatory
requirements. In most cases, the Company and the reviewing agency will agree
upon corrective measures to be taken to bring the facility into compliance.
There can be no assurance that future agency inspections will not have a
material adverse effect on the Company.
CERTIFICATES OF NEED. A majority of the states in which the Company
operates have adopted CON or similar laws which generally require that a state
agency determine that a need exists prior to the construction of new facilities,
the addition or reduction of licensed beds or services, the implementation of
other changes, the incurrence of certain capital expenditures, the approval of
certain acquisitions and changes in ownership or, in certain states, the closure
of a facility. State CON approval is generally issued for a specific project or
number of beds, specifies a maximum expenditure, is sometimes subject to an
inflation adjustment, and requires implementation of the proposal within a
specified period of time. Failure to obtain the necessary state approval can
result in the inability of the facility to provide the service, operate the
facility or complete the acquisition, addition or other change and can also
result in adverse reimbursement action or the imposition of sanctions or other
adverse action on the facility's license.
MEDICARE AND MEDICAID. In 1990 and 1993, Congress passed legislation
("OBRA" and "OBRA 93") revising Medicare nursing standards and reimbursement and
methods for nursing homes. Although the Company believes that it is in
substantial compliance with the current requirements of OBRA and OBRA 93, it is
unable to predict how future interpretation and enforcement of regulations
promulgated under OBRA and OBRA 93 by the state and federal governments could
affect the Company in the future.
46
<PAGE>
Effective July 1, 1995, the Health Care Financing Administration ("HCFA")
promulgated new survey, certification and enforcement rules governing long-term
care facilities participating in the Medicare and Medicaid programs, which
impose significant new requirements on long-term care facilities. The breadth of
the new rules creates uncertainty over the manner in which the rules will be
implemented, the ability of any long-term care facility to comply with them and
the effect of the new rules on the Company.
Under the rules, unannounced standard surveys of facilities must be
conducted at least once every 15 months with a state-wide average of 12 months.
In addition to the standard survey, survey agencies have the authority to
conduct surveys as frequently as necessary to determine whether facilities
comply with participation requirements, to determine whether facilities have
corrected past deficiencies and to monitor care if a change occurs in the
ownership or management of a facility. Furthermore, the state survey agency must
review all complaint allegations and conduct a standard or an abbreviated survey
to investigate such complaints if a review of the complaint shows that a
deficiency in one or more of the Federal requirements may have occurred and that
only a survey will determine whether a deficiency or deficiencies exist. If a
facility has been found to furnish substandard care, it is subject to an
extended survey. The extended survey is intended to identify the policies and
procedures that caused a facility to deliver substandard care.
HCFA's new rules substantially revise provisions regarding the enforcement
of compliance requirements and remedies for long-term care facilities with
deficiencies. At a minimum, the following remedies are available: termination of
provider agreement; temporary management; denial of payment for new admissions;
civil money penalties; closure of the facility in emergencies or transfer of
patients or both; and on-site state monitoring. States may also adopt optional
remedies. The new rules divide remedies into three categories. Category I
remedies include directed plans of correction, state monitoring and directed
in-service training. Category 2 remedies include denial of payments for new
admissions, denial of payments for all individuals (imposed only by HCFA) and
civil money penalties of $50 to $3,000 per day. Category 3 remedies include
temporary management, immediate termination or civil money penalties of $3,050
to $10,000 per day. The rules define situations in which one or more of the
penalties must be imposed.
HCFA has announced its intention to propose rules applying salary
equivalency guidelines to speech and occupational therapy services, while
updating physical and respiratory therapy guidelines. In addition, on April 14,
1995, HCFA issued a memorandum that sets forth rates for speech and occupational
therapy services that are lower than the Medicare reimbursement rates currently
received by the Company for such services. In response to a challenge to this
memorandum, HCFA stated that it would not enforce these guidelines. The Company,
however, believes that HCFA is prepared to issue proposed salary equivalency
guidelines for speech and occupational therapy services in the near future,
although the Company cannot predict when, or to what extent, such rules, if
proposed, will be adopted. The imposition of salary equivalency guidelines on
contract speech and occupational therapy services could adversely affect the
Company's revenues derived from specialty services and thereby limit the
Company's ability to recoup its investment in that part of its business.
Similarly, any future regulations reducing the government payment rates for
subacute or other specialty medical services could materially adversely affect
the Company. On March 10, 1997, HCFA published proposed Medicare conditions of
participation for home health care agencies that would, if adopted, require home
health care agencies to monitor patient outcomes using the government's standard
core assessment data (the "Outcomes and Assessment Information Set" or "OASIS").
The proposed rules would also impose more stringent qualifications for home
health care personnel and would expand government enforcement efforts against
fraud and abuse in the home health care field. Final rules will be published
following a 90-day comment period on the proposed rules.
FEE-SPLITTING AND REFERRALS. The Company is also subject to federal and
state laws that govern financial and other arrangements between providers.
Federal laws, as well as the laws of certain states, prohibit payments or fee
splitting arrangements between providers that are designed to induce or
47
<PAGE>
encourage the referral of patients to, or the recommendation of, a particular
provider for medical products and services. These laws include the federal
"anti-kickback law" which prohibits, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of Medicare and Medicaid patients.
Effective January 1, 1995, OBRA 93 prohibits any physician with a financial
relationship (defined as a direct or indirect ownership or investment interest
or compensation arrangement) with an entity from making a referral for
"designated health services" to that entity and prohibits that entity from
billing for such services. "Designated health services" do not include skilled
nursing services but do include many services which long-term care facilities
provide to their patients, including, but not limited to, infusion therapy and
enteral and parenteral nutrition. Various exceptions to the application of this
law exist, including one which protects the payment of fair market compensation
for the provision of personal services, so long as various requirements are met.
Violations of these provisions may result in civil or criminal penalties for
individuals or entities and/or exclusion from participation in the Medicaid and
Medicare programs. Various state laws contain analogous provisions, exceptions
and penalties. Violation of these state laws could lead to loss of licensure,
significant fines and other penalties. The Company believes that in the past it
has been, and in the future it will be, able to arrange its business
relationships so as to comply with these provisions. Failure to comply with such
laws could subject the Company to civil fines, possible exclusion from
government reimbursement programs and, in certain cases, criminal prosecution.
HEALTH CARE REFORM. In addition to extensive existing governmental
regulation, there are numerous legislative and executive initiatives at the
federal and state levels for comprehensive reforms affecting the payment for and
availability of services. It is not clear at this time what proposals, if any,
will be adopted or, if adopted, what effect such proposals would have on the
Company's business. Aspects of certain of these proposals, such as reductions in
funding of the Medicare and Medicaid programs, potential changes in
reimbursement regulations for rehabilitation therapy services, interim measures
to contain costs such as a short-term freeze on prices charged by providers or
changes in the administration of Medicaid at the state level, could materially
adversely affect the Company. There can be no assurance that currently proposed
or future legislation or other changes in the administration or interpretation
of governmental programs will not have an adverse effect on the Company.
ENVIRONMENTAL AND OTHER. The Company is also subject to a wide variety of
federal, state and local environmental and occupational health and safety laws
and regulations. Among the types of regulatory requirements faced by providers
are: air and water quality control requirements, waste management requirements,
specific regulatory requirements applicable to asbestos, polychlorinated
biphenyls and radioactive substances, requirements for providing notice to
employees and members of the public about hazardous materials and wastes and
certain other requirements.
In its role as owner and/or operator of properties or facilities, the
Company may be subject to liability for investigating and remedying any
hazardous substances that have come to be located on the property, including
such substances that may have migrated off of, or emitted, discharged, leaked,
escaped or been transported from, the property. The Company's operations may
involve the handling, use, storage, transportation, disposal and/or discharge of
hazardous, infectious, toxic, radioactive, flammable and other hazardous
materials, wastes, pollutants or contaminants. Such activities may harm
individuals, property or the environment; may interrupt operations and/or
increase their costs; may result in legal liability, damages, injunctions or
fines; may result in investigations, administrative proceedings, penalties or
other governmental agency actions; and may not be covered by insurance. The cost
of any required remediation or removal of hazardous or toxic substances could be
substantial and the liability of an owner or provider for any property is
generally not limited under applicable laws and could exceed the property's
value. Although the Company is not aware of any material liability under any
environmental or occupational health and safety laws, there can be no assurance
that the Company will not encounter such liabilities in the future, which could
have a material adverse effect on the Company.
48
<PAGE>
PERSONNEL
As of March 31, 1997, the Company employed, directly or indirectly,
approximately 8,300 persons, including approximately 5,100 full-time and 3,200
part-time employees. As of March 31, 1997, the Company had collective bargaining
agreements related to ten facilities covering approximately 1,000 employees and
was negotiating with bargaining units at two additional facilities. The Company
believes that it has a satisfactory relationship with these employees and
strives to maintain this relationship by offering competitive benefit packages,
training programs and opportunities for advancement. See "Certain Transactions."
INSURANCE
The Company maintains property, liability, and professional liability
insurance policies in amounts and with such coverage and deductibles that are
deemed appropriate by management, based upon historical claims, industry
standards and the nature and risks of its business. The Company also requires
that physicians practicing at its facilities carry medical professional
liability insurance to cover their respective individual professional
liabilities. The Company directly and indirectly maintains a self-insurance
program with appropriate reinsurance for workers' compensation. This program
covers employees as required by state law. In certain states, the Company
participates in state approved programs. Contractors who provide services to the
Company must demonstrate adequate insurance prior to commencing work, however,
there can be no assurance that any current or future claims will not exceed
applicable insurance coverage.
LEGAL PROCEEDINGS
As is typical in the industry, the Company is subject to claims and legal
actions in the ordinary course of its business, including employment matters and
malpractice and wrongful death claims. In addition, on October 6, 1995, prior to
the Transitional Merger, NPF IV, Inc. ("NPF"), an accounts receivable factoring
firm, filed suit against Transitional, Cardinal Development Co., Inc. and its
related entities ("Cardinal") and certain other parties in the United States
District Court for the Southern District of Ohio, alleging successor liability
for various accounts receivable factoring transactions between Cardinal and NPF.
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 normal course of its business are either adequately
covered by insurance or will be resolved without a material adverse affect on
the Company's financial condition, although there can be no assurance that such
amounts will be adequate or that such results will be achieved.
49
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- ----------- ---------------------------------------------------------------------
<S> <C> <C>
J. Stephen Eaton................... 46 Chairman of the Board, President and Chief Executive Officer
Kent C. Fosha, Sr.................. 56 Executive Vice President of Operations
Alan C. Dahl....................... 36 Executive Vice President, Chief Financial Officer, Treasurer and
Director
Randall J. Bufford................. 37 Executive Vice President of Business Development
Laurence W. Lepley, Jr............. 53 President of Paragon Rehabilitation, Inc.
Wayne H. Mayo...................... 53 Eastern Division Vice President
Clay F. Crosson.................... 40 Western Division Vice President
John P. Cobb....................... 66 Senior Vice President of Reimbursement
Daniel F. Montgomery............... 39 Senior Vice President and Chief Information Officer
James B. Hoover.................... 42 Director
Bertil D. Nordin................... 62 Director
Robert A. Ortenzio................. 39 Director
Andrew M. Paul..................... 41 Director
</TABLE>
Centennial's Board of Directors (the "Board") is classified into three
classes which consist of, as closely as possible, an equal number of directors.
The members of each class will serve staggered three-year terms. Messrs. Eaton
and Paul are Class I directors, Messrs. Nordin and Hoover are Class II directors
and Messrs. Dahl and Ortenzio are Class III directors. The terms of the Class I,
Class II and Class III directors expire at the annual shareholders meeting to be
held in 1998, 1999 and 2000, respectively.
The Board has established a Compensation Committee and an Audit Committee.
The Compensation Committee is currently comprised of Messrs. Eaton, Paul and
Ortenzio and Mr. Paul is the chairman. The Audit Committee is comprised of
Messrs. Hoover and Ortenzio and Mr. Eaton is an ex-officio, non-voting member.
J. STEPHEN EATON is Chairman of the Board and the founder of Centennial and
has served as its President and Chief Executive Officer since founding the
Company in 1989. From 1982 to 1988, Mr. Eaton served in various executive
positions (including Vice President in 1988) at Consolidated Resources
Corporation of America and its successors ("CRCA"). When Centennial acquired
CRCA in 1990, it served as the general partner of private and public limited
partnerships that owned in excess of 31 long-term care and assisted living
facilities. Mr. Eaton also serves as a director of Saint Joseph's Mercy Care
Corporation, a non-profit corporation based in Atlanta, Georgia which provides
mobile health services to the homeless and other underserved populations, and of
Saint Joseph's Health System, a major tertiary care hospital and health system
in Atlanta, Georgia.
KENT C. FOSHA, SR. has served as Executive Vice President of Operations
since January 1996 and also serves as President of Centennial International
Management Corporation. He joined Centennial in 1990 and served as the Company's
senior vice president of operations until January 1996. Mr. Fosha has over 20
years experience in all aspects of nursing home management, including the
supervision of multi-state operations for National Heritage, Inc. and Beverly
Enterprises. Mr. Fosha, a licensed nursing home
50
<PAGE>
administrator, has served as president of the Georgia Healthcare Association and
has served on several long-term care related committees.
ALAN C. DAHL has served as Executive Vice President, Chief Financial
Officer, Treasurer and Director of Centennial since January 1996. From February
1991 to December 1995, he served as senior vice president. Mr. Dahl has been
involved in health care finance for the past 11 years. Mr. Dahl was previously
senior vice president of Southmark Public Syndications, Inc., a subsidiary of
Southmark Corporation. Mr. Dahl, a certified public accountant, also worked in
the tax department at Arthur Young & Company.
RANDALL J. BUFFORD has served as Executive Vice President-Business
Development of the Company since January 1996. From 1993 to December 1995, Mr.
Bufford served as General Manager/Chief Executive Officer of Transitional. Mr.
Bufford served as an officer of Cardinal from 1982 until 1993, and he organized
and led a management buy-out and recapitalization through which Transitional
purchased many of the assets of Cardinal. Mr. Bufford began his career as an
auditor at Arthur Young & Company.
LAURENCE W. LEPLEY, JR., has served as President of Paragon Rehabilitation
Inc., a subsidiary of Centennial ("Paragon"), since its inception in 1989. Mr.
Lepley has 29 years of experience in the health care industry, having previously
served as vice president of development and general counsel for a corporation
specializing in head injury rehabilitation. Mr. Lepley has also served as vice
president, corporate attorney and lobbyist for the Tennessee Hospital
Association. Mr. Lepley began his health care career as a pharmacist in both
hospital and retail settings, and he maintains licenses in pharmacy and law in
the state of Tennessee.
WAYNE H. MAYO has served as Eastern Division Vice President of Centennial
since January 1997. Prior to being Eastern Division Vice President, Mr. Mayo
served as regional vice president from 1991 to 1996, and he was responsible for
Centennial's Eastern region of facilities. Mr. Mayo was previously regional vice
president of operations for Vantage Healthcare Corporation and also served as
regional vice president of operations for Medco Centers, Inc. for seven years.
Mr. Mayo is a member of the American College of Nursing Home Administrators.
CLAY F. CROSSON has served as Western Division Vice President of Centennial
since February 1997. Prior to joining Centennial in 1997, Mr. Crosson was vice
president of operations and a member of the Board of Directors for CareMore,
Inc. for five years. Previous to that, Mr. Crosson served 11 years at National
HealthCorp, L.P. in various capacities, including regional vice president. Mr.
Crosson has an MBA and 17 years of experience in long-term care, subacute care,
home health care, managed care and assisted living. Mr. Crosson is a licensed
administrator and a certified fellow of the American College of Health Care
Administrators, an organization where he currently serves as a governor on the
Board of Governors. He also presently serves as Vice Chairman of the Georgia
Nursing Home Association.
JOHN P. COBB joined the Company in 1991. He has served as Senior Vice
President of Reimbursement since January 1995. He served as director of
reimbursement from 1991 to January 1995. Mr. Cobb has over 18 years of
experience in third-party reimbursement of long-term care facilities. Prior to
joining the Company, Mr. Cobb was director of reimbursement for Convalescent
Services, Inc. ("CSI"), where he was responsible for the preparation of over 48
Medicaid and Medicare cost reports for facilities in six states. Mr. Cobb has
also served as an auditor/investigator for the Medicaid Fraud Division of the
Arkansas Attorney General's office.
DANIEL F. MONTGOMERY has served as Senior Vice President and Chief
Information Officer of Centennial since January 1996. From 1991 to 1996, he
served as vice president of finance for Centennial. Prior to joining Centennial,
Mr. Montgomery served six years at National Heritage, Inc. in various
capacities, including vice president of administrative services, director of
internal audit and financial reporting and vice president and controller. Mr.
Montgomery, a certified public accountant, also served as internal auditor for
AMI, Inc.
51
<PAGE>
JAMES B. HOOVER, a Director of the Company since January 1996, has served as
general partner of the sole general partner of WCAS VI since 1992. From 1984 to
1992, Mr. Hoover served as general partner of Robertson, Stephens & Co.
("RS&Co."). RS&Co. is an investment banking firm specializing in the financing
of emerging growth companies, with particular emphasis in the health care
industry. Prior to joining RS&Co., Mr. Hoover was vice president of the
Investment Management Group of Citibank, N.A., from 1977 to 1984. Mr. Hoover
serves as a director for Housecall Medical Resources, Inc. and U.S. Physical
Therapy, publicly traded companies as well as five private companies.
Additionally, Mr. Hoover is a member of the Special Projects Committee of
Memorial Sloan-Kettering Cancer Center which raises funds and evaluates funding
proposals from physicians interested in pursuing cancer research projects.
BERTIL D. NORDIN, a Director of Centennial since March 1997, is currently an
investor and advisor. From 1990 to 1994, Mr. Nordin served as chairman of the
board of Digital Communications Associates, Inc. ("DCA"), a telecommunications
company. Mr. Nordin was also president and chief executive officer of DCA from
1981 to 1990. Mr. Nordin serves as a director for TechForce Corporation, a
public company, Masada Corporation, a private company, and the Atlanta Symphony
Orchestra.
ROBERT A. ORTENZIO, a Director of Centennial since January 1996, has served
as President of Select Medical Corporation, a private health care company based
in Mechanicsburg, Pennsylvania, since 1996. From 1986 to 1996, Mr. Ortenzio was
employed by Continental Medical Systems, Inc., a nationwide provider of
rehabilitation services, as its president and chief executive officer. Mr.
Ortenzio also serves as a director of American Oncology Resources, Inc. and
OccuSystems, Inc.
ANDREW M. PAUL, a Director of the Company since January 1996, serves as a
general partner of the sole general partner of WCAS VI, a private equity
investment fund. Prior to joining WCAS VI in 1984, Mr. Paul was an associate in
Hambrecht & Quist's venture capital group. From 1978 to 1981, he was a systems
engineer and later a marketing representative for International Business
Machines Corporation. Mr. Paul serves as a director of American Oncology
Resources, Inc.; EmCare Holdings, Inc.; Housecall Medical Resources, Inc.;
Lincare Holdings, Inc.; MedCath Inc.; National Surgery Centers; OccuSystems,
Inc.; and Quorum Health Group.
BOARD OF DIRECTORS
There are no family relationships between any of the directors or executive
officers of the Company. The Board has established two standing committees: (i)
the Compensation Committee and (ii) the Audit Committee.
The Audit Committee consists of up to two directors, none of whom is also an
officer or employee of the Company. The President of the Company is an
ex-officio, non-voting member of the Audit Committee. The Audit Committee
selects the Company's auditors, reviews the audit and has other authority
customary for an audit committee.
The 1994 Stock Option Plan, the 1996 Executive Stock Plan, the 1996 Employee
Stock Option Plan and the 1997 Stock Plan (collectively, the "Stock Plans") are
administered by the Compensation Committee which consists of not more than four
directors of the Company appointed by the Board of Directors, one of whom, in
certain instances, must be the Chairman of the Board. With respect to any
options granted to an individual who is subject to the provisions of Section 16
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
provided in Rule 16a-2 promulgated pursuant to the Exchange Act (a "Section 16
Insider"), the Compensation Committee consists of at least two directors who are
"non-employee directors" (which term has the meaning set forth in Rule 16b-3
under the Exchange Act or in any successor rule thereto) and all authority and
discretion must be exercised by such "non-employee directors." Any compensation
package set forth in an employment agreement is subject to approval by the
Compensation Committee.
52
<PAGE>
DIRECTORS' COMPENSATION
Outside Directors (as defined below) receive $8,000 annually (paid in four
quarterly installments) and $1,000 for each meeting of the Board or any
committee of the Board (except for telephonic meetings and committee meetings
held on the same day as a full Board meeting) for their services as Outside
Directors. Outside Directors are also reimbursed for their reasonable
out-of-pocket expenses, incurred in connection with their attendance at Board
and committee meetings. In addition, Outside Directors receive automatic grants
of options to purchase 10,700 shares of Common Stock upon their election to the
Board and Outside Directors who are serving as such on July 1 of each year
receive automatic grants of options to acquire 2,150 shares of Common Stock
pursuant to the 1997 Stock Plan. Outside Directors are directors who are not
employees or affiliates of the Company. The 1997 Stock Plan is intended to allow
the Outside Directors receiving grants of options to continue to be
"non-employee directors" under Rule 16b-3 of the Exchange Act. See "Management
- -- Stock Plans."
EXECUTIVE COMPENSATION
The following table sets forth the information with respect to the Company's
Chief Executive Officer and each of the other executive officers of the Company
whose total annual salary and bonus exceeded $100,000 for all services rendered
in all capacities to the Company for the calendar year ended December 31, 1996
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION --------------
------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY (1) BONUS (2) COMPENSATION OPTIONS/SARS COMPENSATION
- ------------------------------------------ ----------- ----------- ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
J. Stephen Eaton.......................... $ 300,000 $ 50,000 $ 324,359(3)(4) -- --
Chairman of the Board, President and
Chief Executive Officer
Kent C. Fosha, Sr......................... 175,000 25,000 163,041(3)(4) -- --
Executive Vice President
Alan C. Dahl.............................. 175,000 35,000 158,498(3) -- --
Executive Vice President and Chief
Financial Officer
Randall J. Bufford (5).................... 250,000 -- 100,000(6) 30,048(7) --
Executive Vice President--Business
Development
Laurence W. Lepley, Jr. (8)............... 132,341 65,575 6,794(9) 6,316(7) --
President of Paragon Rehabilitation,
Inc.
</TABLE>
- ------------------
(1) Represents annual salary, including compensation deferred by the Named
Executive Officers pursuant to the Company's 401(k) Plan.
(2) Represents annual bonuses earned by the Named Executive Officers for the
period indicated.
(3) Represents the difference between the exercise price for stock options
exercised and the fair market value of the shares received.
(4) Includes insurance for Messrs. Eaton and Fosha which provides for
reimbursement for health and dental costs in excess of the amount payable
under the Company's group health and dental plan.
(5) Mr. Bufford became an officer of the Company upon the completion of the
Transitional Merger.
(6) Consists of a moving allowance in the amount of $100,000.
(7) These incentive stock options were granted in replacement of Transitional
options.
(8) Mr. Lepley remained as president of Paragon after the Transitional Merger.
(9) Includes $794 as a matching 401(k) contribution and an automobile allowance
of $6,000.
53
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning stock option grants made
to each of the Named Executive Officers during the fiscal year ended December
31, 1996. No stock appreciation rights were granted during such year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM (1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR $/SH DATE 5% ($) 10% ($)
- ----------------------------- ------------ ------------- ----------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
J. Stephen Eaton............. -- --% $ -- -- $ -- $ --
Kent C. Fosha, Sr............ -- -- -- -- -- --
Alan C. Dahl................. -- -- -- -- -- --
Randall J. Bufford........... 30,048(2) 46.7 8.74(4) 2006 -0-(5) 104,560
Laurence W. Lepley, Jr....... 6,316(3) 9.8 8.74(4) 2006 -0-(5) 21,981
</TABLE>
- ------------------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the term
will be at the assumed 5% and 10% levels or at any other defined level.
Unless the market price of the Common Stock appreciates over the option
term, no value will be realized from the option grants made to the Named
Executive Officers.
(2) Represents incentive stock options granted pursuant to the Transitional
Merger in replacement of Transitional options. These options vest ratably
one-third on each of January 31, 1996, January 1, 1997 and January 1, 1998.
(3) Represents incentive stock options granted pursuant to the Transitional
Merger in replacement of Transitional options. These options are fully
vested.
(4) These incentive stock options were granted in replacement of Transitional
options at an exercise price of $8.74 taking into account the exercise price
of the Transitional options and the share conversion ratio set forth in the
agreement and plan of merger.
(5) The exercise price exceeded the fair market value of the underlying
securities on the date of the grant such that the potential realizable value
calculated at a 5% annualized rate results in a negative number.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND OPTION VALUES AT
DECEMBER 31, 1996
The following table sets forth information concerning option exercises and
option holdings for the fiscal year ended December 31, 1996, with respect to
each of the Named Executive Officers. No stock appreciation rights were
exercised during such year or were outstanding at the end of that year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT FISCAL YEAR- THE-MONEY OPTIONS/SARS AT
END(#) FISCAL YEAR-END($) (1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- --------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
J. Stephen Eaton........... 76,633 $ 316,996 28,737 86,211 $ 0 $ 0
Kent C. Fosha, Sr.......... 38,316 158,498 21,074 28,737 70,949 0
Alan C. Dahl............... 49,811 158,498 9,579 28,737 0 0
Randall J. Bufford......... -- -- 29,611 38,753 105,368 52,684
Laurence W. Lepley, Jr..... -- -- 6,316 -- 33,222 --
</TABLE>
- ------------------
(1) There was no public market for the Common Stock at December 31, 1996.
Accordingly, the values represent the difference between the assumed public
offering price of $14.00 and the applicable exercise price.
54
<PAGE>
STOCK PLANS
The Company currently has four stock plans with outstanding options or
options available to be granted, which include the 1994 Stock Option Plan, the
1996 Executive Stock Plan, the 1996 Employee Stock Option Plan and the 1997
Stock Plan. Centennial's 1992 Stock Option Plan that provided for the grant of
options to purchase 277,775 shares (which number reflects the stock dividend
declared effective January 6, 1996 as part of the Transitional Merger but does
not include the Reverse Stock Split) of Common Stock to key employees and
consultants of the Company in the form of non-qualified stock options has been
terminated. Options for all of the 277,775 shares authorized by that plan have
been granted and exercised at exercise prices of $0.29.
1994 STOCK OPTION PLAN. A total of 216,000 shares of Common Stock were
reserved for issuance pursuant to the 1994 Stock Option Plan, subject to
anti-dilution provisions. This number increased to 226,110 due to the stock
dividend declared effective January 6, 1996 as part of the Transitional Merger
(the "Stock Dividend") and was reduced to 155,943 to reflect the Reverse Stock
Split. As of March 31, 1997, options to purchase all 155,948 shares had been
granted under this plan, of which options to purchase 58,236 shares remain
outstanding and unexercised of which shares 55,171 are vested and 3,065 shares
vest during 1997. All of the options granted under this plan were granted at
exercise prices of $4.17 or $7.83, representing the fair market value of the
Common Stock as determined by the Compensation Committee at the time of the
grants. The remaining options expire in 2001 and 2002.
1996 EXECUTIVE STOCK PLAN. The Board of Directors adopted and the
shareholders approved the Company's 1996 Executive Stock Plan, which allows the
grant to officers, directors and key employees of non-qualified stock options,
restricted stock or stock appreciation rights. This Plan may be terminated by
the Board of Directors at any time.
A total of 500,000 shares of Common Stock were reserved for issuance
pursuant to the 1996 Executive Stock Plan, subject to anti-dilution provisions.
This number increased to 555,550 due to the Stock Dividend and was reduced to
383,162 to reflect the Reverse Stock Split. As of March 31, 1997, options to
purchase 372,480 shares had been granted under this plan, exclusive of options
to purchase 19,311 shares which were granted and had reverted back to this plan.
Options to purchase 63,682 shares are outstanding and vested and options to
purchase 308,798 shares are outstanding and unvested, of which 86,211 will vest
upon the closing of the Offering. The remaining outstanding and unvested options
(not vesting upon the closing of the Offering) will vest through the year 2000.
The options were granted at exercise prices of $14.03 and $14.00. All of the
options granted under this plan were granted at exercise prices representing
amounts equal to or exceeding the fair market value of the Common Stock as
determined by the Compensation Committee at the time of the grant.
1996 EMPLOYEE STOCK OPTION PLAN. The Company's 1996 Employee Stock Option
Plan was created as part of the Transitional Merger. The Board of Directors of
the Company adopted and the shareholders of the Company approved the Company's
1996 Employee Stock Option Plan. Awards under this plan are permitted to be
granted to employees of the Company in the form of non-qualified or incentive
stock options. This Plan may be terminated by the Board of Directors at any
time.
A total of 64,341 shares of Common Stock (which includes the Stock Dividend
and is reduced to reflect the Reverse Stock Split) were reserved for issuance
pursuant to the 1996 Employee Stock Option Plan, subject to anti-dilution
provisions. As of March 31, 1997, incentive options to purchase all 64,341
shares of Common Stock had been granted under this plan to certain former
employees of Transitional at an exercise price of $8.74 a share, of which
options to purchase 1,914 shares were exercised, options to purchase 45,734
shares were vested and options to purchase 2,418 shares had reverted back to the
plan. These options replaced options to acquire shares of Transitional's common
stock. All of the options granted under this plan were granted at exercise
prices equivalent to the exercise prices of options held by former employees of
Transitional before the Transitional Merger, taking into account the share
55
<PAGE>
conversion ratio set forth in the agreement and plan of merger, and were equal
to or in excess of the fair market value of the Common Stock as determined by
the Compensation Committee at the time of the grants.
1997 STOCK PLAN. The Board of Directors of the Company has adopted and the
shareholders of the Company have approved the Company's 1997 Stock Plan. Awards
under this plan are permitted to be granted to officers, directors and key
employees in the form of non-qualified stock options, incentive stock options,
restricted stock or stock appreciation rights. This Plan may be terminated by
the Board of Directors at any time.
A total of 482,790 shares (reflecting the Reverse Stock Split) of Common
Stock are reserved for issuance pursuant to the 1997 Stock Plan, subject to
anti-dilution provisions. As of March 31, 1997, options to purchase 45,583
shares had been granted under this plan at an exercise price of $14.00 , none of
which were vested. All of such options were granted at exercise prices
representing the fair market value of the Common Stock as determined by the
Compensation Committee at the time of the grants.
The 1997 Stock Plan also provides for the grant of non-qualified stock
options to non-employee, non-affiliate directors ("Outside Directors") of the
Company. This Plan is intended to allow the Outside Directors receiving grants
to be disinterested persons as defined in Rule 16b-3 ("Rule 16b-3") of the
Exchange Act with respect to the Company's Stock Plans and, accordingly, is
intended to be self-governing with respect to the Outside Directors to the
extent required by Rule 16b-3.
Under the terms of the 1997 Stock Plan, 103,455 shares will be reserved for
issuance to Outside Directors and each person who is elected or appointed as an
Outside Director will be automatically granted options to purchase 10,345 shares
of Common Stock at the time of his or her election or appointment. Commencing in
1998, each person who is an Outside Director on July 1 of each year during the
term of this plan will receive options to purchase 2,070 shares of Common Stock.
Options issued to Outside Directors under this plan become exercisable on the
first anniversary of the date of the grant. All options granted to Outside
Directors under this plan will be non-qualified stock options and will be
exercisable for ten years from the date of each grant. The exercise price of
such options shall be equal to the average closing bid price for the 20 trading
days before the Company's annual meeting of shareholders.
ADMINISTRATION OF THE PLANS. Each of the Stock Plans is administered by the
Compensation Committee of the Board of Directors, except for grants to Outside
Directors under the 1997 Stock Plan, which are intended to be self-governing to
the extent required by Rule 16b-3. The Compensation Committee determines the
persons to whom, and the times at which, awards are granted, the type of awards
granted and all other related terms and conditions of the awards, subject to
certain limitations set forth in the respective plans. Under each of the Stock
Plans, the Compensation Committee must consist of at least three directors,
including, in certain instances, the Chairman of the Board. With respect to any
options or awards to any Section 16 Insider, the Compensation Committee must
consist of at least two directors who are "non-employee directors" under Rule
16b-3 and all authority and discretion must be exercised by the "non-employee
directors." In this regard, Mr. Eaton, as Chairman of the Board, does not vote
and does not exercise any authority or discretion with respect to any options or
awards to any Section 16 Insider.
401(K) PLAN
The Company has a defined contribution plan (the "401(k) Plan") pursuant to
which employees with at least 15 months of service are eligible to participate.
Participants may not contribute more than $9,500 or 15.0% of their pre-tax total
compensation. The Company may at its option match a portion of the employee
contributions. In 1996, the matching contributions paid by the Company totaled
approximately $91,743.
56
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee are Messrs. Eaton, Paul
and Ortenzio and Mr. Paul is the chairman. W. Scott Miller served as a member of
the Compensation Committee until his resignation from the Board on August 1,
1996, at which time Mr. Ortenzio was appointed to the Compensation Committee.
Mr. Eaton is the Chairman of the Board, President and Chief Executive Officer of
the Company. Neither Mr. Paul or Mr. Ortenzio has been an officer or an employee
of the Company at any time.
TRANSACTIONS WITH MR. PAUL AND AFFILIATES. Mr. Paul, an affiliate of WCAS
VI, WCAS Capital and WCAS Healthcare, is a director of the Company and the
chairman of the Compensation Committee.
In January 1996, pursuant to the Transitional Merger, Mr. Paul, WCAS VI,
WCAS Capital and WCAS Healthcare received 7,729, 2,875,351, 406,562 and 67,629
shares of Special Voting Common Stock (reflecting the Settlement Agreement as
defined below), respectively, and Mr. Paul, WCAS VI and WCAS Healthcare also
received 318, 115,810 and 2,780 shares of the Company's Series C Preferred
Stock, respectively, in exchange for shares of Transitional's common and
preferred stock. The Special Voting Common Stock will be converted into
2,315,507 shares of Common Stock and the Series C Preferred Stock will be
converted into 1,194,747 shares of Common Stock upon the closing of the
Offering.
Effective January 31, 1997, Mr. Paul, WCAS VI and WCAS Healthcare acquired
225, 82,308 and 1,975 shares of Common Stock, respectively, from Mr. Eaton and
Mr. Fosha for an aggregate purchase price of $1,029,240, or $12.18 per share.
Effective January 31, 1997, Mr. Paul, WCAS VI and WCAS Healthcare acquired 114,
41,338 and 993 shares of Series D Preferred Stock, respectively, from the
Company for an aggregate purchase price of $4,244,500, or $100 per share. WCAS
Capital acquired 44,250 shares of Series E Redeemable Preferred Stock and 56,491
shares of Common Stock effective January 31, 1997, for an aggregate purchase
price of $4,425,000, or $100 per unit. See "Certain Transactions." The Series D
Preferred Stock will be converted into 348,503 shares of Common Stock and the
Series E Redeemable Preferred Stock will be redeemed upon the closing of the
Offering, and accrued but unpaid dividends thereon will be paid upon redemption.
The Company believes, based on available information regarding the Company
and its financial condition and prospects and recent sales of the Company's
securities, that all of the shares sold to Mr. Paul and his affiliates were sold
at prices equal to the fair market value per share of the stock on the date of
the respective sales.
In addition, WCAS Capital holds approximately 96.2% of the Subordinated Debt
that will be repaid with a portion of the proceeds of the Offering.
TRANSACTIONS WITH MR. ORTENZIO AND AFFILIATES. In January 1996, pursuant to
the Transitional Merger, Mr. Ortenzio received 1,884 shares of Special Voting
Common Stock and Horizon Investment Associates II ("Horizon"), an affiliate of
Mr. Ortenzio, received 39,562 shares of Special Voting Common Stock and 1,588
shares of Series C Preferred Stock. The Special Voting Common Stock will be
converted into 28,584 shares of Common Stock and the Series C Preferred Stock
will be converted into 15,955 shares of Common Stock upon the closing of the
Offering.
Effective January 31, 1997, Horizon acquired 567 shares of Series D
Preferred Stock from the Company for an aggregate purchase price of $56,700, or
$100 per unit. See "Certain Transactions." These shares of Series D Preferred
Stock will be converted into 4,655 shares of Common Stock upon the closing of
the Offering.
The Company believes, based on available information regarding the Company
and its financial condition and prospects and recent sales of the Company's
securities, that all of the shares sold to Mr. Ortenzio and his affiliates were
sold at prices equal to the fair market value per share of the stock on the date
of the sale.
57
<PAGE>
TRANSACTIONS WITH MR. EATON AND AFFILIATES. On January 15, 1996, Mr. Eaton
exercised options granted to him under the Company's 1992 Stock Option Plan to
purchase 76,633 shares of Common Stock at an exercise price of $0.4269 per
share. Effective January 31, 1997, Mr. Eaton sold such shares of Common Stock to
Mr. Paul, WCAS VI, WCAS Healthcare and others for an aggregate purchase price of
$933,324, or $12.18 per share.
Mr. Eaton has outstanding options to acquire 114,948 and 34,485 shares of
Common Stock at the exercise prices of $14.03 and $14.00 per share. Mr. Eaton
abstained and will continue to abstain from voting on matters before the
Compensation Committee in which he had or has a direct financial interest and he
will not vote or exercise any authority or discretion with respect to any option
or awards to or on any matters affecting any "insider" (within the meaning of
Rule 16a-2 promulgated under the Exchange Act).
The Company believes, based on available information regarding the Company
and its financial condition and prospects and recent sales of the Company's
securities, that all of the options granted to Mr. Eaton were granted at a price
equal to or greater than the fair market value per share of the stock on the
date of the grant.
As part of the Transitional Merger, holders of Common Stock (the "Centennial
Holders") and holders of the Special Voting Common Stock (the "THS Holders")
placed into escrow the shares of Common Stock or Special Voting Common Stock,
respectively, representing the Stock Dividend. The shares were to be held in
escrow as indemnification for settlement of post-closing purchase price
adjustments resulting from, imposed upon or incurred by either Centennial or
Transitional. The Centennial Holders placed 232,164 shares of Common Stock (not
reflecting the Reverse Stock Split) and the THS Holders placed 426,327 shares of
Special Voting Common Stock (not reflecting the Reverse Stock Split) into the
escrow. On January 31, 1997, Mr. Eaton as representative of the Centennial
Holders (the "Centennial Agent") and Mr. Paul as representative of the THS
Holders (the "THS Agent") entered into a settlement agreement (the "Settlement
Agreement") whereby the parties agreed to settle any and all claims for
indemnification by having the THS Holders transfer 304,218 shares of Special
Voting Common Stock or cash in lieu thereof at a value for such purpose of $8.40
per share. The Centennial Holders received cash or shares of Special Voting
Common Stock as designated in the Settlement Agreement. The THS Holders
transferred 85,816 shares of Special Voting Common Stock to the Centennial
Holders and $1.83 million cash in lieu thereof to the Centennial Holders. Mr.
Eaton received $1.14 million cash in lieu of his pro-rata portion of shares of
Special Voting Common Stock. Certain of the THS Holders, including Messrs. Paul
and Hoover, received their pro rata portion of 122,109 shares of Special Voting
Common Stock released from escrow pursuant to the Settlement Agreement.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
On December 31, 1995, the Company entered into employment agreements with
Messrs. Eaton, Dahl, Fosha and Bufford (the "Employment Agreements"). The
Employment Agreements provide for a base salary, an annual bonus, and an amount
for fees incurred for legal, accounting or other professional advice. The basic
salaries for Messrs. Eaton, Dahl, Fosha and Bufford total $300,000, $175,000,
$175,000 and $250,000, respectively. These base salaries are reviewed at least
once annually on May 1 by the Board of Directors to determine whatever increase
may be merited, with the minimum annual increase equal to the increase in the
Consumer Price Index as published by the U.S. Department of Labor, Bureau of
Statistics, for the period since the last annual review. In addition, each of
these employees is eligible to participate in the 1996 Executive Stock Option
Plan, management incentive programs, retirement, welfare and other benefit plans
or programs of the Company, including, at the Company's sole expense, health,
dental and hospitalization insurance coverage. Unless earlier terminated as
provided therein, the Employment Agreements continue until December 31, 1998 (or
1999 for Mr. Eaton), and extend automatically each day for an additional day so
that the remaining term continues to be two years for Mr. Eaton and one year for
Messrs. Dahl, Fosha and Bufford. The Company can terminate such agreements
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<PAGE>
upon the death or disability of an employee or for cause as defined therein.
Each employee may terminate his employment for any reason within a 90-day period
beginning on the 30th day after a Change in Control of the Company (as defined
below) or within a 90-day period beginning on the one-year anniversary of a
Change in Control. If Centennial terminates an Employment Agreement, or if an
employee terminates his employment for Good Reason (as defined below) upon a
Change in Control, then the Company must pay the employee (or, in the case of
death, the employee's estate) for 12 consecutive months thereafter (24 months in
the case of Mr. Eaton) the greater of one-twelfth of his salary at the rate in
effect on his termination date or at the highest rate in effect at any time
during the 90-day period prior to a Change in Control, as well as all amounts of
his base salary that are deferred under the Company's qualified and
non-qualified employee benefit plans or any other agreement or arrangement. In
addition, the restrictions on the employee's outstanding incentive awards,
including stock options, would lapse and such incentive awards would immediately
vest. Under each of the Employment Agreements, the employee agrees to maintain
the confidentiality of the Company's trade secrets and agrees, for a period of
one year following termination, not to compete with or solicit employees or
customers of the Company. For the purposes of the Employment Agreements, Good
Reason includes an occurrence after a Change in Control including an adverse
change in the employee's status, title, position or responsibilities; reduction
in base salary or other compensation or benefits; or a material breach of the
terms of the Employment Agreements. A Change of Control includes an acquisition
of the Company's voting securities of 40% or more; a merger, consolidation or
reorganization involving the Company unless at least two-thirds of the combined
voting power of the corporation resulting from such merger, consolidation or
reorganization is owned in substantially the same proportion as before such
merger, consolidation or reorganization and the persons serving as directors
before such merger, consolidation or reorganization constitute at least
two-thirds of the directors of the surviving corporation; a complete liquidation
or dissolution of the Company; or an agreement for the sale or disposition of
all or substantially all of the Company's assets.
In connection with the Transitional Merger, the Company assumed the
obligations of Transitional and Paragon under an employment agreement dated
December 1, 1994 with Laurence W. Lepley, Jr., who serves as president of
Paragon, a subsidiary of Centennial (the "Lepley Agreement"). The Lepley
Agreement provides for an annual base salary of $125,000 (subject to annual
increases) and annual bonus, allows participation in the 1996 Employee Stock
Option Plan and provides for health, dental and short and long-term disability
insurance and an automobile allowance. The initial term ends on December 31,
1997, but extends for additional one-year periods, unless either party gives
written notice of termination at least 30 days before the end of the then
current term. Centennial may terminate Mr. Lepley's employment upon his death or
his disability, or for good cause as defined therein. If Mr. Lepley's employment
is terminated for any other reason or if he terminates his employment for
constructive discharge, he is entitled to a lump sum severance payment in an
amount equal to his salary for the most recent nine month period prior to
termination of employment. Mr. Lepley agrees to maintain the confidentiality of
the Company's trade secrets and agrees for a period of one year following his
termination not to compete with or solicit employees or customers of the
Company.
