<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1997.
REGISTRATION NO. 333-24267
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
PRE-EFFECTIVE AMENDMENT NO. 3 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
JULY 1, 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)(3).............................. $ $ $
</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."
(3) The net proceeds received by the Company upon the exercise of the
over-allotment option, if any, will be used by the Company to acquire at the
Price to Public shares of Common Stock pro rata from certain former holders
of the Company's Series C Preferred Stock. See "Use of Proceeds" and
"Principal Shareholders and Selling Shareholders."
--------------
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 July ,
1997.
ALEX. BROWN & SONS
INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MORGAN STANLEY DEAN WITTER
EQUITABLE SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS JULY , 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 5,759 3,194 14,535 1,989 4,591
Equity in income (loss) of unconsolidated
partnerships (2).......................... (2,766) 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 (99) 2,111
Income (loss) before extraordinary item..... (586) 3,791 3,475 1,876 2,779 (105) 1,241
Net income (loss)........................... $ (586) $ 5,389 $ 3,725 $ 1,876 $ 2,779 $ (105) $ 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 of the
general partner 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 two of 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," "Principal Shareholders and Selling
Shareholders" 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 Amended and Restated 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 up to 558,000 shares
of Common Stock pro rata from the Former Holders (the "Stock Repurchase"). 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. If any of the Former Holders
does not elect to participate in the Stock Repurchase, the Company will purchase
less than 558,000 shares of Common Stock from the Former Holders and the net
proceeds not used in the Stock Repurchase will be available to the Company and
will be used to repay additional amounts under the Senior Credit Facility. See
"Principal Shareholders and Selling Shareholders."
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)................. 518 (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 of 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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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, key employees 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 four 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 10,345 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 155,948 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 55,171 shares 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 "non-employee directors" 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. Except for grants to Outside Directors under
the 1997 Stock Plan, 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's father, 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 Section 16 Insider.
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 upon
the death or disability of an employee or for cause as defined therein. Each
employee may
58
<PAGE>
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.
59
<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,
60
<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.
61
<PAGE>
PRINCIPAL SHAREHOLDERS AND SELLING 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.
62
<PAGE>
(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 of the 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 of the 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's father 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 10,345 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.
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as adjusted to give effect to the sale
of shares of Common Stock offered by the Company in the Offering and to give
effect to the full exercise by the Underwriters of the over-allotment option and
the purchase by the Company with the net proceeds received by the Company from
such exercise ($7.8 million) of 558,000 shares of Common Stock at the Price to
Public in the Offering (the "Stock Repurchase") pro rata from the former holders
of the Company's Series C Preferred Stock (the "Former Holders"). This
information is presented for (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, (iv) all directors and executive officers of
the Company as a group, and (v) all of the Former Holders. Except as otherwise
specified in the notes to the previous table, the named beneficial owner has
sole voting and investment power as described in note 1 to the previous table.
63
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER OFFERING
AND STOCK REPURCHASE
NUMBER OF SHARES AGREEMENT
ELIGIBLE FOR ----------------------
NAME STOCK REPURCHASE (1) NUMBER PERCENT
- --------------------------------------------------------------------- --------------------- --------- -----------
<S> <C> <C> <C>
Welsh, Carson, Anderson & Stowe VI L.P.(1)........................... 448,501 3,119,970 27.0%
WCAS Capital Partners II, L.P........................................ -- 336,896 2.9
WCAS Healthcare Partners L.P.(1)..................................... 10,766 73,937 *
J. Stephen Eaton..................................................... -- 1,187,214 10.2
South Atlantic Venture Fund II....................................... -- 808,963 7.0
South Atlantic Venture Fund III...................................... -- 206,214 1.8
Randall J. Bufford................................................... -- 169,470 1.4
Lawrence W. Lepley, Jr.(1)........................................... 24,325 120,696 1.0
Alan C. Dahl......................................................... -- 79,439 *