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<PAGE>
CERTAIN TRANSACTIONS
On January 30, 1997, the Company sold to a company controlled by Mr. Eaton,
the stock of certain indirect subsidiaries of the Company, WelCare Consolidated
Resources Corporation of America, WelCare Service Corporation-II, WelCare
Service Corporation-IV, WelCare Service Corporation-V and WelCare Service
Corporation-VI (collectively, the "GP Corporations"). The GP Corporations serve
as corporate general partners of certain public and private limited partnerships
which own facilities managed by Centennial. The accounting rules which govern
the Company have required it to include in its financial statements certain
profits and losses of these partnerships which have tended to vary greatly from
year to year. As a result of the sale of the stock of the GP Corporations,
Centennial will not be required to include such profits and losses in its
consolidated financial statements for future periods. The Eaton controlled
company purchased the GP Corporations for nominal consideration and the Board of
Directors believes it is highly unlikely that Mr. Eaton or such company will
realize any profit from owning the GP Corporations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Mr. Eaton owns 100% of the common stock of Centennial Employee Management
Corporation ("CEMC"). Centennial leases its facility-based employees at cost
from CEMC on a pass through basis. CEMC was set up to take advantage of reduced
workers' compensation and group health insurance rates and passes on these
insurance cost savings to the Company. Mr. Eaton receives no economic benefit
from his ownership of this entity.
Mr. Eaton owns 70% of the issued and outstanding stock of WelCare Management
Services, Inc. ("Services"). Services owns The Health and Rehabilitation Centre
at Dolphins View ("Dolphins View"), which is managed by the Company. Services
exercised its right of first refusal to purchase the property from an
unaffiliated owner and purchased Dolphins View in 1994. Dolphins View paid
Centennial $125,634 as management fees in 1996. In the Facility Transaction,
Centennial is negotiating with Services to acquire Dolphins View. Based on the
value of the facility, after payment of the underlying mortgage debt and
repayment of advances and accrued interest owed to Centennial, it is unlikely
that Mr. Eaton and the other shareholders at Services will receive any of the
proceeds of this sale.
Ashton Woods Rehabilitation Center ("AWRC"), which is leased by the Company,
is owned by Ashton Woods Limited Partnership. Mr. Dahl owns all of the
outstanding stock of the corporate general partner of this partnership. Mr. Dahl
receives no economic benefit from his ownership of this entity.
A portion of the Subordinated Debt, which is to be repaid with a portion of
the proceeds of the Offering, is held by WCAS Capital. Messrs. Paul and Hoover,
directors of the Company, serve as general partners of the sole general partner
of WCAS Capital. See "Use of Proceeds."
WCAS VI, WCAS Healthcare, Mr. Hoover (individually and through his IRA) and
Mr. Paul hold shares of Series D Preferred Stock which will be automatically
converted into shares of Common Stock upon the closing of the Offering. Messrs.
Paul and Hoover, directors of the Company, are affiliates of these entities.
These parties acquired their shares of Series D Preferred Stock effective
January 31, 1997, for $100 per share.
WCAS VI, WCAS Healthcare, WCAS Capital, Mr. Paul and Mr. Hoover are parties
to the Stock Repurchase Agreement, which provides that Centennial will acquire,
to the extent net proceeds are received from the sale of Common Stock pursuant
to the exercise of the Underwriters' over-allotment option, shares of Common
Stock, at the Price to Public, pro rata from the Former Holders (including WCAS
VI, WCAS Capital, WCAS Healthcare, Mr. Paul and Mr. Hoover).
WCAS VI holds 44,250 shares of Series E Redeemable Preferred Stock, which is
to be redeemed with a portion of the proceeds of the Offering. WCAS VI acquired
the Series E Redeemable Preferred Stock effective January 31, 1997, for $100 a
unit (which unit included one share of Series E Redeemable Preferred Stock and
1.85102 shares of Common Stock not reflecting the Reverse Stock Split) and will
receive $4,425,000 for the Series E Redeemable Preferred Stock upon the closing
of the Offering,
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<PAGE>
exclusive of dividends accrued at 10% from January 31, 1997 to the date of the
closing of the Offering, which will be paid from operating cash flow. Messrs.
Paul and Hoover are general partners of the sole general partner of WCAS VI. See
"Use of Proceeds."
In connection with the Transitional Merger, the THS Holders and the
Centennial Holders entered into an escrow agreement whereby shares representing
the Stock Dividend were placed in escrow until the parties completed final due
diligence and certain contingencies were settled. The shares were to be released
to either the THS Holders or the Centennial Holders, as determined by agreement
of the Centennial Agent and the THS Agent, in order to adjust the proportionate
ownership interest each group of holders received in Centennial. This escrow
arrangement had the effect of adjusting the purchase price by decreasing the
amount of dilution to the Centennial Holders.
In January 1997, the Centennial Agent and the THS Agent entered into the
Settlement Agreement which determined the distribution of the escrowed shares.
Pursuant to the Settlement Agreement, the Centennial Holders received all of
their shares of Common Stock and approximately 70% of the shares of Special
Voting Common Stock placed in escrow by the THS Holders. The THS Holders were
allowed to substitute cash for their shares of Special Voting Common Stock at
the then estimated fair market value of approximately $8.40 per share. As a
result, $1.8 million (representing 218,396 shares at $8.40 per share) and 85,816
shares (not reflecting the Reverse Stock Split) were transferred to the
Centennial Holders. Under the Settlement Agreement, Mr. Eaton and Mr. Fosha
received approximately $1.14 million and approximately $36,800 in cash,
respectively, in lieu of their pro rata portions of shares of Special Voting
Common Stock, and Mr. Dahl received 5,881 shares of Special Voting Common Stock
(not reflecting the Reverse Stock Split). The remaining 122,115 shares of
Special Voting Common Stock (not reflecting the Reverse Stock Split) were
released from escrow and returned to the THS Holders. WCAS VI, WCAS Capital,
WCAS Healthcare and Messrs. Paul, Hoover and Bufford received their pro rata
portion of 122,109 shares of Special Voting Common Stock released from escrow
pursuant to the Settlement Agreement.
Based on the revised percentages of ownership in Centennial resulting from
the Settlement Agreement, the Company adjusted goodwill through a reduction in
the value of the Special Voting Common Stock issued in the Transitional Merger.
Based on the timing of the issuance of the December 31, 1995 financial
statements, such adjustment was reflected in the original valuation of goodwill
and the Special Voting Common Stock.
Prior to consummation of the Transitional Merger, Mr. Bufford borrowed
$528,480 from Transitional to purchase 330,300 shares of Transitional's common
stock, which shares were converted into 61,684 shares of Special Voting Common
Stock upon the Transitional Merger. Pursuant to a Promissory Note for $528,480
dated December 31, 1995, the original principal amount and accrued but unpaid
interest must be repaid on or before December 31, 2005. Interest accrues at an
annual rate equal to the prime rate (as announced by CoreStates from time to
time) plus 1%. Repayment of the note is secured by a pledge of 59,615 shares of
Mr. Bufford's Common Stock.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock, as adjusted to give effect to the sale
of the shares of Common Stock offered by the Company in the Offering, by (i)
each person known by the Company to be a beneficial owner of more than 5% of the
Common Stock and certain other beneficial owners of Common Stock, (ii) each
director of the Company, (iii) each of the Named Executive Officers and (iv) all
directors and executive officers of the Company as a group. Except as otherwise
specified, the named beneficial owner has sole voting and investment power.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
BEFORE THE OFFERING (1) AFTER THE OFFERING (1)
------------------------------ -----------------------
NAME NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------------------------- ---------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Welsh, Carson, Anderson & Stowe VI, L.P...................... 3,568,471(2) 47.4% 3,568,471 31.0%
WCAS Capital Partners II, L.P................................ 336,896(3) 4.5 336,896 2.9
WCAS Healthcare Partners L.P................................. 84,703(4) 1.1 84,703 *
J. Stephen Eaton............................................. 1,187,214(5) 15.6 1,187,214 10.2
South Atlantic Venture Fund II, Limited Partnership.......... 808,963(6) 10.8 808,963 7.0
South Atlantic Venture Fund III, Limited Partnership......... 206,214(7) 2.7 206,214 1.8
Randall J. Bufford........................................... 169,470(8) 2.2 169,470 1.5
Laurence W. Lepley, Jr....................................... 145,021(9) 1.9 145,021 1.3
Alan C. Dahl................................................. 79,439(10) 1.1 79,439 *
Kent C. Fosha, Sr............................................ 63,412(11) * 63,412 *
Horizon Investment Associates II............................. 47,895(12) * 47,895 *
James B. Hoover.............................................. 12,107(13) * 12,107 *
Andrew M. Paul............................................... 9,686(14) * 9,686 *
Robert A. Ortenzio........................................... 1,299(15) * 1,299 *
Bertil D. Nordin............................................. --(16) * -- *
All directors and executive officers as a group (14
persons).................................................... 1,730,440 22.4% 1,730,440 14.8%
</TABLE>
- ------------------
* Less than 1.0% of the outstanding Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes general voting power and/or
investment power with respect to securities. Shares of Common Stock subject
to options currently exercisable within sixty days are deemed outstanding
for computing the percentage of ownership of the option holder or holders.
Assumes no exercise of the Underwriter's over-allotment option or stock
repurchase.
(2) Includes 3,486,163 shares issuable upon the conversion of Special Voting
Common Stock, Series C Preferred Stock and Series D Preferred Stock into
Common Stock upon the closing of the Offering. The shareholder's address is
320 Park Avenue, Suite 2500, New York, New York 10022-6815.
(3) Includes 280,405 shares issuable upon the conversion of Special Voting
Common Stock into Common Stock upon the closing of the Offering. Does not
include 44,250 shares of Series E Redeemable Preferred Stock to be redeemed
with a portion of the proceeds of the Offering. The shareholder's address is
320 Park Avenue, Suite 2500, New York, New York 10022-6815.
(4) Includes 82,728 shares issuable upon the conversion of Special Voting
Common Stock, Series C Preferred Stock and Series D Preferred Stock into
Common Stock upon the closing of the Offering. The shareholder's address is
320 Park Avenue, Suite 2500, New York, New York 10022-6815.
(5) Includes 71,843 shares purchasable upon exercise of stock options that are
currently exercisable or will become exercisable within 60 days. Does not
include options to acquire 77.590 shares that are not exercisable within 60
days. The shareholder's address is 400 Perimeter Center Terrace, Suite 650,
Atlanta, Georgia 30346.
(6) Includes 777,888 shares issuable upon the conversion of Special Voting
Common Stock, Series A and B Preferred Stock and Series D Preferred Stock
into Common Stock upon the closing of the Offering. Does not include 1,448
shares of Series E Redeemable Preferred Stock not convertible into Common
Stock and to be redeemed with a portion of the proceeds of the Offering. The
shareholder's address is 614 West Bay Street, Suite 200, Tampa, Florida
33606-2704.
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(7) Includes 168,813 shares issuable upon the conversion of Special Voting
Common Stock, Series B Preferred Stock and Series D Preferred Stock into
Common Stock upon the closing of the Offering. Does not include 4,302 shares
of Series E Redeemable Preferred Stock not convertible into Common Stock.
The shareholder's address is 614 West Bay Street, Suite 200, Tampa, Florida
33606-2704.
(8) Includes 43,979 shares purchasable upon exercise of stock options that are
currently exercisable or will become exercisable within 60 days, and 125,491
shares issuable upon conversion of Special Voting Common Stock into Common
Stock upon the closing of the Offering, which shares are pledged to
Centennial to secure repayment of a promissory note in the amount of
$528,480. Does not include options to acquire 34,730 shares that are not
exercisable within 60 days. The shareholder's address is 400 Perimeter
Center Terrace, Suite 650, Atlanta, Georgia 30346.
(9) Includes 6,316 shares purchasable upon exercise of stock options that are
currently exercisable and 138,705 shares issuable upon the conversion of
Special Voting Common Stock and Series C Preferred Stock into Common Stock
upon the closing of the Offering. Does not include options to acquire 31,611
shares that are not exercisable within 60 days. The shareholder's address is
400 Perimeter Center Terrace, Suite 650, Atlanta, Georgia 30346.
(10) Includes 23,947 shares purchasable upon the exercise of stock options that
are currently exercisable or will become exercisable within 60 days and
4,056 shares issuable upon the conversion of Special Voting Common Stock
into Common Stock. Does not include options to acquire 4,028 shares that are
not exercisable within 60 days. The shareholder's address is 400 Perimeter
Center Terrace, Suite 650, Atlanta, Georgia 30346.
(11) Includes 35,442 shares purchasable upon exercise of stock options that are
currently exercisable or will become exercisable within 60 days. Does not
include options to acquire 31,611 shares that are not exercisable within 60
days. The shareholder's address is 400 Perimeter Center Terrace, Suite 650,
Atlanta, Georgia 30346.
(12) Includes 47,895 shares issuable upon the conversion of Special Voting
Common Stock, Series C Preferred Stock and Series D Preferred Stock into
Common Stock upon the closing of the Offering. The shareholder's address is
4718 Old Gettysburg Road, Mechanicsburg, Pennsylvania 17055.
(13) Includes 5,409 shares held by the James Hoover IRA which are issuable upon
the conversion of Special Voting Common Stock and Series C Preferred Stock
into Common Stock and 6,416 shares owned directly which are issuable upon
the conversion of Special Voting Common Stock, Series C Preferred Stock and
Series D Preferred Stock into Common Stock upon the closing of the Offering.
Does not include shares held by WCAS VI, WCAS Capital or WCAS Healthcare, of
which Mr. Hoover serves as a general partner or is an affiliate. Mr. Hoover
disclaims beneficial ownership of these shares. The shareholder's address is
320 Park Avenue, Suite 2500, New York, New York 10022-6815.
(14) Includes 9,461 shares issuable upon the conversion of Special Voting Common
Stock, Series C Preferred Stock and Series D Preferred Stock into Common
Stock upon the closing of the Offering. Does not include shares held by WCAS
VI, WCAS Capital, or WCAS Healthcare, of which entities Mr. Paul serves as a
general partner or is an affiliate. Mr. Paul disclaims beneficial ownership
of these shares. The shareholder's address is 320 Park Avenue, Suite 2500,
New York, New York 10022-6815.
(15) Includes 1,299 shares issuable upon the conversion of Special Voting Common
Stock into Common Stock upon the closing of the Offering. Does not include
47,895 shares held by Horizon Investment Associates II, of which Mr.
Ortenzio is an affiliate, issuable upon conversion of Special Voting Common
Stock, Series C Preferred Stock and Series D Preferred Stock into Common
Stock upon the closing of the Offering. Mr. Ortenzio disclaims beneficial
ownership of such shares. The shareholder's address is 4718 Old Gettysburg
Road, Mechanicsburg, Pennsylvania 17055.
(16) Does not include options to acquire 10,700 shares that are not exercisable
within 60 days or 206,214 shares held by South Atlantic III, of which Mr.
Nordin is a special limited partner. Mr. Nordin disclaims beneficial
ownership of the shares owned by South Atlantic. The shareholder's address
is 400 Perimeter Center Terrace, Suite 650, Atlanta, Georgia 30346.
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DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company is only a
summary and is subject to the provisions of the Articles and Bylaws, copies of
which have been included as exhibits to the Registration Statement of which this
Prospectus forms a part, and the provisions of Georgia law. The following
discussion is qualified in its entirety by reference to such exhibits.
The authorized capital stock of the Company, without giving effect to the
Reverse Stock Split, consists of 50,000,000 shares of Common Stock, $0.01 par
value per share (the "Common Stock"); 5,000,000 shares of Special Voting Common
Stock, no par value per share (the "Special Voting Common Stock"); 205,541
shares of Series A Convertible Preferred Stock, $11.0011 par value per share
(the "Series A Preferred Stock"); 328,892 shares of Series B Convertible
Preferred Stock, $8.7377 par value per share (the "Series B Preferred Stock");
144,086 shares of Series C Convertible Preferred Stock, $1.00 par value per
share (the "Series C Preferred Stock"); 50,000 shares of Series D Convertible
Preferred Stock, $1.00 par value per share (the "Series D Preferred Stock"); and
50,000 shares of Series E Redeemable Preferred Stock, $1.00 par value per share
(the "Series E Redeemable Preferred Stock"). Giving effect to the Reverse Stock
Split, all shares of Special Voting Common Stock, Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
currently issued and outstanding will be automatically converted by their terms
into 2,942,520 shares, 604,053 shares, 252,038 shares, 1,447,710 shares and
410,529 shares of Common Stock, respectively, upon the closing of the Offering.
A portion of the proceeds of the Offering will be used to redeem all of the
Series E Redeemable Preferred Stock. Accordingly, no information regarding the
currently outstanding shares of such classes is set forth below. As of March 31,
1997, there were 7,525,122 shares of Common Stock issued and outstanding (giving
effect to the conversion of the Special Voting Common Stock, Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock into Common Stock and the redemption of the Series E Redeemable Preferred
Stock) and approximately 66 holders of record of Common Stock. To the extent of
the net proceeds attributable to the sale of shares of Common Stock pursuant to
the Underwriters' exercise of their over-allotment option, the Company plans to
repurchase shares of Common Stock at the Price to Public pro rata from the
Former Holders.
Each holder of Common Stock is entitled to one vote for each share held on
all matters submitted to a vote of shareholders. Holders of Common Stock are
entitled to such dividends as may be declared from time to time by the Board of
Directors out of funds legally available therefore, and subject to the dividend
restrictions in certain bank credit facilities the Company has with its lenders.
See "Dividend Policy." The holders of Common Stock will share ratably in all
assets of the Company remaining after the payment of liabilities in the event of
the liquidation, dissolution or winding-up of the Company. There are no
preemptive or subscription rights (other than the rights of option holders),
conversion rights, or redemption or sinking fund provisions with respect to the
Common Stock. All of the Company's presently issued and outstanding Common Stock
is fully paid and nonassessable.
Under the Articles, the Board of Directors has the authority to issue
50,000,000 shares of preferred stock in one or more classes or series, and,
within certain limitations, to determine the voting rights (including the right
to vote as a series on particular matters), preferences as to dividends and in
liquidation and conversion and other rights of such series. Centennial has no
current plans to issue any shares of such preferred stock. The rights of the
holders of Common Stock discussed above are subject to such rights as the Board
of Directors may hereafter confer on the holders of the preferred stock, which
rights may adversely affect the rights of holders of Common Stock.
CERTAIN PROVISIONS OF THE ARTICLES, BYLAWS AND GEORGIA LAW
CLASSIFICATION OF BOARD OF DIRECTORS. The Articles and Bylaws of the
Company divide the Board of Directors into three classes, designated as Class I,
Class II and Class III, respectively, each class to be as nearly equal in number
as possible. The term of Class I, Class II and Class III directors will expire
at the
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1998, 1999 and 2000 annual meetings of shareholders, respectively, and in all
cases directors elected will serve until their respective successors are elected
and qualified. At each annual meeting of shareholders, directors will be elected
to succeed those in the class whose terms then expire, each elected director to
serve for a term expiring at the third succeeding annual meeting of shareholders
after such director's election, and until the director's successor is elected
and qualified. Thus, directors elected stand for election only once in three
years.
ADDITIONAL DIRECTORSHIPS, VACANCIES AND REMOVAL OF DIRECTORS. The Bylaws of
the Company provide that the Board shall consist of up to nine members, the
exact number to be determined by resolution of the Board from time to time.
Under the Georgia Business Corporation Code (the "GBCC"), the Articles and
Bylaws, the Board of Directors is authorized to create additional directorships
and abolish any vacant directorships, so long as the size of the Board does not
exceed nine Directors. Newly-created directorships and vacancies may be filled
by a majority of directors then in office to hold office until the next annual
meeting of shareholders and until their successors are elected and qualified.
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Bylaws establish an advance notice procedure for the
nomination, other than by or at the direction of the Board or a committee
thereof, of candidates for election as directors (the "Nomination Procedure") as
well as for other shareholder proposals to be considered at annual shareholders'
meetings. Notice to the Company from a shareholder who proposes to nominate a
person at a meeting for election as a director generally must be given not less
than 120 nor more than 150 days prior to the anniversary of the date notice of
the annual meeting of shareholders was given in the preceding year and contain,
(i) the name and record address of the shareholder who intends to make the
nomination, (ii) the name, age and residence address of the nominee, (iii) the
principal occupation or employment of the nominee, (iv) the class, series and
number of shares held of record, beneficially and by proxy, by the shareholder
and the nominee as of the record date of such meeting (if such record date is
publicly available) and as of the date of such notice, and (v) such other
information relating to the nominee proposed by such shareholder as is required
to be included in a proxy statement or otherwise required pursuant to Regulation
14A under the Securities Exchange Act of 1934, including the written consent of
each nominee to be named in the proxy statement and to serve as a director of
the Company if so elected. The presiding officer of the meeting may refuse to
acknowledge the nomination of any person not made in compliance with the
Nomination Procedure. Similar advance notice must be given of any other proposed
business which a shareholder proposes to bring before an annual meeting of
shareholders. Such notice must contain (i) a brief description of the business
desired to be brought before the meeting and the reasons for conducting such
business at the meeting, (ii) the name and record address of the shareholder
proposing such business, (iii) the class, series and number of shares of the
Company's stock which are held of record, beneficially and by proxy by the
shareholder as of the record date of such meeting (if such record date is
publicly available) and as of the date of such notice, (iv) a description of all
arrangements or understandings between the shareholder and any other person or
persons (naming such person or persons) in connection with the proposing of such
business by the shareholder, and (v) any material interest of the shareholder in
such business. The purpose of requiring advance notice is to afford the Board an
opportunity to consider the qualifications of the proposed nominees or the
merits of other shareholder proposals and, to the extent deemed necessary or
desirable by the Board, to inform shareholders about those matters. Although the
advance notice provisions do not give the Board any power to approve or
disapprove shareholder nominations or proposals for action by the Company, they
may have the effect of precluding a contest for the election of directors or the
consideration of shareholder proposals if the procedures established by the
Bylaws are not followed and of discouraging or deterring a third-party from
conducting a solicitation of proxies to elect its own slate of directors or to
approve its own proposals, without regard to whether consideration of such
nominees or proposals might be harmful or beneficial to the Company and its
shareholders.
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<PAGE>
ANTI-TAKEOVER EFFECTS. The foregoing provisions of the Articles and Bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control of the Company. These provisions are intended to enhance the
continuity and stability of the Board and the policies formulated by the Board
and to discourage certain types of transactions that may involve an actual or
threatened change in control of the Company. These provisions are also designed
to reduce the vulnerability of the Company to an unsolicited acquisition
proposal and to discourage certain tactics that may be used in proxy fights,
however, such provisions may discourage third parties from making tender offers
for the Company's shares. As a result, the market price of the Common Stock may
not benefit from any premium that might occur in anticipation of a threatened or
actual change in control. Such provisions also may have the effect of preventing
changes in the management of the Company.
FAIR PRICE REQUIREMENTS. The Bylaws adopt the Fair Price requirements of
the GBCC (O.C.C.A. Section 14-2-1110 ET SEQ.) which generally prohibits a
Georgia corporation from engaging in a "business combination" with an
"interested shareholder" unless the business combination is (i) unanimously
approved by the directors of the Company, or (ii) is recommended by at least
two-thirds of the directors of the Company and approved by a majority of the
votes entitled to be cast by the holders of Common Stock, other than the Common
Stock beneficially owned by the interested shareholder who is a party to the
business combination. For these purposes, "business combination" generally
includes any merger, asset-sale, share exchange, or other transaction resulting
in a financial benefit to an interested shareholder, define to mean a person who
is the beneficial owner of ten percent or more of the Common Stock.
GEORGIA BUSINESS COMBINATION STATUTE. The Bylaws also adopt the Georgia
Business Combination Statute (O.C.C.A. Section 14-2-1131 ET. SEQ.) which
generally prohibits various "business combinations" involving "interested
shareholders" for a period of five years after the shareholder becomes an
interested shareholder of the Company. Such provisions prohibit any business
combination with an interested shareholder unless either (i) prior to such time,
the Board of Directors approves either the business combination or the
transaction by which such shareholder became an interested shareholder, (ii) in
the transaction that resulted in the shareholder becoming an interested
shareholder, the interested shareholder became the beneficial owner of at least
90% of the outstanding voting stock of the Company which was not held by
directors, officers, affiliates thereof, subsidiaries or certain employee stock
option plans of the Company, or (iii) subsequent to becoming an interested
shareholder, such shareholder acquired additional shares resulting in such
shareholder owning at least 90% of the outstanding voting stock of the Company
and the business combination is approved by a majority of the disinterested
shareholders' shares not held by directors, officers, affiliates thereof,
subsidiaries or certain employee stock option plans of the Company. Under the
relevant provisions of the GBCC, a "business combination" is defined to include,
among other things, (i) any merger, consolidation, share exchange or any sale,
transfer or other disposition (or series of related sales or transfers) of
assets of the Company having an aggregate book value of 10% or more of the
Company's net assets (measured as of the end of the most recent fiscal quarter),
with an interested shareholder of the Company or any other corporation which is
or, after giving effect to such business combination, becomes an affiliate of
any such interested shareholder, (ii) the liquidation or dissolution of the
Company, (iii) the receipt by an interested shareholder of any benefit from any
loan, advance, guarantee, pledge, tax credit or other financial benefit from the
Company, other than in the ordinary course of business, and (iv) certain other
transactions involving the issuance or reclassification of securities of the
Company which produce the result that 5% or more of the total equity shares of
the Company, or of any class or series thereof, is owned by an interested
shareholder. An "interested shareholder" is defined by the GBCC to include any
person or entity that, together with its affiliates, beneficially owns or has
the right to own 10% or more of the outstanding voting shares of the Company, or
any person that is an affiliate of the Company and has, at any time within the
preceding two-year period, been the beneficial owner of 10% or more of the
outstanding voting shares of the Company. The restrictions on business
combinations shall not apply to any person who was an interested shareholder
before the adoption of the Bylaws which made the provisions applicable to the
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<PAGE>
Company nor to any persons who subsequently become interested shareholders
inadvertently, subsequently divest sufficient shares so that the shareholder
ceases to be an interested shareholder and would not, at any time within the
five-year period immediately before a business combination involving the
shareholder have been an interested shareholder but for the inadvertent
acquisition.
LIMITATION ON DIRECTORS' LIABILITY
In accordance with the GBCC, the Articles provide that the directors of the
Company shall not be personally liable to the Company or its shareholders for
monetary damages for breach of fiduciary duty as a director except (i) for any
appropriation, in violation of its duties, of any business opportunity of the
Company, (ii) for acts or omissions which involve intentional misconduct or a
knowing violation of law, (iii) under Section 14-2-832 of the GBCC, which
relates to unlawful payments of dividends and unlawful stock repurchases and
redemptions; or (iv) for any transaction from which the director derived an
improper personal benefit. This provision does not eliminate a director's
fiduciary duties; it merely eliminates the possibility of damage awards against
a director personally which may be occasioned by certain unintentional breaches
(including situations that may involve grossly negligent business decisions) by
the director of those duties. The provision has no effect on the availability of
equitable remedies, such as injunctive relief or rescission, which might be
necessitated by a director's breach of his or her fiduciary duties. However,
equitable remedies may not be available as a practical matter where transactions
(such as merger transactions) have already been consummated. The inclusion of
this provision in the Articles may have the effect of reducing the likelihood of
derivative litigation against directors, and may discourage or deter
shareholders or management from bringing a lawsuit against directors for breach
of their duty of care, even though such an action, if successful, might
otherwise have benefitted the Company and its shareholders.
INDEMNIFICATION AND INSURANCE
The Articles and Bylaws provide that the Company shall indemnify and hold
harmless each of its directors, officers, employees and agents to the extent
that he or she is or was a party, or is threatened to be made a party, to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that such person
is or was a director, officer, employee or agent of the Company, against
expenses (including, but not limited to, attorneys' fees), judgments, fines and
amounts paid in settlement in connection with such action, suit or proceeding;
provided, however, that no indemnification shall be made for (i) any
appropriation, in violation of his duties, of any business opportunity of the
Company, (ii) acts or omissions which involve intentional misconduct or a
knowing violation of law, (iii) any liability under Section 14-2-832 of the
GBCC, which relates to unlawful payments of dividends and unlawful stock
repurchases and redemptions, or (iv) any transaction from which he derived an
improper personal benefit. The Company has the power, under its Bylaws, to
obtain insurance on behalf of any director, officer, employee or agent of the
Company against any liability asserted against or incurred by such person in any
such capacity, whether or not the Company has the power to indemnify such person
against such liability at that time under the Articles or Bylaws.
TRANSFER AGENT AND REGISTRAR
The proposed transfer agent and registrar for the Common Stock is
ChaseMellon Shareholder Services, L.L.C.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
11,525,122 shares of Common Stock. Of these outstanding shares, the 4,000,000
shares sold in the Offering (4,600,000 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act, except for shares
purchased by "affiliates" of the Company, as that term is defined in Rule 144
(which may generally be sold only in compliance with Rule 144).
The remaining 7,525,122 shares of Common Stock outstanding after the
Offering will be "restricted shares" (the "Restricted Shares") within the
meaning of Rule 144 and may not be sold except in compliance with the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act") or pursuant to an exemption from registration such as the
exemption provided by Rule 144. Substantially all of the Restricted Shares are
subject to the Lock-up Agreements (described below). Upon expiration of the
Lock-up Period (defined below), (i) approximately 383,047 Restricted Shares will
be eligible for sale in the public market without restriction pursuant to Rule
144(k) or Rule 701 and (ii) approximately 6,608,535 Restricted Shares will be
eligible for sale in the public market, subject to the volume limitations,
manner of sale and other conditions of Rule 144.
The Company, all of its officers and directors, and substantially all of its
shareholders and option holders have agreed to enter into the Lock-up
Agreements. The Lock-up Agreements generally provide that the Company's
officers, directors, shareholders and option holders will not offer, sell or
otherwise dispose of any shares of Common Stock or any securities that are
convertible into or exercisable for Common Stock owned by them for a period of
180 days after the date of this Prospectus (the "Lock-up Period"), without the
prior written consent of Alex. Brown & Sons Incorporated. Similarly, the Company
has agreed generally that it will not issue, offer, sell, grant options to
purchase or otherwise dispose of any of its equity securities during the Lock-up
Period, except that the Company may grant stock options under the Stock Plans
and issue shares of Common Stock upon the exercise of options previously
granted.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be affiliates, whose
Restricted Shares have been fully paid for and held for at least a one-year
period (as computed under Rule 144), may sell such securities in brokers'
transactions or directly to market makers, provided the number of shares sold in
any three-month period does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (approximately 115,251 shares based on the
number of shares to be outstanding after the Offering) or (ii) the average
weekly trading volume of the Common Stock in the public market during the four
calendar weeks preceding the filing of the seller's Form 144 required to be
filed by Rule 144. Sales under Rule 144 are also subject to the availability of
current public information concerning the Company. A person (or persons whose
shares are aggregated) who is not deemed an affiliate of the Company at any time
during the 90 days immediately preceding a sale and whose Restricted Shares have
been fully paid for and held for at least a two-year period (as computed under
Rule 144), may sell such shares under Rule 144(k) without regard to the volume
and manner of sale limitations described above. In addition, Rule 144A
promulgated under the Securities Act ("Rule 144A") permits the immediate sale by
the current holders of Restricted Shares of all or a portion of their shares to
certain qualified institutional buyers as defined in Rule 144A.
The Securities and Exchange Commission has proposed certain amendments to
Rule 144 that would eliminate the manner of sale requirements and change other
conditions to the sale of shares in the public market under Rule 144. The
proposal is intended to ease compliance with Rule 144 and, if adopted, could
increase the number of shares of Common Stock sold in reliance on Rule 144
following the expiration of the Lock-up Period. No assurance can be given
whether or when the proposal to amend Rule 144 will be adopted by the
Commission.
Substantially all of the approximately 253,605 shares of Common Stock which
may be acquired upon the exercise of stock options which are vested or which
will vest during the Lock-up Period (collectively, the "Option Shares") are
subject to the Lock-up Agreements. The Option Shares, however, may be
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<PAGE>
eligible for resale following the expiration of the Lock-up Period (subject, in
the case of affiliates, to certain limitations) pursuant to Rule 701 or a Form
S-8 registration statement to be filed by the Company under the Securities Act.
See "Management -- Stock Plans." Additional options will continue to vest and
may be exercised and sold from time to time by option holders following the
expiration of the Lock-up Agreements.
The Company intends to file one or more registration statements on Form S-8
to register all shares of Common Stock issuable under the Company's Stock Plans
within 30 days after the date of this Prospectus and these registration
statements are expected to become effective immediately upon filing. Shares
covered by these registration statements will be eligible for sale in the public
market after the effective date of such registration statement and following the
expiration of the Lock-up Period, subject to Rule 144 limitations applicable to
affiliates of the Company. See "Management -- Stock Plans."
Sales of Common Stock in the public market, or the availability of such
shares for sale, could adversely affect the market price of the Common Stock and
make it more difficult for the Company to sell equity securities in the future
at a time and price which it deems appropriate. The Company is unable to
estimate accurately the number of Restricted Shares that will be sold in the
future under Rule 144 because such sales will depend in part on the market price
for the Common Stock, the personal circumstances of the sellers and other
factors.
REGISTRATION RIGHTS
J. Stephen Eaton, South Atlantic II, South Atlantic III, WCAS VI, WCAS
Capital, WCAS Healthcare, CID Equity and certain of the holders of the Special
Voting Common Stock, or their respective transferees (collectively, the "Rights
Holders") are entitled to certain rights with respect to the registration under
the Securities Act of approximately 6,953,236 shares of Common Stock upon
completion of the Offering (the "Registrable Securities"). These rights are
provided under the terms of a Registration Rights Agreement dated as of December
31, 1995, as amended by a First Amendment to Registration Rights Agreement dated
as of January 31, 1997 (together, the "Registration Rights Agreement").
Pursuant to the Registration Rights Agreement, the Company granted to the
Rights Holders up to two demand registrations, subject to certain limitations
and other terms and conditions, upon the written demand from the holders of at
least a majority of the outstanding shares of Registrable Securities. In
addition to the demand registration rights described above, the Registration
Rights Agreement provides that the Company shall effect a registration on Form
S-3, subject to certain limitations and other terms and conditions, upon written
request of any Rights Holder. The Registration Rights Agreement also provides
that if the Company at any time or from time to time proposes to register any of
its securities under the Securities Act, on a form other than Form S-4 or S-8 or
any successor form, the Rights Holders are entitled to have their shares
included in such registration statement on a pro rata basis, subject to certain
limitations and other terms and conditions. Any registrations effected by the
Company pursuant to the Registration Rights Agreement are at the expense of the
Company.
In addition, the Rights Holders are permitted to participate in any
offering, subject to certain restrictions, in the event the Company proposes to
register any of its equity securities under the Securities Act. The Company has
agreed under the Registration Rights Agreement to indemnify the selling holders
of Registrable Securities against certain liabilities under the Securities Act.
Likewise, the Rights Holders have agreed under the Registration Rights Agreement
to indemnify the Company against certain liabilities under the Securities Act.
To the extent required, substantially all of the holders of the registration
rights described above have agreed to waive any right they may have to
participate in the Offering and not to exercise such registration rights for a
period of 180 days after the date of this Prospectus.
In addition, as part of the consideration for the Home Health Acquisition,
the sellers of TCC received a note that may convert into 142,857 shares of
Common Stock after 180 days after the closing of the Offering and will have
piggyback registration rights.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their representatives,
Alex. Brown & Sons Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation, Morgan Stanley & Co. Incorporated and Equitable Securities
Corporation (the "Representatives"), have severally agreed to purchase from the
Company the following respective numbers of shares of Common Stock at the
initial public offering price, less the underwriting discounts and commissions
set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-----------
<S> <C>
Alex. Brown & Sons Incorporated......................................................................
Donaldson, Lufkin & Jenrette Securities Corporation..................................................
Morgan Stanley & Co. Incorporated....................................................................
Equitable Securities Corporation.....................................................................
-----------
Total.......................................................................................... 4,000,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares are
purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
Representatives.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 600,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 4,000,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 4,000,000 shares are being offered.
Up to five percent of the shares of Common Stock offered hereby may be
reserved for sale to the Company's employees and certain other persons. Sales of
shares to such persons will be at the initial public offering price. The number
of shares available for sale to the general public may be reduced to the extent
such persons purchase such reserved shares. Any reserved shares not so purchased
will be offered by the Underwriters to the general public on the same terms as
the other shares offered hereby.
The Company has agreed to indemnify the Underwriters and certain controlling
persons against certain liabilities, including liabilities under the Securities
Act.
The Company and each of its directors and executive officers and certain of
its shareholders have agreed not to offer, sell or otherwise dispose of any
shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Alex. Brown & Sons Incorporated,
except
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<PAGE>
that the Company may issue, and grant options to purchase, shares of Common
Stock under the Stock Plans, and other currently outstanding options. See
"Shares Eligible for Future Sale."
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
During and after the Offering, the Underwriters may purchase and sell Common
Stock in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. The Underwriters may also impose a
penalty bid pursuant to which selling concessions allowed to Underwriters or
selected dealers in respect of shares sold in the Offering for their account may
be reclaimed by the Underwriters if such shares are repurchased by the
Underwriters in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock at
a level which may be higher than the price that might otherwise prevail in the
open market. These transactions may be effected on the Nasdaq National Market or
otherwise and these activities, if commenced, may be discounted at any time.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price of the Common
Stock has been determined by negotiations between the Company and the
Representatives. The material factors to be considered in such negotiations are
prevailing market conditions, the results of operations of the Company in recent
periods, the market capitalization and stages of development of other companies
which the Company and the Representatives believe to be comparable to the
Company, estimates of the business potential of the Company and the present
stage of the Company's development.
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<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Nelson Mullins Riley & Scarborough, L.L.P., 999 Peachtree Street,
Suite 1400, Atlanta, Georgia 30309. Paul A. Quiros, a partner at Nelson Mullins
Riley & Scarborough, L.L.P., beneficially owns 41,337 shares of Common Stock and
serves as the Company's secretary. Certain legal matters in connection with the
Offering will be passed upon and for the Underwriters by Waller Lansden Dortch &
Davis, A Professional Limited Liability Company, 511 Union Street, Suite 2100,
Nashville, Tennessee 37219.
EXPERTS
The consolidated balance sheet of Centennial HealthCare Corporation and
Subsidiaries as of December 31, 1995 and 1996, and the consolidated statements
of operations, shareholders' equity and cash flows, for the seven months ended
December 31, 1995 and the years ended December 31, 1995 and 1996, have been
included herein and elsewhere in the Registration Statement in reliance on the
report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The consolidated balance sheets of Centennial and Subsidiaries as of May 31,
1994 and 1995, and the consolidated statements of operations, shareholders'
equity (deficit), and cash flows for the years ended May 31, 1993, 1994 and
1995, have been included herein and elsewhere in the Registration Statement in
reliance on the report of BDO Seidman, LLP, independent accountants, given on
the authority of that firm as experts in accounting and auditing.
The consolidated balance sheets of Transitional Health Services, Inc. and
Subsidiaries as of December 31, 1994 and 1995 and the consolidated statements of
operations, stockholders' equity (deficiency) and cash flows for the years ended
December 31, 1994 and 1995, have been included herein and elsewhere in the
Registration Statement in reliance on the report of Ernst & Young LLP,
independent auditors, given on the authority of that firm as experts in
accounting and auditing.
BDO Seidman, LLP, independent accountants, previously engaged as the
principal accountant to audit the Company's financial statements, was dismissed
on or about October 15, 1995. Coopers & Lybrand, L.L.P., independent
accountants, was engaged on or about February 6, 1996 as the principal
accountant to audit the Company's financial statements. The decision to change
accountants was recommended and approved by the Company's Board of Directors.
The principal accountant's report of BDO Seidman, LLP, on the financial
statements for the fiscal year ended May 31, 1995 did not contain an adverse
opinion or a disclaimer of opinion, nor was any such report qualified or
modified as to uncertainty, audit scope or accounting principles. During the
Company's fiscal year ended May 31, 1995 and the interim period preceding the
dismissal of BDO Seidman, LLP, there were no disagreements on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or disclosure.
ADDITIONAL INFORMATION
Centennial has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the shares of Common Stock offered hereby. This Prospectus omits
certain information contained in the Registration Statement, and reference is
made to the Registration Statement and the exhibits and schedules thereto for
further information with respect to the Company and the Common Stock offered
hereby. Statements contained herein concerning the provisions of any documents
are not necessarily complete, and in each instance reference is made to the copy
of such document filed as an exhibit to the Registration Statement. Each such
statement is qualified in its entirety by such reference. The Registration
Statement, including exhibits and schedules filed therewith, may be inspected
without charge at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the
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regional offices of the Commission located at Suite 1300, Seven World Trade
Center, New York, New York 10048 and Suite 1400, Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such materials may be
obtained from the Public Reference Section of the Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Registration Statement, including the exhibits and schedules thereto, is also
available on the Commission's Web site at http://www.sec.gov.
Upon completion of the Offering being made hereby, the Company will be
subject to the informational reporting requirements of the Securities Exchange
Act of 1934, as amended, and, in accordance therewith, will file reports, proxy
statements and other information with the Commission.
73
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
Report of Independent Accountants........................................................................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996............................................. F-3
Consolidated Statements of Operations for the seven months ended December 31, 1995 and the years ended
December 31, 1995 and 1996............................................................................. F-4
Consolidated Statements of Shareholders' Equity for the seven months ended December 31, 1995 and the
years ended December 31, 1995 and 1996................................................................. F-5
Consolidated Statements of Cash Flows for the seven months ended December 31, 1995 and the years ended
December 31, 1995 and 1996............................................................................. F-6
Notes to Consolidated Financial Statements............................................................... F-7
Condensed Consolidated Balance Sheets as of December 31, 1996 and March 31, 1997(unaudited).............. F-27
Condensed Consolidated Statements of Operations for the three month period ended March 31, 1996 and
1997(unaudited)........................................................................................ F-28
Condensed Consolidated Statements of Cash Flows for the three month period ended March 31, 1996 and
1997(unaudited)........................................................................................ F-29
Notes to Condensed Consolidated Financial Statements..................................................... F-30
Report of Independent Certified Public Accountants....................................................... F-32
Consolidated Balance Sheets as of May 31, 1994 and 1995.................................................. F-33
Consolidated Statements of Operations for the years ended May 31, 1993, 1994 and 1995.................... F-34
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended May 31, 1993, 1994 and
1995................................................................................................... F-35
Consolidated Statements of Cash Flows for the years ended May 31, 1993, 1994 and 1995.................... F-36
Notes to Consolidated Financial Statements............................................................... F-37
TRANSITIONAL HEALTH SERVICES, INC. AND SUBSIDIARIES
Report of Independent Auditors........................................................................... F-50
Consolidated Balance Sheets as of December 31, 1994 and 1995............................................. F-51
Consolidated Statements of Operations for the years ended December 31, 1994 and 1995..................... F-52
Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended December 31, 1994 and
1995................................................................................................... F-53
Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995..................... F-54
Notes to Consolidated Financial Statements............................................................... F-55
</TABLE>
F-1
<PAGE>
After consummation of the proposed reverse stock split, as described in Note
21, Coopers & Lybrand L.L.P. will be in a position to render the following
report.
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors of
Centennial HealthCare Corporation
We have audited the accompanying consolidated balance sheets of Centennial
HealthCare Corporation and subsidiaries as of December 31, 1995 and 1996 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the seven months ended December 31, 1995 and the years ended December
31, 1995 and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Centennial HealthCare Corporation and subsidiaries as of December 31, 1995 and
1996 and the consolidated results of their operations and their cash flows for
the seven months ended December 31, 1995 and the years ended December 31, 1995
and 1996 in conformity with generally accepted accounting principles.
Atlanta, Georgia
March 7, 1997 except for Notes 9 and 21
as to which the date is May 27, 1997
F-2
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 4,894,448 $ 6,029,763
Patient accounts receivable and third-party payor settlements, net of allowance
for doubtful accounts of $5,911,820 in 1995 and $2,472,138 in 1996.............. 24,923,429 39,854,486
Other receivables................................................................. 4,876,685 3,195,690
Prepaid expenses and other current assets......................................... 2,174,993 2,665,180
Deferred income taxes............................................................. 5,053,205 3,882,690
Due from related parties.......................................................... 159,857 --
------------- -------------
Total current assets............................................................ 42,082,617 55,627,809
Property and equipment, net......................................................... 55,336,722 67,409,359
Restricted cash..................................................................... 5,949,277 6,045,035
Note receivable from affiliate...................................................... 1,636,925 1,865,005
Notes and advances receivable, net.................................................. -- 13,800,452
Refundable deposits, including amounts due from affiliates of $2,875,000............ 4,305,594 4,334,625
Deferred costs, net................................................................. 2,979,475 3,826,112
Deferred income taxes............................................................... 4,349,961 4,101,153
Investment in unconsolidated partnerships........................................... 108,494 --
Licenses and other intangible assets, including goodwill, net....................... 37,407,113 36,297,113
Other assets........................................................................ 861,580 140,923
------------- -------------
Total assets...................................................................... $ 155,017,758 $ 193,447,586
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.............................................. $ 1,648,211 $ 1,710,964
Accounts payable and accrued expenses............................................. 16,850,196 27,119,929
Accrued payroll................................................................... 7,315,663 8,268,925
Accrued provider and property taxes............................................... 2,130,071 2,591,002
Estimated merger closure costs.................................................... 4,908,310 3,391,000
Other liabilities................................................................. 5,245,929 6,634,358
------------- -------------
Total current liabilities....................................................... 38,098,380 49,716,178
Long-term debt, less current maturities............................................. 59,315,574 83,437,633
Subordinated debt, less current maturities.......................................... 24,243,641 24,357,397
Due to related party................................................................ 1,030,246 669,544
Other long-term liabilities......................................................... 2,006,091 2,009,265
------------- -------------
124,693,932 160,190,017
------------- -------------
Commitments and contingencies (Note 16)
Redeemable preferred stock.......................................................... 19,454,522 21,305,372
Shareholders' equity:
Common stock with par value of $.01; 50,000,000 shares authorized; 1,841,239 and
2,044,306 shares issued; 1,601,379 and 1,804,446 shares outstanding............. 18,412 20,443
Special voting common stock with no par value; 5,000,000 shares authorized;
2,940,639 and 2,941,325 shares issued and outstanding........................... -- --
Paid-in capital................................................................... 5,213,946 5,707,467
Retained earnings................................................................. 7,652,626 8,239,967
Treasury stock, at cost; 239,860 shares of common stock........................... (1,487,200) (1,487,200)
------------- -------------
11,397,784 12,480,677
Note receivable from shareholder.................................................. (528,480) (528,480)
------------- -------------
Net shareholders' equity........................................................ 10,869,304 11,952,197
------------- -------------
Total liabilities and shareholders' equity...................................... $ 155,017,758 $ 193,447,586
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SEVEN
MONTHS ENDED FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31,
---------------- ----------------------------------
1995 1995 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
(NOTE 1)
Revenues:
Net patient service revenues.............................. $ 42,103,452 $ 71,862,297 $ 227,387,341
Management fees and other revenues........................ 2,108,241 3,363,695 5,660,472
---------------- ---------------- ----------------
Total revenues........................................ 44,211,693 75,225,992 233,047,813
---------------- ---------------- ----------------
Expenses:
Facility operating expenses:
Salaries, wages and benefits (Note 15).................. 19,283,582 31,651,036 107,038,905
Other operating expenses................................ 15,978,551 26,915,007 76,285,474
Lease expense............................................. 4,651,680 7,701,523 18,776,611
Corporate administrative costs............................ 3,525,766 5,026,652 11,399,949
Depreciation and amortization............................. 428,992 737,738 5,011,671
---------------- ---------------- ----------------
Total operating expenses.............................. 43,868,571 72,031,956 218,512,610
---------------- ---------------- ----------------
343,122 3,194,036 14,535,203
---------------- ---------------- ----------------
Other income (expense):
Interest income........................................... 237,075 413,630 695,194
Interest expense.......................................... (353,404) (589,856) (10,067,534)
Equity in income (loss) of unconsolidated partnerships.... 24,843 448,580 (108,394)
---------------- ---------------- ----------------
Total other income (expense).......................... (91,486) 272,354 (9,480,734)
---------------- ---------------- ----------------
Income before income taxes and minority interest............ 251,636 3,466,390 5,054,469
Provision for income taxes.................................. (327,738) (1,389,106) (2,092,447)
---------------- ---------------- ----------------
Income (loss) before minority interest...................... (76,102) 2,077,284 2,962,022
Minority interest in net income of subsidiary, net of income
taxes..................................................... (82,159) (201,250) (182,932)
---------------- ---------------- ----------------
Net income (loss)..................................... (158,261) 1,876,034 2,779,090
Dividends and accretion on preferred stock.................. -- -- (2,191,749)
---------------- ---------------- ----------------
Income (loss) applicable to common stock.................... $ (158,261) $ 1,876,034 $ 587,341
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Net income (loss) per common share.......................... $ (.06) $ .72 $ .12
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Weighted average number of common and common stock
equivalents outstanding................................... 2,601,238 2,601,238 4,781,622
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SPECIAL VOTING COMMON NOTE
COMMON STOCK STOCK RECEIVABLE
---------------------- ---------------------- PAID-IN RETAINED TREASURY FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK SHAREHOLDER
--------- ----------- --------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1995
(Note 1).............. 1,505,589 $ 17,455 -- $ -- $ -- $ 3,551,265 $(1,487,200) $ --
Dividends paid on
Series A and B
preferred stock..... -- -- -- -- -- (170,451) -- --
Exercise of common
stock options....... 95,790 957 -- -- 359,043 -- -- --
Special voting common
stock issued in
connection with
merger.............. -- -- 2,940,639 -- 4,854,903 -- -- (528,480)
Accretion of preferred
stock to estimated
redemption value.... -- -- -- -- -- 4,430,073 -- --
Net loss.............. -- -- -- -- -- (158,261) -- --
--------- ----------- --------- ----------- ----------- ----------- ----------- ------------
Balance at December 31,
1995.................. 1,601,379 $ 18,412 2,940,639 $ -- $5,213,946 $ 7,652,626 $(1,487,200) $ (528,480)
--------- ----------- --------- ----------- ----------- ----------- ----------- ------------
--------- ----------- --------- ----------- ----------- ----------- ----------- ------------
Balance at December 31,
1994.................. 1,505,589 $ 17,455 -- $ -- $ -- $ 1,952,080 $(1,487,200) $ --
Dividends paid on
Series A and B
preferred stock..... -- -- -- -- -- (340,897) -- --
Exercise of common
stock options....... 95,790 957 -- -- 359,043 -- -- --
Special voting common
stock issued in
connection with
merger.............. -- -- 2,940,639 -- 4,854,903 -- -- (528,480)
Accretion of preferred
stock to estimated
redemption value.... -- -- -- -- -- 4,165,409 -- --
Net income............ -- -- -- -- -- 1,876,034 -- --
--------- ----------- --------- ----------- ----------- ----------- ----------- ------------
Balance at December 31,
1995.................. 1,601,379 18,412 2,940,639 -- 5,213,946 7,652,626 (1,487,200) (528,480)
Dividends paid on
Series A and B
preferred stock..... -- -- -- -- -- (340,897) -- --
Dividends accrued on
Series C preferred
stock............... -- -- -- -- -- (1,469,797) -- --
Exercise of common
stock options....... 203,067 2,031 -- -- 169,747 -- -- --
Exercise of special
voting stock
options............. -- -- 686 -- 6,000 -- -- --
Tax benefit on options
exercised........... -- -- -- -- 317,774 -- -- --
Accretion of preferred
stock to estimated
redemption value.... -- -- -- -- -- (381,055) -- --
Net income............ -- -- -- -- -- 2,779,090 -- --
--------- ----------- --------- ----------- ----------- ----------- ----------- ------------
Balance at December 31,
1996.................. 1,804,446 $ 20,443 2,941,325 $ -- $5,707,467 $ 8,239,967 $(1,487,200) $ (528,480)
--------- ----------- --------- ----------- ----------- ----------- ----------- ------------
--------- ----------- --------- ----------- ----------- ----------- ----------- ------------
<CAPTION>
NET
-----------
<S> <C>
Balance at May 31, 1995
(Note 1).............. $ 2,081,520
Dividends paid on
Series A and B
preferred stock..... (170,451)
Exercise of common
stock options....... 360,000
Special voting common
stock issued in
connection with
merger.............. 4,326,423
Accretion of preferred
stock to estimated
redemption value.... 4,430,073
Net loss.............. (158,261)
-----------
Balance at December 31,
1995.................. $10,869,304
-----------
-----------
Balance at December 31,
1994.................. $ 482,335
Dividends paid on
Series A and B
preferred stock..... (340,897)
Exercise of common
stock options....... 360,000
Special voting common
stock issued in
connection with
merger.............. 4,326,423
Accretion of preferred
stock to estimated
redemption value.... 4,165,409
Net income............ 1,876,034
-----------
Balance at December 31,
1995.................. 10,869,304
Dividends paid on
Series A and B
preferred stock..... (340,897)
Dividends accrued on
Series C preferred
stock............... (1,469,797)
Exercise of common
stock options....... 171,778
Exercise of special
voting stock
options............. 6,000
Tax benefit on options
exercised........... 317,774
Accretion of preferred
stock to estimated
redemption value.... (381,055)
Net income............ 2,779,090
-----------
Balance at December 31,
1996.................. $11,952,197
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31,
----------------- ------------------------
1995 1995 1996
----------------- ----------- -----------
<S> <C> <C> <C>
(NOTE 1)
Operating activities:
Net income (loss)................................................. (158,261) $ 1,876,034 $ 2,779,090
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization................................... 428,992 737,738 5,011,671
Amortization of discount on subordinated debt................... -- -- 113,757
Deferred income taxes........................................... (743,714) (1,095,691) 1,697,612
Consulting fees offset against note receivable.................. 72,919 125,004 125,004
Equity in income of unconsolidated partnerships................. (24,843) (448,580) (145,000)
Minority interest............................................... 136,931 335,417 304,887
Provision for doubtful accounts................................. 757,590 1,034,618 851,608
Loss on sale of equipment....................................... -- -- 24,584
Loss on sale of investment in unconsolidated partnerships....... -- -- 253,394
Change in assets and liabilities:
Accounts receivable........................................... (4,515,497) (6,314,662) (15,732,798)
Due from related parties...................................... (358,996) (533,982) 164,965
Prepaid expenses and other assets............................. 2,106,892 2,644,990 1,364,150
Refundable deposits........................................... -- -- (29,031)
Accounts payable, accrued expenses and other current
liabilities................................................. 3,976,107 4,312,588 11,321,857
----------------- ----------- -----------
Cash provided by operating activities....................... 1,678,120 2,673,474 8,105,750
----------------- ----------- -----------
Investing activities:
Increase in restricted cash....................................... (293,741) (99,537) (95,758)
Purchases of property and equipment............................... (3,913,594) (5,398,570) (15,785,638)
Proceeds from the sale of equipment............................... -- -- 599,859
Payments on advances to managed facilities........................ -- -- 29,075
Advances to managed facilities.................................... (1,270,000) (1,270,000) (3,389,847)
Deferred costs.................................................... (2,310,386) (3,013,652) (1,667,127)
Distributions received from unconsolidated partnerships........... -- 300,000 --
Notes receivable from managed facilities.......................... -- -- (10,020,274)
Cash received in acquisition of subsidiary........................ 2,247,740 2,247,740 --
----------------- ----------- -----------
Cash used in investing activities........................... (5,539,981) (7,234,019) (30,329,710)
----------------- ----------- -----------
Financing activities:
Distributions paid to minority partners........................... -- (84,759) (299,200)
Proceeds from the exercise of stock options....................... 360,000 360,000 177,778
Payments of dividends to preferred shareholders................... (170,451) (340,897) (340,897)
Payments on amounts due to related party.......................... -- -- (360,703)
Proceeds from borrowings.......................................... 5,750,000 6,750,000 47,046,797
Principal payments on long-term debt.............................. (1,546,073) (1,581,017) (22,864,500)
----------------- ----------- -----------
Cash provided by financing activities....................... 4,393,476 5,103,327 23,359,275
----------------- ----------- -----------
Net increase in cash and cash equivalents........................... 531,615 542,782 1,135,315
Cash and cash equivalents, beginning of year........................ 4,362,833 4,351,666 4,894,448
----------------- ----------- -----------
Cash and cash equivalents, end of year.............................. $ 4,894,448 $ 4,894,448 $ 6,029,763
----------------- ----------- -----------
----------------- ----------- -----------
Supplemental disclosure:
Income taxes paid................................................. $ 1,208,390 $ 1,363,430 $ 1,057,850
----------------- ----------- -----------
----------------- ----------- -----------
Interest paid..................................................... $ 319,357 $ 533,030 $ 9,839,816
----------------- ----------- -----------
----------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
Centennial HealthCare Corporation (the "Company") (formerly known as WelCare
International, Inc.) was incorporated in February 1989 under the laws of the
State of Georgia. The Company's principal business is to provide basic and
specialty healthcare services to patients in a long-term care setting. At
December 31, 1995, prior to the merger with Transitional Health Services, Inc.,
as further discussed, the Company operated 39 long-term care facilities through
either management contracts, lease agreements or direct ownership.
Effective December 31, 1995, the Company merged with Transitional Health
Services, Inc. ("THS"), a company that operated 36 nursing homes and provided
rehabilitation services in ten states. All outstanding shares of THS were
exchanged for capital stock of the Company. The acquisition has been recorded,
at December 31, 1995, using the purchase method of accounting.
As of December 31, 1996, subsidiaries of the Company operated 76 owned,
leased and managed long-term care facilities with 8,113 beds in 19 states,
consisting of eight owned facilities, 46 leased facilities, 22 managed
facilities and provided contract rehabilitation services.
At December 31, 1996, certain subsidiaries of the Company held general
partner interests in certain public and private limited partnerships, the
majority of which own and operate long-term care facilities. The Company's
general partner interests in those partnerships ranged from .49% to 3.992%. The
Company's proportionate share of the net assets and results of operations was
not significant during 1995 or 1996. Certain subsidiaries which owned these
partnership interests were sold on January 30, 1997.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries and a majority-owned (55%) affiliated limited
partnership. The Company accounts for its investments in certain other limited
partnerships in which the Company serves as a general partner under the equity
method, i.e., at cost, increased or decreased by the Company's share of earnings
or losses, less distributions. All material intercompany balances, investments
and transactions have been eliminated.
REVENUES
Net patient service revenues are primarily derived from the operation and
management of long-term care facilities and from providing rehabilitative
occupational, speech and physical therapy services to long-term care facilities.
Revenues that are reimbursed by patients at the Company's long-term care
facilities are recorded at established billing rates. Revenues to be reimbursed
by contracts with third-party payors, primarily Medicare and Medicaid programs,
are recorded at the amount estimated to be realized under these contractual
arrangements. Revenues from the management of long-term care facilities and
acute care hospitals are recognized over the period during which the services
are rendered. Revenues from Medicare and Medicaid are generally based on
reimbursement of allowable costs of providing services to program beneficiaries.
The Company estimates amounts due from third-party payors and records the
revenue in the period services are rendered. Amounts ultimately payable by
Medicare and Medicaid are determined based on annual cost reports which are
subject to audit and
F-7
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
retroactive adjustment by the payor. Changes in estimated revenues due in
connection with Medicare and Medicaid may be recorded by the Company subsequent
to the year of origination and prior to final settlement based on improved
estimates. Differences between estimated amounts due from the Medicare and
Medicaid programs and ultimate settlements with these programs are recognized in
the year of final settlement.
Costs reimbursed under the Medicare program are subject to regional limits.
The costs at certain of the Company's facilities have frequently exceeded these
limits and, accordingly, the Company is required to submit exception requests to
cover such excess costs. The accompanying balance sheets include amounts
estimated to be recoverable under such exception requests.
Accounts receivable, net, at December 31, 1995 and 1996 includes $24,203,893
and $28,395,082, respectively, of amounts due from Medicare and Medicaid
programs.
The Company is not aware of any material claims, disputes, or other
unsettled matters related to third-party reimbursements, other than those
reflected on its balance sheets, and believes retroactive adjustments related to
these receivables will not be material.
CONCENTRATIONS
A significant portion of the Company's revenues are derived from the
Medicare and Medicaid programs. There have been, and the Company expects that
there will continue to be, a number of proposals to limit reimbursements to
long-term care facilities under these programs. The Company cannot predict
whether any of these proposals will be adopted, or if adopted and implemented,
what effect such proposals would have on the Company. Approximately 77%, 76% and
68% of the Company's total revenues in the seven months ended, December 31, 1995
and the years ended December 31, 1995 and 1996, respectively, are from the
Medicare and Medicaid programs. While the Company operates long-term care
facilities in 19 states and the District of Columbia, 33 of its 54 owned or
leased facilities are located in North Carolina, Indiana and Michigan.
FACILITY OPERATING EXPENSES
Facility operating expenses include direct operating costs at the facility
level. The majority of these costs consist of payroll and employee benefits
related to nursing, housekeeping and dietary services provided to patients, as
well as maintenance and administration of the facilities. Other significant
facility operating expenses include: the cost of rehabilitation therapies,
medical and pharmacy supplies, food and utilities.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
Income taxes for the Company are calculated using the liability method in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109),
ACCOUNTING FOR INCOME TAXES. Deferred taxes are provided for the differences
between the tax and accounting basis of assets and liabilities. For Federal
income tax purposes, the Company and its subsidiaries file a consolidated income
tax return.
ACCRUED PROVIDER AND PROPERTY TAXES
Accrued provider and property taxes include taxes assessed in certain
jurisdictions based on the number of occupied beds as well as property taxes
accrued but not paid.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over the
estimated useful lives of the individual assets using the straight-line method.
Expenditures that extend the lives of assets are capitalized, while maintenance
and repairs are charged to expense as incurred. The estimated useful lives range
from five to ten years for equipment, five to 15 years for furniture and 30 to
40 years for buildings and improvements.
INTANGIBLE ASSETS
In connection with each of its acquisitions, the Company reviews the assets,
including intangible assets, and liabilities acquired and assesses the
individual components' relative fair values in comparison to the total purchase
price. The Company's policy is to evaluate each acquisition separately and
identify an appropriate amortization period for goodwill and other intangible
assets based on the characteristics of the acquired company. Licensed and other
intangible assets, including goodwill, is being amortized using the
straight-line method primarily over a 30 to 40 year period. Accumulated
amortization of goodwill totaled approximately $1,110,000 at December 31, 1996.
ASSESSMENT OF LONG-LIVED ASSETS
The Company periodically reviews the carrying values of its long-lived
assets (primarily property, plant and equipment, and intangible assets) whenever
events or circumstances provide evidence that suggest that the carrying amount
of long-lived assets may not be recoverable. If this review indicates that
long-lived assets may not be recoverable, the Company reviews the expected
undiscounted future net operating cash flows from its facilities, as well as
valuations obtained in connection with various refinancings. Any permanent
impairment in value is recognized as a charge against earnings in the statement
of operations. As of December 31, 1996, the Company does not believe there is
any indication that the amortization period of its long-lived assets needs to be
adjusted.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
F-9
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RESTRICTED CASH
Restricted cash consists mainly of certificates of deposit with maturities
of one year or less. Certain of these certificates of deposit are pledged for
letters of credit issued by banks in connection with various facility lease
agreements, a workers' compensation insurance arrangement, and certain other
agreements. Also included in restricted cash are amounts reserved for
improvements on a leased facility and a debt service reserve for two owned
facilities.
INCOME PER SHARE
In February 1997, the FASB issued Statement No. 128, EARNINGS PER SHARE.
This Statement is effective for financial statements issued for periods ending
after December 15, 1997. The Company has not yet determined the impact of
implementing FASB No. 128.
In accordance with APB Opinion No. 15, the Company has computed its income
per share based on the weighted average number of common and common equivalent
shares outstanding during the periods. Common stock equivalents include options
to purchase common stock assumed to be exercised using the treasury stock method
and Series A and B Preferred Stock assumed to be converted. The assumption of
the conversion of Series A and B Preferred Stock was anti-dilutive during 1996.
The accretion and dividends accrued on Series A and B Preferred Stock and the
accretion and dividends on Series C Preferred Stock, which is not convertible
into common stock, was deducted from net income in the computation of net income
applicable to common stock in 1996.
CHANGE IN FISCAL YEAR
In connection with the Transitional Merger, the Company changed its fiscal
year to December 31. The accompanying financial statements reflect the seven
month transition period from June 1, 1995 through December 31, 1995 and the
subsequent year ended December 31, 1996. The twelve months ended December 31,
1995 has been provided for comparative purposes. The following presents the
summarized results of operations for the comparative seven month period ended
December 31, 1994 (unaudited) and December 31, 1995:
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED DECEMBER
31,
------------------------------
1995
1994 --------------
--------------
(UNAUDITED)
<S> <C> <C>
Revenues $ 34,203,351 $ 44,211,693
Operating income before net interest expense and equity in income (loss) of
unconsolidated partnerships 2,907,479 343,122
Income before income taxes and minority interest 2,966,790 251,636
Provision for income taxes 1,270,809 327,738
Net income (loss) $ 1,690,675 $ (158,261)
-------------- --------------
-------------- --------------
Net income (loss) per common share $ .69 $ (.06)
-------------- --------------
-------------- --------------
Weighted average shares outstanding 2,469,682 2,601,238
-------------- --------------
-------------- --------------
</TABLE>
F-10
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. MERGER WITH TRANSITIONAL HEALTH SERVICES, INC.:
Effective December 31, 1995, the Company acquired all of the capital stock
of THS, valued at $19,024,390, through the issuance of 2,940,639 shares of
Special Voting Common Stock and 144,086 shares of Series C Preferred Stock. The
Series C Preferred Stock was recorded at approximately $14.7 million, based on
the present value of the stated redemption amount and accrued and required
dividends through the mandatory redemption date. The value ascribed to the
Special Voting Common Stock issued of approximately $4.3 million, net of the
outstanding note receivable from a shareholder in connection with the purchase
of Common Stock, was determined based on a valuation of THS less the value of
the Series C Preferred Stock issued. The Company has allocated the purchase
price to the identifiable tangible and intangible net assets acquired.
The purchase price was allocated among the identifiable assets and
liabilities acquired based on their respective fair values. The excess of
purchase price over identified tangible net assets of approximately $37.4
million has been allocated to the identified intangible assets (i.e., licenses,
certificates of need, marketing systems and name recognition). These identified
intangible assets were valued based on their respective estimated fair value.
Licenses and other intangibles, including goodwill are amortized on the
straight-line basis primarily over periods of 30 to 40 years.
In connection with the Transitional Merger, the Company formulated a plan to
integrate the operations of THS. Such plan included the disposal of its
leasehold interests at two facilities which were not compatible with the
Company's operations and the closing of THS's corporate headquarters. The
facilities identified for disposal were valued at their estimated disposal
value. Accordingly, the Company accrued (i) approximately $3,000,000 for the
estimated costs to cancel one of the leases; (ii) approximately $690,000 for the
estimated cost to prepare the identified facilities for disposition and net
operating deficits during 1996; and (iii) approximately $1,218,000 for rent,
severance, relocation and related costs of closing the THS headquarters. Such
accruals resulted in an increase to goodwill in purchase accounting.
During the year ended December 31, 1996, the Company disposed of one of the
identified facilities at its previously estimated fair value. The Company was
not successful in its efforts to dispose of the remaining facility, however,
based on improvements made to the operations of the facility, the Company
expects that it will be disposed of during 1997. Any additional costs to be
incurred to operate the facility and ultimately dispose of the facility will be
charged to earnings.
As of December 31, 1996, remaining accrued merger closure costs of
$3,391,000 included the accrual for the lease buyout of $3,000,000 and remaining
rents due on the THS headquarters facility. The Company expects the remaining
facility to be disposed of within the next year.
The following unaudited pro forma financial information reflects the
combined results of operations for the seven months ended December 31, 1995 and
the year ended December 31, 1995 as though the Transitional Merger occurred at
the beginning of each period presented. The unaudited pro forma information is
not necessarily indicative of either the results of operations that would have
occurred had
F-11
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. MERGER WITH TRANSITIONAL HEALTH SERVICES, INC.: (CONTINUED)
the transaction taken place at January 1, 1995 or the future results of
operations of the combined companies.
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1995
--------------------- -------------------
(UNAUDITED)
<S> <C> <C>
Net revenues..................................... $ 112,903,703 $ 192,983,723
Net loss......................................... (5,254,643) (6,860,620)
Loss applicable to common shares................. (8,589,620) (6,263,226)
Loss per common share............................ (1.55) (1.13)
</TABLE>
3. FACILITY ACQUISITIONS:
The Company acquired a 77 bed long-term care facility located in Louisiana
in October 1995. The purchase price, totaling $2,942,500, was financed with the
Company's credit facility.
In October 1996, the Company acquired two long-term care facilities located
in Michigan with a total of 185 beds. The purchase price, totaling approximately
$9,100,000, was financed with the Company's credit facility. The Company had
managed these facilities under long-term management agreements since 1991.
4. OPERATING LEASES:
The Company leases 39 long-term care facilities which are accounted for as
operating leases. The long-term facility leases consist of (i) fourteen leases
with various expiration dates through 2006, (ii) two leases with affiliated
entities of which the Company or an affiliate of one of its officers serves as a
general partner and (iii) 23 leases obtained in connection with the merger with
THS.
The leases with affiliated entities expire in 2002 and 2009 with both having
two five-year extensions. Total lease payments paid to the affiliated entities
totaled $1,807,928, $2,920,374 and $3,284,261 for the seven months ended
December 31, 1995 and the years ended December 31, 1995 and 1996, respectively.
In connection with one lease, the Company paid the affiliated lessor a deposit
of $2,875,000 which is refundable upon the termination of the lease. The Company
owes the other affiliated lessor $1,030,246 and $699,544 at December 31, 1995
and 1996, respectively.
The THS leases, which expire on various dates through 2011, include
provisions for increases in lease payments. Certain of these leases provide the
Company an option to renew the lease after the initial lease term.
Total rent expense under facility operating lease agreements approximated
$4,500,000, $7,400,000 and $17,700,000 for the seven months ended December 31,
1995 and the years ended December 31, 1995 and 1996, respectively.
F-12
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. OPERATING LEASES: (CONTINUED)
Minimum future rent payments under the facility leases and related equipment
and office space are summarized as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---------------------------------------------------------------------------- ----------------
<S> <C>
1997........................................................................ $ 20,635,989
1998........................................................................ 20,666,985
1999........................................................................ 20,803,669
2000........................................................................ 21,023,883
2001........................................................................ 20,939,344
Thereafter.................................................................. 96,435,036
----------------
$ 200,504,906
----------------
----------------
</TABLE>
5. TOTAL REVENUE
The distribution of net patient service revenue by class of payor for the seven
months ended December 31, 1995 and the years ended December 31, 1995 and 1996
was as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED DECEMBER YEARS ENDED DECEMBER 31,
31, --------------------------------
CLASS OF PAYOR 1995 1995 1996
- ------------------------------------------- -------------- -------------- ----------------
<S> <C> <C> <C>
Private pay, management fee and other...... $ 10,115,399 $ 17,798,102 $ 74,074,329
Medicaid................................... 25,683,580 43,734,664 99,803,192
Medicare................................... 8,412,714 13,693,226 59,170,292
-------------- -------------- ----------------
$ 44,211,693 $ 75,225,992 $ 233,047,813
-------------- -------------- ----------------
-------------- -------------- ----------------
</TABLE>
The above revenue amounts are net of third-party contractual allowances of
$4,193,377, $7,582,663 and $44,674,215 for the seven months ended December 31,
1995, and for the years ended December 31, 1995 and 1996, respectively.
Included in other operating expenses is bad debt expense of approximately
$758,000, $1,035,000 and $852,000 for the seven months ended December 31, 1995
and years ended December 31, 1995 and 1996, respectively.
6. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31, 1995 and
1996:
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
Land......................................................... $ 4,109,510 $ 4,243,369
Buildings and improvements................................... 44,158,630 55,022,505
Furniture and equipment...................................... 8,438,598 12,284,357
Construction in progress--improvements to facilities......... 1,719,652 1,944,705
-------------- --------------
58,426,390 73,494,936
Less accumulated depreciation and amortization............... (3,089,668) (6,085,577)
-------------- --------------
$ 55,336,722 $ 67,409,359
-------------- --------------
-------------- --------------
</TABLE>
Depreciation and amortization expense for the seven months ended December
31, 1995 and the years ended December 31, 1995 and 1996 totaled $266,696,
$548,112 and $3,228,168, respectively.
F-13
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS:
Certain subsidiaries of the Company acquired, in 1990, stock of the
corporate general partners of certain limited partnerships. These partnerships
owned long-term care facilities and retirement centers. Investments in
partnerships in which the Company's subsidiaries serve as a general partner are
accounted for using the equity method. For the seven months ended December 31,
1995 and the years ended December 31, 1995 and 1996, the Company recognized
income from its share of the partnerships' operations of approximately $24,843,
$448,580 and $145,000, respectively. On January 30, 1997, the Company sold its
stock in the corporate general partners in most of the limited partnerships to a
corporation affiliated to the president of the Company for $100 and the
assumption of all the liabilities of the corporate general partners. For the
year ended December 31, 1996, the Company recognized a loss, totaling $253,394,
in connection with the sale of the corporate general partners.
8. DEFERRED COSTS:
Deferred costs consist of the following at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------------- --------------
<S> <C> <C>
Management contract acquisition costs.......................... $ 846,987 $ 868,643
Debt issuance and other costs.................................. 1,450,298 2,556,256
Lease acquisition costs........................................ 650,000 1,014,042
Other.......................................................... 138,006 497,206
------------- --------------
3,085,291 4,936,147
Less accumulated amortization.................................. (105,816) (1,110,035)
------------- --------------
$ 2,979,475 $ 3,826,112
------------- --------------
------------- --------------
</TABLE>
Management contract and lease acquisition costs are being amortized over the
period of their respective management and lease agreements. Debt issuance costs
are being amortized over the life of the related debt agreements.
9. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
Bank credit facilities....................................... $ 20,752,165 $ 47,000,000
Mortgage notes payable....................................... 17,658,471 17,427,354
Other notes.................................................. 676,250 696,364
-------------- --------------
39,086,886 65,123,718
Capital lease obligations.................................... 21,876,899 20,024,879
-------------- --------------
60,963,785 85,148,597
Current maturities of long-term debt......................... 1,648,211 1,710,964
-------------- --------------
$ 59,315,574 $ 83,437,633
-------------- --------------
-------------- --------------
</TABLE>
F-14
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT: (CONTINUED)
On December 18, 1996, the Company amended and restated its credit agreement
(the "Credit Agreement") with CoreStates Bank, N.A. ("CoreStates") as agent for
certain lenders. The Agreement provides that the maximum aggregate advances to
the Company are $65,000,000 and cannot exceed the Borrowing Base. The Borrowing
Base is defined as the sum of (i) annualized earnings before interest, taxes,
depreciation and amortization ("EBITDA") multiplied by 2.50 for the quarter
ended December 31, 1996 and 2.25 for each quarter in 1997 plus three times the
EBITDA of acquired operations. The Company had an available Borrowing Base of
$60,000,000, exclusive of acquired operations, as of December 31, 1996.
Interest accrues at varying rates dependent upon the method used to compute
interest and the rates applicable at the time of the borrowings. The Company can
elect a rate based on CoreStates' prime rate or LIBOR, each increased by the
Applicable Margin, as defined in the Credit Agreement, which varies dependent
upon the ratio of debt to earnings before interest, taxes, depreciation,
amortization and operating lease expense. The weighted average interest rate on
the Company's borrowings at December 31, 1996 was 8.1%.
Interest is paid currently and principal reduction is deferred until
December 1998 at which time the outstanding principal balance will be paid in 15
equal quarterly payments plus accrued interest beginning March 31, 1999, with
repayment in full on or before September 30, 2002. The Credit Agreement is
collateralized by substantially all of the assets of the Company and requires
the Company to comply with certain financial and other covenants. The Company is
required to pay a fee on the average unused portion of the commitment.
The Credit Agreement includes various negative covenants including
restrictions on additional loans and advances, guaranties, stock repurchases and
redemptions, and the payment of dividends. Terms of the Credit Agreement require
the Company to comply with certain financial and other covenants, the violation
of which could cause the amounts of outstanding principal, interest and fees to
be immediately due and payable. On December 31, 1996, the Company was in
compliance with all of its debt covenants except its net worth covenant.
Subsequent to year end, the Company received a waiver of compliance with this
net worth covenant and the Credit Agreement was amended to modify the minimum
required net worth.
At December 31, 1995, the Company had a senior credit facility with
CoreStates and a $15,000,000 working capital line-of-credit facility with Heller
Financial, Inc. ("Heller"). The outstanding balances under both of these
facilities were paid in 1996 with proceeds of the Credit Agreement.
At December 31, 1995 and 1996, the Company had $17,658,471 and $17,427,354,
respectively, of mortgage debt outstanding, including a current portion of
$230,659 and $180,834, respectively. The mortgage debt requires monthly payments
of principal and interest of approximately $165,000. The debt agreements are for
five to twenty-year periods with amortization periods covering twenty to
twenty-five years. At December 31, 1996, interest rates on the mortgages range
from 8.87% to 10.50%. These debts are collateralized by real property.
F-15
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT: (CONTINUED)
Future maturities of mortgage debt are summarized as follows:
<TABLE>
<S> <C>
1997.......................................................... $ 180,834
1998.......................................................... 194,493
1999.......................................................... 220,085
2000.......................................................... 242,815
2001.......................................................... 267,901
Thereafter.................................................... 16,321,226
-----------
$17,427,354
-----------
-----------
</TABLE>
In connection with the Transitional Merger, the Company acquired leases for
seven facilities and related equipment which are accounted for as capital
leases. The total cost of the facilities and equipment which are included in
property and equipment in the accompanying balance sheet is $20,935,122, with
related accumulated depreciation of $2,674,761, at December 31, 1996. One of the
leases expires in 2006 with an option to extend the lease for an additional ten
years. The remaining leases expire in 2013, with no options to extend. These
leases include provisions for contingent rental payments. The leases also
provide the Company a right of first refusal to purchase the facilities. Under
terms of the leases, the Company is required to pay all taxes, insurance and
maintenance expenses.
Rent escalation clauses in the capital facility leases are based on
contingent factors such as increases in the consumer price index or annual
increases in a facility's revenues, and have resulted in increased current and
future lease payments.
The following is a schedule of future minimum lease payments under capital
leases together with the present value of the net minimum lease payments as of
December 31, 1996:
<TABLE>
<CAPTION>
NURSING
YEAR ENDING DECEMBER 31 EQUIPMENT FACILITIES TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
1997................................. $1,006,342 $ 2,468,250 $ 3,474,592
1998................................. 647,513 2,468,250 3,115,763
1999................................. -- 2,468,250 2,468,250
2000................................. -- 2,468,250 2,468,250
2001................................. -- 2,468,250 2,468,250
Thereafter........................... -- 23,373,896 23,373,896
---------- ----------- -----------
Total minimum lease payments......... 1,653,855 35,715,146 37,369,001
Less amount representing interest.... 183,363 17,160,759 17,344,122
---------- ----------- -----------
Present value of minimum lease
payments........................... 1,470,492 18,554,387 20,024,879
Current portion...................... 860,908 642,972 1,503,880
---------- ----------- -----------
Noncurrent portion................... $ 609,584 $17,911,415 $18,520,999
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The interest rate on the capital leases is based on the Company's borrowing
rates at the time a lease is executed. The average interest rate used on nursing
facilities and equipment was 10.47% and 15.9%, respectively.
F-16
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBORDINATED DEBT:
The Company has $25,300,000 of subordinated debt which was issued to certain
shareholders in two instruments. The subordinated notes are due on October 30,
2002 and have effective interest rates between 10.8% and 11.7%. The subordinated
debt is carried net of unamortized offering discounts of $1,056,359 and $942,603
at December 31, 1995 and 1996, respectively.
Interest is due quarterly on the subordinated notes. The Company has an
option to prepay all or a portion of the notes at any time without penalty or
premium. Upon proper notice, scheduled mandatory prepayments beginning October
31, 2000 and each October thereafter are required to retire one-third of the
original aggregate principal amount of the notes (or, if less, the entire
outstanding principal amount of the notes). Mandatory prepayment of some or all
of the notes is also required in certain events, including a change in control
of the Company.
11. REDEEMABLE PREFERRED STOCK:
As of December 31, 1996, the Company had issued and outstanding 205,541
shares of $11.0011 par value Series A Preferred Stock. The shares of Series A
Preferred Stock earn cumulative dividends of $.88 per share per annum and are
convertible to common at any time at the holder's option at a conversion
multiple of 2.9388. The shares are subject to mandatory conversion by the
Company in limited circumstances. The holders of the Series A Preferred Stock
have the right to redeem one-third of their shares each December 31, 1998, 1999
and 2000 at the greater of par value or fair market value, as defined in the
Company's Amended and Restated Articles of Incorporation.
As of December 31, 1996, the Company had issued and outstanding 328,892
shares of $8.7377 par value Series B Preferred Stock. The shares of Series B
Preferred Stock earn cumulative dividends at $.49 per annum and are convertible
into .7663 share of Common Stock at the holder's option. The shares are also
subject to mandatory conversion in certain limited circumstances. The holders of
the Series B Preferred Stock have the right to redeem one third of their shares
each June 30, 1999, 2000 and 2001 at the greater of par value or fair market
value, as defined in the Company's Amended and Restated Articles of
Incorporation.
The Series A and B Preferred Stock is reflected on the accompanying balance
sheets at its estimated redemptive value, including accrued and unpaid
dividends, as of December 31, 1995 and 1996. Management's estimate of the
redemptive value increased during the year ended December 31, 1996 by $121,820
and decreased during the seven months ended December 31, 1995 and the year ended
December 31, 1995 by $4,430,073 and $4,165,409, respectively. The Company may
cause all outstanding shares of Series A and B Preferred Stock to be converted
into Common Stock upon a public offering under certain circumstances.
As stated in Note 2, in connection with the Transitional Merger, the Company
issued 144,086 shares of $1 par value Series C Preferred Stock. The shares of
Series C Preferred Stock earn cumulative dividends of $12 per share per annum.
The Series C Preferred Stock may be redeemed at the option of the Company at
$100 per share, plus any accrued but unpaid dividends to the date fixed for
redemption. The Company is obligated to redeem all of the shares of the Series C
Preferred Stock outstanding on December 31, 2003 at $100 per share, plus any
accrued but unpaid dividends. The Series C Preferred Stock is reflected on the
accompanying balance sheet at its fair value increased by periodic accretions,
using the interest method, so that the carrying amount will equal the mandatory
redemption amount at the mandatory redemption date. Accretion on the Series C
Preferred Stock totaled $259,235 for the year ended December 31, 1996.
F-17
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EQUITY TRANSACTIONS:
The Company has stock options outstanding under the 1994 Stock Option Plan,
1996 Executive Stock Plan and the 1996 Employee Stock Option Plan (collectively
referred to as the "Stock Option Plans"). During 1996, the Company's 1992 Stock
Option Plan was terminated.
The 1994 Stock Option Plan and the 1996 Executive Stock Plan provide that
options may be granted to officers, directors and key employees. The options
granted pursuant to the 1996 Executive Stock Plan vest in equal increments on
each December 31 of 1996, 1997, 1998 and 1999. The vesting on one-half of these
options accelerates in the case of certain corporate events. The 1996 Employee
Stock Option Plan provides that options may be granted to certain employees at
an exercise price of $8.15. Approximately half of the 1996 Employee Stock
Options vests 60% at the date of grant with the remaining 40% vesting in equal
increments on January 1, 1997 and 1998. The other half of the 1996 Employee
Stock Options vest 33% each at date of grant and on January 1, 1997 and 1998.
The Board of Directors of the Company approved the 1997 Stock Plan which
provides that options, totaling 482,790, may be granted to officers,
non-employee, non-affiliated directors and key employees at an exercise price
and vesting schedule to be determined by the compensation committee of the Board
of Directors at the time of grant, except in the case of non-employee directors
where such grants are automatic. All stock options have been granted with
exercise prices equal to or greater than the estimated fair market value of the
common stock on the date of grant and are exercisable for up to ten years, as
determined by the Company's Board of Directors.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
SEVEN MONTHS
ENDED
DECEMBER 31, 1995 1995 1996
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding--beginning of
period................................. 347,523 $ 3.07 347,523 $ 3.07 515,346 $ 8.13
Granted................................ 254,035 14.03 254,035 14.03 64,330 8.74
Exercised.............................. (86,212) (5.07) (86,212) (5.07) (203,761) (.88)
Forfeited.............................. -- -- -- -- (20,755) (13.08)
---------- ----- ---------- ----- ---------- -----------
Options outstanding--end of period....... 515,346 $ 8.13 515,346 $ 8.13 355,160 $ 12.09
---------- ----- ---------- ----- ---------- -----------
---------- ----- ---------- ----- ---------- -----------
Weighted average fair value of options
granted during the period.............. $ 2.42 $ 2.42 $ 2.51
</TABLE>
The fair value of each option is estimated on the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Expected volatility.................................................. 37.2% 41.1%
Risk-free interest rate.............................................. 5.04% 5.33%
Expected term........................................................ 2.5 years 5 years
Dividend yield....................................................... 0% 0%
</TABLE>
F-18
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EQUITY TRANSACTIONS: (CONTINUED)
The following table summarizes information about outstanding and exercisable
stock options at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED
REMAINING AVERAGE
CONTRACTUAL EXERCISE
EXERCISE PRICES SHARES LIFE SHARES PRICE
- ------------------------------------------------------------------ --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
$ 7.83............................................................ 58,236 5.5 years 55,179 $ 7.83
8.74............................................................ 62,200 9.0 years 29,906 8.74
14.03............................................................ 234,724 9.1 years -- --
</TABLE>
The Company applies APB Opinion 25 and related interpretations in accounting
for fixed stock option plans. Accordingly, no compensation cost has been
recognized for the fixed stock option plans. Had compensation cost been based on
the estimated fair value at the grant dates for awards under those plans
consistent with the method of FASB Statement No. 123, the net effect on net
income and income per share for the seven months ended December 31, 1995 and for
the years ended December 31, 1995 and 1996 would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED DECEMBER 31,
ENDED ----------------------------
DECEMBER 31, 1995 1995 1996
------------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss):
As reported............................. $ (158,261) $ 1,876,034 $ 2,753,840
Pro forma............................... (158,261) $ 1,876,034 $ 2,649,778
Net income (loss) per common share:
As reported............................. $ (.06) $ .72 $ .12
Pro forma............................... $ (.06 ) $ .72 $ .10
</TABLE>
As of December 31, 1996, the Company had repurchased 239,860 shares of
common stock for $1,487,200. These shares were held as treasury stock at
December 31, 1995 and 1996 and were accounted for under the cost method.
As previously mentioned, the Company issued Special Voting Common Stock in
connection with the Transitional Merger. The Special Voting Common Stock is
similar to the Company's Common Stock, except that each share of Special Voting
Common Stock carries 70% of the voting power of one share of Common Stock. As
required by the merger agreement, the Company declared a stock dividend in
January 1996 increasing the number of shares of both Special Voting Common Stock
and Common Stock outstanding by 11.11% (the "Stock Dividend"). The shares issued
by the Stock Dividend totaled 294,038 shares of Special Voting Common Stock and
160,124 shares of Common Stock. All references to authorized and outstanding
shares and the weighted shares outstanding used in the calculation of net income
per share has been retroactively adjusted to reflect the Stock Dividend.
In connection with the Transitional Merger, the holders of Common Stock (the
"Centennial Holders") and the holders of Special Voting Common Stock (the "THS
Holders") entered into an escrow agreement whereby shares representing the Stock
Dividend were placed in escrow until the parties completed final due diligence
and certain contingencies were settled. The escrowed shares were to be released
to either the THS Holders or the Centennial Holders as determined by the
Centennial agent and
F-19
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EQUITY TRANSACTIONS: (CONTINUED)
THS agent, in order to adjust the proportionate ownership interest each group of
holders received in the combined entity.
In January 1997, the Centennial agent and the THS agent entered into a
Settlement Agreement which determined the distribution of the escrowed shares.
Under the terms of the Settlement Agreement, the equivalent of 293,735 shares of
the Special Voting Common Stock held in escrow were distributed to the
Centennial Holders and all remaining shares were released to the respective
parties. This settlement effectively reduced the purchase price paid for THS and
has been recorded as a reduction in goodwill effective at the merger date with a
corresponding decrease to the value of the Special Voting Common Stock.
13. INCOME TAXES:
The components of the income tax provision for the seven months ended
December 31, 1995 and the years ended December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED DECEMBER 31,
ENDED ----------------------------
DECEMBER 31, 1995 1995 1996
------------------- ------------- -------------
<S> <C> <C> <C>
Current
Federal................................. $ 792,696 $ 1,959,021 $ 103,662
State................................... 278,756 525,776 291,173
------------------- ------------- -------------
1,071,452 2,484,797 394,835
------------------- ------------- -------------
Deferred
Federal................................. (707,770) (1,040,521) 1,781,093
State................................... (35,944) (55,170) (83,481)
------------------- ------------- -------------
(743,714) (1,095,691) 1,697,612
------------------- ------------- -------------
Total provision........................... $ 327,738 $ 1,389,106 $ 2,092,447
------------------- ------------- -------------
------------------- ------------- -------------
</TABLE>
Reconciliations of the differences between income taxes computed at federal
statutory tax rates and consolidated provisions for income taxes for the seven
months ended December 31, 1995 and the years ended December 31, 1995 and 1996
are as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED DECEMBER 31,
ENDED ----------------------------
DECEMBER 31, 1995 1995 1996
------------------- ------------- -------------
<S> <C> <C> <C>
Tax at U.S. statutory rate................ $ 85,556 $ 1,178,573 $ 1,718,519
State income taxes........................ 242,812 298,110 202,179
Goodwill amortization..................... -- -- 142,122
Other..................................... (630) (87,577) 29,627
---------- ------------- -------------
Provision for income taxes............ $ 327,738 $ 1,389,106 $ 2,092,447
---------- ------------- -------------
---------- ------------- -------------
</TABLE>
F-20
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES: (CONTINUED)
Deferred tax assets and liabilities are comprised of the following at
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
Current deferred income tax assets:
Allowances for uncollectible receivables.................... $ 2,838,350 $ 1,814,237
Liabilities not deductible for tax purposes................. 1,566,030 2,068,453
Accrued closing costs....................................... 648,825 --
-------------- --------------
Current deferred income tax assets...................... $ 5,053,205 $ 3,882,690
-------------- --------------
-------------- --------------
Noncurrent deferred income tax assets:
Net operating loss and tax credit carryforwards............. $ 3,924,825 $ 4,455,935
Tax basis receivables in excess of book..................... 2,549,000 2,549,000
Net effects of capital leases............................... 1,054,000 1,046,000
Deferred tax asset on non-owned affiliates.................. -- -
-------------- --------------
7,527,825 8,050,935
-------------- --------------
Noncurrent deferred income tax liabilities:
Temporary goodwill.......................................... -- (353,052)
Write-up of property and equipment.......................... (2,005,202) (1,950,500)
Other, including depreciation............................... (444,432) (850,000)
Tax losses from investment in unconsolidated partnerships in
excess of book............................................ (728,230) (796,230)
-------------- --------------
(3,177,864) (3,949,782)
-------------- --------------
Net noncurrent deferred income tax assets............... $ 4,349,961 $ 4,101,153
-------------- --------------
-------------- --------------
</TABLE>
As of December 31, 1996, the Company had approximately $11,379,000 and
$1,562,087 of federal net operating loss carryforwards available to offset
future taxable income which expire in the years 2010 and 2011, respectively. In
addition, the Company had $305,000 of federal targeted jobs tax credit
carryforwards, and various state net operating loss carryforwards.
14. MANAGEMENT AGREEMENTS:
In March 1996, the Company entered into management agreements with an
unaffiliated entity, NCHC, Inc., to manage four long-term care facilities with a
total of 480 beds. NCHC, Inc. acquired the leases on these facilities for
consideration of approximately $2,800,000. The Company made advances pursuant to
a long-term note, totaling $4,557,881, to NCHC, Inc. which were utilized for the
acquisition of the leases on the facilities and for working capital
requirements. In addition, the Company has made advances to NCHC, Inc. totaling
$1,063,000. NCHC, Inc. also owes the Company at December 31 , 1996,
approximately $859,129 for therapy services and management fees. Notes and
amounts advanced to NCHC, Inc. and NC HealthCare are included in notes and
advances receivable on the accompanying balance sheets.
In July 1996, the Company entered into management agreements with NC Health
Care, Inc. ("NC Health Care"), an unaffiliated entity, to manage four long-term
facilities with a total of 328 beds. The Company made advances pursuant to a
long-term note, totaling $5,462,393, to NC Health Care, which were utilized for
the acquisition of the facilities and for working capital requirements. In
addition, the
F-21
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. MANAGEMENT AGREEMENTS: (CONTINUED)
Company has made advances to NC Health Care totaling approximately $957,000. NC
Health Care also owes the Company at December 31, 1996, approximately $563,180
for therapy services and management fees.
The notes receivable from NC Health Care and NCHC, Inc. both require monthly
payments of interest at a per annum rate equal to a specified prime rate, plus
3%, not to exceed 12%. All principal on both notes, is due December 31, 2006.
The advances made to NC Health Care and NCHC, Inc. are to be repaid from
available net cash flows with interest at a specified prime rate, plus 2%. Both
notes are collateralized by receivables and the pledge of the stock of NC Health
Care and NCHC, Inc. As a result of the losses incurred at these facilities,
notes and advances receivable have been reduced by an allowance for estimated
uncollectible amounts of approximately $600,000, based on the Company's estimate
of future operating results of these facilities. Summarized financial
information of NC Health Care and NCHC, Inc. is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------
NC HEALTH CARE, INC. NCHC, INC.
-------------------- --------------
<S> <C> <C>
ASSETS
Current assets................................................. $ 1,918,897 $ 3,344,635
Property and equipment......................................... 13,888,594 179,364
Other assets................................................... 902,651 3,071,688
-------------------- --------------
Total assets................................................. 16,710,142 6,595,687
-------------------- --------------
-------------------- --------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities............................................ $ 1,380,332 $ 1,630,437
Mortgage note payable.......................................... 8,949,288 --
Note and advances payable to Centennial HealthCare
Corporation.................................................. 6,419,393 5,620,881
Shareholders' deficit.......................................... (38,871) (655,631)
-------------------- --------------
Total liabilities and shareholders' deficit............ $ 16,710,142 $ 6,595,687
-------------------- --------------
-------------------- --------------
<CAPTION>
FROM INCEPTION
THROUGH DECEMBER 31, 1996
------------------------------------
NC HEALTH CARE, INC. NCHC, INC.
-------------------- --------------
<S> <C> <C>
CONDENSED STATEMENTS OF OPERATIONS:
Total revenues................................................. $ 5,257,869 $ 9,909,826
Operating income (loss) before net interest expense............ 364,773 (1,105,747)
Loss before income tax benefit................................. (65,626) (1,118,823)
Income tax benefit............................................. 26,755 463,192
Net loss....................................................... (38,871) (655,631)
</TABLE>
In October 1996, the Company entered into a management and a lease agreement
with the owner of a 36-bed hospital in Florida with three licensed home health
care offices. The agreement provides that the Company will manage the hospital
until all necessary approvals and licenses are obtained at which time the
Company will operate the hospital under a long-term lease. Under the agreement,
the Company is responsible for all operating deficits. The Company has accounted
for the transaction as a management agreement beginning in October 1996. The
Company has advanced amounts, totaling $1,370,000, to fund operating deficits of
the hospital.
F-22
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. MANAGEMENT AGREEMENTS: (CONTINUED)
As of December 31, 1996, the Company provided operational management
services for 23 facilities (including NC Health Care, Inc., NCHC, Inc. and the
36 bed hospital) under long-term management contracts having remaining effective
terms ranging from 16 to 20 years. Twenty-three of these agreements are with
third-party owners and are noncancelable without cause. One of these agreements,
with fees totaling $65,769, $124,021 and $141,850, respectively, during the
seven months end December 31, 1995 and the years ended December 31, 1995 and
1996, is with an affiliate and is cancelable by either party in certain
circumstances. Five of these agreements, with fees totaling $631,213, $995,311
and $938,731, respectively, during the seven months end December 31, 1995 and
the years ended December 31, 1995 and 1996, are with affiliated limited
partnerships in which certain subsidiaries of the Company served as general
partner and can be terminated by either party without cause given sixty days
notice. The management agreements provide for the Company to receive annual fees
equal to 6% of each facility's gross revenues, payable on a monthly basis and
may include additional compensation based on achieving certain performance
standards. Additionally, the Company performs oversight management services for
three facilities in which it oversees the management of another management
company. The Company typically receives a fee of 1% of revenues for oversight
management services.
15. TRANSACTIONS WITH RELATED PARTIES:
The Company has employment agreements with five officers which provide for
salary continuation and non-competition with the Company, subject to certain
conditions.
The Company leases two long-term care facilities from affiliated lessors
(Note 4).
The Company manages five long-term care facilities for affiliated limited
partnerships in which the Company serves as a general partner (Note 14).
The Company leases its facilities' employees from an affiliated company
which is owned by the president of the Company. The total payroll costs and
reimbursements from the Company totaled $14,621,000, $23,100,000 and $37,200,000
for the seven months ended December 31, 1995, and for the years ended December
31, 1995 and 1996, respectively. Such costs are billed by the related entity at
cost.
16. COMMITMENTS AND CONTINGENCIES:
Certain subsidiaries of the Company serve as the general partner in various
limited partnerships. As a general partner, the Company may be liable for
certain deficiencies which arise in meeting the terms of loan obligations
incurred by these partnerships and for operating expenses and other liabilities
incurred by these partnerships in the ordinary course of business. The Company
sold substantially all of its subsidiaries serving as corporate general partners
on January 30, 1997.
The Company has a consulting agreement with an unaffiliated owner of certain
facilities which the Company manages. Under the terms of the consulting
agreement, the Company will pay the unaffiliated owner annual consulting fees
ranging from $135,000 to $375,000 through the earlier of 2013 or the termination
of the facility management contracts. For the seven months ended December 31,
1995 and the years ended December 31, 1995 and 1996, the Company incurred
approximately $97,000, $163,000 and $150,000, respectively, of consulting fees.
The Company has guaranteed a mortgage note up to $500,000 related to a
long-term care facility that it manages. The mortgage had an outstanding balance
of approximately $1,946,000 at December 31,
F-23
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
1996. The market value of this facility, based on an independent appraisal,
substantially exceeds the total amount of the mortgage note. All principal and
interest payments are paid currently by the obligors.
The Company has guaranteed $17,000,000 of mortgage indebtedness of two
unrelated entities that lease five nursing facilities to the Company. The
unrelated entities are two syndicated limited partnerships of which the Company
does not control major decisions. The outstanding principal balance of the debt
was approximately $16,108,000 at December 31, 1996. All principal and interest
payments are paid currently by the obligors.
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 THS and the factor. It is the belief of management that this lawsuit as well
as other claims and actions that the Company is subject to in the normal course
of business will be resolved without a material adverse effect on the Company's
financial position, results of operations or liquidity.
The Company self-insures for workers' compensation claims and health
benefits for its employees. The Company maintains stop-loss insurance such that
the Company's liability for losses is limited. The Company recognized as an
expense and accrued for estimated workers' compensation and health benefit
claims incurred but not reported as of December 31, 1995 and 1996.
F-24
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUPPLEMENTAL CASH FLOW DISCLOSURE:
As discussed in note 2, on December 31, 1995, the Company merged with THS
and has included the accounts of this entity in its December 31, 1995
consolidated balance sheet. The net assets included in the consolidated balance
sheet were as follows as of December 31, 1995:
<TABLE>
<S> <C>
Cash and cash equivalents.................................... $ 2,247,740
Patient accounts and third-party settlements, net............ 16,515,527
Deferred income taxes........................................ 5,053,205
Other current assets......................................... 5,484,702
-------------
Total current assets................................... 29,301,174
-------------
Property and equipment, net.................................. 45,027,262
-------------
Restricted cash.............................................. 4,613,848
Deferred income taxes........................................ 4,763,270
Goodwill, net................................................ 36,340,543
Other assets................................................. 2,516,853
-------------
Total assets........................................... 122,562,950
-------------
Accounts payable and accrued expenses........................ 17,494,742
Current maturities of long-term debt......................... 1,536,475
Other current liabilities.................................... 8,704,764
-------------
Total current liabilities.............................. 27,735,981
-------------
Long-term debt, less current maturities...................... 49,558,938
Subordinated debt, less current maturities................... 24,243,641
Other long-term liabilities.................................. 2,000,000
-------------
Total liabilities...................................... 103,538,560
-------------
Net assets included in balance sheet......................... $ 19,024,390
-------------
-------------
</TABLE>
18. CONCENTRATION OF CREDIT RISK:
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
19. EMPLOYEE BENEFITS:
The Company has 401(k) savings plans available to substantially all
employees depending on their length of service. Employees may defer up to 15% of
their salary, subject to the maximum permitted by law. The Company may at its
discretion, match a portion of the employee contribution. The Company funded
$91,743 during the year ended December 31, 1996 as a match to the employee
contributions.
F-25
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity of
those instruments, and includes the restricted cash reflected on the balance
sheet under the caption "Restricted Cash."
NOTES RECEIVABLE
The carrying amount approximates fair value for the notes receivable based
on the fair value being estimated as the net present value of cash flows that
would be received on the notes over the remaining notes term using current
market interest rates rather than stated interest rates.
LONG-TERM DEBT
The carrying amount of the Credit Agreement approximates fair value since
the Credit Agreement was recently renegotiated at market rates. The carrying
amount of mortgage notes approximates their values based on the net present
value of cash flows that would be paid on each note over the remaining note term
using the Company's current incremental borrowing rate rather than the stated
interest rates on the notes.
21. SUBSEQUENT EVENTS:
On January 31, 1997, the Company issued 50,000 shares of $1 par value Series
D Preferred Stock and an aggregate 50,000 investment units, with each unit being
comprised of one share of $1 par value Series E Senior Preferred Stock and
1.7873 shares of common stock of the Company for $10,000,000. The Series D
Preferred Stock is redeemable at the option of the holder at any time after
December 31, 2006 for the redemption price of $100 plus interest on the $100 per
share at the rate of 10% per annum from the date of issuance of the Series D
Preferred Stock. Each share of Series D Preferred Stock is convertible into
8.2106 shares of Common Stock, at the holder's option. All outstanding shares of
Series D Preferred Stock are converted into Common Stock upon a public offering
of its common stock where the proceeds of the offering exceed $30,000,000 and
the price per share is at least $12.18.
The Series E Senior Preferred Stock is subject to 10% dividends and is
redeemable at any time at the option of the Company but is required to be
redeemed on October 30, 2002 at the redemption price of $100 plus accrued but
unpaid dividends.
Subsequent to year end, the Board of Directors of the Company approved a
reverse stock split, with the ratio to be determined at a later date. However,
all references to shares, weighted shares outstanding used in the calculation of
net income per share and per share amounts have been retroactively adjusted to
reflect a .6897 for one reverse stock split. The reverse stock split is subject
to a vote of the Company's shareholders.
Effective May 1, 1997, the Company acquired by merger Total Care
Consolidated, Inc. ("TCC"), a provider of home health care services in North
Carolina, South Carolina and Louisiana. Total consideration of $8,000,000
consisted of $6,000,000 in cash and a $2,000,000 promissory note. The note may
be converted at the option of the holder into shares of Common Stock. The
transaction is accounted for under the purchase method and the Company's fiscal
results will include TCC from the effective date of the merger.
The Company is currently pursuing an acquisition which is subject to the
negotiation of a definitive agreement and receipt of all necessary consents and
approvals.
F-26
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
---------------- ----------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 6,029,763 $ 10,507,035
Patient accounts receivable and third-party payor settlements, net of
allowance for doubtful accounts of approximately $2,500,000 and $2,200,000
(unaudited)............................................................... 39,854,486 43,551,329
Other current assets........................................................ 9,743,560 9,703,451
---------------- ----------------
Total current assets...................................................... 55,627,809 63,761,815
Property and equipment, net................................................... 67,409,359 67,229,124
Restricted cash............................................................... 6,045,035 6,203,256
Licenses and other intangibles, including goodwill, net....................... 36,297,113 36,040,507
Notes receivable and other assets............................................. 28,068,270 27,907,376
---------------- ----------------
Total assets.............................................................. $ 193,447,586 $ 201,142,078
---------------- ----------------
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................................... $ 37,099,818 $ 34,877,718
Other liabilities........................................................... 12,616,360 11,662,921
---------------- ----------------
Total current liabilities................................................. 49,716,178 46,540,639
Long-term debt, less current maturities....................................... 83,437,633 82,793,937
Subordinated debt, less current maturities.................................... 24,357,397 24,379,158
Other long-term liabilities................................................... 2,678,809 3,006,026
---------------- ----------------
160,190,017 156,719,760
Commitments and contingencies
Redeemable preferred stock.................................................... 21,305,372 31,800,131
Shareholders' equity:
Common Stock with par value of $.01; 50,000,000 shares authorized; 2,044,306
and 2,108,132 shares issued; 1,804,447 and 1,868,272 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 5,716,189
Retained earnings........................................................... 8,239,967 8,900,597
Treasury stock, at cost; 239,860 shares of common stock..................... (1,487,200) (1,487,200)
---------------- ----------------
12,480,677 13,150,667
Note receivable from shareholder.............................................. (528,480) (528,480)
---------------- ----------------
Net shareholders' equity.................................................... 11,952,197 12,622,187
---------------- ----------------
Total liabilities and shareholders' equity.................................. $ 193,447,586 $ 201,142,078
---------------- ----------------
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-27
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD
ENDED MARCH 31,
1996 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Net patient service revenues.............................................. $ 54,587,259 $ 62,371,563
Management fees and other revenues........................................ 1,347,268 1,863,276
-------------- --------------
Total revenues.......................................................... 55,934,527 64,234,839
-------------- --------------
Expenses:
Facility operating expenses:
Salaries, wages and benefits............................................ 28,631,197 33,272,786
Other operating expenses................................................ 16,557,152 16,398,555
Lease expense............................................................. 4,532,673 5,083,406
Corporated administrative costs........................................... 3,066,964 3,368,233
Depreciation and amortization............................................. 1,157,509 1,521,145
-------------- --------------
Total operating expenses................................................ 53,945,495 59,644,125
-------------- --------------
1,989,032 4,590,714
-------------- --------------
Other income (expense):
Interest income........................................................... 166,309 148,939
Interest expense.......................................................... (2,254,205) (2,629,375)
-------------- --------------
Total other income (expense)............................................ (2,087,896) (2,480,436)
-------------- --------------
(98,864) 2,110,278
Provision (benefit) for income taxes........................................ (40,986) 795,537
-------------- --------------
Income (loss) before minority interest...................................... (57,878) 1,314,741
Minority interest in net income of subsidiary, net of income taxes.......... (47,239) (74,128)
-------------- --------------
Net income (loss)....................................................... (105,117) 1,240,613
Dividends and accretion on preferred stock.................................. (471,976) (786,363)
-------------- --------------
Income (loss) applicable to common stock.................................... $ (577,093) $ 454,250
-------------- --------------
-------------- --------------
Net income (loss) per common share.......................................... (.12) .09
-------------- --------------
-------------- --------------
Weighted average number of common and common stock equivalents
outstanding............................................................... 4,776,663 4,826,600
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-28
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD
ENDED MARCH 31,
1996 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Cash used in operating activities......................................... $ (5,797,268) $ (2,840,187)
-------------- --------------
Investing Activities:
Purchases of property and equipment..................................... (1,544,477) (875,512)
Increase in restricted cash............................................. (784,410) (158,171)
Advances to managed facilities.......................................... (1,060,929) --
Deferred costs.......................................................... (490,341) (905,659)
-------------- --------------
Cash used in investing activities......................................... (3,880,157) (1,939,342)
-------------- --------------
Financing Activities:
Proceeds from issuance of preferred stock............................... -- 10,000,000
Payments on notes to affiliates......................................... (3,226,179) (34,733)
Proceeds from borrowings under lines of credit.......................... 10,750,000 --
Principal payments on long term debt.................................... (463,005) (475,229)
Other financing activities.............................................. (242,698) (233,233)
-------------- --------------
Cash provided from financing activities................................... 6,818,118 9,256,805
-------------- --------------
Net increase in cash and cash equivalents................................. (2,859,307) 4,477,276
Cash and cash equivalents, beginning of period............................ 4,894,448 6,029,759
-------------- --------------
Cash and cash equivalents, end of period.................................. 2,035,141 10,507,035
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-29
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited consolidated
financial statements of Centennial HealthCare Corporation and Subsidiaries ("the
Company") contain all adjustments necessary to present fairly the financial
position at March 31, 1997 and the results of operations and cash flows for the
three month periods ended March 31, 1996 and 1997. These financial statements
should be read in conjunction with the notes to the financial statements for the
year ended December 31, 1996. The year-end condensed balance sheet data was
derived from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles.
2. Subsequent to March 31, 1997, the Company filed a registration statement on
Form S-1 for the issuance of 4,000,000 shares of its Common Stock in an initial
public offering. The proceeds of such offering are to be used to repay two
subordinated promissory notes aggregating $25.3 million accruing interest at
10.8% and 11.7% per annum, to redeem the Series E Redeemable Preferred Stock for
$5.1 million, and to repay approximately $20.4 of the outstanding principal
balance of its Senior Credit Facility accruing interest of approximately 8.5%.
Concurrently with the closing of this Offering the Company's Series A and B
Preferred Stock, Series C Convertible Preferred Stock and Series D Convertible
Preferred Stock will be converted to shares of Common Stock. The following
supplemental earnings per share data reflects earnings per share as if such
offering of Common Stock and the use of proceeds described and preferred stock
conversions has taken place on January 1, 1996.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
-------------- -----------------
1996 1997
-------------- -----------------
<S> <C> <C>
Net income applicable to Common Stock: $ 5,289 $ 1,859
-------------- --------
-------------- --------
Weighted average number of common shares outstanding: 11,086 11,255
-------------- --------
-------------- --------
Supplemental earnings per share: $ .48 $ .17
-------------- --------
-------------- --------
</TABLE>
Above amounts reflect the estimated reduction in interest expense of
approximately $4.0 million and $1.0 million and preferred dividends of
approximately $2.0 million and $0.6 million for the year ended December 31, 1996
and the three months ended March 31, 1997, respectively, resulting from the
above-described transaction and the addition of approximately 6.3 million and
4.7 million shares of Common Stock.
3. Net income per common share for the three months ended March 31, 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.
In February 1997, the Financial Accounting Standards Board issued Statement
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 requires 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, such as the Company. 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.
If Statement No. 128 had been applied for the periods ended March 31, 1996 and
1997, basic and diluted earnings per share would have been ($0.12) and $0.10,
respectively. Such
F-30
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
computations are based on weighted average shares outstanding of approximately
4,542,000 and 4,789,000 for the periods ended March 31, 1996 and 1997,
respectively. Dividends on preferred shares have been deducted from net income
in arriving at net income available to Common Stock. Such preferred shares are
anti-dilutive and accordingly have not been assumed to be converted for purposes
of diluted earnings per share.
F-31
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors of
Centennial HealthCare Corporation
We have audited the accompanying consolidated balance sheets of Centennial
HealthCare Corporation and subsidiaries (formerly known as WelCare
International, Inc. and subsidiaries) as of May 31, 1994 and 1995, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for each of the three years in the period ended May 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Centennial HealthCare Corporation and subsidiaries at May 31, 1994 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended May 31, 1995 in conformity with generally
accepted accounting principles.
BDO Seidman, LLP
Atlanta, Georgia
July 7, 1995, except for
Note 18 which is as of
August 15, 1995
F-32
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
------------------------------
1994 1995
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents...................................................... $ 5,279,539 $ 4,362,833
Patient accounts and third party payor settlements, net of allowance for
doubtful accounts of $71,413 in 1995 (Note 3)................................ 4,198,742 6,614,290
Prepaid expenses and other current assets...................................... 401,076 748,757
Due from related parties....................................................... 69,843 46,443
-------------- --------------
Total current assets............................................................. 9,949,200 11,772,323
-------------- --------------
Property and equipment at cost, net of accumulated depreciation (Notes 5 and
8)............................................................................. 444,140 6,662,562
-------------- --------------
Other assets
Note receivable (Note 6)....................................................... 422,000 309,917
Due from related parties (Note 4).............................................. 193,035 1,558,336
Investment in unconsolidated partnerships (Note 7)............................. 1,450,984 83,651
Restricted cash (Note 2)....................................................... 1,496,964 1,041,688
Refundable deposit (Note 2).................................................... -- 2,875,000
Deferred managment cost, net of accumulated amortization of $35,291 in 1995
(Note 12).................................................................... -- 811,696
Minority interest (Note 1)..................................................... -- 130,840
Other.......................................................................... 215,891 253,375
-------------- --------------
Total other assets............................................................... 3,778,874 7,064,503
-------------- --------------
$ 14,172,214 $ 25,499,388
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (Note 8).................................. $ 87,500 $ 1,106,910
Accounts payable and accrued expenses.......................................... 3,234,923 3,830,242
Provider taxes payable......................................................... 313,421 1,028,355
Other liabilities.............................................................. 773,135 1,001,959
-------------- --------------
Total current liabilities........................................................ 4,408,979 6,967,466
Due to affiliate................................................................. 683,713 1,197,239
Long-term debt, less current maturities (Note 8)................................. 676,250 4,557,535
Deferred income taxes (Note 11).................................................. 1,079,000 1,509,000
Cash held in escrow (Note 2)..................................................... 1,496,964 --
-------------- --------------
8,344,906 14,231,240
-------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTES 12, 13 AND 14)
Redeemable preferred stock (Note 9).............................................. 4,300,290 9,186,628
-------------- --------------
SHAREHOLDERS' EQUITY (NOTES 9 AND 10)
Common stock, with par value of $.01; 50,000,000 shares authorized; 1,745,449
shares issued; 1,582,222 and 1,505,589 shares outstanding in 1994 and 1995... 17,455 17,455
Retained earnings.............................................................. 2,123,003 3,551,265
Treasury stock, at cost; 163,227 and 239,860 shares held in 1994 and 1995...... (613,440) (1,487,200)
-------------- --------------
1,527,018 2,081,520
-------------- --------------
$ 14,172,214 $ 25,499,388
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------------------------
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES
Net patient service revenues................................... $ 6,863,361 $ 38,115,076 $ 61,855,427
Management fees (Note 12)...................................... 4,434,990 3,384,357 3,362,223
-------------- -------------- --------------
Total revenues................................................... 11,298,351 41,499,433 65,217,650
-------------- -------------- --------------
EXPENSES
Facility operating expenses.................................... 5,330,767 29,510,176 48,872,211
Lease expense (Note 2)......................................... 926,676 4,823,314 6,900,843
Corporate administrative costs................................. 3,004,715 2,927,045 3,395,795
Depreciation and amortization.................................. 48,325 82,197 290,408
-------------- -------------- --------------
Total expenses................................................... 9,310,483 37,342,732 59,459,257
-------------- -------------- --------------
OTHER INCOME (EXPENSE)
Interest income................................................ 73,824 163,071 382,394
Interest expense............................................... (42,042) (31,615) (325,477)
Equity in income (loss) of unconsolidated partnerships (Note
7)........................................................... (2,765,867) 1,733,341 (27,504)
-------------- -------------- --------------
Total other income (expense)..................................... (2,734,085) 1,864,797 29,413
-------------- -------------- --------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES, SHARE OF
MINORITY INTEREST AND EXTRAORDINARY ITEM....................... (746,217) 6,021,498 5,787,806
Provision for income taxes (benefit) (Note 11)................... (160,275) 2,230,965 2,105,978
-------------- -------------- --------------
INCOME (LOSS) BEFORE SHARE OF MINORITY INTEREST AND EXTRAORDINARY
ITEM........................................................... (585,942) 3,790,533 3,681,828
Minority interest in net income of subsidiary.................... -- -- 207,328
-------------- -------------- --------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.......................... (585,942) 3,790,533 3,474,500
Extraordinary item-foregiveness of debt, net of taxes ($940,682
and $143,268, respectively) -- 1,598,274 250,471
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK..................... $ (585,942) $ 5,388,807 $ 3,724,971
-------------- -------------- --------------
-------------- -------------- --------------
PER COMMON SHARE DATA
Income (loss) before extraordinary item.......................... $ (.26) $ 1.60 $ 1.35
Extraordinary item-foregiveness of debt, net of taxes............ -- .68 .10
-------------- -------------- --------------
Net income (loss)................................................ $ (.26) $ 2.28 $ 1.45
-------------- -------------- --------------
-------------- -------------- --------------
WEIGHTED AVERAGE NUMBER OF COMMON STOCK AND COMMON STOCK
EQUIVALENTS OUTSTANDING........................................ 2,266,654 2,363,362 2,576,001
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MAY 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK PURCHASE WARRANTS ADDITIONAL
---------------------- -------------------- PAID-IN EARNINGS TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) STOCK
--------- ----------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, at May 31, 1992...... 1,829,600 $ 18,553 553,577 $ 800,000 $ 287,387 $ (587,964) $ --
Termination of common stock
purchase warrants......... -- -- (553,577) (800,000) -- -- --
Purchase and retirement of
common stock.............. (84,151) (1,098) -- -- (866) (148,201) --
Dividends on redeemable
preferred stock............. -- -- -- -- -- (33,003)
Net loss.................... -- -- -- -- -- (585,942)
--------- ----------- --------- --------- ----------- ----------- -----------
Balance, at May 31,1993....... 1,745,449 17,455 -- -- 286,521 (1,355,110) --
Dividends on redeemable
preferred stock -- -- -- -- -- (160,530) --
Purchase of treasury
stock..................... (163,227) -- -- -- -- -- (613,440)
Accretion of preferred stock
to estimated redemption
value (Note 9)............ -- -- -- -- (286,521) (1,750,164) --
Net income.................. -- -- -- -- -- 5,388,807 --
--------- ----------- --------- --------- ----------- ----------- -----------
Balance, at May 31, 1994...... 1,582,222 17,455 -- -- -- 2,123,003 (613,440)
Dividends on redeemable
preferred stock............. -- -- -- -- -- (284,132) --
Purchase of treasury
stock..................... (76,633) -- -- -- -- -- (873,760)
Accretion of preferred stock
to estimated redemption
value (Note 9)............ -- -- -- -- -- (2,012,577) --
Net income.................... -- -- -- -- -- 3,724,971 --
--------- ----------- --------- --------- ----------- ----------- -----------
Balance, at May 31, 1995...... 1,505,589 $ 17,455 -- $ -- $ -- $ 3,551,265 $(1,487,200)
--------- ----------- --------- --------- ----------- ----------- -----------
--------- ----------- --------- --------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------------------------
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................................... $ (585,942) $ 5,388,807 $ 3,724,971
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization................................. 48,325 82,197 240,134
Deferred income taxes......................................... (226,275) 1,428,645 430,000
Consulting fees offset against note receivable................ -- -- 112,083
Equity in income (loss) of unconcolidated partnership......... 2,765,867 (4,272,295) (366,235)
Share of minority interest.................................... -- -- 207,328
Gain on sale of bonds......................................... (12,450) -- (50,920)
Change in assets and liabilities:
Accounts receivable......................................... (1,669,179) (2,500,034) (2,259,705)
Due from related parties.................................... 416,041 337,190 223,053
Prepaid expenses and other assets........................... (608,999) 168,429 (488,601)
Accounts payable and accrued expenses....................... 1,956,625 2,062,441 935,942
-------------- -------------- --------------
Cash provided by operating activities............................. 2,084,013 2,695,380 2,708,050
-------------- -------------- --------------
INVESTING ACTIVITIES:
Investment in subsidiary partnership............................ -- (980,000) --
Advances to affiliate........................................... -- (230,493) (946,275)
Distributions received from unconsolidated partnership.......... 31,496 114,475 460,471
Proceeds from sale of long-term securities...................... 39,990 -- 139,714
Purchases of property and equipment............................. (264,041) (66,664) (1,108,810)
Cash paid for refundable deposit................................ -- -- (2,875,000)
Purchase of management contract................................. -- -- (846,987)
Cash received in acquisition of subsidiary in excess of purchase
price paid.................................................... -- -- 183,464
-------------- -------------- --------------
Cash used in investing activitites................................ (192,555) (1,162,682) (4,993,423)
-------------- -------------- --------------
FINANCING ACTIVITIES:
Distributions paid to minority partner.......................... -- -- (84,759)
Redemption of common stock...................................... (150,165) (613,440) (873,760)
Payments on subordinated debentures............................. (62,500) -- (150,000)
Payments of dividend to preferred shareholders.................. (33,003) (160,530) (284,132)
Payments on notes to shareholders............................... (73,750) -- --
Proceeds from issuance of preferred stock....................... 1,650,165 613,440 2,873,761
Proceeds from notes payable..................................... 25,000 500,000 --
Payments on notes payable....................................... (475,000) (262,500) (87,500)
Payments on mortgage payable.................................... -- -- (24,943)
-------------- -------------- --------------
Cash provided by financing activities............................. 880,747 76,970 1,368,667
-------------- -------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................... 2,772,205 1,609,668 (916,706)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...................... 897,666 3,669,871 5,279,539
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR............................ $ 3,669,871 $ 5,279,539 $ 4,362,833
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Centennial HealthCare Corporation (the "Company") (formally known as WelCare
International, Inc.) was incorporated in February 1989 under the laws of the
State of Georgia. The Company's principal business is to provide basic and
specialty healthcare services to patients in a long-term care setting.
As of May 31, 1995, subsidiaries of the Company operated 32 owned, leased
and managed long-term care facilities with 3,657 beds in 15 states, consisting
of one owned facility, 16 leased facilities and 15 managed facilities.
At May 31, 1995, certain subsidiaries of the Company held general partner
interests in certain public and private limited partnerships, the majority of
which own and operate long-term care facilities. The Company's general partner
interests in those partnerships ranged from .49% to 3.992%.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and a majority owned affiliated partnership. The
Company accounts for its investments in certain other public and private
partnerships in which the Company has a greater than 20% ownership or serves as
the general partner, under the equity method, i.e., at cost, increased or
decreased by the Company's share of earnings or losses, less distributions. All
intercompany balances, investments and transactions have been eliminated.
REVENUES AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Revenues are derived from the management of fourteen facilities, the
operation of sixteen leased facilities and one majority owned facility, and from
providing related supplies and services to these facilities. Management fee
revenues are recorded on a monthly basis as earned. Patient service revenues are
recorded at established rates and adjusted for differences between such rates
and estimated amounts reimbursable by third party payors. Estimated settlements
under third-party payor retrospective rate setting programs (primarily Medicare
and Medicaid) are accrued in the period the related services are rendered.
Settlements receivable and related revenues under such programs are based on
annual cost reports prepared in accordance with federal and state regulations,
which reports are subject to audit and retroactive adjustments in future
periods. In the opinion of management, adequate provision has been made
therefor, and such adjustments in determining final settlements will not have a
material effect on financial position or results of operations.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated over the estimated useful lives of
the individual assets using the straight-line method. The estimated useful lives
range from five to ten years for equipment, five to fifteen years for furniture
and thirty years for buildings and improvements.
F-37
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED MANAGEMENT COST
During 1995, the Company purchased a management contract from an unrelated
party for a facility that it currently owns a majority interest. Costs
associated with the purchase of this management contract are amortized over 10
years, the life of the associated management agreement.
ACCRUED PROVIDER AND PROPERTY TAXES
Accrued provider and property taxes includes taxes assessed in certain
jurisdictions based on the number of occupied beds as well as property taxes
accrued but not paid.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
INCOME TAXES
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes", which
significantly changes existing practice by requiring, among other things, a
liability approach to deferred income taxes. The Company adopted SFAS 109
effective June 1, 1993. The adoption of SFAS 109 had no significant impact on
the Company's accompanying financial statements.
STOCK SPLIT AND STOCK DIVIDEND
Effective January 6, 1996, the Board of Directors declared a 11.11% stock
dividend on outstanding shares of common stock. In addition, the Board of
Directors of the Company approved a reverse stock split with the ratio to be
determined at a later date. All references to issued and/or outstanding shares
and the weighted shares outstanding used in the calculations of net income per
share have been retroactively adjusted to reflect the 11.11% stock dividend and
a .6897 for one stock split.
INCOME (LOSS) PER SHARE
Income (loss) per share are computed based on the weighted average number of
common and common equivalent shares outstanding during the period. Common stock
equivalents include options to purchase common stock, assumed to be exercised
using the treasury stock method, and redeemable preferred stock. Income (loss)
per share have been retroactively adjusted to reflect the subsequent stock
dividends and stock splits.
2. LEASED FACILITIES
Effective January 1, 1993, Grant Park Nursing Home Limited Partnership (the
"Partnership"), an affiliate, leased Grant Park Care Center, a long-term care
facility, to the Company under an operating lease expiring in 2002 with two,
five year extensions at the Company's option. The lease calls for monthly rental
payments of $142,661 and provides for a sharing of profits until the Partnership
receives 50% of
F-38
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LEASED FACILITIES (CONTINUED)
any excess profits generated by the facility. Total rent expense for years ended
May 31, 1993, 1994 and 1995 was $812,700, $2,356,106 and $2,056,671,
respectively.
Effective October 1, 1993, the Company began leasing thirteen long-term care
facilities (the "Leased Facilities") from EBT HealthCare Properties, L.P.
("EBT"), an unrelated lessor, under operating leases having an initial term
expiring in 2006. Six of the leases call for fixed monthly lease payments and
seven of the leases require variable monthly payments. The leases expire at
various dates ranging from 2004 to 2006 plus two, five year extensions
exercisable at the Company's option. Rent is payable monthly, in advance, and
amounted to $2,320,538 and $3,840,979 for the years ended May 31, 1994 and 1995,
respectively. Eight of the Leased Facilities pay fees to an unrelated third
party for services related to their operation. The total of these fees paid in
1994 and 1995 was $399,640 and $677,202, respectively.
During 1994, the Company held in escrow funds provided by EBT for capital
improvements on the leased facilities. In fiscal 1994 and 1995, the cumulative
fundings received from EBT totaled $2,584,394 and $3,050,000, respectively,
which were held in escrow by the Company. As of May 31, 1994 and 1995,
$1,087,430 and $3,050,000, respectively, of the escrowed capital improvements
funds had been disbursed by the Company. Undisbursed capital improvement funds
are included in restricted cash and cash held in escrow in the accompanying 1994
balance sheet.
In July 1994, the Company began leasing Royal Terrace Nursing and
Rehabiltation Center ("Royal Terrace"), a long-term care facility, from an
unrelated lessor under an operating lease having an initial term of fourteen
years plus two, five year extensions exercisable at the Company's option. Rent
is payable in monthly installments of $58,711 and totaled $555,694 for the year
ended May 31, 1995.
In December 1994, the Company began leasing Ashton Woods Rehabilitation
Center, a long-term care facility, from an affiliated lessor under an operating
lease having an initial term of fourteen years plus two, five year extensions,
exercisable at the Company's option. Rent is payable in monthly installments of
$67,935 and totaled $338,677 for the year ended May 31, 1995. In connection with
this lease, the Company paid the lessor a deposit of $2,875,000 which is
refundable upon the termination of the lease. Additionally, the Company placed
approximately $1,000,000 in escrow, as required by the lessor, to be used for
capital improvements at this facility. This amount is included in restricted
cash in the accompanying consolidated 1995 balance sheet.
Minimum rent payments under all sixteen of the facility leases are
summarized as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------------------------------------------------------------ --------------
<S> <C>
1996.......................................................................... $ 6,816,328
1997.......................................................................... 6,816,328
1998.......................................................................... 6,816,328
1999.......................................................................... 6,816,328
2000.......................................................................... 6,816,328
Thereafter.................................................................... 36,666,830
--------------
$ 70,748,470
--------------
--------------
</TABLE>
Effective January 1, 1994, the Company began leasing employees at most of
its leased facilities, at cost, from an affiliated company. The Company's lease
agreement with the affiliate calls for monthly
F-39
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LEASED FACILITIES (CONTINUED)
payments in amounts equal to each facilities' payroll costs. This lease
agreement allowed the Company to lower workers' compensation insurance rates,
resulting in a net savings to the Company. Total employee leasing expense
incurred in 1994 and 1995 amounted to approximately $8,400,000 and $18,359,000,
respectively, and is included in nursing home expenses in the accompanying 1994
and 1995 consolidated statements of operations.
3. PATIENT ACCOUNTS AND THIRD-PARTY PAYOR SETTLEMENTS
Patient accounts and third party payor settlements receivable consist of the
following:
<TABLE>
<CAPTION>
MAY 31,
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
Patient accounts................................................ $ 4,175,582 $ 6,467,520
Third-party payor settlements................................... 23,160 218,183
------------- -------------
4,198,742 6,685,703
Allowance for doubtful accounts................................. -- 71,413
------------- -------------
$ 4,198,742 $ 6,614,290
------------- -------------
------------- -------------
</TABLE>
The Company generally does not require collateral or other security in
extending credit to patients; however, the Company routinely obtains assignments
of (or is otherwise entitled to receive) benefits receivable under the health
insurance programs, plans or policies of patients (e.g. Medicare, Medicaid,
commercial insurance and managed care organizations). Medicaid programs
accounted for approximately 94%, 83% and 69% of net patient service revenues
during 1993, 1994 and 1995, respectively. Accounts receivable and operating
revenue include amounts estimated by management to be reimbursable by Medicaid,
Medicare and other third-party programs under the provisions of cost
reimbursement formulas in effect. Final determination of amounts earned is
subject to audit by the intermediaries. In the opinion of management, adequate
provision has been made for any adjustments that may result from such audits.
Differences between estimated provisions and final settlement are reflected as
charges or credits to operating revenue in the year finalized.
Accounts receivable are recorded net of any contractual adjustments and
relate principally to amounts due from various Medicaid programs as well as
amounts due from Medicare and private payors. Receivables from Medicaid programs
were approximately as follows:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
District of Columbia............................................ $ 1,324,000 $ 1,466,000
Mississippi..................................................... 1,007,000 957,000
Louisiana....................................................... 428,000 440,000
Idaho........................................................... 210,000 204,000
Montana......................................................... 90,000 203,000
Georgia......................................................... -- 195,000
Kansas.......................................................... 48,000 193,000
Texas........................................................... 110,000 113,000
</TABLE>
F-40
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PATIENT ACCOUNTS AND THIRD-PARTY PAYOR SETTLEMENTS (CONTINUED)
Significant changes have and will continue to be made in government
reimbursement programs, and such changes could have a material impact on future
reimbursement formulas. Amounts due from Medicaid and Medicare programs are
generally paid within 30 to 90 days from date of billing and are subject to
final settlements in certain states.
4. TRANSACTIONS WITH RELATED PARTIES AND MANAGED FACILITIES
As of May 31, 1994, WelCare Management Services, Inc. ("WelCare Services"),
an affiliate of the Company, owed $612,061 to the Company for previous advances
and accrued management fees. During 1994 and prior years, WelCare Services
operated a long-term care facility known as Deluxe Care Inn under an operating
lease agreement. In 1994 and prior years, the Company had recorded a $419,026
reserve on these receivables resulting in a net receivable balance of $193,035
at May 31, 1994. During 1995, the Company advanced an additional $946,275 to
WelCare Services to purchase Deluxe Care Inn. In November 1994, the total amount
due from WelCare Services of $1,558,336 was formalized into an unsecured
promissory note bearing interest at 9% and payable at maturity, December 31,
1998. Under the terms of the note, the Company has the right to place a security
interest on any or all of WelCare Service's assets, including Deluxe Care Inn.
The property and equipment of the Deluxe Care Inn are currently encumbered under
a first mortgage with an unrelated party having an outstanding balance of
approximately $980,000. At May 31, 1995, based on improved operations at Deluxe
Care Inn, the Company determined that the receivable was fully collectible and
the associated reserve was charged to operations.
During 1992, the Company entered into employment agreements with three
officers which provide for salary continuation and non-competition with the
Company, subject to certain conditions.
The Company leases two long-term care facilities from related and affiliated
parties (see Note 2).
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at May 31, 1994 and 1995:
<TABLE>
<CAPTION>
MAY 31,
---------------------------
1994 1995
------------ -------------
<S> <C> <C>
Land............................................................. $ -- $ 739,259
Buildings and improvements....................................... -- 4,119,947
Equipment........................................................ 349,409 1,419,018
Furniture and fixtures........................................... 245,396 702,927
------------ -------------
594,805 6,981,151
Less accumulated depreciation.................................... (150,665) (318,589)
------------ -------------
$ 444,140 $ 6,662,562
------------ -------------
------------ -------------
</TABLE>
Effective December 1, 1994, the Company attained majority control of an
affiliated limited partnership (see Note 7) which owns and operates a long-term
care facility. The property and equipment of this
F-41
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT (CONTINUED)
subsidiary partnership was consolidated into the Company's financial statements
in 1995 and consisted of the following at May 31, 1995:
<TABLE>
<S> <C>
Land........................................................... $ 739,259
Buildings and improvements..................................... 3,875,243
Equipment, furniture and fixtures.............................. 807,646
----------
5,422,148
Less accumulated depreciation.................................. (86,938)
----------
$5,335,210
----------
----------
</TABLE>
6. NOTE RECEIVABLE
The Company has an unsecured note receivable, with an original balance of
$422,000, from an affiliate of the owner (the "Borrower") of a facility managed
by the Company. The note matures in 1998 and provides for annual payments of
principal and interest and allows for offsets of payments due from the Company
under a consulting agreement with the Borrower. Under the terms of the
consulting agreement, beginning June 30, 1994, the Borrower will earn annual
consulting fees ranging from $135,000 to $350,000 through the earlier of 2013 or
the termination of the facility management contracts with affiliates of the
Borrower. Any unpaid fees earned by the Borrower will reduce amounts outstanding
under the note receivable. During 1995, the Company incurred $249,583 of
consulting fees of which $137,500 were paid in cash with the remaining $112,083
reducing amounts outstanding under the note receivable.
7. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS
The Company through certain of its subsidiaries have various investments in
both public and private limited partnerships ranging from .499% to 3.992%
ownership interests. These partnerships own primarily long-term care facilities
and retirement centers. Investments in partnerships in which subsidiaries of the
Company own at least a 20% interest or where such subsidiaries serve as a
general partner are accounted for using the equity method. In its capacity as
general partner, such subsidiaries may be liable for the net liabilities of
these partnerships. Accordingly, the Company has recorded greater than its
proportionate share of partnership losses in instances where the limited
partners are not liable to fund their share of these losses. In such instances,
subsequent income is allocated first to the Company to the extent of losses
previously recorded in excess of the Company's pro-rata share of losses, based
upon its partnership interests.
As of May 31, 1994, the Company had a 33% ownership interest in a privately
held limited partnership which owns and operates a long-term care facility known
as Montclair Nursing Center ("Montclair") and accounted for this investment
under the equity method. During fiscal 1995, the Company acquired additional
limited partnership units bringing the Company's total ownership interest to
55%. Accordingly, the Company began consolidating this entity. Unaudited pro
forma consolidated results of operations of the Company for the years ended May
31, 1994 and 1995 are presented below (in thousands).
F-42
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS (CONTINUED)
Such pro forma presentation, combining the results of operations of Montclair
and the Company, has been prepared assuming that the acquisition had been
completed as of June 1, 1994:
<TABLE>
<CAPTION>
MAY 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Revenues............................................................... $ 47,223 $ 68,985
Net earnings........................................................... $ 5,750 $ 3,840
Net earnings per common share.......................................... $ 1.82 $ 1.06
</TABLE>
The Company's investment in unconsolidated partnerships is summarized as
follows:
<TABLE>
<S> <C>
BALANCE, MAY 31, 1992.......................................... $ (889,473)
Net loss..................................................... (2,750,534)
Amortization of investment over net assets................... (15,333)
Capital distributions........................................ (31,496)
-----------
BALANCE, MAY 31, 1993.......................................... (3,686,836)
Capital contributions........................................ 980,000
Net income................................................... 4,312,225
Amortization of investment over net assets................... (39,930)
Capital distributions........................................ (114,475)
-----------
BALANCE, MAY 31, 1994.......................................... 1,450,984
Capital contributions........................................ 1,390,000
Net income................................................... 430,543
Amortization of investment over net assets................... (64,308)
Capital distributions........................................ (460,471)
Consolidation of majority-owned partnership.................. (2,663,097)
-----------
BALANCE, MAY 31, 1995.......................................... $ 83,651
-----------
-----------
</TABLE>
Summarized financial information of the Partnerships is included in the
following schedule. The year end of the Partnerships is December 31. The
Partnerships have recorded summarized financial information on the basis of a
March 31 year end in order to allow for more current information relative to the
May 31 year end of the Company.
F-43
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS (CONTINUED)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------
1993 1994 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
ASSETS
Current assets............................ $ 14,902,234 $ 12,105,828 $ 22,527,386
Property and equipment.................... 57,852,467 35,926,920 13,111,777
Other assets.............................. 12,430,199 7,710,185 3,604,031
--------------- --------------- ---------------
$ 85,184,900 $ 55,742,933 $ 39,243,194
--------------- --------------- ---------------
--------------- --------------- ---------------
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities....................... $ 31,164,760 $ 23,201,585 $ 21,545,145
Long-term debt............................ 53,968,791 32,663,633 19,172,713
Other liabilities......................... 19,313,736 18,778,243 18,262,822
Partners' deficit......................... (19,262,387) (18,900,528) (19,737,486)
--------------- --------------- ---------------
$ 85,184,900 $ 55,742,933 $ 39,243,194
--------------- --------------- ---------------
--------------- --------------- ---------------
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------------------
1993 1994 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME (LOSS)
Revenue................................... $ 80,691,577 $ 56,821,143 $ 37,095,992
Loss from operations...................... (243,289) (1,705,055) (3,177,440)
Gain on sales of facilities............... -- 7,259,612 607,167
Extraordinary items....................... -- 7,213,550 14,746,767
Net income (loss)......................... (3,011,060) 11,158,801 12,910,363
Company's share of net income (loss)
before extraordinary items.............. (2,765,867) 1,733,341 (27,504)
Company's share of extraordinary items.... -- 2,538,954 393,739
</TABLE>
In fiscal 1995, three public partnerships in which the Company serves as
general partner were forgiven notes payable totaling approximately $7,213,000
and $14,760,000 in 1994 and 1995, respectively. The Company has recorded its
share of these items as an extraordinary item in the accompanying Statements of
Operations.
F-44
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
MAY 31,
--------------------------
1994 1995
----------- -------------
<S> <C> <C>
Mortgage note payable in monthly installments of principal and
interest totaling $40,851 through November 1997, interest
accrues at the U.S. Treasury Bond rate plus 3%, collateralized
by real estate.................................................. $ -- $ 4,138,195
Revolving line of credit agreement with a bank due in November
1995, interest accrues at 9% , collateralized by accounts
receivable (see Note 18)........................................ -- 1,000,000
Note to one of the Company's lessors, interest accrues on the note
at 6% with all accrued interest and outstanding principal
payable on October 20, 1998 (see Note 18)....................... 500,000 500,000
Promissory notes to two individuals payable in semi-annual
installments through July 1994.................................. 87,500 --
Subordinated Debentures, due April 2001, accruing interest at 20%
per annum, payable on a monthly basis, fully redeemed during
1995............................................................ 150,000 --
9.25% notes payable to certain stockholders due in April 1996,
collateralized by proceeds from the sale of zero coupon bonds
totaling $27,000 at May --]31, 1995............................. 26,250 26,250
----------- -------------
763,750 5,664,445
Less current maturities........................................... 87,500 1,106,910
----------- -------------
$ 676,250 $ 4,557,535
----------- -------------
----------- -------------
</TABLE>
Future maturities of long-term debt are summarized as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
1996........................................................................... $ 1,106,910
1997........................................................................... 89,108
1998........................................................................... 3,968,427
1999........................................................................... 500,000
-------------
$ 5,664,445
-------------
-------------
</TABLE>
9. REDEEMABLE PREFERRED STOCK
As of May 31, 1994, the Company had issued and outstanding, 205,541 shares
of $11.01 par value Series A voting preferred stock. The Series A shares earn
cumulative dividends of $.88 per share per annum and are convertible to common
at any time at the holder's option at a conversion multiple of 3.834. The shares
are subject to mandatory conversion by the Company in limited circumstances. The
holders of the Series A shares have the right to redeem one third of their
shares each December 1, 1996, 1997 and 1998 at the greater of par value or fair
market value as defined in the stockholder agreement.
F-45
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. REDEEMABLE PREFERRED STOCK (CONTINUED)
During July of 1994, the Company issued 328,892 shares of $8.74 par value
Series B voting preferred stock. Each Series B preferred share earns cumulative
dividends at $.49 per annum and is convertible into one share of common stock at
the holder's option. The Series B shares are also subject to mandatory
conversion in certain limited circumstances. The holder of the Series B shares
have the right to redeem one third of their shares each June 30, 1998, 1999 and
2000 at the greater of par value or fair market value as defined in the articles
of incorporation.
As of May 31, 1994, management's estimated redemption price of the Series A
preferred stock exceeded its issuance cost of $2,263,605 by $2,036,685. This
difference was accreted to preferred stock and charged against common
stockholders' equity. For the year ended May 31, 1995, an additional $2,012,578
was accreted to preferred stock based on the estimated redemption price of the
Series A and B shares as of May 31, 1995.
10. EQUITY TRANSACTIONS
In May 1989, the Company completed a private placement offering of 20 common
stock units at $10,000 per unit (the "Stock Units"), raising a total of
$200,000. Each Stock Unit consisted of 39,682 shares of common stock and a
collateralized interest-bearing note in the principal amount of $5,000.
On April 30, 1991, the Company made an offer to its shareholders to
repurchase the 20 Stock Units. The purchase price offered per unit was $20,000
which consisted of $10,000 cash and a $10,000 unsecured promissory note. During
1993 the Company purchased and subsequently retired 87,152 shares, of common
stock bringing the total number of shares retired, including shares retired
prior to 1993, from the initial private placement to 672,475. A total of $73,750
and $150,000 in notes payable were retired in conjunction with this offer
through May 31, 1994 and 1995, respectively.
On November 21, 1990, the Company issued warrants to two individuals to each
acquire 697,500 shares of outstanding common stock of a subsidiary in exchange
for total proceeds of $800,000. On August 17, 1992, the Company canceled the
warrants in exchange for promissory notes totaling $800,000. The promissory
notes are payable in semi-annual installments through July 1994. Amounts
outstanding under the note agreements totaled $87,500 as of May 31, 1994. The
notes were retired in July, 1994.
The Company initiated two non-qualified stock option plans for key
employees, officers and directors of the Company. As of May 31, 1994, the
Company has reserved 369,845 shares of common stock for issuance under these
plans. All of these shares are exercisable at a price which is less than
management's current estimate of the share value. 297,622 of the options are
exercisable immediately after the grant date and expire in five years. The
remaining options vest over a period of five years from the start date of
individual employment with the Company. No options have been exercised as of May
31, 1995.
In 1994 and 1995, the Company repurchased 169,049 and 79,366 shares of
common stock for $613,440 and $873,760, respectively. These shares were held as
treasury stock at May 31, 1994 and 1995 and were accounted for under the cost
method.
F-46
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES
The components of the provision for income taxes for fiscal 1993, 1994 and
1995 were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------- -------------
<S> <C> <C> <C>
Current
Federal......................................... $ 46,000 $ 1,330,000 $ 1,531,000
State........................................... 20,000 413,000 288,000
------------ ------------- -------------
66,000 1,743,000 1,819,000
------------ ------------- -------------
Deferred
Federal......................................... (330,000) 1,436,000 410,000
State........................................... 104,000 (7,000) 20,000
------------ ------------- -------------
(226,000) 1,429,000 430,000
------------ ------------- -------------
Total provision (benefit)................... $ (160,000) $ 3,172,000 $ 2,249,000
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
During fiscal 1993 and 1994, the Company utilized net operating loss
carryforwards of approximately $692,000 and $92,000, respectively, for federal
tax purposes. At May 31, 1994, the Company had no remaining federal net
operating loss carryforwards.
Deferred income taxes for the year ended May 31, 1993 result from timing
differences in the recognition of revenue and expense for tax and financial
reporting purposes. The source of these differences and their tax effects are as
follows:
<TABLE>
<CAPTION>
1993
-----------
<S> <C>
Tax losses from partnerships..................................................... $ 22,275
Net operating loss carryforward.................................................. 246,000
Accelerated depreciation methods................................................. 49,000
Accounts receivable valuation differences........................................ (40,000)
Other, net....................................................................... (51,000)
-----------
$ 226,275
-----------
-----------
</TABLE>
Deferred income taxes for the year ended May 31, 1994 and 1995 reflect the
net tax effect of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes, and amounts used for income
tax purposes. The sources of the temporary differences and their effect on the
deferred tax liability at May 31, 1994 and May 31, 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Tax losses from partnerships.................................... $ 1,138,000 $ 1,436,000
Accelerated depreciation methods................................ 88,000 157,000
Accounts receivable valuation differences....................... (139,000) (93,000)
Other, net...................................................... (8,000) 9,000
------------- -------------
$ 1,079,000 $ 1,509,000
------------- -------------
------------- -------------
</TABLE>
F-47
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. MANAGEMENT AGREEMENTS
The Company provides operational management services for 14 facilities under
long-term management contracts having remaining effective terms ranging from 17
to 20 years. Eight of these agreements are with third party owners and are
noncancellable without cause. Six of these agreements are with affiliated
partnerships in which the Company serves as general partner and can be
terminated without cause with sixty days notice. The management agreements
provide for the Company to receive annual fees equal to 6% of each facility's
gross revenues, payable on a monthly basis. Additionally, the Company performs
oversight management services for two facilities in which it oversees the
management of another management company. The Company typically receives a fee
of 1% of gross revenues for oversight management services.
During 1995, the Company purchased a management contract from the former
manager of a long-term care facility, which is currently owned by a consolidated
subsidiary of the Company, for a lump sum payment of $846,987.
13. CONTINGENCIES
Certain subsidiaries of the Company serve as general partners in both public
and private limited partnerships. As the general partner, such subsidiaries may
be liable for certain deficiencies which arise in meeting the terms of certain
loan obligations incurred by these partnerships and for operating expenses and
other liabilities incurred by these partnerships in the ordinary course of
business.
The Company has guaranteed a mortgage note up to $500,000 related to a
long-term care facility that it manages. The mortgage had an outstanding balance
of approximately $1,980,000 at May 31, 1995. The market value of this facility,
based on an independent appraisal, substantially exceeds the total amount of the
mortgage note.
14. COMMITMENTS
The Company is committed under a six year lease for office space which
expires in November 1999. Base monthly rental payments for the first twelve
months of the lease was $19,914 and escalates annually according to the rent
structure as stated in the lease. Rent expense for 1993, 1994 and 1995, net of
allocations of overhead costs to unconsolidated affiliates, was approximately
$109,000, $143,000 and $230,000, respectively. Minimum rent payments for future
years are approximately as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
1996........................................................................... $ 263,000
1997........................................................................... 272,000
1998........................................................................... 259,000
1999........................................................................... 295,000
2000........................................................................... 165,000
-------------
Total.................................................................... $ 1,254,000
-------------
-------------
</TABLE>
15. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company made cash payments totaling approximately $113,000, 242,000 and
$3,116,000 for income taxes and $44,118, $31,615 and $323,044 for interest
during 1993, 1994 and 1995, respectively.
F-48
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
(FORMERLY WELCARE INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUPPLEMENTAL CASH FLOW DISCLOSURES (CONTINUED)
In 1994, the Company converted management fee receivables totaling $191,507
to notes receivable.
In 1993, common stock purchase warrants totaling $800,000 were converted to
notes payable (See Note 10).
During 1995, the Company purchased a majority in interest in Montclair and
has included the accounts of this entity in its May 31, 1995 consolidated
financial statements. The aggregate net liabilities acquired, including the
minority partners' share of net liabilities, were as follows as of December 1,
1994 (the date of majority control):
<TABLE>
<S> <C>
Cash........................................................... $ 1,573,464
Accounts receivable............................................ 227,256
Other assets................................................... 95,900
Property and equipment......................................... 2,357,656
Accounts payable and accrued expenses.......................... (603,135)
Mortgage payable............................................... (4,163,138)
-----------
Net liabilities acquired....................................... $ (511,997)
-----------
-----------
</TABLE>
16. RECLASSIFICATION
Certain prior years amounts have been reclassified to conform with the 1995
presentation.
17. CONCENTRATION OF CREDIT RISK
At May 31, 1995, the Company had cash equivalents invested in bank
repurchase agreements totaling $1,459,309, cash invested in money market
accounts totaling $1,222,194 and cash in bank accounts which exceeded Federal
Depository Insurance Company limits by $271,878.
18. SUBSEQUENT EVENT
In August 1995, the Company entered into a line of credit with a bank which
allows the Company to borrow up to $5,000,000 for working capital needs and
$20,000,000 for acquisitions of nursing facilities and related businesses.
Initial fundings under the line totaled $2,500,000 which were utilized to retire
the Company's existing $1,000,000 line of credit, retire $500,000 in notes
payable and pay fees associated with the new line of credit. Outstanding
borrowings under the new line of credit accrue interest at variable rates based
on the London Interbank Offered Rate ("LIBOR"). Currently, the rate is 1.25% in
excess of LIBOR. The working capital portion of the line is due on July 31,
1997, and the acquisition portion converts to a 60-month term loan in August,
1997.
F-49
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Transitional Health Services, Inc.
We have audited the accompanying consolidated balance sheets of Transitional
Health Services, Inc. and subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Transitional
Health Services, Inc. and subsidiaries as of December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Louisville, Kentucky
July 3, 1996
F-50
<PAGE>
TRANSITIONAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER31,
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents (Notes 3 and 11)............................................. $ 12,689,277 $ 2,247,740
Receivables:
Resident accounts receivable, less allowance for doubtful accounts of $755,000
in 1994 and $5,491,000 in 1995 (Note 10)....................................... 11,411,152 19,172,913
Estimated settlements due from third-party payors............................... 1,207,052 --
Other receivables............................................................... 1,339,692 2,498,390
Recoverable income taxes........................................................ 815,000 158,000
------------- -------------
14,772,896 21,829,303
Inventories....................................................................... 770,013 990,773
Prepaid expenses.................................................................. 998,371 1,837,539
Deferred income taxes (Note 7).................................................... 485,000 4,088,000
------------- -------------
Total current assets................................................................ 29,715,557 30,993,355
Property and equipment (Notes 4 and 8):
Land.............................................................................. 1,154,511 1,343,112
Buildings and improvements........................................................ 14,370,103 15,780,167
Furniture and equipment........................................................... 2,567,472 3,427,976
Facilities and equipment leased under capital leases (Note 5)..................... 19,694,284 22,046,873
Construction in process........................................................... 526,755 1,291,201
------------- -------------
38,313,125 43,889,329
Less accumulated depreciation and amortization.................................... 1,797,173 3,875,073
------------- -------------
36,515,952 40,014,256
Other assets:
Goodwill, net of accumulated amortization of $770,696 in 1994 and $1,594,179 in
1995 (Note 4)................................................................... 32,677,334 29,274,554
Deferred income taxes (Note 7).................................................... 4,440,000 8,216,825
Restricted cash (Note 11)......................................................... 3,558,396 4,613,848
Other assets...................................................................... 1,679,204 3,552,023
------------- -------------
42,354,934 45,657,250
------------- -------------
Total assets........................................................................ $ 108,586,443 $ 116,664,861
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable.................................................................. $ 4,859,575 $ 9,870,444
Accrued salaries.................................................................. 2,167,669 3,401,928
Accrued payroll taxes............................................................. 579,099 1,947,831
Accrued workers compensation liabilities.......................................... 162,085 1,376,356
Accrued other..................................................................... 1,491,098 4,103,047
Income taxes payable.............................................................. 510,253 132,480
Estimated settlements due to third-party payors................................... -- 657,386
Current obligations related to acquisitions (Note 3).............................. 10,315,311 2,475,150
Current portion of mortgage debt (Note 8)......................................... 88,584 145,173
Current portion of capital lease obligations (Note 5)............................. 741,616 1,391,302
------------- -------------
Total current liabilities........................................................... 20,915,290 25,501,097
Long-term obligations:
Notes payable (Note 4)............................................................ 2,700,000 650,000
Heller line of credit (Note 10)................................................... -- 15,002,165
Noncurrent portion of capital lease obligations (Note 5).......................... 19,736,158 20,485,597
Mortgage debt (Note 8)............................................................ 9,903,260 13,421,176
Subordinated debt (Note 9)........................................................ 24,158,616 24,243,641
------------- -------------
Total long-term obligations......................................................... 56,498,034 73,802,579
Redeemable preferred stock, $1 par value; 160,000 shares authorized; 143,403 shares
issued and outstanding in 1994 (144,086 shares in 1995) (at aggregate liquidation
and redemption value) (Notes 12 and 15)........................................... 16,009,671 17,674,648
Stockholders' equity (deficiency)(Notes 12 and 15):
Common stock, $.01 par value; 20,000,000 shares authorized; 15,192,020 shares
issued and outstanding in 1994 (16,292,899 shares in 1995)...................... 151,920 162,929
Paid-in capital................................................................... 14,481,049 13,927,550
Retained earnings (deficit)....................................................... 530,479 (14,403,942)
------------- -------------
Total stockholders' equity (deficiency)............................................. 15,163,448 (313,463)
------------- -------------
Total liabilities and stockholders' equity (deficiency)............................. $ 108,586,443 $ 116,664,861
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-51
<PAGE>
TRANSITIONAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995
---------------- ----------------
<S> <C> <C>
Revenues:
Net patient service revenues (Note 3)....................................... $ 89,423,035 $ 127,545,610
Other....................................................................... 758,050 660,690
---------------- ----------------
90,181,085 128,206,300
---------------- ----------------
Costs and expenses:
Facilities operating expenses............................................... 64,298,066 102,578,013
Lease expense (Note 6)...................................................... 8,494,849 11,385,061
Corporate administrative costs.............................................. 9,140,740 15,568,516
Provision for doubtful accounts............................................. 176,440 4,736,419
Depreciation and amortization............................................... 2,412,070 3,245,758
Interest expense............................................................ 4,099,960 6,971,375
Write-off of goodwill (Note 4).............................................. -- 2,913,000
Merger related charges (Note 15)............................................ -- 3,355,404
---------------- ----------------
88,622,125 150,753,546
---------------- ----------------
Income (loss) before provision (credit) for income taxes and extraordinary
item........................................................................ 1,558,960 (22,547,246)
Provision (credit) for income taxes:
Current:
Federal income taxes...................................................... 314,000 --
State income taxes........................................................ 148,000 47,000
Deferred income taxes....................................................... 45,000 (7,659,825)
---------------- ----------------
507,000 (7,612,825)
---------------- ----------------
Income (loss) before extraordinary item....................................... 1,051,960 (14,934,421)
Extraordinary item, net of applicable income taxes
of $284,000 (Note 9)........................................................ (550,000) --
---------------- ----------------
Net income (loss)............................................................. $ 501,960 $ (14,934,421)
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes.
F-52
<PAGE>
TRANSITIONAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK RETAINED STOCKHOLDERS'
-------------------------- PAID-IN EARNINGS EQUITY
SHARES DOLLARS CAPITAL (DEFICIT) (DEFICIENCY)
------------- ----------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1994....... 9,840,000 $ 98,400 $ 9,572,800 $ 28,519 $ 9,699,719
Issuance of stock................. 5,427,020 54,270 6,494,320 -- 6,548,590
Redemption of common stock........ (75,000) (750) (85,500) -- (86,250)
Cancellation of warrant........... -- -- (10,000) -- (10,000)
Preferred stock dividends......... -- -- (1,490,571) -- (1,490,571)
Net income........................ -- -- -- 501,960 501,960
------------- ----------- -------------- --------------- ---------------
Balances at December 31, 1994..... 15,192,020 151,920 14,481,049 530,479 15,163,448
Issuance of stock (Notes 3, 12 and
15)............................. 1,100,879 11,009 1,667,662 -- 1,678,671
Note receivable issued for common
stock (Note 12)................. -- -- (528,480) -- (528,480)
Preferred stock dividends......... -- -- (1,692,681) -- (1,692,681)
Net loss.......................... -- -- -- (14,934,421) (14,934,421)
------------- ----------- -------------- --------------- ---------------
Balances at December 31, 1995..... 16,292,899 $ 162,929 $ 13,927,550 $ (14,403,942) $ (313,463)
------------- ----------- -------------- --------------- ---------------
------------- ----------- -------------- --------------- ---------------
</TABLE>
See accompanying notes.
F-53
<PAGE>
TRANSITIONAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1994 1995
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Income (loss) before extraordinary item........................................ $ 1,051,960 $ (14,934,421)
Adjustments to reconcile income (loss) before extraordinary item to net cash
provided (used) by operating activities:
Depreciation and amortization................................................ 2,412,070 3,245,758
Provision for doubtful accounts.............................................. 176,440 4,736,419
Write-off of goodwill........................................................ -- 2,913,000
Deferred income taxes........................................................ 45,000 (7,659,825)
Other........................................................................ (213,176) (168,676)
Increase (decrease) in cash resulting from changes in operating assets and
liabilities:
Resident accounts receivable............................................... (564,402) (12,498,180)
Estimated settlements due to or from third party payors.................... (378,855) 1,864,438
Other receivables.......................................................... (824,395) (793,698)
Recoverable income taxes................................................... (815,000) 657,000
Inventories................................................................ (406,172) (220,760)
Prepaid expenses........................................................... (272,824) (839,168)
Accounts payable........................................................... 233,322 5,010,869
Accrued expenses........................................................... (148,027) 6,429,211
Income taxes payable....................................................... 116,906 (377,773)
--------------- ---------------
Net cash provided (used) by operating activities............................... 412,847 (12,635,806)
INVESTING ACTIVITIES
Acquisitions of businesses (Note 3)............................................ (8,206,646) (222,139)
Acquisitions of property and equipment......................................... (11,427,783) (5,253,866)
Proceeds from sale of facility (Note 4)........................................ -- 4,400,000
Increase in other assets....................................................... (1,082,100) (1,536,945)
Increase in restricted cash.................................................... (734,092) (1,055,452)
--------------- ---------------
Net cash used by investing activities.......................................... (21,450,621) (3,668,402)
FINANCING ACTIVITIES
Proceeds from issuance of redeemable preferred stock........................... 5,150,300 --
Proceeds from issuance of common stock......................................... 5,150,300 145,630
Redemption of stock............................................................ (86,250) (666,004)
Proceeds from subordinated debt................................................ 25,300,000 --
Repayments of subordinated debt................................................ (10,120,000) --
Increase in Heller line of credit.............................................. -- 15,002,165
Proceeds from mortgage debt.................................................... 10,000,000 6,850,000
Payments on mortgage debt...................................................... (8,156) (5,075,495)
Payments on notes payable...................................................... -- (2,700,000)
Payments on capital lease obligations.......................................... (495,923) (953,464)
Obligations related to acquisitions............................................ (3,764,735) (6,740,161)
--------------- ---------------
Net cash provided by financing activities...................................... 31,125,536 5,862,671
--------------- ---------------
Net increase (decrease) in cash and equivalents................................ 10,087,762 (10,441,537)
Cash and equivalents at beginning of year...................................... 2,601,515 12,689,277
--------------- ---------------
Cash and equivalents at end of year............................................ $ 12,689,277 $ 2,247,740
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes.
F-54
<PAGE>
TRANSITIONAL HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Transitional Health Services, Inc. (THSI) was incorporated in 1993 as a
Delaware corporation to function as a parent holding company of two
whollly-owned corporate general partners (THS Partners I, Inc. and THS Partners
II, Inc.). Each partner is a Delaware corporation with a 50% ownership interest
in Transitional Health Partners d/b/a Transitional Health Services (THS), a
Delaware general partnership. On November 30, 1994, Paragon Rehabilitation, Inc.
became a wholly-owned subsidiary of THSI. In February 1995, Transitional
Financial Services, Inc. was incorporated in Delaware as a wholly-owned
financing subsidiary of THSI.
The consolidated financial statements include the accounts of each of the
above entities (together referred to herein as the "Company"). All intercompany
accounts and transactions have been eliminated from the consolidated financial
statements.
The Company is in the business of operating and managing nursing homes and
providing related healthcare services in the states of Arkansas, Florida,
Indiana, Kentucky, Michigan, Ohio, New Jersey, North Carolina, Tennessee, and
West Virginia.
As more fully discussed in Note 15, THSI merged with Centennial HealthCare
Corporation, formerly known as WelCare International, Inc., effective December
31, 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND EQUIVALENTS
The Company considers all short-term, highly liquid investments with
original maturities of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are principally comprised of amounts due from Medicare
and Medicaid for patient services, and represent a concentrated group of credit
for the Company; however, management does not believe there is credit risk
associated with these governmental agencies.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment is computed by the straight-line method based upon the
estimated useful lives of the assets (or terms of the leases, if shorter). The
estimated useful lives range principally from 35 to 40 years for buildings and
improvements, five to ten years for furniture and equipment, and ten to twenty
years for facilities and equipment leased under capital leases.
GOODWILL
Goodwill is being amortized on a straight-line basis over 40 years.
F-55
<PAGE>
TRANSITIONAL HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If this review indicates that the value of the
asset will not be recoverable as determined based on the indicated cash flows
related to the asset over its remaining life, then the carrying value of the
asset is reduced to its estimated fair value.
NET PATIENT SERVICE REVENUES
Net patient service revenues are reported at the estimated net realizable
amounts from residents, third-party payors, and others for services rendered.
Approximately 80% in 1994 and 79% in 1995 of the Company's net nursing home
revenues are derived from the Medicare and Medicaid programs.
Revenue under third-party agreements is subject to audit and retroactive
adjustment. Provisions for estimated third-party settlements are provided in the
period the related services are rendered. Estimated settlements from third party
payors in the accompanying consolidated balance sheets include estimated amounts
receivable for exceptions to the Medicare established routine cost limitations
for the reimbursement of costs exceeding these limitations. Differences between
the estimated settlement amounts accrued and final settlements are reported in
operations in the year of settlement. In the opinion of management, any
differences between the net revenue recorded and final determination will not
materially affect the consolidated financial statements.
INCOME TAXES
Income taxes are accounted for under the liability method of accounting.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE DISCLOSURES
The fair value of the Company's financial instruments approximates their
carrying value.
3. ACQUISITIONS OF BUSINESSES
On November 1, 1993, the Company purchased substantially all assets of
Cardinal Group's nursing home business, except for cash and accounts receivable.
The Company assumed obligations under leases, as well as other agreements
necessary to the operations of the business, and also assumed and immediately
repaid a 10% collateralized installment note that had a balance of $344,189 as
of November 1, 1993.
The purchase agreement contained a contingent purchase price feature that
required the Company to pay an amount based on the Company's ability to rebase
certain Medicaid rates. The Company recorded $9,000,000 of goodwill and
$9,000,000 of subordinated debt in 1993 with the expectation that the Company
would be required to pay the maximum purchase price specified in the agreement.
Uncertainties arose in 1994 with respect to the Indiana Medicaid reimbursement
system which resulted
F-56
<PAGE>
TRANSITIONAL HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS OF BUSINESSES (CONTINUED)
in the contingent purchase price feature of the agreement being renegotiated.
The renegotiated settlement resulted in a reduction in the purchase price of
$838,000. The $9,000,000 of subordinated debt and related interest obligation
were eliminated; however, the Company assumed an obligation of approximately
$8,162,000 to purchase and settle claims with Cardinal's vendors and
stockholders. At December 31, 1994, current obligations related to acquisitions
includes $4,400,169, representing the portion of the $8,162,000 not yet paid.
The renegotiated final purchase price was $26,667,000, of which $12,895,000
was paid in 1993 to Cardinal Group, $8,162,000 was paid or accrued in 1994 to
purchase and settle Cardinal's vendor and stockholder claims, $5,000,000 was
paid in 1993 to the majority stockholder of Cardinal Group, and $610,000 was
incurred as expenses in connection with the acquisition.
The allocation of the purchase price was finalized in 1994. Assets purchased
included inventories of $228,157, and property and equipment of $24,300,873
(including facilities leased under capital leases of $22,700,000). Goodwill of
$24,064,144 has been recorded in connection with the acquisition, and a
noncurrent deferred income tax asset was recorded for $4,565,000. This
represents the tax effect of temporary differences between assigned fair values
of assets and liabilities for financial reporting purposes and the tax bases of
such assets and liabilities. Capital lease obligations of $25,606,985 were
assumed in connection with the acquisition, and accruals of $1,150,000 were
recorded, which includes the $610,000 of expenses mentioned above.
On April 30, 1994, the Company purchased a 150 bed nursing home facility in
Cary, North Carolina for $7,633,188, of which $4,240,000 was allocated to land,
buildings and equipment and $3,393,188 was allocated to goodwill.
On November 30, 1994, the Company purchased all of the outstanding capital
stock of Paragon Rehabilitation, Inc. (Paragon), a therapy company headquartered
in Nashville, Tennessee. The purchase price was $6,832,000, including
acquisition expenses of $54,000. The purchase price was comprised of $6,332,000
of cash and $500,000 of the Company's stock (166,667 shares of common stock
valued at $250,000 and 2,500 shares of preferred stock valued at $250,000). A
majority of the cash purchase price was not paid until 1995. At December 31,
1994, current obligations related to acquisitions includes $5,915,142 for the
liability to sellers and cash and equivalents includes $5,500,000 of
certificates of deposit which collateralized a letter of credit securing payment
of the obligation.
Assets purchased included current assets of $3,446,715, property and
equipment of $161,602, and goodwill of $5,990,695. Liabilities assumed included
$2,767,016 of current payables and accruals, including the acquisition expenses
of $54,000 mentioned above.
A contingent purchase price of $1,500,000 was earned by the sellers in 1995
based on Paragon's adding revenue producing contracts. The contingent purchase
price was satisfied with issuance of the Company's common stock (426,374 shares
valued at $639,561), preferred stock (6,383 shares valued at $638,300) and cash
of $222,139.
On January 11, 1995, the Company began managing a 71 bed facility in Ann
Arbor, Michigan, and in June 1995 purchased the facility for $2,000,000. The
acquisition was financed with a $1,800,000 10.50% mortgage with the previous
owner.
F-57
<PAGE>
TRANSITIONAL HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS OF BUSINESSES (CONTINUED)
The above acquisitions have been accounted for as purchases and,
accordingly, the results of operations of the acquired businesses are included
in the consolidated statements of operations since the respective dates of
acquisition.
The following unaudited pro forma financial information gives effect to the
Paragon acquisition (the only significant acquisition not included for the
entire period) as if it had occurred on January 1, 1994. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the acquisition occurred on January 1, 1994:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-------------------
<S> <C>
Net revenues............................................................. $ 102,168,312
Income before extraordinary item......................................... $ 1,607,348
Net income............................................................... $ 1,057,348
</TABLE>
4. FACILITY TRANSACTIONS
On September 1, 1994, the Company opened the Rutherfordton, North Carolina
(Oak Grove) facility. This was a new facility with a cost of $2,700,000. The
facility is owned by a partnership which is 50%-owned by the Company. The
Company has an option, which it intends to exercise, to purchase the remaining
50% partnership interest on September 1, 1997 for a nominal price. Since the
Company has substantially all of the risks and rewards of ownership related to
this facility, the partnership has been consolidated with the accounts of the
Company, and the other 50% owner's share of earnings eliminated from the
Company's consolidated statements of operations.
The Oak Grove facility was originally financed with notes, including a
$2,145,000 first mortgage 10% interest-only note due March 1, 1995; a $400,000
second mortgage 12% interest-only note due September 1, 1996; and, a $155,000
10% unsecured interest-only note due March 1, 1995. These notes total $2,700,000
and are shown as noncurrent notes payable on the accompanying consolidated
balance sheet at December 31, 1994, since the Company had the ability and intent
to refinance the March 1, 1995 notes on a long-term basis with proceeds from the
Heller Financial arrangement discussed in Note 10. In December 1995, the Company
refinanced the Oak Grove facility with a $3,000,000 8.87% mortgage with a bank.
On October 31, 1994, the Company purchased the Greensboro, North Carolina
facility which was previously leased under a long-term capital lease. The
purchase price was $5,000,000 and the purchase was financed with mortgage debt.
In February 1995, the Company reached an agreement to sell the facility for
$4,400,000. In connection with the sale, the Company repaid the approximate
$5,000,000 of outstanding related mortgage debt.
On December 30, 1994, the Company purchased the Pikeville, Kentucky facility
which was previously leased under a short-term operating lease. The purchase
price was $3,650,000. The purchase was initially financed with subordinated
debt, and in July 1995 was refinanced with a $3,850,000 9.56% mortgage with a
bank.
In May 1995, the Company began managing a 70 bed facility in Little Rock,
Arkansas. The Company manages this facility for a fee. Revenues and expenses of
this facility are not included in the Company's consolidated statement of
operations. Management fee income in 1995 amounted to $41,466. The
F-58
<PAGE>
TRANSITIONAL HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FACILITY TRANSACTIONS (CONTINUED)
Company has an option to lease and under certain conditions purchase this
facility at some time in the future.
In October 1995, the Company opened a 90 bed nursing home facility in
Mecklenburg County, North Carolina. The Company includes all revenues and
expenses of this facility in its consolidated financial statements under a
management agreement that will be converted into a leasing arrangement.
During 1995, $2,913,000 of goodwill was written off on three underperforming
facilities.
5. CAPITAL LEASES
The Company leases seven facilities and related equipment under agreements
accounted for as capital leases. One of the leases expires in 2006 and the
remaining leases expire in 2013. Most of these leases include provisions for
contingent rental payments, and one lease provides the Company with an option to
renew after the initial lease term. Most leases also provide the Company a right
of first refusal option to purchase the facilities upon termination of the
leases. Under terms of the leases, the Company is required to pay all taxes,
insurance and maintenance expenses.
Rent escalation clauses in the capital leases are based on contingent
factors such as increases in the consumer price index, and have resulted in
increased current and future lease payments. Contingent rental payments were
$58,494 in 1994 and $72,444 in 1995. The escalation clauses have created lease
commitments as of December 31, 1995, to be paid in future years totaling
$1,138,261. These commitments are in addition to amounts reflected as an
obligation on the consolidated balance sheet at December 31, 1995.
Accumulated amortization of $1,275,633 at December 31, 1994, and $2,531,726
at December 31, 1995, related to facilities under capital leases is included in
accumulated depreciation and amortization in the accompanying consolidated
balance sheets.
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of December 31, 1995:
<TABLE>
<CAPTION>
NURSING
EQUIPMENT FACILITIES TOTAL
------------- -------------- --------------
<S> <C> <C> <C>
Years ending December 31,
1996........................................ $ 1,124,408 $ 2,468,250 $ 3,592,658
1997........................................ 1,103,542 2,468,250 3,571,792
1998........................................ 719,802 2,468,250 3,188,052
1999........................................ 115,116 2,468,250 2,583,366
2000........................................ 115,116 2,468,250 2,583,366
Thereafter.................................. 250,744 25,829,946 26,080,690
------------- -------------- --------------
Total minimum lease payments.................. 3,428,728 38,171,196 41,599,924
Less amount representing interest............. 676,044 19,046,981 19,723,025
------------- -------------- --------------
Present value of minimum lease payments....... 2,752,684 19,124,215 21,876,899
Current portion............................... 809,275 582,027 1,391,302
------------- -------------- --------------
Noncurrent portion............................ $ 1,943,409 $ 18,542,188 $ 20,485,597
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
F-59
<PAGE>
TRANSITIONAL HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OPERATING LEASES
The Company had eighteen nursing facilities and related equipment and office
space under operating leases at December 31, 1994. During 1995, the Company
leased five additional facilities bringing the total facilities under operating
leases at December 31, 1995 to twenty-three. Initial terms of these operating
leases expire on various dates through 2011. Most of these operating leases
include provisions for increases in lease payments and provide the Company with
an option to renew after the initial lease term. Most leases also provide the
Company a right of first refusal to purchase the facilities upon termination of
the leases. Under terms of most of the leases, the Company is required to pay
all taxes, insurance and maintenance expenses.
The total future minimum annual lease payments under operating lease
arrangements are as follows:
<TABLE>
<CAPTION>
NURSING
OFFICES FACILITIES TOTAL
------------- ---------------- ----------------
<S> <C> <C> <C>
Years ending December 31,
1996..................................... $ 375,289 $ 11,450,398 $ 11,825,687
1997..................................... 394,688 11,568,693 11,963,381
1998..................................... 361,176 11,679,271 12,040,447
1999..................................... 371,751 11,523,824 11,895,575
2000..................................... 286,316 11,534,877 11,821,193
Thereafter............................... 254,514 71,342,227 71,596,741
------------- ---------------- ----------------
$ 2,043,734 $ 129,099,290 $ 131,143,024
------------- ---------------- ----------------
------------- ---------------- ----------------
</TABLE>
Rent expense under operating leases amounted to $8,018,211 for 1994
(including $96,034 of contingent rent expense) and $10,425,116 in 1995
(including $281,631 of contingent rent expense).
7. INCOME TAXES
Components of the Company's deferred income tax assets (liabilities) are as
follows:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Tax effects of:
Allowances for uncollectible receivables...................... $ 396,000 $ 2,688,000
Liabilities not deductible for tax purposes................... 89,000 1,400,000
------------- -------------
Current deferred income tax asset............................... $ 485,000 $ 4,088,000
------------- -------------
------------- -------------
Tax effects of:
Net operating loss carryforwards.............................. $ -- $ 3,924,825
Tax basis receivables in excess of book....................... 2,605,000 2,549,000
Net effect of capital leases.................................. 1,485,000 1,054,000
Goodwill write-off............................................ -- 1,460,000
Other......................................................... 350,000 (771,000)
------------- -------------
Net noncurrent deferred income tax asset........................ $ 4,440,000 $ 8,216,825
------------- -------------
------------- -------------
</TABLE>
The Company expects the deferred tax assets will be realized from future
taxable income of the merged company (see Note 15).
F-60
<PAGE>
TRANSITIONAL HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The reconciliation of the provision (credit) for income taxes computed at
the U.S. federal statutory tax rate to amounts shown on the accompanying
consolidated statements of operations before extraordinary item is as follows:
<TABLE>
<CAPTION>
1994 1995
----------- --------------
<S> <C> <C>
Tax at U.S. statutory rate....................................... $ 530,046 $ (7,666,064)
State income tax, net of federal effect.......................... 44,880 (513,916)
Expenses for which no tax benefit has been recorded.............. 19,897 397,804
Other, net....................................................... (87,823) 169,351
----------- --------------
Provision (credit) for income taxes.............................. $ 507,000 $ (7,612,825)
----------- --------------
----------- --------------
</TABLE>
As of December 31, 1995, the Company has approximately $11,379,000 of
federal net operating loss carryforwards available to offset future taxable
income through 2010. In addition, the Company has approximately $69,000 in
alternative minimum tax loss carryforwards, $305,000 of federal targeted jobs
tax credit carryforwards, and various state net operating loss carryforwards.
8. MORTGAGE DEBT
At December 31, 1994, the Company had $9,991,884 of mortgage debt
outstanding, including a noncurrent portion of $9,903,260 and a current portion
of $88,584.
At December 31, 1995, the Company has $13,566,349 of mortgage debt
outstanding, including a noncurrent portion of $13,421,176 and a current portion
of $145,173. The mortgage debt requires monthly payments in total of
approximately $129,000. The debt agreements are for five to twenty year periods,
with amortization periods ranging from twenty to twenty-five years. Interest
rates on the mortgages range from 8.87% to 10.50%. Balloon payments are due as
follows: 1999, $4,728,419; 2002, $3,490,152; and 2003, $2,692,201. The mortgage
debt is secured by four facilities with a total net book value of $11,850,476 at
December 31, 1995.
9. SUBORDINATED DEBT
In 1994, subordinated debt with a face amount of $25,300,000 was issued,
replacing subordinated debt issued in 1993 with a face amount of $10,000,000
which was retired. Early extinguishment of the 1993 debt resulted in an
extraordinary charge in November 1994 of $550,000 after a related tax credit of
$284,000.
The $25,300,000 of subordinated debt was issued in two installments. On
November 28, 1994, 10.8% senior subordinated notes due October 30, 2002 in the
face amounts of $16,833,000 and $817,000 were issued, payable to WCAS II and CID
III, respectively. Common stock was issued in connection with the issuance of
the 10.8% notes (765,527 shares valued at $1,148,291), resulting in an original
issue discount of $1,148,291. Accretion of the discount is being charged to
interest expense, raising the effective rate to approximately 12% on the notes.
On December 28, 1994, 11.7% senior subordinated notes due October 30, 2002 in
the face amounts of $7,500,000 and $150,000 were issued, payable to WCAS II and
CID III, respectively.
F-61
<PAGE>
TRANSITIONAL HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBORDINATED DEBT (CONTINUED)
Interest is due quarterly on the senior subordinated notes. The Company has
an option to prepay all or a portion of the notes at any time without penalty or
premium. Upon proper notice, scheduled mandatory prepayments beginning October
31, 2000 and each October thereafter are required to retire one-third of the
original aggregate principal amount of the notes (or, if less, the entire
outstanding principal amount of the notes). Mandatory prepayment of some or all
of the notes is also required if the Company undertakes a public offering or if
there is a change in control of the Company. Mandatory prepayment was waived in
connection with the merger discussed in Note 15.
In December 1994, a 12% junior subordinated note with a principal balance of
$120,000 was retired. The note was payable to a minority stockholder of the
Company.
10. ACCOUNTS RECEIVABLE FINANCING
On February 24, 1995, the Company closed a three-year $15,000,000 working
capital line of credit facility with Heller Financial. The line is supported by
resident accounts receivable and requires interest at 1% over prime. Terms of
the agreement require the Company to maintain certain financial ratios on a
monthly basis and to comply with certain covenants and conditions. The Company
was not in compliance with certain terms of the agreement as of December 31,
1995. See Note 16 for changes to the Heller Financial credit facility subsequent
to December 31, 1995.
11. COMMITMENTS AND CONTINGENCIES
In March 1994 the Company agreed to guarantee mortgage indebtedness of two
unrelated entities that lease five nursing facilities to the Company. The
outstanding principal balance of the debt amounted to approximately $16,460,000
at December 31, 1995.
At December 31, 1994, the Company had $9,058,396 of cash collateralizing
letters of credit. Of this amount, $5,500,000 was in cash and equivalents
collateralizing an acquisition obligation described in Note 3, $3,055,470 was in
restricted cash as collateral for various lease agreements, and $502,926 was in
restricted cash as collateral for a worker's compensation insurance arrangement.
At December 31, 1995, restricted cash of $4,613,848 collateralized letters of
credit issued by a bank in connection with various facility lease agreements, a
worker's compensation insurance arrangement, and certain other agreements.
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 THS and the factor. It is the belief of management that this lawsuit as well
as other claims and actions that the Company is a party to in the normal course
of business will be resolved without a material adverse effect on the Company's
financial position, results of operations or liquidity.
12. CAPITAL STOCK
The preferred stock is nonvoting and requires dividends of $12 per share
annually. Dividends are cumulative and accrue from the date of issue of the
preferred stock. The preferred stock may be redeemed in whole or in part at any
time at a redemption price of $100 per share. On December 31, 2003, the Company
must redeem all the shares of preferred stock then outstanding at a redemption
price of $100 per share. The preferred shares have a liquidation value of $100
per share. The liquidation and
F-62
<PAGE>
TRANSITIONAL HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CAPITAL STOCK (CONTINUED)
redemption value at December 31, 1994 and 1995 includes $1,669,371 and
$3,266,048 of accrued dividends, respectively.
A minority stockholder of the Company had a warrant to purchase up to
1,060,000 shares of common stock at $1 per share at any time prior to October
31, 2000. On October 20, 1994, the Company entered into an agreement with the
minority stockholder to purchase 75,000 shares of his common stock on December
1, 1994 at $1.15 per share, to purchase 4,400 shares of his preferred stock for
$440,000 on April 1, 1995, to purchase the 12% junior subordinated note of
$120,000 on December 1, 1994, to cancel the warrant described above, and to
grant options to purchase 300,000 shares of common stock at $1.15 per share. In
December 1995, the Company agreed to issue 330,300 shares of common stock at
$1.60 per share to the minority stockholder in exchange for a note receivable.
The stock was issued to replace stock options canceled in connection with the
merger discussed in Note 15. The $528,480 note requires interest at prime plus
1% until maturity on December 31, 2005. The principal amount of the note has
been charged to paid in capital with the corresponding common stock reported as
issued and outstanding.
The Company had three stock option plans:
Plan (a)--The Transitional Health Services Non-Qualified Stock Option Plan
under which 692,000 shares of the Company's common stock were reserved for
issuance.
Plan (b)--The Transitional Health Services Senior Executive Performance
Non-Qualified Stock Option Plan under which 692,000 shares of the Company's
common stock were reserved for issuance.
Plan (c)--The Transitional Health Services Outside Directors Non-Qualified
Stock Option Plan under which options for shares of the Company's common stock
could be issued to each member of the Company's Board who were not employed by
the Company or any of its principal stockholders (up to a maximum of 48,000
shares of the Company's common stock).
The following table sets forth stock option activity:
<TABLE>
<CAPTION>
PLAN (A) PLAN (B) PLAN (C)
--------- --------- -----------
<S> <C> <C> <C>
Options outstanding at December 31, 1993.......................................... 262,500 442,800 24,000
Options granted at $1.00 to $1.50 per share....................................... 402,500 149,200 --
Options canceled.................................................................. (40,000) (24,600) --
--------- --------- -----------
Options outstanding at December 31, 1994.......................................... 625,000 567,400 24,000
Options granted at $1.50 per share................................................ 75,000 20,000 --
Options exercised................................................................. (34,000) (19,680) (14,400)
Options canceled.................................................................. (346,000) (234,960) (9,600)
Options canceled upon cash payment by the Company................................. (98,000) (142,680) --
Options canceled upon receiving stock or successor company options................ (222,000) (190,080) --
--------- --------- -----------
Options outstanding at December 31, 1995.......................................... -- -- --
--------- --------- -----------
--------- --------- -----------
</TABLE>
Prior to the merger discussed in Note 15, a majority of the Company's issued
and outstanding common stock had been owned by Welsh, Carson, Anderson & Stowe
VI, L.P. (WCAS VI). WCAS VI's general partner is WCAS VI Partners, a general
partnership comprised of individual members of Welsh, Carson, Anderson & Stowe.
F-63
<PAGE>
TRANSITIONAL HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. 401(K) PLAN
On January 1, 1994, the Company established a 401(k) plan for all employees
not governed by a collective bargaining agreement. Employees of the Company on
January 1, 1994, were eligible to participate. Employees hired after January 1,
1994 could join the plan after completing one year of service and reaching age
21. Employees could defer up to 20% of their salary, subject to the maximum
permitted by law. The Company, at its discretion, has matched a portion of the
employee's contribution. Employee contributions are vested immediately. Employer
contributions vest over time. The Company contributed approximately $47,000 to
the plan in 1994 and $69,000 to the plan in 1995.
14. SUPPLEMENTARY CASH FLOW INFORMATION
The purchase of Paragon Rehabilitation, Inc. (see Note 3), the acquisition
of the Ann Arbor facility in 1995 (see Note 3) and the acquisition of the Oak
Grove facility in 1994 (see Note 4) were accomplished primarily through noncash
investing and financing transactions. In addition to these noncash transactions,
the Company entered into new capital leases in 1994 totaling $1,344,284 and in
1995 totaling $2,352,589.
Cash paid for interest was $4,000,888 in 1994 and $6,627,379 in 1995. Cash
paid for income taxes was $1,049,359 in 1994. Cash refunds for income taxes
amounted to $698,031 in 1995.
15. MERGER WITH CENTENNIAL HEALTHCARE CORPORATION
Effective December 31, 1995, THSI has merged with Centennial HealthCare
Corporation, formerly known as WelCare International, Inc. The combined
companies will operate under the name of Centennial HealthCare Corporation
("Centennial") with headquarters in Atlanta, Ga. In connection with the merger,
shares of the Company's common stock were converted into shares of special
voting common stock of Centennial. Also, shares of the Company's redeemable
preferred stock were converted into shares of Series C preferred stock of
Centennial. For accounting purposes, Centennial is considered the acquirer.
Centennial will include THSI in its consolidated financial statements at
December 31, 1995.
Centennial began operations in 1989 and, pre-merger, operated 39 long-term
care, subacute and rehabilitation centers in 17 states and the District of
Columbia. Post-merger, Centennial operates 76 long-term care and subacute
facilities with approximately 8,000 beds in 19 states and the District of
Columbia.
Various costs and expenses were incurred in connection with the merger
(severance pay, compensation payments in connection with "change of control"
provisions in stock option agreements, investment banker fees, attorney fees,
accounting fees, estimated sublease losses and the write-off of certain assets).
These costs and expenses have been reflected as a separate line on the
accompanying 1995 consolidated statement of operations. Certain of these merger
costs are not deductible for income tax purposes, which has an impact on the
Company's 1995 effective tax rate.
Immediately preceding the merger, WCAS VI was issued a $365,000 convertible
note, which provided for conversion rights at any time. The convertible note was
converted on December 31, 1995. Accordingly, 228,125 shares of common stock were
issued to WCAS VI. The $365,000 due from WCAS VI in connection with this
transaction is included in other receivables in the accompanying consolidated
balance sheet as of December 31, 1995.
F-64
<PAGE>
TRANSITIONAL HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS
In March 1996, certain terms of the $15,000,000 Heller accounts receivable
line were revised, and the Company entered into a term loan with Heller for an
additional $5,000,000. The term loan is secured by accounts receivable, bears
interest at 1.75% over prime and is repayable over a ten month period at
$500,000 per month beginning in the second month of the agreement.
Centennial received, subsequent to December 31, 1995, commitments for a new
long-term credit facility to be used for various purposes including repayment
and elimination of its credit facilities, including the Company's Heller credit
facility. Accordingly, amounts borrowed under the Heller credit facility are
classified as long-term in the accompanying consolidated balance sheet as of
December 31, 1995.
F-65
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 8
Use of Proceeds................................ 14
Dividend Policy................................ 15
Capitalization................................. 16
Dilution....................................... 17
Selected Consolidated Financial Data........... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................ 19
Business....................................... 34
Management..................................... 50
Certain Transactions........................... 60
Principal Shareholders......................... 62
Description of Capital Stock................... 64
Shares Eligible for Future Sale................ 68
Underwriting................................... 70
Legal Matters.................................. 72
Experts........................................ 72
Additional Information......................... 72
Index to Financial Statements.................. F-1
</TABLE>
--------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
4,000,000 SHARES
[LOGO]
COMMON STOCK
-------------
PROSPECTUS
-------------
ALEX. BROWN & SONS
INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MORGAN STANLEY DEAN WITTER
EQUITABLE SECURITIES CORPORATION
June , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses (other than underwriting commissions) of the sale of the
shares of Common Stock are as follows:
<TABLE>
<S> <C>
Registration Fee..................................................... $ 21,432.00
NASD Filing Fee...................................................... 7,572.50
NASDAQ Application Fee...............................................
Blue Sky Fees and Expenses...........................................
Printing and Engraving...............................................
Transfer Agent's Fees and Expenses...................................
Legal Fees and Expenses..............................................
Accounting Fees and Expenses.........................................
Miscellaneous Disbursements.......................................... $
-------------
TOTAL............................................................ $1,300,000.00
-------------
-------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Georgia Business Corporation Code ("GBCC") permits a corporation to
eliminate or limit the personal liability of a director to the corporation or
its shareholders for monetary damages for a breach of duty, provided that no
provision shall eliminate or limit the liability of a director for: an
appropriation of any business opportunity of the corporation; any act or
omission which involves an intentional misconduct or a knowing violation of law;
any transaction from which the director derives an improper personal benefit; or
any distribution that is illegal under Section 14-2-832 of the GBCC. The
Company's Articles contain a provision which limits the liability of a director
to the Company or its shareholders for any breach of duty as a director except
for a breach of duty for which the GBCC prohibits such limitation of liability.
This provision does not limit the right of the Company or its shareholders to
seek injunctive or other equitable relief not involving monetary damages.
The Company's Articles and Bylaws contain certain provisions which provide
indemnification to directors of the Company that is broader than the protection
expressly mandated in Sections 14-2-852 and 14-2-857 of the GBCC. If a director
or officer of the Company has been wholly successful, on the merits or
otherwise, in the defense of any action or proceeding brought by reason of the
fact that such person was a director or officer of the Company, Sections
14-2-852 and 14-2-857 of the GBCC would require the Company to indemnify such
person against expenses (including attorneys' fees) actually and reasonably
incurred in connection therewith. The GBCC expressly allows the Company to
provide for greater indemnification rights to its officers and directors,
subject to shareholder approval.
The indemnification provisions in the Company's Articles and Bylaws require
the Company to indemnify and hold harmless each of its directors, officers,
employees and agents to the extent that he or she is or was a party, or is
threatened to be made a party, to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative by
reason of the fact that such person is or was a director, officer, employee or
agent of the Company, against expenses (including, but not limited to,
attorneys' fees and disbursements, court costs and expert witness fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by such person in connection with the action, suit or proceeding.
Indemnification would be disallowed under any circumstances where
indemnification may not be authorized by action of the board of directors, the
shareholders or otherwise, including any liability of a director for: (i) any
appropriation, in violation of his duties, of any business opportunity of the
Company; (ii) any acts or omissions involving intentional misconduct or a
knowing violation of the law; (iii) any unlawful distribution as set forth in
Section 14-2-832 of the GBCC; or (iv) any
II-1
<PAGE>
transaction from which the director received an improper personal benefit.
Indemnified persons would also be entitled to have the Company advance expenses
prior to the final disposition of the proceeding. If it is ultimately determined
that they are not entitled to indemnification, however, such amounts must be
repaid.
Pursuant to Laurence W. Lepley's employment agreement with the Company dated
December 1, 1994, the Company is obligated to indemnify Mr. Lepley to the
fullest extent permitted under Delaware law, which is the state of incorporation
of both Paragon (for whom Mr. Lepley serves as President) and Transitional.
The Company has the power, under its Bylaws, to obtain insurance on behalf
of any director, officer, employee or agent of the Company against any liability
asserted against or incurred by such person in any such capacity, whether or not
the Company has the power to indemnify such person against such liability at
that time under the Articles, Bylaws or the GBCC.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The share numbers presented below do not reflect the conversion of such
shares into Common Stock or the .6897-for-1.0 reverse stock split to occur on
the effective date with respect to all shares of capital stock outstanding
before the Offering.
The Company sold 50,000 shares of its Series D Preferred Stock, $1.00 par
value per share, effective January 31, 1997, at a price of $100 per share, for
an aggregate cash purchase price of $5,000,000. These shares were acquired by
South Atlantic Venture Fund II Limited Partnership, South Atlantic Venture Fund
III Limited Partnership, Welsh, Carson, Anderson & Stowe VI, L.P., WCAS
Healthcare Partners, L.P., Horizon Investment Associates II and certain
individuals affiliated with these entities.
The Company sold, effective January 31, 1997, 50,000 shares of its Series E
Preferred Stock, $1.00 par value per share, in units of one share of Series E
Preferred Stock and 1.85102 shares of its Common Stock, $.01 par value per
share, for a per unit price of $100 and an aggregate cash purchase price of
$5,000,000. These shares were acquired by South Atlantic Venture Fund II Limited
Partnership, South Atlantic Venture Fund III Limited Partnership and WCAS
Capital Partners II, L.P.
Pursuant to a private placement memorandum dated December 31, 1995 (the
"PPM"), the Company issued an aggregate of 3,838,219 shares of Special Voting
Common Stock, no par value per share (the "Special Voting Common Stock"), and
144,086 shares of Series C Preferred Stock, $1.00 par value per share (the
"Series C Preferred Stock"), to the stockholders of Transitional Health
Services, Inc. ("Transitional") in connection with the merger of Transitional
with and into a wholly-owned subsidiary of the Company, with Transitional
surviving the merger (the "Transitional Merger"). At the effective time of the
Transitional Merger, each outstanding share of Transitional's common stock was
converted into the right to receive .235521068 shares of Special Voting Common
Stock. The Special Voting Common Stock included 93,289 shares later issued
pursuant to incentive stock options to certain former Transitional option
holders.
In addition, pursuant to the PPM, the Company issued 232,164 shares of its
Common Stock and 426,327 shares of Special Voting Common Stock pursuant to a
stock dividend declared effective January 5, 1996 as a condition to the
Transitional Merger. These shares were placed into an escrow account to be held
in escrow as indemnification for the settlement of post-closing purchase price
adjustments resulting from, imposed upon or incurred by either Centennial or
Transitional. The Centennial shareholders before the Transitional Merger (the
"Centennial Holders") placed 232,164 shares of Common Stock and the shareholders
of Transitional before the Transitional Merger ("THS Holders") placed 426,327
shares of Special Voting Common Stock into the escrow. On January 31, 1997, Mr.
Eaton as representative of the Centennial Holders (the "Centennial Agent") and
Mr. Paul as representative of the THS Holders (the "THS Agent") entered into a
settlement agreement (the "Settlement Agreement")
II-2
<PAGE>
whereby the parties agreed to settle any and all claims for indemnification by
having the THS Holders transfer shares of Special Voting Common Stock or cash in
lieu thereof at a value for such purpose of $8.40 per share. The Centennial
Holders received cash or shares of Special Voting Common Stock as designated in
the Settlement Agreement. The THS Holders transferred 85,816 shares of Special
Voting Common Stock to the Centennial Holders and $1.83 million cash in lieu
thereof to the Centennial Holders.
On July 28, 1994, South Atlantic Venture Fund II, Limited Partnership and
South Atlantic Venture Fund III, Limited Partnership acquired 328,892 shares of
the Company's Series B Preferred Stock, $8.7377 par value per share, for an
aggregate purchase price of $2,873,760.
From December 31, 1995 through May 1, 1996, the Company sold a total of
419,442 shares of Common Stock to directors, key officers and consultants of the
Company. These sales were made pursuant to the exercise of options granted by
the Company under its Stock Option Plans to such directors, key officers and
consultants. The option exercise prices ranged from $.2944 to $5.40 per share.
The aggregate consideration received by Centennial for these shares of Common
Stock was $531,778.76.
Each of these transactions was completed without registration of the
relevant security under the Securities Act of 1933, as amended (the "Securities
Act") in reliance upon the exemptions provided by Section 4(2) of the Securities
Act and the rules and regulations promulgated thereunder on the basis that such
transactions did not involve a public offering, the purchasers were
sophisticated with access to the kind of information registration would provide
and that such purchasers acquired the securities without a view toward the
distribution thereof.
ITEM 16(A). EXHIBITS
The following documents are filed as exhibits to this Registration
Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Third Amended and Restated Articles of Incorporation
3.2 Amended and Restated Bylaws
4.1 Article III of Registrant's Third Amended and Restated Articles of Incorporation
4.2 Article V of Registrant's Third Amended and Restated Articles of Incorporation
4.3 Specimen Common Stock Certificate
5.1 Form of Opinion of Nelson Mullins Riley & Scarborough, L.L.P.
10.1 WelCare International, Inc. 1994 Employee Stock Option Plan
10.2 WelCare International, Inc. 1996 Executive Stock Plan
10.3 WelCare International, Inc. 1996 Employee Stock Option Plan
10.4 Centennial HealthCare Corporation 1997 Stock Option Plan
10.5 Amended and Restated Credit Agreement dated December 18, 1996 by and among Centennial HealthCare
Corporation and the Borrowers named therein, the Lenders named therein, and Core States Bank, N.A., as
agent for the Lenders
10.6 Amended and Restated Employment Agreement between WelCare International, Inc. n/k/a Centennial
HealthCare Corporation ("CHC") and J. Stephen Eaton dated December 31, 1995
10.7 Employment Agreement between Transitional Health Partners ("THP") and Laurence W. Lepley, Jr. dated
December 1, 1994
10.8 Registration Rights Agreement dated December 31, 1995 by and between CHC and the Shareholders as defined
therein, as amended
10.9 Lease between Grant Park Nursing Home L.P. and WelCare Acquisition Corp. n/k/a Centennial Acquisition
Corporation ("CAC") commencing on January 1, 1993
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.10 Amended and Restated Lease Agreement by and between International Health Care Properties XXVII, L.P. and
WelCare International Properties Corporation n/k/a Centennial HealthCare Properties Corporation
("CHPC") dated October 4, 1994
10.11 Amended and Restated Lease Agreement by and between Ashton Woods Limited Partnership and WelCare/Ashton
Properties, Inc. n/k/a Centennial/Ashton Properties Corporation ("CAPC"), dated December 20, 1994
10.12 Amended and Restated Lease Agreement by and between EBT Healthcare Properties, L.P. and CHPC dated July
6, 1994
10.13 Operating Lease by and between Health Care Property Investors, Inc. and Cardinal of Indiana, Inc., as
amended by that certain Amendment to Operating Lease dated November 1, 1993, as amended by that
certain Second Amendment to Operating Lease dated April 1, 1994, as amended by that certain Third
Amendment to Operating Lease dated March 31, 1995, as amended by that certain Fourth Amendment to
Operating Lease dated January 1, 1996, as assigned.
10.14 Lease Agreement by and between Brownsboro Hills Nursing Home, Inc. and Brownsboro Hills Plaza and THP
dated August 17, 1995
10.15 Lease Agreement by and between Elderberry Nursing Home, Inc. and Cardinal of Kentucky, Inc. dated March
10, 1993, as assigned
10.16 Lease Agreement by and between Healthcare Realty Trust Incorporated and Cardinal Development Co., Inc.
("Cardinal"), as amended by that certain Amendment Number One to Lease Agreement dated November 1,
1993, as assigned to THP pursuant to that certain Lease Assignment, Consent and Release dated March 1,
1994
10.17 Lease Agreement by and between Auerbach/Conner and Cardinal of Kentucky, Inc. dated March 29, 1991, as
assigned
10.18 Lease Agreement by and between House Investments -- Nursing Homes Partners I and THP dated November 1,
1993
10.19 Lease Agreement by and between THP and Willowbrook Health Care Center, Inc., dated January 20, 1995
10.20 Operating Lease by and between HCPI Charlotte, Inc. and THP dated June 19, 1995
10.21 Lease Agreement by and between Elderberry Nursing Home, Inc. and Cardinal of Kentucky, Inc. dated June
3, 1991, as assigned
10.22 Lease Agreement by and between Sheridan Health Care Center, Inc. and Cardinal Development Co. dated
April 27, 1989, as amended pursuant to that First Amendment to Lease Agreement dated August 5, 1992,
as amended pursuant to that Second Amendment dated October 25, 1993, as assigned
10.23 Lease Agreement by and between Odell Investors I, Limited Partnership and THP dated October 5, 1995
10.24 Lease Agreement by and between Pomeroy Health, Inc. and THP dated May 22, 1995
10.25 Lease Agreement by and between Wilora Lake Health Care Center, Inc. and THP, dated March 1, 1996
10.26 Lease Agreement dated October 1, 1996 by and between Calhoun-Liberty Hospital Association, Inc. and
Centennial HealthCare Investment Corporation ("CHIC")
10.27 Amended and Restated Long Term Care Facility Management Agreement by and between CHPC and Centennial
HealthCare Management Corporation ("CHMC") dated July 6, 1994
10.28 Amended and Restated Management Agreement by and between Montclair Medical Investors, Ltd., and CHMC
dated January 1, 1995
10.29 Long Term Care Facility Management Agreement by and between International Health Care Properties XX,
L.P., and CHMC dated April 1, 1993
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.30 Management Agreement by and between International Health Care Properties VII & VIII, L.P., and CHMC
dated January 1, 1992
10.31 Management Agreement by and between Consolidated Resources Health Care Fund VI, and CHMC dated January
1, 1992
10.32 Long-Term Care Facility Management Agreement by and between CHMC and THP dated as of January 1, 1996
10.33 Long-Term Care Facility Management Agreement by and between HP/North Carolina IV, Inc. and THP dated
December 1, 1992
10.34 Long-Term Care Facility Management Agreement by and between NCHC, Inc. and CHMC dated March 25, 1996
10.35 Long-Term Care Facility Management Agreement by and between NC Health Care -- Archdale, Inc. and CHMC
dated June 30, 1996
10.36 Management Agreement by and between Oak Grove of Rutherford Limited Partnership and THP dated September
1, 1994
10.37 Management Agreement by and between Holman Management Services, Inc. and THP dated February 1, 1995
10.38 Management Agreement by and between THP and Cardinal dated November 1, 1993
10.39 Long-Term Care Facility Management Agreement by and among CHMC, North Florida Health Facilities II, Ltd.
and Blountstown Health Investors, L.C. dated June 1, 1996
10.40 Long-Term Care Facility Management Agreement dated January 31, 1997 by and between International Health
Care Properties 72, L.P. and CHMC
10.41 Contract for Therapy Services by and between Paragon and Americare Corporation effective August 1, 1993
10.42 Agreement for Rehab Program Management Services by and between Paragon and Wilora Lake Healthcare Center
dated April 9, 1996
10.43 Direct Therapy Services Agreement by and between Paragon and Evangeline of Albemarle dated May 10, 1996
10.44 Fee for Service Therapy Services Agreement by and between Paragon and Rivermont A Rehab and Nursing
Center dated January 1, 1997
10.45 Professional Services Contract dated September 26, 1996 by and between Tri-State Health and Rehab and
Paragon
10.46 Right of First Refusal Agreement by and between International Health Care Properties XX, L.P. and CHMC
dated April 1, 1993
10.47 Subordination of Right of First Refusal Agreement by and between International Health Care Properties
VII & VIII, L.P. and CHMC dated August 1, 1993
10.48 Stock Repurchase Agreement by and among CHC and certain former holders of Series C Preferred Stock
10.49 Management Agreement by and between Capitol Hill Community Hospital, Capitol Hill Healthcare Group and
CHMC dated May 1, 1997.
10.50 Long-Term Care Facility Management Agreement by and between Canton Health Investors, LLC and CHMC dated
June 1, 1997
10.51 Long-Term Care Facility Management Agreement by and between North Raleigh Health Investors, LLC and CHMC
dated June 1, 1997
11.1 Statement Regarding Computation of Per Share Earnings
16.1 Letter Regarding Change in Certifying Accountant
21.1 List of Subsidiaries
23.1 Consent of Nelson Mullins Riley & Scarborough, L.L.P. (included in the opinion at Exhibit 5.1)
23.2 Consent of Coopers & Lybrand, L.L.P.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
23.3 Consent of Ernst & Young, LLP
23.4 Consent of BDO Seidman, LLP
24.1 Power of Attorney (contained on the signature page of this filing)
27.1 Restated Financial Data Schedule
</TABLE>
ITEM 16(B). FINANCIAL STATEMENT SCHEDULES.
Schedule II -- Valuation and Qualifying Accounts.
ITEM 17. UNDERTAKINGS.
1. The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
2. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
registrant as described in Item 14 or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
3. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Pre-Effective Amendment No. 2 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Atlanta, State of Georgia, on June 16, 1997.
CENTENNIAL HEALTHCARE CORPORATION
By: /S/ J. STEPHEN EATON*
-----------------------------------------
J. Stephen Eaton
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints J. Stephen Eaton and Alan C. Dahl, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite or necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, and each of them or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
/S/ J. STEPHEN EATON* President and Chief
- ------------------------------ Executive Officer June 16, 1997
J. Stephen Eaton (principal executive
officer)
Senior Vice President and
/S/ ALAN C. DAHL Chief Financial Officer
- ------------------------------ (principal financial June 16, 1997
Alan C. Dahl officer and principal
accounting officer)
/S/ ANDREW M. PAUL*
- ------------------------------ Director June 16, 1997
Andrew M. Paul
/S/ JAMES B. HOOVER*
- ------------------------------ Director June 16, 1997
James B. Hoover
/S/ ROBERT A. ORTENZIO*
- ------------------------------ Director June 16, 1997
Robert A. Ortenzio
/S/ BERTIL D. NORDIN*
- ------------------------------ Director June 16, 1997
Bertil D. Nordin
*Signed by Alan C. Dahl pursuant to power of attorney previously filed.
II-7
<PAGE>
After consummation of the proposed stock split, as discussed in Note 20,
Coopers & Lybrand, L.L.P. will be in a position to render the following report.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
Board of Directors of
Centennial HealthCare Corporation
Our audits referred to in our report dated March 7, 1997, which appears on
page F-2 of the Form S-1 registration statement, included an audit of the
financial statement schedule listed under Item 16(b). In our opinion, this
financial statement schedule presents fairly, in all material respects, in
relation to the financial statements taken as a whole, the information required
to be stated thereon.
Atlanta, Georgia
March 7, 1997
II-8
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Board of Directors of
Centennial HealthCare Corporation
The audit referred to in our report to Centennial HealthCare Corporation and
subsidiaries (formerly known as Welcare International, Inc. and subsidiaries),
dated July 7, 1995, except for Note 18 which is as of August 15, 1995, which is
contained in the Prospectus constituting part of this Registration Statement
included the audit of the schedule listed under Item 16(b) for the year ended
May 31, 1995. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audit.
In our opinion, this schedule presents fairly, in all material respects, the
information set forth therein.
/s/ BDO SEIDMAN, LLP
Atlanta, Georgia
July 7, 1995
II-9
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
SEVEN MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COST AND CHARGED TO BALANCE AT
DESCRIPTIONS YEAR EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF YEAR
- ----------------------------- ------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1996
Allowance for doubtful
accounts (deducted from
accounts receivable)..... $ 5,911,820 $ 851,608 $ (2,983,449 (3) $ (1,307,841 (2) $ 2,472,138
------------- -------------- -------------- -------------- -------------
------------- -------------- -------------- -------------- -------------
Year ended
December 31, 1995
Allowance for doubtful
accounts (deducted from
accounts receivable)..... $ 71,300 $ 1,034,618 $ (348,167) $ 5,154,069(3) $ 5,911,820
------------- -------------- -------------- -------------- -------------
------------- -------------- -------------- -------------- -------------
Seven months ended
December 31, 1995
Allowance for doubtful
accounts (deducted from
accounts receivable)..... $ 71,413 $ 757,590 $ (71,252) $ 5,154,069(3) $ 5,911,820
------------- -------------- -------------- -------------- -------------
------------- -------------- -------------- -------------- -------------
Year ended
May 31, 1995
Allowance for doubtful
accounts................. $ -0- $ 71,413 $ -0- $ -0- $ 71,413
------------- -------------- -------------- -------------- -------------
------------- -------------- -------------- -------------- -------------
</TABLE>
- --------------
(1) Accounts receivable that were previously reserved that were directly
written-off to allowance for doubtful accounts.
(2) Due to reclassification of accounts receivable to notes receivable and
related reserve.
(3) Reserve on December 31, 1995 balance sheet of Transitional Health Services,
Inc. which was consolidated with the Company as of December 31, 1995
totaling $5,491,000 and reclassification of account receivable to notes
receivable and stated reserve totaling $(336,931).
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.......................................................... *
3.1 Third Amended and Restated Articles of Incorporation.................................... *
3.2 Amended and Restated Bylaws............................................................. *
4.1 Article III of Registrant's Third Amended and Restated Articles of Incorporation........ *
4.2 Article V of Registrant's Third Amended and Restated Articles of Incorporation.......... *
4.3 Specimen Common Stock Certificate....................................................... *
5.1 Form of Opinion of Nelson Mullins Riley & Scarborough, L.L.P. ..........................
10.1 WelCare International, Inc. 1994 Employee Stock Option Plan............................. +
10.2 WelCare International, Inc. 1996 Executive Stock Plan................................... +
10.3 WelCare International, Inc. 1996 Employee Stock Option Plan............................. +
10.4 Centennial HealthCare Corporation 1997 Stock Option Plan................................ *
10.5 Amended and Restated Credit Agreement dated December 18, 1996 by and among Centennial
HealthCare Corporation and the Borrowers named therein, the Lenders named therein, and
CoreStates Bank, N.A., as agent for the Lenders....................................... +
10.6 Amended and Restated Employment Agreement between WelCare International, Inc. n/k/a
Centennial HealthCare Corporation ("CHC") and J. Stephen Eaton dated December 31,
1995.................................................................................. +
10.7 Employment Agreement between Transitional Health Partners ("THP") and Laurence W.
Lepley, Jr. dated December 1, 1994.................................................... +
10.8 Registration Rights Agreement dated December 31, 1995 by and between CHC and the
Shareholders as defined therein, as amended........................................... +
10.9 Lease between Grant Park Nursing Home L.P. and WelCare Acquisition Corp. n/k/a
Centennial Acquisition Corporation ("CAC") commencing on January 1, 1993.............. +
10.10 Amended and Restated Lease Agreement by and between International Health Care Properties
XXVII, L.P. and WelCare International Properties Corporation n/k/a Centennial
HealthCare Properties Corporation ("CHPC") dated October 4, 1994...................... +
10.11 Amended and Restated Lease Agreement by and between Ashton Woods Limited Partnership and
WelCare/Ashton Properties, Inc. n/k/a Centennial/ Ashton Properties Corporation
("CAPC") dated December 20, 1994...................................................... +
10.12 Amended and Restated Lease Agreement by and between EBT Healthcare Properties, L.P. and
CHPC dated July 6, 1994............................................................... +
10.13 Operating Lease by and between Health Care Property Investors, Inc. and Cardinal of
Indiana, Inc., as amended by that certain Amendment to Operating Lease dated November
1, 1993, as amended by that certain Second Amendment to Operating Lease dated April 1,
1994, as amended by that certain Third Amendment to Operating Lease dated March 31,
1995, as amended by that certain Fourth Amendment to Operating Lease dated January 1,
1996, as assigned..................................................................... +
10.14 Lease Agreement by and between Brownsboro Hills Nursing Home, Inc. and Brownsboro Hills
Plaza and THP dated August 17, 1995................................................... +
10.15 Lease Agreement by and between Elderberry Nursing Home, Inc. and Cardinal of Kentucky,
Inc. dated March 10, 1993, as assigned................................................ +
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------
<C> <S> <C>
10.16 Lease Agreement by and between Healthcare Realty Trust Incorporated and Cardinal
Development Co., Inc. ("Cardinal"), as amended by that certain Amendment Number One to
Lease Agreement dated November 1, 1993, as assigned to THP pursuant to that certain
Lease Assignment, Consent and Release dated March 1, 1994............................. +
10.17 Lease Agreement by and between Auerbach/Conner and Cardinal of Kentucky, Inc. dated
March 29, 1991, as assigned........................................................... +
10.18 Lease Agreement by and between House Investments -- Nursing Homes Partners I and THP
dated November 1, 1993................................................................ +
10.19 Lease Agreement by and between THP and Willowbrook Health Care Center, Inc. dated
January 20, 1995...................................................................... +
10.20 Operating Lease by and between HCPI Charlotte, Inc. and THP dated June 19, 1995......... +
10.21 Lease Agreement by and between Elderberry Nursing Home, Inc. and Cardinal of Kentucky,
Inc. dated June 3, 1991, as assigned.................................................. +
10.22 Lease Agreement by and between Sheridan Health Care Center, Inc. and Cardinal
Development Co. dated April 27, 1989, as amended pursuant to that First Amendment to
Lease Agreement dated August 5, 1992, as amended pursuant to that Second Amendment
dated October 25, 1993, as assigned................................................... +
10.23 Lease Agreement by and between Odell Investors I, Limited Partnership and THP dated
October 5, 1995....................................................................... +
10.24 Lease Agreement by and between Pomeroy Health, Inc. and THP dated May 22, 1995.......... +
10.25 Lease Agreement by and between Wilora Lake Healthcare Center, Inc. and THP dated March
1, 1996............................................................................... +
10.26 Lease Agreement dated October 1, 1996 by and between Calhoun-Liberty Hospital
Association, Inc. and Centennial HealthCare Investment Corporation ("CHIC")........... +
10.27 Amended and Restated Long Term Care Facility Management Agreement by and between CHPC
and Centennial HealthCare Management Corporation ("CHMC") dated July 6, 1994.......... +
10.28 Amended and Restated Management Agreement by and between Montclair Medical Investors,
Ltd. and CHMC dated January 1, 1995................................................... +
10.29 Long Term Care Facility Management Agreement by and between International Health Care
Properties XX, L.P. and CHMC dated April 1, 1993...................................... +
10.30 Management Agreement by and between International Health Care Properties VII & VIII,
L.P. and CHMC dated January 1, 1992................................................... +
10.31 Management Agreement by and between Consolidated Resources Health Care Fund VI, and CHMC
dated January 1, 1992................................................................. +
10.32 Long-Term Care Facility Management Agreement by and between CHMC and THP dated as of
January 1, 1996....................................................................... +
10.33 Long-Term Care Facility Management Agreement by and between HP/North Carolina IV, Inc.
and THP dated December 1, 1992........................................................ +
10.34 Long-Term Care Facility Management Agreement by and between NCHC, Inc. and CHMC dated
March 25, 1996........................................................................ +
10.35 Long-Term Care Facility Management Agreement by and between NC Health Care -- Archdale,
Inc. and CHMC dated June 30, 1996..................................................... +
10.36 Management Agreement by and between Oak Grove of Rutherford Limited Partnership and THP
dated September 1, 1994............................................................... +
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------
<C> <S> <C>
10.37 Management Agreement by and between Holman Management Services, Inc. and THP dated
February 1, 1995...................................................................... +
10.38 Management Agreement by and between THP and Cardinal dated November 1, 1993............. +
10.39 Long-Term Care Facility Management Agreement by and among CHMC, North Florida Health
Facilities II, Ltd. and Blountstown Health Investors, L.C. dated June 1, 1996......... +
10.40 Long-Term Care Facility Management Agreement dated January 31, 1997 by and between
International Health Care Properties 72, L.P. and CHMC................................ +
10.41 Contract for Therapy Services by and between Paragon and Americare Corporation effective
August 1, 1993........................................................................ +
10.42 Agreement for Rehab Program Management Services by and between Paragon and Wilora Lake
Healthcare Center dated April 9, 1996................................................. +
10.43 Direct Therapy Services Agreement by and between Paragon and Evangeline of Albemarle
dated May 10, 1996.................................................................... +
10.44 Fee for Service Therapy Services Agreement by and between Paragon and Rivermont A Rehab
and Nursing Center dated January 1, 1997.............................................. +
10.45 Professional Services Contract dated September 26, 1996 by and between Tri-State Health
and Rehab and Paragon................................................................. +
10.46 Right of First Refusal Agreement by and between International Health Care Properties XX,
L.P. and CHMC dated April 1, 1993..................................................... +
10.47 Subordination of Right of First Refusal Agreement by and between International Health
Care Properties VII & VIII, L.P. and CHMC dated August 1, 1993........................ +
10.48 Stock Repurchase Agreement by and among CHC and certain former holders of Series C
Preferred Stock....................................................................... *
10.49 Management Agreement by and between Capitol Hill Community Hospital, Capitol Hill
Healthcare Group and CHMC dated May 1, 1997........................................... +
10.50 Long-Term Care Facility Management Agreement by and between Canton Health Investors, LLC
and CHMC dated June 1, 1997...........................................................
10.51 Long-Term Care Facility Management Agreement by and between North Raleigh Health
Investors, LLC and CHMC dated June 1, 1997............................................
11.1 Statement Regarding Computation of Per Share Earnings................................... +
16.1 Letter Regarding Change in Certifying Accountant........................................ +
21.1 List of Subsidiaries.................................................................... +
23.1 Consent of Nelson Mullins Riley & Scarborough, L.L.P. (included in the opinion at
Exhibit 5.1)..........................................................................
23.2 Consent of Coopers & Lybrand, L.L.P.....................................................
23.3 Consent of Ernst & Young, LLP...........................................................
23.4 Consent of BDO Seidman, LLP.............................................................
24.1 Power of Attorney (contained on the signature page of this filing)......................
27.1 Restated Financial Data Schedule........................................................ +
</TABLE>
- --------------
* To be filed by amendment
+ Previously filed
<PAGE>
LAW OFFICES
NELSON MULLINS RILEY & SCARBOROUGH, L.L.P.
A REGISTERED LIMITED LIABILITY PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
400 COLONY SQUARE
SUITE 2200
1201 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30361
TELEPHONE (404) 817-6000
TELECOPIER (404) 817-6050
OTHER OFFICES:
Charleston, South Carolina
Charlotte, North Carolina
Columbia, South Carolina
Florence, South Carolina
Greenville, South Carolina
Myrtle Beach, South Carolina
June 16, 1997
Centennial HealthCare Corporation
400 Perimeter Center Terrace
Suite 650
Atlanta, Georgia 30346
Ladies and Gentlemen:
We have acted as counsel to Centennial HealthCare Corporation (the
"Company") in connection with the filing of a Registration Statement on Form
S-1 (Registration No. 333-24267), as amended (the "Registration Statement")
under the Securities Act of 1933, as amended, covering the offering of up to
4,600,000 shares (the "Shares") of the Company's Common Stock, $.01 par value
per share. In connection therewith, we have examined such corporate records,
certificates of public officials and other documents and records as we have
considered necessary or proper for the purpose of this opinion.
This opinion is limited by and is in accordance with, the January 1,
1992, edition of the Interpretive Standards applicable to Legal Opinions to
Third Parties in Corporate Transactions adopted by the Legal Opinion
Committee of the Corporate and Banking Law Section of the State Bar of
Georgia.
Based on the foregoing, and having regard to legal considerations which
we deem relevant, we are of the opinion that the Shares, when issued and
delivered as described in the Registration Statement, will be legally issued,
fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus contained in the Registration Statement.
Very truly yours,
NELSON MULLINS RILEY & SCARBOROUGH, L.L.P.
<PAGE>
LONG-TERM CARE FACILITY
MANAGEMENT AGREEMENT
THIS LONG-TERM CARE FACILITY MANAGEMENT AGREEMENT (the "Agreement") is
made as of this 1st day of June, 1997, by and between Canton Health
Investors, LLC, a North Carolina limited liability company ("Owner"), and
Centennial HealthCare Management Corporation, a Georgia corporation
("Manager").
W I T N E S S E T H :
WHEREAS, Owner owns certain real and personal property comprising a certain
114-bed nursing center located in Canton, North Carolina (the "Facility");
WHEREAS, the parent corporation of Manager, Centennial HealthCare
Corporation ("CHC") and Owner have entered into that certain Loan Agreement
dated of even date herewith (the "Loan Agreement"), whereby CHC will loan
certain funds to Owner (the "CHC Loan"); and
WHEREAS, Owner and Manager desire for Manager to provide its experience,
skill and supervision to manage the Facility on behalf of Owner under and
subject to the terms of this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual promises and
covenants of the parties contained herein and for such other good and valuable
consideration, the receipt, adequacy and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
ARTICLE I.
MANAGEMENT DUTIES AND OBLIGATIONS
I.01 Control Retained by Owner. Owner shall at all times exercise overall
control over the assets and operations of the Facility, subject to the terms of
this Agreement, and Manager shall perform the duties herein required to be
performed by it as the agent of Owner and in accordance with the policies and
directives from time to time adopted by Owner.
I.02 Changes in Method of Operation. Manager shall not make substantial
changes in the method of operating the Facility unless Manager first notifies
Owner and Owner has given its approval, which approval shall not be
unreasonably withheld.
I.03 Management of Facility. During the term of this Agreement and subject
to the terms of this Agreement, Manager shall on behalf of Owner manage all
aspects of the operation of the Facility, including, but not limited to
staffing, accounting, billing, collections, setting of rates and charges and
general administration. In connection therewith, Manager (either directly or
through supervision of employees of the Facility) shall:
(a) Hire or lease on behalf of Owner and retain (to the extent such
personnel are reasonably available in the community in which the Facility is
located) an
<PAGE>
adequate staff of nurses, technicians, nurse aides, office and
other employees, including a qualified administrator (the "Administrator")
and shall promote, direct, assign and discharge all such employees on behalf
of Owner at Manager's reasonable discretion; provided, however, that leased
employees shall be subject to the direction and control of the lessor of such
leased employees. All employees shall be employees of or leased by Owner and
carried on the payroll of the Facility and shall not be deemed employees or
agents of Manager.
(b) Institute and amend, from time to time general salary scales,
personnel policies and appropriate employee benefits for all employees on
behalf of Owner; provided, however, that leased employees shall be subject to
the general salary scales, personnel policies and employee benefit programs
of the lessor of such leased employees. Employee benefits may include
pension and profit sharing plans, insurance benefits, incentive plans for key
employees and holiday, vacation, personal leave and sick leave policies.
(c) Issue appropriate bills for services and materials furnished by
the Facility and use its reasonable best efforts to diligently collect
accounts receivable and monies owed to the Facility, design and maintain
accounting, billing, patient and collection records; and prepare and file
insurance, Medicare, Medicaid and any and all other necessary or desirable
reports and claims related to revenue production. Owner hereby grants
Manager the right to enforce Owner's rights as creditor under any contract or
in connection with rendering any services for purposes of collecting accounts
receivable and monies owed the Facility.
(d) Order, supervise and conduct a program of regular maintenance and
repair.
(e) Purchase food, beverage, medical, cleaning and other supplies,
equipment, furniture and furnishings for the account of Owner.
(f) Administer, supervise and schedule all patient and other services
of the Facility, including the operation of food, barber/beautician and other
ancillary services.
(g) Provide for the orderly payment (to the extent funds are
available therefor) of accounts payable, employee payroll, amounts due on
short and long-term indebtedness, taxes, insurance premiums, and all other
obligations of the Facility.
(h) Institute standards and procedures for admitting patients, for
charging patients for services, and for collecting the charges from the
patients or third parties.
(i) Obtain and maintain insurance coverage for the Facility naming
Owner, Manager, any mortgagees of the Facility and such other persons
requested by Owner as insureds as provided in Section 5.01 hereof.
(j) Negotiate and enter into, in the name of and on behalf of
Owner, such agreements, contracts and orders as Manager may deem necessary or
advisable, for the furnishing of services, concessions and supplies for the
operation and maintenance of the Facility, including, without limitation,
agreements for the provision of therapy and rehabilitation services, and
medical supplies.
2
<PAGE>
(k) After notice to Owner, negotiate on behalf of Owner (and in
conjunction with Owner's counsel) with any labor union lawfully entitled to
represent employees of Owner who work at the Facility, but any collective
bargaining agreement or labor contract must be submitted to Owner for its
approval and execution.
(l) As provided in Section 1.08(a), assist in maintaining all
licenses and permits required for the operation of the Facility, its
contracts with third party payors and other similar governmental and
nongovernmental agencies and intermediaries.
(m) Make periodic evaluations of the performances of all
departments of the Facility.
(n) Design, establish and maintain a suitable accounting system
using accounts and classifications consistent with those used in similar
facilities.
(o) Advise and assist Owner in designing an adequate and
appropriate public relations program.
I.04 Reports to Owner.
(a) Manager shall prepare and deliver to Owner, within thirty (30)
days after the close of each calendar month, unaudited financial statements
covering the prior month and containing a balance sheet and statement of
income and expenses in reasonable detail. Manager shall also provide any
required assistance to the independent accountants for the Facility, who
shall be selected by Manager, in the preparation of audited annual financial
statements for the operation of the Facility. Such financial statements shall
be prepared at Owner's expense in accordance with generally accepted
accounting principles in the health care field consistently applied and
delivered to Manager and Owner within ninety (90) days after the end of each
fiscal year of the Facility. Manager shall prepare reports or provide
information to Owner required by any mortgagee of the Facility or any loan
documents of Owner, including the Loan Agreement and related documents.
(b) Manager shall submit to Owner for its approval (which approval
will not be unreasonably withheld) each twelve (12) months its budget for the
operation of the Facility setting out anticipated income, expenses and
capital expenditures during the succeeding twelve (12) month period. Manager
shall use its reasonable best efforts to operate the Facility in accordance
with the provisions of the budget for the Facility as submitted to Owner.
Such proposed budget for the Facility shall be delivered to Owner prior to
the commencement of the operational fiscal year of the Facility.
(c) Manager or Owner shall schedule periodic management meetings to
be attended by representatives of both Manager and Owner no less frequently
than quarterly and shall furnish to Owner quarterly written progress reports
concerning the operation of the Facility.
I.05 Bank Accounts.
3
<PAGE>
(a) Manager shall deposit in a bank account or accounts of Manager
or Manager's affiliate(s) (collectively referred to in this Section 1.05 as
Manager) established in Manager's name (the "Facility Depository Accounts")
all funds received from the operations of the Facility (the "Facility
Funds"). Manager shall segregate such Facility Funds in an account(s)
separate and apart from Manager's Operating Accounts (the "Segregated
Facility Accounts"). Manager shall disburse Facility Funds received from the
Facility's operations in the manner and order of priority described in
section 1.06 below. Manager shall also deposit and maintain the personal
funds of the Facility's residents into a separate trust account established
in Manager's name (the "Facility Trust Accounts"). Manager shall designate
the signatory or signatories required on all checks or other documents of
withdrawal for the Facility Depository, Operating, Segregated Facility, and
Facility Trust Accounts.
I.06 Flow of Facility Funds.
(a) All revenues and cash of the Facility shall be disbursed by
Manager in the following order of priority and, in each case, in such amounts
and at such times as Manager deems is required to be made in connection with
the payment of:
(1) the Facility's mortgage payments due from Owner to any
mortgagee of the Facility;
(2) the costs and expenses of operating the Facility,
including the reimbursable expenses of Manager;
(3) all accrued and unpaid Management Fees (defined in
Section 4.01) to Manager;
THEN, after retention by Manager of an adequate working
capital reserve (in cash or available credit under the CHC
Loan) (such reserve to be determined by Manager in its
reasonable discretion and approved by Owner in connection
with its approval of the operating budget for the Facility
(with such approval to be not unreasonably withheld or
delayed) and held in such subaccount of the Facility
Depository, Operating or Segregated Facility Accounts as
Manager shall determine);
(4) all accrued and unpaid interest on the CHC Loan; and
(5) any principal balance outstanding under the CHC Loan
whether or not any or all of such balance is then due and
payable.
(b) Manager agrees that to the extent the total of items described in
paragraphs 1, 2, 3 and 4 above (collectively the "Base Operating Costs") exceed
the Facility's collected net revenues (resulting in an "Operating Deficit"),
Manager shall, as soon as possible and not less than five (5) business days
after notice from Owner, advance funds
4
<PAGE>
under the CHC Loan, if available, as may
be necessary to cover or offset such Operating Deficit.
I.07 Access to Books, Records and Documents. If it is ultimately
determined that Section 952 of the Omnibus Budget Reconciliation Act of 1980
and final regulations promulgated thereunder apply to this Agreement:
(a) Until the expiration of four (4) years after the furnishing of
services pursuant to this Agreement, Manager shall, as provided in Section
952, make available, upon written request, to the Secretary of Health and
Human Services, or upon request, to the Comptroller General of the United
States, or any of their duly authorized representatives, this Agreement, and
all books, documents and records of Manager that are necessary to verify the
nature of this Agreement for which payment may be made under the Medicare
program; and
(b) If Manager carries out any of the duties of this Agreement
pursuant to a subcontract or subcontracts with an aggregate value or cost of
$10,000 or more over a twelve (12) month period with a related organization,
such subcontract or subcontracts shall contain a clause to the effect that,
until the expiration of four years after the furnishing of such services
pursuant to such subcontract or subcontracts, the related organization shall,
as provided in Section 952, make available, upon written request, to the
Secretary of Health and Human Services, or upon request, to the Comptroller
General of the Untied States, or any of their duly authorized
representatives, the subcontract or subcontracts, and all books, documents
and records of such subcontractors for which payment may be made under the
Medicare program.
I.08 Licenses.
(a) Manager, as agent for Owner and on Owner's behalf, shall apply
for and seek to obtain and maintain all necessary licenses, permits,
certifications, consents, and approvals from all governmental agencies which
have jurisdiction over the operation of the Facility. Manager agrees that
its management and operation of the Facility shall materially and
substantially comply with any representations made by the Owner in the
Certificate of Need application for the Facility, to the extent disclosed in
writing to Manager, as well as all conditions placed upon such Certificate of
Need and so disclosed in writing to Manager. Manager, by applying for such
licenses, permits, consents, and approvals, does not in any way guarantee the
approval of such applications and shall have no liability with respect to any
failure of the Facility to receive any such license, permit, consent or
approval.
(b) Neither Owner nor Manager shall knowingly take any action or
fail to take any action which may (1) cause any governmental authority having
jurisdiction over the operation of the Facility to institute any proceeding
for the rescission or revocation of any necessary license, permit, consent or
approval, or (2) adversely affect Owner's right to accept and obtain payments
under Medicare, Medicaid, or any other public or private third party medical
payment program.
(c) Manager shall, with the written approval of Owner, have the
right to contest by appropriate legal proceedings, diligently conducted in
good faith in the name of
5
<PAGE>
Owner, the validity or application of any law,
ordinance, rule, ruling, regulation, order or requirement of any governmental
agency having jurisdiction over the operation of the Facility. Owner, after
having given its written approval, shall pay attorneys' fees incurred with
regard to the contest. Counsel for any such contest shall be selected by
Manager, with Owner's approval which shall not be unreasonably withheld.
Manager shall have the right, upon notice to Owner but without the written
consent of Owner, to process all third-party claims for the services of the
Facility, including, without limitation, the full right to contest to the
exhaustion of all applicable administrative proceedings or procedures,
adjustment and denials by governmental agencies or their fiscal
intermediaries as third-party payors.
I.09 Administrator. Manager shall employ or lease for the Facility an
Administrator to serve as the chief executive officer of such Facility. The
Administrator shall be an employee of and shall be compensated by Owner, in
accordance with the approved operating budget for the Facility or as
otherwise approved by Owner, and Manager shall pay on Owner's behalf out of
the Operating Accounts of the Facility, in advance, on or before the fifth
(5th) day of each month, all such compensation, including salary, fringe
benefits, bonuses and business expense reimbursements approved by Manager, to
the Administrator. The term "fringe benefits" shall include, without
limitation, employer's F.I.C.A. payments, unemployment compensation and other
employment taxes, bonuses, vacation, personal and sick leave benefits,
workers' compensation, group life, health and accident insurance premiums and
disability and other benefits.
I.10 Taxes. Any federal, state or local taxes, assessments or other
governmental charges properly imposed on the Facility are the obligations of
Owner, not of Manager, but all such obligations shall be paid by Manager on
Owner's behalf out of the Operating Accounts of the Facility. With Owner's
prior written consent, Manager may contest the validity or amount of any such
tax or imposition on the Facility in the same manner as described in Section
1.08(c) hereof.
I.11 Use of Manager's Personnel. An authorized representative of Manager
shall visit the Facility as often as Manager deems necessary. The time spent
by such authorized representative of Manager during such visits and all
out-of-pocket expenses arising from travel and lodging connected with such
visitations shall not be charged separately to Owner.
I.12 Government Regulations. Manager agrees to operate and maintain the
Facility in substantial compliance with the requirements of any material
statute, ordinance, law, rule, regulation or order of any governmental or
regulatory body having jurisdiction over the Facility and to comply with all
orders and requirements of the local board of fire underwriters or any other
body which may exercise similar functions; provided, however, that Manager
shall not be required to expend its separate funds in order to comply with
any such statutes, ordinances, laws, rules, regulations or orders, and to the
extent any funds are so required, it shall fulfill its obligations hereunder
by notifying Owner of the actions necessary in order to be in compliance
therewith and expending such funds of Owner as Owner may provide or as
Manager may deem available for such purpose.
I.13 Quality Controls. Manager shall activate and maintain on a
continuing basis a "Quality Assurance Program" in order to provide objective
measurements of the quality of health care provided at the Facility and, in
connection therewith, shall utilize such techniques
6
<PAGE>
as patient questionnaires
and interviews, physician questionnaires and interviews, and inspections.
I.14 Staff Specialists. In addition to the other managerial services
provided for herein, Manager shall make available to the Facility, for
consultation and advice, when Manager deems necessary or appropriate,
specialists in such fields as accounting, auditing, budgeting, dietary
services, operations, environmental control, management, maintenance,
nursing, personnel, pharmacy operations, public relations, purchasing,
quality assurance, systems and procedures, and third-party reimbursement.
I.15 Performance of Services by Manager. In the performance of its
services hereunder, Manager shall exercise the same standards and degree of
care used by reasonable and prudent managers of nursing homes of similar
size, nature and character as the Facility. Notwithstanding anything herein
to the contrary, Manager shall not be deemed in violation of this Agreement
if Manager is prevented from performing any of its obligations hereunder for
reasons beyond its reasonable control including, without limitation, strikes,
walkouts or other employee disturbances, acts of God, or the action or
promulgation of any statute, rule, regulation or order by any federal, state,
or local governmental or judicial agency or official, nor shall it be deemed
in default hereunder or otherwise liable for any error of judgment or act or
omission in the performance of its services hereunder, which is made in
reasonable good faith.
I.16 Additional Services. Owner agrees that any specialized or
additional services recommended by Manager may be performed for a separate
fee as agreed upon by Owner in advance of the performance of such service.
If Manager provides such service, such fee shall not be in excess of such
amount as would be charged by a third party, negotiating at arm's length, for
the performance of such service.
I.17 Obligations under CHC Loan. Manager acknowledges the existence and
terms of the CHC Loan and all documents related thereto. Manager agrees to
perform or cause to be performed, on Owner's behalf, for so long as the
Agreement remains in full force and effect, all covenants therein relating to
the manner of operation of the Facility. Manager assumes no liability or
responsibility for repayment of the CHC Loan or for any other monetary
obligation of Owner (including, without limitation, obligations to pay
mortgage payments), or for the financial performance of the Facility.
I.18 Maintenance of Facility. Manager agrees to maintain the Facility in
a good and serviceable condition, ordinary wear and tear and damage by fire
or other casualty or resulting from condemnation excepted, to the extent
sufficient revenues of the Facility are available for such purpose.
I.19 Civil Money Damages. Manager agrees that if any civil money
penalties are imposed by HCFA or the State of North Carolina as a result of
the nursing care and/or treatment provided to residents of the Facility by
employees of the Facility, Manager will reimburse Owner for the amount of the
civil money penalty imposed; provided, however, that following termination of
this Agreement, Manager must be notified immediately upon notice of the civil
money penalty and/or any Statement of Deficiencies issued by HCFA or the
State of North Carolina for a period during which Manager served under this
Agreement. Manager
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reserves the right to appeal or waive appeal of any civil
money penalty imposed by HCFA or the State of North Carolina. Manager
further reserves the right to retain counsel to represent the Facility in any
appeal or settlement proceedings.
ARTICLE II.
TERM AND TERMINATION
II.01 Term. The term of this Agreement shall commence as of the date
hereof (the "Effective Date"), and shall continue until the earlier of the
following dates: (i) the date which falls on the fifth (5th) anniversary
thereof, or (ii) the date on which Manager ceases to furnish management
services to the Facility and this Agreement is terminated for whatever reason.
II.02 Termination.
(a) Manager has the option to terminate this Agreement, without
damage or penalty, upon ten (10) business days prior written notice to Owner,
upon the occurrence of either of the following events:
(i) The Facility or any material portion thereof is damaged
or destroyed to the extent that, in the written opinion of an
independent architect or engineer reasonably acceptable to both
parties, (x) it is not practicable or desirable to rebuild, repair or
restore the Facility within a period of nine (9) months to its
condition immediately preceding such damage, or (y) the conducting of
normal operations of the Facility would be prevented for a period of
nine (9) months or more; or
(ii) Title to or the temporary use of all or substantially
all the Facility is taken under the exercise of the power of eminent
domain by any governmental authority or person, firm or corporation
acting under governmental authority which, in the opinion of an
independent architect or engineer reasonably acceptable to both
parties, prevents or is likely to prevent the conducting of normal
operations at the Facility for a period of at least nine (9) months.
Provided, however, that in either of such events, in addition to the rights of
Manager under Article VI hereof, Manager shall have the right to rebuild,
restore or otherwise rearrange the Facility and recommence operations thereof,
and thereupon Manager shall continue to manage the Facility under the same
terms, conditions, and fees as provided herein.
(b) If an Event of Default (as hereinafter defined) by either party
shall occur and be continuing, the other party may terminate this Agreement by
giving written notice of such termination pursuant to Section 3.02 hereunder.
(c) Manager shall have the option to terminate this Agreement
without damage or penalty upon ten (10) days prior written notice to Owner
following the sale, transfer, assignment, or other disposition, in whole or
in part, by Owner of its interest in the
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Facility. In the event Owner is a
corporation, limited liability company, or partnership, any dissolution,
merger, consolidation or other transfer of a substantial portion of the stock
or underlying ownership interests (as the case may be) of Owner shall
constitute an assignment of the Facility for all purposes of this Section
2.02(c). The term "substantial portion" means the ownership of stock or
underlying ownership interests (as the case may be) possessing, and of the
right of exercise, at least fifty percent (50%) of the total combined voting
power of such corporation, limited liability company, or partnership,
provided, however, that this prohibition on stock transfer shall not apply to
a "publicly traded corporation," which term is hereby defined for all
purposes under this Agreement as a corporation whose shares of stock have
been registered pursuant to the Securities Act of 1933, as amended.
(d) Notwithstanding the foregoing, commencing on the Effective Date
and continuing until the date which falls on the third (3rd) anniversary
thereof (the "First Refusal Period"), for so long as (i) the CHC Loan remains
outstanding and unpaid or (ii) this Agreement remains in full force and
effect, no sale, transfer, assignment or other disposition, in whole or in
part, by Owner of its interest in the Facility shall be permitted without
Manager's prior written consent, which consent may be granted or withheld in
Manager's sole and absolute discretion unless Owner shall have afforded to
Manager a right of first refusal to purchase Owner's interest in the Facility
on the same terms and conditions, including purchase price, acceptable to
Owner pursuant to the terms of a bona fide third party offer. Manager shall
be furnished with (i) written notice of the terms of such third party offer,
and (ii) a period of not less than fifteen (15) business days within which to
exercise such right of first refusal. Upon exercise, Owner and Manager shall
close Manager's acquisition of the Facility within the greater of (i) thirty
(30) days thereafter or (ii) the time period, if any, specified in the terms
of such third party offer. The parties acknowledge and agree that any
purported sale, transfer, assignment or other disposition by Owner in
violation of this section shall, at Manager's option, be null, void and of no
force or effect, and that equitable remedies, including the remedy of
specific performance (to compel rescission of any such sale, transfer,
assignment or other disposition) and injunctive relief (to prevent or
restrain such prohibited actions) shall be available to Manager, in addition
to its rights and remedies at law and under this Agreement.
In the event Manager elects not to exercise its right of first refusal
under this section and there shall occur a sale, transfer, assignment or
other disposition of Owner's interest in the Facility during the First
Refusal Period, this Agreement shall continue in full force and effect and
shall bind the purchaser (without releasing or otherwise affecting Owner's
primary liability for its obligations hereunder, which shall thereupon be
deemed joint and several with the liability of such purchaser); provided,
however, that in the event of such sale, transfer, assignment or other
disposition of Owner's interest pursuant to the foregoing, Owner shall have
the right and option to terminate this Agreement upon payment and delivery to
Manager of the following, said termination to become effective upon Manager's
receipt of the last of the following:
(1) a termination fee equal to forty percent (40%) of the Facility's
"Average Monthly Fee" multiplied by the number of months remaining in
the Term, calculated from the date of such termination. "Average
Monthly Fee" for the Facility shall mean the average of the monthly
Management Fees payable to
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Manager under Article IV of this Agreement
for each of the twelve (12) full calendar months prior to such
termination;
(2) all amounts outstanding under the CHC Loan;
(3) all amounts due under Article IV of this Agreement;
(4) any other amounts due Manager under the provisions of this Agreement
or any other agreements between Owner and Manager or Manager's
affiliates; and
(5) evidence, satisfactory to Manager, that amounts have been escrowed by
Owner sufficient to pay all pending liabilities of Manager arising
during the term of this Agreement.
ARTICLE III.
DEFAULT AND REMEDIES
III.01 Events of Default. The following shall constitute events of
default ("Events of Default" and each individually an "Event of Default") under
this Agreement:
(a) If Owner fails to do any of the following and the
responsibility and means (including any and all necessary funds) to pay or
perform same has not been delegated to Manager hereunder: (i) make or cause
to be made any payment to Manager required to be made by Owner, and such
failure shall continue for as much as thirty (30) days after written notice
thereof shall have been given to Owner, (ii) perform its obligations under
this Agreement in any material respect, and such default shall continue for a
period of thirty (30) days after written notice thereof shall have been given
by Manager to Owner, or (iii) make payments, or keep any covenants owing to
any third party and which would cause Owner to lose possession of the
Facility's buildings, equipment or properties;
(b) If Manager fails (i) to make any payment to or on behalf of
Owner required to be made by Manager, and such failure shall continue for as
much as thirty (30) days after written notice thereof shall have been given
to Manager, (ii) to perform its obligations under this Agreement in any
material respect, and such failure shall continue for a period of thirty (30)
days after written notice thereof shall have been given by Owner to Manager,
or (iii) to make payments, or keep any covenants owing to any third party and
which would cause Owner to lose possession of the Facility's buildings,
equipment or properties;
(c) If, through no fault of Manager, the licenses required for the
operation of Facility are at any time suspended, terminated, or revoked, and
such suspension, termination or revocation shall continue unstayed and in
effect for a period of fourteen (14) consecutive days;
(d) If, due to Manager's failure to maintain the Facility in
material compliance with applicable laws, regulations or rules, the Facility
(i) loses its Medicaid
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>or Medicare certification, (ii) loses its license to
operate as a nursing home, or (iii) is closed, and such event continues
unstayed and in effect for a period of fourteen (14) consecutive days;
(e) If, due to Manager's failure to maintain the Facility in
material compliance with applicable laws, regulations or rules, patient
admissions are suspended, and such event continues unstayed and in effect for
the later of ninety (90) days or the date on which occupancy decreases more
than ten percent (10%) from the occupancy level at the date of such
suspension;
(f) If either Owner or Manager shall (i) be adjudicated bankrupt;
(ii) admit in writing its inability to pay its debts generally as they become
due; (iii) become insolvent in that its total assets are in the aggregate
worth less than all of its liabilities or it is unable to pay its debts
generally as they become due; (iv) make a general assignment for the benefit
of creditors; (v) file a petition, or admit (by answer, default or otherwise)
the material allegations of any petition filed against it, in bankruptcy
under the federal bankruptcy laws (as in effect on the date of this Agreement
or as they may be amended from time to time), or under any other law for the
relief of debtors, or for the discharge, arrangement or compromise of its
debts; or (vi) consent to the appointment of a receiver, conservator, trustee
or liquidator of all or part of its assets; or
(g) If a petition shall have been filed against Owner or Manager in
proceedings under the federal bankruptcy laws (as in effect on the date of
this Agreement, or as they may be amended from time to time), or under any
other laws for the relief of debtors, or for the discharge, arrangement or
compromise of its debts, or an order shall be entered by any court of
competent jurisdiction appointing a receiver, conservator, trustee or
liquidator of all or part of Owner's or Manager's assets, and such petition
or order is not dismissed or stayed within sixty (60) consecutive days after
entry thereof.
(h) Receipt of a notice of default or occurrence of any event or
condition which with the passage of time or giving of notice or both would
constitute an event of default under the Loan Agreement and the documents
related thereto (the "Loan Documents"). No grace or cure periods or notice
provisions which may otherwise be available to Owner shall apply to this
provision. Without limiting the foregoing, upon the receipt of such notice
of default, Manager shall immediately thereupon have the right, without
incurring any liability whatsoever, to discontinue its performance of duties
under this Agreement, including, without limitation, its obligation to cause
the disbursement of any funds under Section 1.06 hereof.
III.02 Remedies Upon Default. If an Event of Default by either party
shall occur and be continuing, the other party may, in addition to any other
remedy available to it in law or equity on account of such event of default,
terminate this Agreement by giving written notice of such termination, and
neither party shall have any further obligations whatever under this
Agreement; provided, however, that as a condition to the effectiveness of
Owner's termination of this Agreement, Owner shall pay to Manager all
payments due under Article IV, and shall pay to CHC all amounts outstanding
under the CHC Loan.
ARTICLE IV.
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MANAGEMENT FEE
IV.01 Management Fee. Commencing upon the Effective Date until the
end of the term hereof, Owner shall pay to Manager a monthly management fee
equal to six and one-half percent (6.5%) of the Facility's "Gross Revenues,"
as determined on an accrual basis (the "Management Fee"). "Gross Revenues"
shall mean, for the Facility, total revenues of such Facility, including,
without limitation, all ancillary fees, charges, rentals and other revenue
derived in any way from the operation of such Facility, on an accrual basis,
after deduction of allowances for contractual adjustments as they relate to
third-party payors and before deduction of any and all expenses.
IV.02 Payment of Management Fee. If there is not sufficient cash
from the operation of the Facility to pay the Management Fee when due, the
Management Fee shall be paid with an advance under the CHC Loan.
IV.03 Adjustment. Within fifteen (15) days after the delivery of the
annual financial statements of the Facility, Owner shall pay to Manager or
Manager shall credit Owner such amount as is necessary to make the amount of
the Management Fees paid with respect to the year to which the financial
statements relate equal to the amount of Management Fees shown to be due by
the annual financial statements.
ARTICLE V.
INSURANCE
V.01 Insurance/Indemnity. During the term of this Agreement, Manager
shall at all times keep the Facility insured with the kinds and amounts of
insurance described below, which, at a minimum, shall be modified as
necessary to satisfy all requirements of any Facility mortgagee. This
insurance shall be written by companies authorized to do insurance business
in the State of North Carolina. The policies will name Owner as additional
insured, and name any mortgagee of the Facility by way of standard form of
mortgagee's loss payee endorsement. Losses shall be payable to Owner, in
trust, as provided in Section 5.05 below. Any loss adjustment shall require
the written consent of Owner, Manager and each mortgagee. Evidence of
insurance shall be deposited with Owner and, if requested, with any
mortgagee(s). The policies on the Facility shall insure against the
following risks:
(a) Loss or damage by fire and such other risks as may be included
in the broadest form of extended coverage insurance from time to time
available, including but not limited to loss or damage from leakage of any
sprinkler system, now or hereafter installed in the Facility, in amounts
sufficient to prevent Owner or Manager from becoming a co-insurer within the
terms of the applicable policies and in any event in an amount not less than
one hundred percent (100%) of the then full replacement value thereof (as
defined below in Section 5.02);
(b) Loss or damage by explosion of steam boilers, pressure vessels
or similar apparatus, now or hereafter installed in the Facility, in such
limits with respect to any one accident as may be reasonably agreed by Owner
and Manager from time to time;
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(c) Claims for personal injury or property damage under a policy of
general public liability insurance with amounts not less than One Million
Dollars ($1,000,000.00) per occurrence in respect of bodily injury, One
Million Dollars ($1,000,000.00) aggregate per occurrence, and Three Hundred
Thousand Dollars ($300,000.00) for property damage;
(d) Claims arising out of malpractice in an amount not less than
One Million Dollars ($1,000,000.00) for each person and for each occurrence;
(e) Such other hazards and in such amounts as may be customary for
comparable properties in the area and is available from insurance companies
authorized to do business in the State of North Carolina.
(f) Loss of rental under a rental value insurance policy covering a
risk of loss during the first six (6) months of reconstruction resulting from
the occurrence of any of the hazards described in subsections (a) and (b) of
this Section 5.01 in an amount sufficient to prevent Owner from becoming a
co-insurer; and
(g) Workers' compensation.
V.02 Replacement Cost. The term "full replacement value" of
improvements as used herein, shall mean the actual replacement cost thereof
from time to time, less exclusions provided in the normal fire insurance
policy.
V.03 Additional Insurance. In addition to the insurance described
above, Manager shall maintain such additional insurance as may be reasonably
required from time to time by any mortgagee of the Facility.
V.04 Waiver of Subrogation. Any provision in this Agreement to the
contrary notwithstanding, each party, to the extent it is permitted to do so
by the terms and provisions of any of the above policies, hereby waives any
and all rights it may have against the other, its agents, or employees, for
any loss or damage from risks ordinarily insured against under such policies,
but only to the extent that such loss or damage is in fact covered by such
insurance and is collectible by the insured party. Each party further
covenants and agrees that it will, upon request of the other, request each
such insurance company to attach to such policy or policies issued by it a
waiver of subrogation with respect to the other party, its agents or
employees.
V.05 Insurance Proceeds. All proceeds payable by reason of any
casualty loss or damage to all or any part of the Facility and insured under
any policy of insurance required by Section 5.01 above of this Agreement
shall be paid to Owner and held by Owner in trust (subject to the provisions
of Section 5.06 below and the rights of the holders of the Facility
mortgages) and shall be made available for reconstruction or repair, as the
case may be, of any damage to or destruction of the Facility, and shall be
paid out by Owner from time to time for the reasonable costs of such work.
Any excess proceeds of insurance remaining after the completion of the
restoration or reconstruction of the Facility shall be returned, as
applicable, to the insurer or Manager as their interests may appear. All
salvage resulting from any such loss covered by insurance shall belong to
Owner.
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V.06 Damage or Destruction. If, during the term of this Agreement,
the Facility is totally or partially destroyed from a risk covered by the
insurance described in Section 5.01 above, Owner shall, as soon as
practicable, restore the Facility to substantially the same condition as
existed immediately before the destruction. Upon the commencement of such
work, Owner shall proceed with due diligence to complete such work within a
reasonable period of time. If the costs of the restoration exceed the amount
of proceeds received by Owner from the insurance required under Section 5.01
Manager shall have the right, but not the obligation, to pay the difference
between the amount of insurance proceeds and such cost of restoration.
V.07 Restoration of Manager's Property. If Owner is required to
restore the Facility as provided in Section 5.06, Owner shall not be required
to restore alterations made by Manager, or Manager's improvements, trade
fixtures or personal property, such excluded items being the sole
responsibility of Manager to restore. Owner shall, however, be required to
restore the Facility's tangible personal property owned by Owner.
V.08 Manager's Blanket Policy. Notwithstanding anything to the
contrary contained in this Article V, Manager's obligation to carry the
insurance provided for herein may be brought within the coverage of a
so-called blanket policy, carried and maintained by Manager; provided,
however, that the coverage afforded Owner will not be reduced or diminished
or otherwise be different from that which would exist under a separate policy
meeting all other requirements of this Agreement.
ARTICLE VI.
COVENANTS OF OWNER
VI.01 Licensing; Changes and Services. Subject to the terms of this
Agreement, Owner shall take or cause to be taken any and all actions
necessary to be taken by it as the overall supervisor of the assets and
operations of the Facility in order to maintain all required licenses,
permits for the operation of the Facility and the Facility's eligibility to
participate in all public or private third-party medical payment programs,
including providing sufficient funds to bring the Facility in compliance with
all applicable fire safety codes and other laws, regulations and orders, and
to correct all structural, maintenance, procedural and staffing deficiencies
as shown on the surveys and reports of governmental agencies having
jurisdiction over the Facility. Owner agrees that it will not, through the
exercise of its overall supervisory powers, substantially change the services
rendered by the Facility during the term hereof without the prior written
approval of Manager.
VI.02 Transfer of Interest in Facility. Owner acknowledges and
agrees that upon the transfer, lease, assignment, sale or other disposition
or conveyance of all or any part of its interest in and to the Facility, this
Agreement shall remain in full force and effect unless otherwise terminated
as provided in Section 2.02(c). Subject to the foregoing, Owner covenants
and agrees that in the event that it sells, assigns or otherwise transfers
its interest in and to the Facility at any time while this Agreement is in
effect, it will require the transferee to assume the obligations of Owner
hereunder. The provisions of this Section 6.02 are in addition to, and do not
modify or abridge, the prohibitions against sale, transfer,
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assignment or other disposition of the Facility, as set forth in Section 2.02
(c) and elsewhere in this Agreement.
VI.03 Damage or Destruction. If the Facility or any portions thereof
shall be damaged or destroyed by fire or other casualty, Owner shall commence
to repair, restore, rebuild or replace any such damage or destruction within
sixty (60) days after such fire or other casualty and shall proceed with due
diligence to complete such work within a reasonable period of time.
ARTICLE VII.
MISCELLANEOUS COVENANTS
VII.01 Binding Agreement. The terms, covenants, conditions,
provisions and agreements herein contained shall be binding upon and inure to
the benefit of the parties hereto, their successors and assigns.
VII.02 Relationship of Parties. Nothing contained in this Agreement
shall constitute or be construed to be or to create a partnership, joint
venture or lease between Owner and Manager with respect to the Facility.
VII.03 Notices. All notices, demands and requests contemplated
hereunder by either party to the other shall be in writing, and shall be
delivered by hand, transmitted by cable, telegram or telecopy (receipt
confirmed), or mailed, postage prepaid, registered, or certified mail return
receipt requested:
(a) to Owner, by addressing the same to:
Canton Health Investors, LLC
c/o Charles E. Trefzger
46 Third Street, N.W.
Hickory, North Carolina 28601
(b) to Manager, by addressing the same to:
Centennial HealthCare Management Corporation
400 Perimeter Center Terrace
Suite 650
Atlanta, Georgia 30346
Attn: Alan C. Dahl, Executive Vice President
or to such other address or to such other person as may be designated by
notice given from time to time during the term of this Agreement by one party
to the other. Any notice hereunder shall be deemed given five (5) business
days after mailing, if given by mailing in the manner provided above, or on
the date delivered or transmitted if given by hand, cable, telegraph or
telecopy (receipt confirmed).
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VII.04 Entire Agreement; Amendments. This Agreement contains the
entire agreement between the parties hereto, and no prior oral or written,
and no contemporaneous oral representations or agreements between the
parties with respect to the subject matter of this Agreement shall be of any
force and effect. Any additions, amendments or modifications to this
Agreement shall be of no force and effect unless in writing and signed by
both Owner and Manager.
VII.05 Governing Law. All the terms and provisions hereof and the
rights and obligations of the parties hereto shall be governed by, and
construed and enforced in accordance with, the laws of the State of Georgia
(without regard to its rules of conflicts of laws).
VII.06 Captions and Headings. The captions and headings throughout
this Agreement are for convenience and reference only and do not constitute a
part hereof.
VII.07 Disclaimer of Employment of Facility Employees. No person
employed in the operation of the Facility will be an employee of Manager, and
Manager will have no liability for payment of their wages, fringe benefits,
payroll taxes and other expenses of employment.
VII.08 Costs and Expenses; Indemnity. Unless otherwise expressly
provided herein, all fees, costs and expenses arising out of, relating to or
incurred in the operation of the Facility, including, without limitation, the
fees, costs, and expenses of Manager and outside consultants and
professionals, shall be the sole responsibility of Owner and shall be payable
as operating expenses of the Facility. Manager, by reason of the execution
of this Agreement or the performance of its services hereunder, shall not be
liable for or deemed to have assumed any liability for such fees, costs and
expenses, or any other liability or debt of Owner whatsoever, arising out of
or relating to the Facility or incurred at its operation, except the salary
of Manager's employees and the expenses and costs incurred at its central
administrative offices in performance of its obligations hereunder. Owner
agrees to indemnify and hold Manager, CHC and their officers, directors,
agents and employees harmless from and against all losses, claims, damages or
other liabilities, including the costs and expenses incurred in connection
therewith, arising out of or relating to the ownership of the Facility
(except those resulting from the wilful misconduct or negligence of Manager
or CHC), including, without limitation, any liability asserted against
Manager or CHC or any of their officers, directors, employees or agents by
reason of any action taken by any of the foregoing while performing the
duties of Manager hereunder on behalf of Owner.
VII.09 Responsibility for Misconduct of Employees and Other Persons.
Manager will have no liability whatsoever for damages suffered on account of
the dishonesty, misconduct or negligence of any employee of or employee
leased by the Facility or any officer, director, partner, shareholder,
employee or agent of Owner. Manager shall be liable to the Facility in
connection with damage or loss directly sustained by Owner by reason of the
dishonesty, wilful misconduct and gross negligence of Manager's employees in
the operation of the Facility during the term of this Agreement.
7.10 Advances by Manager. Manager shall have the right, but not the
obligation, to acquire for the benefit of Owner, under the CHC Loan, any and
all sums required to maintain all necessary licenses and permits and to
otherwise keep the Facility operating as a fully
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insured nursing home in good
condition and repair. All such sums advanced under the CHC Loan to Owner
shall be repaid by Owner in accordance with the terms of the Loan Agreement
and the Loan Documents, and Manager shall have the right at any time and from
time to time to instruct the signatories of the Operating Accounts to
withdraw and pay such amounts as are necessary to repay such advances.
7.11 Definition of Affiliate. For purposes of this Agreement, the term
"Affiliate" shall mean any person or entity which Manager or Owner or their
respective shareholders or individual partners, directly or indirectly,
through one or more intermediaries, controls, is in common control with, or
is controlled by.
7.12 Authorization of Agreement. Manager and Owner represent and
warrant, each to the other with respect to itself, that the execution and
delivery of this Agreement has been duly authorized by all respective action,
will not presently or with the passage of time, the giving of notice, or both
result in a default under or violate or conflict with (i) the provisions of
the articles of incorporation and bylaws of Manager or the formation
documents and operating agreement of Owner, or (ii) any other material
agreement, mortgage, loan agreement or other contract or instrument by which
either party is bound or to which any of its property or assets are subject,
or (iii) any existing law, regulation, court order or consent decree by which
either party is bound or to which any of its property or assets are subject.
7.13 Severability. If any one or more of the provisions of this
Agreement are held invalid or unenforceable, the validity and enforceability
of all other provisions of this Agreement shall remain in full force and
effect, unless enforcing the remainder of the provisions would not satisfy
the original intentions of the parties.
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IN WITNESS WHEREOF, the parties hereto have executed, sealed and
delivered this Agreement through their duly authorized representatives, as of
the day and year first above written.
OWNER:
CANTON HEALTH INVESTORS, LLC
By:/s/ Charles E. Trefzger
Name: Charles E. Trefzger
Its:
MANAGER:
CENTENNIAL HEALTHCARE MANAGEMENT CORPORATION
By:/s/ Randall J. Bufford
Name: Randall J. Bufford
Its:Executive Vice President
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SCHEDULE 10.50
CHMC has entered into agreements substantially identical to Exhibit 10.50
as follows:
1. Long-Term Care Facility Management Agreement dated June 1, 1997 with
Quality Link-Bertie, L.P. for Windsor, North Carolina facility.
2. Long-Term Care Facility Management Agreement dated June 1, 1997 with
Colonial Health Investors, LLC for Asheville, North Carolina facility.
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LONG-TERM CARE FACILITY
MANAGEMENT AGREEMENT
THIS LONG-TERM CARE FACILITY MANAGEMENT AGREEMENT (the "Agreement") is made
as of this 1st day of June, 1997, by and between North Raleigh Health Investors,
LLC, a North Carolina limited liability company ("Lessee"), and Centennial
HealthCare Management Corporation, a Georgia corporation ("Manager").
W I T N E S S E T H :
WHEREAS, Lessee presently leases certain real and personal property
comprising a certain 114-bed nursing center located in Raleigh, North Carolina
(the "Facility") pursuant to that certain lease dated as of December 1, 1996
(the "Lease");
WHEREAS, the parent corporation of Manager, Centennial HealthCare
Corporation ("CHC") and Lessee have entered into that certain Loan Agreement
dated of even date herewith (the "Loan Agreement"), whereby CHC will loan
certain funds to Lessee (the "CHC Loan"); and
WHEREAS, Lessee and Manager desire for Manager to provide its experience,
skill and supervision to manage the Facility on behalf of Lessee under and
subject to the terms of this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual promises and
covenants of the parties contained herein and for such other good and valuable
consideration, the receipt, adequacy and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
ARTICLE I.
MANAGEMENT DUTIES AND OBLIGATIONS
l.01 Control Retained by Lessee. Lessee shall at all times exercise
overall control over the assets and operations of the Facility, subject to the
terms of this Agreement, and Manager shall perform the duties herein required to
be performed by it as the agent of Lessee and in accordance with the policies
and directives from time to time adopted by Lessee.
l.02 Changes in Method of Operation. Manager shall not make substantial
changes in the method of operating the Facility unless Manager first notifies
Lessee and Lessee has given its approval, which approval shall not be
unreasonably withheld.
l.03 Management of Facility. During the term of this Agreement and subject
to the terms of this Agreement, Manager shall on behalf of Lessee manage all
aspects of the operation of the Facility, including, but not limited to
staffing, accounting, billing, collections, setting of rates and charges and
general administration. In connection therewith, Manager (either directly or
through supervision of employees of the Facility) shall:
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(a) Hire or lease on behalf of Lessee and retain (to the extent such
personnel are reasonably available in the community in which the Facility is
located) an adequate staff of nurses, technicians, nurse aides, office and other
employees, including a qualified administrator (the "Administrator") and shall
promote, direct, assign and discharge all such employees on behalf of Lessee at
Manager's reasonable discretion; provided, however, that leased employees shall
be subject to the direction and control of the lessor of such leased employees.
All employees shall be employees of or leased by Lessee and carried on the
payroll of the Facility and shall not be deemed employees or agents of Manager.
(b) Institute and amend, from time to time general salary scales,
personnel policies and appropriate employee benefits for all employees on behalf
of Lessee; provided, however, that leased employees shall be subject to the
general salary scales, personnel policies and employee benefit programs of the
lessor of such leased employees. Employee benefits may include pension and
profit sharing plans, insurance benefits, incentive plans for key employees and
holiday, vacation, personal leave and sick leave policies.
(c) Issue appropriate bills for services and materials furnished by
the Facility and use its reasonable best efforts to diligently collect accounts
receivable and monies owed to the Facility, design and maintain accounting,
billing, patient and collection records; and prepare and file insurance,
Medicare, Medicaid and any and all other necessary or desirable reports and
claims related to revenue production. Lessee hereby grants Manager the right to
enforce Lessee's rights as creditor under any contract or in connection with
rendering any services for purposes of collecting accounts receivable and monies
owed the Facility.
(d) Order, supervise and conduct a program of regular maintenance and
repair.
(e) Purchase food, beverage, medical, cleaning and other supplies,
equipment, furniture and furnishings for the account of Lessee.
(f) Administer, supervise and schedule all patient and other services
of the Facility, including the operation of food, barber/beautician and other
ancillary services.
(g) Provide for the orderly payment (to the extent funds are
available therefor) of accounts payable, employee payroll, amounts due on short
and long-term indebtedness, taxes, insurance premiums, and all other obligations
of the Facility.
(h) Institute standards and procedures for admitting patients, for
charging patients for services, and for collecting the charges from the patients
or third parties.
(i) Obtain and maintain insurance coverage for the Facility naming
Lessee, Manager and such other persons requested by Lessee as insureds as
provided in Section 5.01 hereof.
(j) Negotiate and enter into, in the name of and on behalf of Lessee,
such agreements, contracts and orders as Manager may deem necessary or
advisable, for the furnishing of services, concessions and supplies for the
operation and maintenance of the
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Facility, including, without limitation, agreements for the provision of
therapy and rehabilitation services, and medical supplies.
(k) After notice to Lessee, negotiate on behalf of Lessee (and in
conjunction with Lessee's counsel) with any labor union lawfully entitled to
represent employees of Lessee who work at the Facility, but any collective
bargaining agreement or labor contract must be submitted to Lessee for its
approval and execution.
(l) As provided in Section 1.08(a), assist in maintaining all
licenses and permits required for the operation of the Facility, its contracts
with third party payors and other similar governmental and nongovernmental
agencies and intermediaries.
(m) Make periodic evaluations of the performances of all departments
of the Facility.
(n) Design, establish and maintain a suitable accounting system using
accounts and classifications consistent with those used in similar facilities.
(o) Advise and assist Lessee in designing an adequate and appropriate
public relations program.
l.04 Reports to Lessee.
(a) Manager shall prepare and deliver to Lessee, within thirty (30)
days after the close of each calendar month, unaudited financial statements
covering the prior month and containing a balance sheet and statement of income
and expenses in reasonable detail. Manager shall also provide any required
assistance to the independent accountants for the Facility, who shall be
selected by Manager, in the preparation of audited annual financial statements
for the operation of the Facility. Such financial statements shall be prepared
at Lessee's expense in accordance with generally accepted accounting principles
in the health care field consistently applied and delivered to Manager and
Lessee within ninety (90) days after the end of each fiscal year of the
Facility. Manager shall prepare reports or provide information to Lessee
required by the Lease, any loan documents of the lessor, or the Loan Agreement
and related documents.
(b) Manager shall submit to Lessee for its approval (which approval
will not be unreasonably withheld) each twelve (12) months its budget for the
operation of the Facility setting out anticipated income, expenses and capital
expenditures during the succeeding twelve (12) month period. Manager shall use
its reasonable best efforts to operate the Facility in accordance with the
provisions of the budget for the Facility as submitted to Lessee. Such proposed
budget for the Facility shall be delivered to Lessee prior to the commencement
of the operational fiscal year of the Facility.
(c) Manager or Lessee shall schedule periodic management meetings to
be attended by representatives of both Manager and Lessee no less frequently
than quarterly and shall furnish to Lessee quarterly written progress reports
concerning the operation of the Facility.
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l.05 Bank Accounts.
(a) Manager shall deposit in a bank account or accounts of Manager or
Manager's affiliate(s) (collectively referred to in this Section 1.05 as
Manager) established in Manager's name (the "Facility Depository Accounts") all
funds received from the operations of the Facility (the "Facility Funds").
Manager shall segregate such Facility Funds in an account(s) separate and apart
from Manager's Operating Accounts (the "Segregated Facility Accounts"). Manager
shall disburse Facility Funds received from the Facility's operations in the
manner and order of priority described in section 1.06 below. Manager shall
also deposit and maintain the personal funds of the Facility's residents into a
separate trust account established in Manager's name (the "Facility Trust
Accounts"). Manager shall designate the signatory or signatories required on
all checks or other documents of withdrawal for the Facility Depository,
Operating, Segregated Facility, and Facility Trust Accounts.
l.06 Flow of Facility Funds.
(a) All revenues and cash of the Facility shall be disbursed by
Manager in the following order of priority and, in each case, in such amounts
and at such times as Manager deems is required to be made in connection with the
payment of:
(1) the Facility's Lease payments due from Lessee to
lessor;
(2) the costs and expenses of operating the Facility,
including the reimbursable expenses of Manager;
(3) all accrued and unpaid Management Fees (defined in
Section 4.01) to Manager;
THEN, after retention by Manager of an adequate working
capital reserve (in cash or available credit under the CHC
Loan) (such reserve to be determined by Manager in its
reasonable discretion and approved by Lessee in connection
with its approval of the operating budget for the Facility
(with such approval to be not unreasonably withheld or
delayed) and held in such subaccount of the Facility
Depository, Operating or Segregated Facility Accounts as
Manager shall determine);
(4) all accrued and unpaid interest on the CHC Loan; and
(5) any principal balance outstanding under the CHC Loan
whether or not any or all of such balance is then due and
payable.
(b) Manager agrees that to the extent the total of items described in
paragraphs 1, 2, 3 and 4 above (collectively the "Base Operating Costs") exceed
the Facility's collected net revenues (resulting in an "Operating Deficit"),
Manager shall, as soon
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as possible and not less than five (5) business days after notice from
Lessee, advance funds under the CHC Loan, if available, as may be necessary
to cover or offset such Operating Deficit.
1.07 Access to Books, Records and Documents. If it is ultimately
determined that Section 952 of the Omnibus Budget Reconciliation Act of 1980 and
final regulations promulgated thereunder apply to this Agreement:
(a) Until the expiration of four (4) years after the furnishing of
services pursuant to this Agreement, Manager shall, as provided in Section 952,
make available, upon written request, to the Secretary of Health and Human
Services, or upon request, to the Comptroller General of the United States, or
any of their duly authorized representatives, this Agreement, and all books,
documents and records of Manager that are necessary to verify the nature of this
Agreement for which payment may be made under the Medicare program; and
(b) If Manager carries out any of the duties of this Agreement
pursuant to a subcontract or subcontracts with an aggregate value or cost of
$10,000 or more over a twelve (12) month period with a related organization,
such subcontract or subcontracts shall contain a clause to the effect that,
until the expiration of four years after the furnishing of such services
pursuant to such subcontract or subcontracts, the related organization shall, as
provided in Section 952, make available, upon written request, to the Secretary
of Health and Human Services, or upon request, to the Comptroller General of the
Untied States, or any of their duly authorized representatives, the subcontract
or subcontracts, and all books, documents and records of such subcontractors for
which payment may be made under the Medicare program.
l.08 Licenses.
(a) Manager, as agent for Lessee and on Lessee's behalf, shall apply
for and seek to obtain and maintain all necessary licenses, permits,
certifications, consents, and approvals from all governmental agencies which
have jurisdiction over the operation of the Facility. Manager agrees that its
management and operation of the Facility shall materially and substantially
comply with any representations made by the Facility lessor and/or Lessee in the
Certificate of Need application for the Facility, to the extent disclosed in
writing to Manager, as well as all conditions placed upon such Certificate of
Need and so disclosed in writing to Manager. Manager, by applying for such
licenses, permits, consents, and approvals, does not in any way guarantee the
approval of such applications and shall have no liability with respect to any
failure of the Facility to receive any such license, permit, consent or
approval.
(b) Neither Lessee nor Manager shall knowingly take any action or
fail to take any action which may (1) cause any governmental authority having
jurisdiction over the operation of the Facility to institute any proceeding for
the rescission or revocation of any necessary license, permit, consent or
approval, or (2) adversely affect Lessee's right to accept and obtain payments
under Medicare, Medicaid, or any other public or private third party medical
payment program.
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(c) Manager shall, with the written approval of Lessee, have the
right to contest by appropriate legal proceedings, diligently conducted in good
faith in the name of Lessee, the validity or application of any law, ordinance,
rule, ruling, regulation, order or requirement of any governmental agency having
jurisdiction over the operation of the Facility. Lessee, after having given its
written approval, shall pay attorneys' fees incurred with regard to the contest.
Counsel for any such contest shall be selected by Manager, with Lessee's
approval which shall not be unreasonably withheld. Manager shall have the
right, upon notice to Lessee but without the written consent of Lessee, to
process all third-party claims for the services of the Facility, including,
without limitation, the full right to contest to the exhaustion of all
applicable administrative proceedings or procedures, adjustment and denials by
governmental agencies or their fiscal intermediaries as third-party payors.
l.09 Administrator. Manager shall employ or lease for the Facility an
Administrator to serve as the chief executive officer of such Facility. The
Administrator shall be an employee of and shall be compensated by Lessee, in
accordance with the approved operating budget for the Facility or as otherwise
approved by Lessee, and Manager shall pay on Lessee's behalf out of the
Operating Accounts of the Facility, in advance, on or before the fifth (5th) day
of each month, all such compensation, including salary, fringe benefits, bonuses
and business expense reimbursements approved by Manager, to the Administrator.
The term "fringe benefits" shall include, without limitation, employer's
F.I.C.A. payments, unemployment compensation and other employment taxes,
bonuses, vacation, personal and sick leave benefits, workers' compensation,
group life, health and accident insurance premiums and disability and other
benefits.
1.10 Taxes. Any federal, state or local taxes, assessments or other
governmental charges properly imposed on the Facility are the obligations of
Lessee, not of Manager, but all such obligations shall be paid by Manager on
Lessee's behalf out of the Operating Accounts of the Facility. With Lessee's
prior written consent, Manager may contest the validity or amount of any such
tax or imposition on the Facility in the same manner as described in
Section 1.08(c) hereof.
1.11 Use of Manager's Personnel. An authorized representative of Manager
shall visit the Facility as often as Manager deems necessary. The time spent by
such authorized representative of Manager during such visits and all
out-of-pocket expenses arising from travel and lodging connected with such
visitations shall not be charged separately to Lessee.
1.12 Government Regulations. Manager agrees to operate and maintain the
Facility in substantial compliance with the requirements of any material
statute, ordinance, law, rule, regulation or order of any governmental or
regulatory body having jurisdiction over the Facility and to comply with all
orders and requirements of the local board of fire underwriters or any other
body which may exercise similar functions; provided, however, that Manager shall
not be required to expend its separate funds in order to comply with any such
statutes, ordinances, laws, rules, regulations or orders, and to the extent any
funds are so required, it shall fulfill its obligations hereunder by notifying
Lessee of the actions necessary in order to be in compliance therewith and
expending such funds of Lessee as Lessee may provide or as Manager may deem
available for such purpose.
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1.13 Quality Controls. Manager shall activate and maintain on a continuing
basis a "Quality Assurance Program" in order to provide objective measurements
of the quality of health care provided at the Facility and, in connection
therewith, shall utilize such techniques as patient questionnaires and
interviews, physician questionnaires and interviews, and inspections.
1.14 Staff Specialists. In addition to the other managerial services
provided for herein, Manager shall make available to the Facility, for
consultation and advice, when Manager deems necessary or appropriate,
specialists in such fields as accounting, auditing, budgeting, dietary services,
operations, environmental control, management, maintenance, nursing, personnel,
pharmacy operations, public relations, purchasing, quality assurance, systems
and procedures, and third-party reimbursement.
1.15 Performance of Services by Manager. In the performance of its
services hereunder, Manager shall exercise the same standards and degree of care
used by reasonable and prudent managers of nursing homes of similar size, nature
and character as the Facility. Notwithstanding anything herein to the contrary,
Manager shall not be deemed in violation of this Agreement if Manager is
prevented from performing any of its obligations hereunder for reasons beyond
its reasonable control including, without limitation, strikes, walkouts or other
employee disturbances, acts of God, or the action or promulgation of any
statute, rule, regulation or order by any federal, state, or local governmental
or judicial agency or official, nor shall it be deemed in default hereunder or
otherwise liable for any error of judgment or act or omission in the performance
of its services hereunder, which is made in reasonable good faith.
1.16 Additional Services. Lessee agrees that any specialized or additional
services recommended by Manager may be performed for a separate fee as agreed
upon by Lessee in advance of the performance of such service. If Manager
provides such service, such fee shall not be in excess of such amount as would
be charged by a third party, negotiating at arm's length, for the performance of
such service.
1.17 Obligations under CHC Loan. Manager acknowledges the existence and
terms of the CHC Loan and all documents related thereto. Manager agrees to
perform or cause to be performed, on Lessee's behalf, for so long as the
Agreement remains in full force and effect, all covenants therein relating to
the manner of operation of the Facility. Manager assumes no liability or
responsibility for repayment of the CHC Loan or for any other monetary
obligation of Lessee (including, without limitation, obligations to pay rent
under the Lease), or for the financial performance of the Facility.
1.18 Maintenance of Facility. Manager agrees to maintain the Facility in a
good and serviceable condition, ordinary wear and tear and damage by fire or
other casualty or resulting from condemnation excepted, to the extent sufficient
revenues of the Facility are available for such purpose.
1.19 Civil Money Damages. Manager agrees that if any civil money penalties
are imposed by HCFA or the State of North Carolina as a result of the nursing
care and/or treatment provided to residents of the Facility by employees of the
Facility, Manager will reimburse Lessee for the amount of the civil money
penalty imposed; provided, however, that
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following termination of this Agreement Manager must be notified immediately
upon notice of the civil money penalty and/or any Statement of Deficiencies
issued by HCFA or the State of North Carolina for a period during which
Manager served under this Agreement. Manager reserves the right to appeal or
waive appeal of any civil money penalty imposed by HCFA or the State of North
Carolina. Manager further reserves the right to retain counsel to represent
the Facility in any appeal or settlement proceedings.
ARTICLE II.
TERM AND TERMINATION
II.01 Term. The term of this Agreement shall commence as of the date
hereof (the "Effective Date"), and shall continue until the earlier of the
following dates: (i) the date which falls on the fifth (5th) anniversary
thereof, or (ii) the date on which Manager ceases to furnish management services
to the Facility and this Agreement is terminated for whatever reason.
II.02 Termination.
(a) Manager has the option to terminate this Agreement, without
damage or penalty, upon ten (10) business days prior written notice to Lessee,
upon the occurrence of either of the following events:
(i) The Facility or any material portion thereof is damaged
or destroyed to the extent that in the written opinion of an
independent architect or engineer reasonably acceptable to both
parties (x) it is not practicable or desirable to rebuild, repair or
restore the Facility within a period of nine (9) months to its
condition immediately preceding such damage, or (y) the conducting of
normal operations of the Facility would be prevented for a period of
nine (9) months or more; or
(ii) Title to or the temporary use of all or substantially
all the Facility is taken under the exercise of the power of eminent
domain by any governmental authority or person, firm or corporation
acting under governmental authority which in the opinion of an
independent architect or engineer reasonably acceptable to both
parties prevents or is likely to prevent the conducting of normal
operations at the Facility for a period of at least nine (9) months.
Provided, however, that in either of such events, in addition to the rights of
Manager under Article VI hereof, Manager shall have the right to rebuild,
restore or otherwise rearrange the Facility and recommence operations thereof,
and thereupon Manager shall continue to manage the Facility under the same
terms, conditions, and fees as provided herein.
(b) If an Event of Default (as hereinafter defined) by either party
shall occur and be continuing, the other party may terminate this Agreement by
giving written notice of such termination pursuant to Section 3.02 hereunder.
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(c) Manager shall have the option to terminate this Agreement without
damage or penalty upon ten (10) days prior written notice to Lessee following
the sale, transfer, assignment, or other disposition, in whole or in part, by
Lessee of its interest in the Facility. In the event Lessee is a corporation,
limited liability company, or partnership, any dissolution, merger,
consolidation or other transfer of a substantial portion of the stock or
underlying ownership interests (as the case may be) of Lessee shall constitute
an assignment of the Facility for all purposes of this Section 2.02(c). The
term "substantial portion" means the ownership of stock or underlying ownership
interests (as the case may be) possessing, and of the right of exercise, at
least fifty percent (50%) of the total combined voting power of such
corporation, limited liability company, or partnership, provided, however, that
this prohibition on stock transfer shall not apply to a "publicly traded
corporation," which term is hereby defined for all purposes under this Agreement
as a corporation whose shares of stock have been registered pursuant to the
Securities Act of 1933, as amended.
(d) Notwithstanding the foregoing, commencing on the Effective Date
and continuing until the date which falls on the third (3rd) anniversary thereof
(the "First Refusal Period"), for so long as (i) the CHC Loan remains
outstanding and unpaid or (ii) this Agreement remains in full force and effect,
no sale, transfer, assignment or other disposition, in whole or in part, by
Lessee of its interest in the Facility shall be permitted without Manager's
prior written consent, which consent may be granted or withheld in Manager's
sole and absolute discretion unless Lessee shall have afforded to Manager a
right of first refusal to purchase Lessee's interest in the Facility on the same
terms and conditions, including purchase price, acceptable to Lessee pursuant to
the terms of a bona fide third party offer. Manager shall be furnished with (i)
written notice of the terms of such third party offer, and (ii) a period of not
less than fifteen (15) business days within which to exercise such right of
first refusal. Upon exercise, Lessee and Manager shall close Manager's
acquisition of the Facility within the greater of (i) thirty (30) days
thereafter or (ii) the time period, if any, specified in the terms of such third
party offer. The parties acknowledge and agree that any purported sale,
transfer, assignment or other disposition by Lessee in violation of this section
shall, at Manager's option, be null, void and of no force or effect, and that
equitable remedies, including the remedy of specific performance (to compel
rescission of any such sale, transfer, assignment or other disposition) and
injunctive relief (to prevent or restrain such prohibited actions) shall be
available to Manager, in addition to its rights and remedies at law and under
this Agreement.
In the event Manager elects not to exercise its right of first refusal
under this section and there shall occur a sale, transfer, assignment or other
disposition of Lessee's interest in the Facility during the First Refusal
Period, this Agreement shall continue in full force and effect and shall bind
the purchaser (without releasing or otherwise affecting Lessee's primary
liability for its obligations hereunder, which shall thereupon be deemed joint
and several with the liability of such purchaser); provided, however, that in
the event of such sale, transfer, assignment or other disposition of Lessee's
interest pursuant to the foregoing, Lessee shall have the right and option to
terminate this Agreement upon payment and delivery to Manager of the following,
said termination to become effective upon Manager's receipt of the last of the
following:
(1) a termination fee equal to forty percent (40%) of the Facility's
"Average Monthly Fee" multiplied by the number of months remaining in
the Term,
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calculated from the date of such termination. "Average Monthly Fee"
for the Facility shall mean the average of the monthly Management
Fees payable to Manager under Article IV of this Agreement for each
of the twelve (12) full calendar months prior to such termination;
(2) all amounts outstanding under the CHC Loan;
(3) all amounts due under Article IV of this Agreement;
(4) any other amounts due Manager under the provisions of this Agreement
or any other agreements between Lessee and Manager or Manager's
affiliates; and
(5) evidence, satisfactory to Manager, that amounts have been escrowed by
Lessee sufficient to pay all pending liabilities of Manager arising
during the term of this Agreement.
ARTICLE III.
DEFAULT AND REMEDIES
III.01 Events of Default. The following shall constitute events of
default ("Events of Default" and each individually an "Event of Default") under
this Agreement:
(a) If Lessee fails to do any of the following and the responsibility
and means (including any and all necessary funds) to pay or perform same has not
been delegated to Manager hereunder: (i) make or cause to be made any payment to
Manager required to be made by Lessee, and such failure shall continue for as
much as thirty (30) days after written notice thereof shall have been given to
Lessee, (ii) perform its obligations under this Agreement in any material
respect, and such default shall continue for a period of thirty (30) days after
written notice thereof shall have been given by Manager to Lessee, or (iii) make
payments, or keep any covenants owing to any third party and which would cause
Lessee to lose possession of the Facility's buildings, equipment or properties;
(b) If Manager fails (i) to make any payment to or on behalf of
Lessee required to be made by Manager, and such failure shall continue for as
much as thirty (30) days after written notice thereof shall have been given to
Manager, (ii) to perform its obligations under this Agreement in any material
respect, and such failure shall continue for a period of thirty (30) days after
written notice thereof shall have been given by Lessee to Manager, or (iii) to
make payments, or keep any covenants owing to any third party and which would
cause Lessee to lose possession of the Facility's buildings, equipment or
properties;
(c) If, through no fault of Manager, the licenses required for the
operation of Facility are at any time suspended, terminated, or revoked, and
such suspension, termination or revocation shall continue unstayed and in effect
for a period of fourteen (14) consecutive days;
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(d) If, due to Manager's failure to maintain the Facility in material
compliance with applicable laws, regulations or rules, the Facility (i) loses
its Medicaid or Medicare certification, (ii) loses its license to operate as a
nursing home, or (iii) is closed, and such event continues unstayed and in
effect for a period of fourteen (14) consecutive days;
(e) If, due to Manager's failure to maintain the Facility in material
compliance with applicable laws, regulations or rules, patient admissions are
suspended, and such event continues unstayed and in effect for the later of
ninety (90) days or the date on which occupancy decreases more than ten percent
(10%) from the occupancy level at the date of such suspension;
(f) If either Lessee or Manager shall (i) be adjudicated bankrupt;
(ii) admit in writing its inability to pay its debts generally as they become
due; (iii) become insolvent in that its total assets are in the aggregate worth
less than all of its liabilities or it is unable to pay its debts generally as
they become due; (iv) make a general assignment for the benefit of creditors;
(v) file a petition, or admit (by answer, default or otherwise) the material
allegations of any petition filed against it, in bankruptcy under the federal
bankruptcy laws (as in effect on the date of this Agreement or as they may be
amended from time to time), or under any other law for the relief of debtors, or
for the discharge, arrangement or compromise of its debts; or (vi) consent to
the appointment of a receiver, conservator, trustee or liquidator of all or part
of its assets; or
(g) If a petition shall have been filed against Lessee or Manager in
proceedings under the federal bankruptcy laws (as in effect on the date of this
Agreement, or as they may be amended from time to time), or under any other laws
for the relief of debtors, or for the discharge, arrangement or compromise of
its debts, or an order shall be entered by any court of competent jurisdiction
appointing a receiver, conservator, trustee or liquidator of all or part of
Lessee's or Manager's assets, and such petition or order is not dismissed or
stayed within sixty (60) consecutive days after entry thereof.
(h) Receipt of a notice of default or occurrence of any event or
condition which with the passage of time or giving of notice or both would
constitute an event of default under the Loan Agreement and the documents
related thereto (the "Loan Documents"). No grace or cure periods or notice
provisions which may otherwise be available to Lessee shall apply to this
provision. Without limiting the foregoing, upon the receipt of such notice of
default, Manager shall immediately thereupon have the right, without incurring
any liability whatsoever, to discontinue its performance of duties under this
Agreement, including, without limitation, its obligation to cause the
disbursement of any funds under Section 1.06 hereof.
III.02 Remedies Upon Default. If an Event of Default by either party
shall occur and be continuing, the other party may, in addition to any other
remedy available to it in law or equity on account of such event of default,
terminate this Agreement by giving written notice of such termination, and
neither party shall have any further obligations whatever under this Agreement;
provided, however, that as a condition to the effectiveness of Lessee's
termination of this Agreement, Lessee shall pay to Manager all payments due
under Article IV, and shall pay to CHC all amounts outstanding under the CHC
Loan.
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ARTICLE IV.
MANAGEMENT FEE
IV.01 Management Fee. Commencing upon the Effective Date until the end
of the term hereof, Lessee shall pay to Manager a monthly management fee equal
to six and one-half percent (6.5%) of the Facility's "Gross Revenues," as
determined on an accrual basis (the "Management Fee"). "Gross Revenues" shall
mean, for the Facility, total revenues of such Facility, including, without
limitation, all ancillary fees, charges, rentals and other revenue derived in
any way from the operation of such Facility, on an accrual basis, after
deduction of allowances for contractual adjustments as they relate to
third-party payors and before deduction of any and all expenses.
IV.02 Payment of Management Fee. If there is not sufficient cash from
the operation of the Facility to pay the Management Fee when due, the Management
Fee shall be paid with an advance under the CHC Loan.
IV.03 Adjustment. Within fifteen (15) days after the delivery of the
annual financial statements of the Facility, Lessee shall pay to Manager or
Manager shall credit Lessee such amount as is necessary to make the amount of
the Management Fees paid with respect to the year to which the financial
statements relate equal to the amount of Management Fees shown to be due by the
annual financial statements.
ARTICLE V.
INSURANCE
V.01 Insurance/Indemnity. During the term of this Agreement, Manager shall
at all times keep the Facility insured with the kinds and amounts of insurance
described below, which, at a minimum, shall be modified as necessary to satisfy
all requirements of the Facility lessor or any Facility mortgagee. This
insurance shall be written by companies authorized to do insurance business in
the State of North Carolina. The policies will name Lessee and the Facility
lessor as additional insureds, and name any mortgagee of the Facility by way of
standard form of mortgagee's loss payee endorsement. Losses shall be payable to
Lessee, in trust, as provided in Section 5.05 below. Any loss adjustment shall
require the written consent of Lessee, Manager, the Facility lessor, and each
mortgagee. Evidence of insurance shall be deposited with Lessee and, if
requested, with any mortgagee(s). The policies on the Facility shall insure
against the following risks:
(a) Loss or damage by fire and such other risks as may be included in
the broadest form of extended coverage insurance from time to time available,
including but not limited to loss or damage from leakage of any sprinkler system
now or hereafter installed in the Facility, in amounts sufficient to prevent
Lessee or Manager from becoming a co-insurer within the terms of the applicable
policies and in any event in an amount not less than one hundred percent (100%)
of the then full replacement value thereof (as defined below in Section 5.02);
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(b) Loss or damage by explosion of steam boilers, pressure vessels or
similar apparatus, now or hereafter installed in the Facility, in such limits
with respect to any one accident as may be reasonably agreed by Lessee and
Manager from time to time;
(c) Claims for personal injury or property damage under a policy of
general public liability insurance with amounts not less than One Million
Dollars ($1,000,000.00) per occurrence in respect of bodily injury, One Million
Dollars ($1,000,000.00) aggregate per occurrence, and Three Hundred Thousand
Dollars ($300,000.00) for property damage;
(d) Claims arising out of malpractice in an amount not less than One
Million Dollars ($1,000,000.00) for each person and for each occurrence;
(e) Such other hazards and in such amounts as may be customary for
comparable properties in the area and is available from insurance companies
authorized to do business in the State of North Carolina.
(f) Loss of rental under a rental value insurance policy covering a
risk of loss during the first six (6) months of reconstruction resulting from
the occurrence of any of the hazards described in subsections (a) and (b) of
this Section 5.01 in an amount sufficient to prevent Lessee from becoming a
co-insurer; and
(g) Workers' compensation.
V.02 Replacement Cost. The term "full replacement value" of improvements
as used herein, shall mean the actual replacement cost thereof from time to
time, less exclusions provided in the normal fire insurance policy.
V.03 Additional Insurance. In addition to the insurance described above,
Manager shall maintain such additional insurance as may be reasonably required
from time to time by any mortgagee of the Facility.
V.04 Waiver of Subrogation. Any provision in this Agreement to the
contrary notwithstanding, each party, to the extent it is permitted to do so by
the terms and provisions of any of the above policies, hereby waives any and all
rights it may have against the other, its agents, or employees, for any loss or
damage from risks ordinarily insured against under such policies, but only to
the extent that such loss or damage is in fact covered by such insurance and is
collectible by the insured party. Each party further covenants and agrees that
it will, upon request of the other, request each such insurance company to
attach to such policy or policies issued by it a waiver of subrogation with
respect to the other party, its agents or employees.
V.05 Insurance Proceeds. All proceeds payable by reason of any casualty
loss or damage to all or any part of the Facility and insured under any policy
of insurance required by Section 5.01 above of this Agreement shall be paid to
Lessee and held by Lessee in trust (subject to the provisions of Section 5.06
below and the rights of the holders of the Facility mortgages) and shall be made
available for reconstruction or repair, as the case may be, of any damage to or
destruction of the Facility, and shall be paid out by Lessee from time to time
for the reasonable costs of such work. Any excess proceeds of insurance
remaining
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after the completion of the restoration or reconstruction of the Facility
shall be returned, as applicable, to the insurer or Manager as their
interests may appear. All salvage resulting from any such loss covered by
insurance shall belong to Lessee.
V.06 Damage or Destruction. If, during the term of this Agreement, the
Facility is totally or partially destroyed from a risk covered by the insurance
described in Section 5.01 above, Lessee shall, as soon as practicable, and, if
permitted under the Lease, restore the Facility to substantially the same
condition as existed immediately before the destruction. Upon the commencement
of such work, Lessee shall proceed with due diligence to complete such work
within a reasonable period of time. If the costs of the restoration exceed the
amount of proceeds received by Lessee from the insurance required under Section
5.01 Manager shall have the right but not the obligation to pay the difference
between the amount of insurance proceeds and such cost of restoration.
V.07 Restoration of Manager's Property. If Lessee is required to restore
the Facility as provided in Section 5.06, Lessee shall not be required to
restore alterations made by Manager, or Manager's improvements, trade fixtures
or personal property, such excluded items being the sole responsibility of
Manager to restore. Lessee shall, however, be required to restore the
Facility's tangible personal property owned by Lessee.
V.08 Manager's Blanket Policy. Notwithstanding anything to the contrary
contained in this Article V, Manager's obligation to carry the insurance
provided for herein may be brought within the coverage of a so-called blanket
policy, carried and maintained by Manager; provided, however, that the coverage
afforded Lessee will not be reduced or diminished or otherwise be different from
that which would exist under a separate policy meeting all other requirements of
this Agreement.
ARTICLE VI.
COVENANTS OF LESSEE
VI.01 Licensing; Changes and Services. Subject to the terms of the
Lease and this Agreement, Lessee shall take or cause to be taken any and all
actions necessary to be taken by it as the overall supervisor of the assets and
operations of the Facility in order to maintain all required licenses, permits
for the operation of the Facility and the Facility's eligibility to participate
in all public or private third-party medical payment programs, including
providing sufficient funds to bring the Facility in compliance with all
applicable fire safety codes and other laws, regulations and orders, and to
correct all structural, maintenance, procedural and staffing deficiencies as
shown on the surveys and reports of governmental agencies having jurisdiction
over the Facility. Lessee agrees that it will not, through the exercise of its
overall supervisory powers, substantially change the services rendered by the
Facility during the term hereof without the prior written approval of Manager.
VI.02 Transfer of Leasehold. Subject to the requirements of the Lease,
Lessee further acknowledges and agrees that upon the transfer, lease,
assignment, sale or other disposition or conveyance of all or any part of its
leasehold interest in and to the Facility, this Agreement shall remain in full
force and effect unless otherwise terminated as provided in Section 2.02(c).
Subject to the foregoing and to the requirements of the Lease, Lessee
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covenants and agrees that in the event that it sells, assigns or otherwise
transfers its leasehold interest in and to the Facility at any time while
this Agreement is in effect, it will require the transferee to assume the
obligations of Lessee hereunder. The provisions of this Section 6.02 are in
addition to, and do not modify or abridge, the prohibitions against sale,
transfer, assignment or other disposition of the Facility, as set forth in
Section 2.02(c) and elsewhere in this Agreement.
VI.03 Damage or Destruction. If the Facility or any portions thereof
shall be damaged or destroyed by fire or other casualty, Lessee shall commence
to repair, restore, rebuild or replace any such damage or destruction within
sixty (60) days after such fire or other casualty and shall proceed with due
diligence to complete such work within a reasonable period of time.
ARTICLE VII.
MISCELLANEOUS COVENANTS
VII.01 Binding Agreement. The terms, covenants, conditions, provisions
and agreements herein contained shall be binding upon and inure to the benefit
of the parties hereto, their successors and assigns.
VII.02 Relationship of Parties. Nothing contained in this Agreement
shall constitute or be construed to be or to create a partnership, joint venture
or lease between Lessee and Manager with respect to the Facility.
VII.03 Notices. All notices, demands and requests contemplated
hereunder by either party to the other shall be in writing, and shall be
delivered by hand, transmitted by cable, telegram or telecopy (receipt
confirmed), or mailed, postage prepaid, registered, or certified mail return
receipt requested:
(a) to Lessee, by addressing the same to:
North Raleigh Health Investors, LLC
c/o Charles E. Trefzger
46 Third Street, N.W.
Hickory, North Carolina 28601
(b) to Manager, by addressing the same to:
Centennial HealthCare Management Corporation
400 Perimeter Center Terrace
Suite 650
Atlanta, Georgia 30346
Attn: Alan C. Dahl, Executive Vice President
or to such other address or to such other person as may be designated by notice
given from time to time during the term of this Agreement by one party to the
other. Any notice hereunder shall be deemed given five (5) business days after
mailing, if given by mailing in
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the manner provided above, or on the date delivered or transmitted if given
by hand, cable, telegraph or telecopy (receipt confirmed).
VII.04 Entire Agreement; Amendments. This Agreement contains the entire
agreement between the parties hereto, and no prior oral or written, and no
contemporaneous oral representations or agreements between the parties with
respect to the subject matter of this Agreement shall be of any force and
effect. Any additions, amendments or modifications to this Agreement shall be
of no force and effect unless in writing and signed by both Lessee and Manager.
VII.05 Governing Law. All the terms and provisions hereof and the
rights and obligations of the parties hereto shall be governed by, and construed
and enforced in accordance with, the laws of the State of Georgia (without
regard to its rules of conflicts of laws).
VII.06 Captions and Headings. The captions and headings throughout this
Agreement are for convenience and reference only and do not constitute a part
hereof.
VII.07 Disclaimer of Employment of Facility Employees. No person
employed in the operation of the Facility will be an employee of Manager, and
Manager will have no liability for payment of their wages, fringe benefits,
payroll taxes and other expenses of employment.
VII.08 Costs and Expenses; Indemnity. Unless otherwise expressly
provided herein, all fees, costs and expenses arising out of, relating to or
incurred in the operation of the Facility, including, without limitation, the
fees, costs, and expenses of Manager and outside consultants and professionals,
shall be the sole responsibility of Lessee and shall be payable as operating
expenses of the Facility. Manager, by reason of the execution of this Agreement
or the performance of its services hereunder, shall not be liable for or deemed
to have assumed any liability for such fees, costs and expenses, or any other
liability or debt of Lessee whatsoever, arising out of or relating to the
Facility or incurred at its operation, except the salary of Manager's employees
and the expenses and costs incurred at its central administrative offices in
performance of its obligations hereunder. Lessee agrees to indemnify and hold
Manager, CHC and their officers, directors, agents and employees harmless from
and against all losses, claims, damages or other liabilities, including the
costs and expenses incurred in connection therewith, arising out of or relating
to the ownership of the Facility (except those resulting from the wilful
misconduct or negligence of Manager or CHC), including, without limitation, any
liability asserted against Manager or CHC or any of their officers, directors,
employees or agents by reason of any action taken by any of the foregoing while
performing the duties of Manager hereunder on behalf of Lessee.
VII.09 Responsibility for Misconduct of Employees and Other Persons.
Manager will have no liability whatsoever for damages suffered on account of the
dishonesty, misconduct or negligence of any employee of or employee leased by
the Facility or any officer, director, partner, shareholder, employee or agent
of Lessee. Manager shall be liable to the Facility in connection with damage or
loss directly sustained by Lessee by reason of the dishonesty, wilful misconduct
and gross negligence of Manager's employees in the operation of the Facility
during the term of this Agreement.
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7.10 Advances by Manager. Manager shall have the right, but not the
obligation, to acquire for the benefit of Lessee, under the CHC Loan, any and
all sums required to maintain all necessary licenses and permits and to
otherwise keep the Facility operating as a fully insured nursing home in good
condition and repair. All such sums advanced under the CHC Loan to Lessee shall
be repaid by Lessee in accordance with the terms of the Loan Agreement and the
Loan Documents, and Manager shall have the right at any time and from time to
time to instruct the signatories of the Operating Accounts to withdraw and pay
such amounts as are necessary to repay such advances.
7.11 Definition of Affiliate. For purposes of this Agreement, the term
"Affiliate" shall mean any person or entity which Manager or Lessee or their
respective shareholders or individual partners, directly or indirectly, through
one or more intermediaries, controls, is in common control with, or is
controlled by.
7.12 Authorization of Agreement. Manager and Lessee represent and warrant,
each to the other with respect to itself, that the execution and delivery of
this Agreement has been duly authorized by all respective action, will not
presently or with the passage of time, the giving of notice, or both result in a
default under or violate or conflict with (i) the provisions of the articles of
incorporation and bylaws of Manager or the formation documents and operating
agreement of Lessee, or (ii) any other material agreement, mortgage, loan
agreement or other contract or instrument by which either party is bound or to
which any of its property or assets are subject, or (iii) any existing law,
regulation, court order or consent decree by which either party is bound or to
which any of its property or assets are subject.
7.13 Severability. If any one or more of the provisions of this Agreement
are held invalid or unenforceable, the validity and enforceability of all other
provisions of this Agreement shall remain in full force and effect, unless
enforcing the remainder of the provisions would not satisfy the original
intentions of the parties.
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IN WITNESS WHEREOF, the parties hereto have executed, sealed and delivered
this Agreement through their duly authorized representatives, as of the day and
year first above written.
LESSEE:
NORTH RALEIGH HEALTH INVESTORS, LLC
By:/s/ Charles E. Trefzger
Name: Charles E. Trefzger
Its:
MANAGER:
CENTENNIAL HEALTHCARE MANAGEMENT CORPORATION
By:/s/ Randall J. Bufford
Name: Randall J. Bufford
Its:Executive Vice President
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SCHEDULE 10.51
CHMC has entered into an agreement substantially identical to Exhibit 10.51
as follows:
1. Long-Term Care Facility Management Agreement dated June 1, 1997 with
Rockingham Health Investors, LLC for Rockingham, North Carolina facility.
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Exhibit 23.2
After consummation of the proposed reverse stock split, as discussed in Note
21 to the audited financial statements, Coopers & Lybrand L.L.P. will be in a
position to render the following consent.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated March 7, 1997, except for Notes 9 and 21 as to which the date is
May 27, 1997, on our audit of the financial statements of Centennial
HealthCare Corporation and Subsidiaries as of December 31, 1995 and 1996 and
for the seven months ended December 31, 1995 and for each of the two years in
the period ended December 31, 1996.
We also consent to the references to our firm under the captions "Experts"
and "Selected Consolidated Financial Data" in the Prospectus.
Atlanta, Georgia
June 16, 1997
<PAGE>
EXHIBIT 23.3
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated July 3, 1996, with respect to the consolidated
financial statements of Transitional Health Services, Inc. and subsidiaries
included in the Pre-Effective Amendment No. 2 to the Registration Statement
(Form S-1 No. 333-24267) and related Prospectus of Centennial HealthCare
Corporation for the registration of 4,000,000 shares of its common stock.
/s/ Ernst & Young LLP
Louisville, Kentucky
June 12, 1997
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Centennial HealthCare Corporation
Atlanta, Georgia
We hereby consent to the use in the Prospectus constituting a part of
this Registration Statement of our report dated July 7, 1995, except for Note
18, which is as of August 15, 1995 relating to the consolidated financial
statements of Centennial HealthCare Corporation (formerly WelCare
International, Inc.), which is contained in that Prospectus.
We also consent to the reference to us under the captions "Selected
Consolidated Financial Data" and "Experts" in the Prospectus.
/s/BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Atlanta, Georgia
June 16, 1997