Kent C. Fosha, Sr.................................................... -- 63,412 *
Horizon Investment Associates II(1)(3)............................... 6,150 41,745 *
James B. Hoover(1)(2)................................................ 1,541 10,566 *
Andrew M. Paul(1)(2)................................................. 1,231 8,455 *
Robert A. Ortenzio(3)................................................ -- 1,299 *
Bertil D. Nordin..................................................... -- -- *
All directors and executive officers as a group
(14 persons)....................................................... 43,345 1,687,095 13.7
Bruce K. Anderson(1)(2).............................................. 3,075 21,115 *
James W. Baker, Jr.(1)............................................... 1,801 8,084 *
James W. Baker, Jr. I/O IRA(1)....................................... 360 1,616 *
Robert M. Baker, M.D. - North Broward Radiologists
Employee Profit Sharing Plan(1).................................... 716 3,226 *
Wiley P. Ballard, Jr.(1)............................................. 577 2,715 *
Hoyt W. Boone, Jr.(1)................................................ 716 3,384 *
Russell L. Carson(1)(2).............................................. 3,075 21,115 *
CID Equity Capital III, L.P.(1)...................................... 40,997 260,908 2.3
Delaware Charter Trust Co., Trustee FBO the IRA Rollover
of Richard H. Stowe(1)............................................. 770 4,639 *
Beauregard A. Fournet, Jr.(1)........................................ 1,440 6,788 *
John G. Hundley(1)................................................... 46 2,961 *
Kelly Family Partnership, Ltd.(1).................................... 968 6,055 *
James T. Kelly Family Trust(1)....................................... 565 3,210 *
David M. Kitchen(1).................................................. 333 6,216 *
Thomas E. McInerney(1)(2)............................................ 616 4,226 *
Robert A. Minicucci(1)(2)............................................ 461 3,161 *
J.O. Patterson(1).................................................... 716 3,386 *
Prudential Securities, Inc., C/F John G. Hundley IRA Rollover(1)..... 155 877 *
Richard H. Stowe(1)(2)............................................... 770 5,928 *
James J. TerBeest(1)................................................. 445 7,149 *
John W. Ulfers(1).................................................... 716 3,226 *
Laura Van Buren(1)(2)................................................ 62 424 *
David C. Watkins(1).................................................. 3,032 14,266 *
Patrick J. Welsh(1)(2)............................................... 3,075 21,115 *
</TABLE>
* Less than 1.0% of the outstanding Common Stock.
(1) Each of these Former Holders may elect, but is not obligated, to sell a pro
rata portion of the shares of Common Stock received upon the conversion of
the Series C Preferred Stock to the Company pursuant to the Stock Repurchase
Agreement. The number indicated for each Former Holder assumes that the
Company purchases at the Price to Public in the Offering all 558,000 shares
available for repurchase with the net proceeds ($7.8 million) received by
the Company from the sale of 600,000 shares pursuant to the Underwriters
exercise of the over-allotment option and that each Former Holder sells its
pro rata portion of such shares of Common Stock eligible in the Stock
Repurchase. Each of the Former Holders must indicate to the Company on or
before July 15, 1997, whether such Former Holder desires to participate in
the Stock Repurchase. If any of the Former Holders do not elect to
participate, the Company will purchase less than 558,000 shares and the net
proceeds not used in the Stock Repurchase will be available to the Company
and will be used by the Company to repay additional amounts under the Senior
Credit Facility. See "Use of Proceeds."
(2) Messrs. Hoover and Paul, directors of the Company, and Messrs. Welsh,
Carson, Anderson, Stowe, McInerney and Minicucci and Ms. Van Buren are
general partners of the general partner of WCAS VI. Messrs. Welsh and Carson
are general partners of WCAS Healthcare. Each of these Former Holders
disclaims beneficial ownership of the shares of Common Stock owned by WCAS
VI and WCAS Healthcare.
(3) The father of Mr. Ortenzio, a director of the Company, is an affiliate of
Horizon Investment Associates II and Mr. Ortenzio disclaims beneficial
ownership of the shares of Common Stock held by Horizon Investment
Associates II.
64
<PAGE>
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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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. The Articles require a majority of the
outstanding shares of Common Stock to approve amendments to the Articles, a
Change in Control (as defined therein), the voluntary liquidation, dissolution
or winding up of the Company, to adopt any provision inconsistent with or to
repeal Article IV of the Articles and any other transaction defined by the GBCC
as a "business combination."
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
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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 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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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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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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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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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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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
73
<PAGE>
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.
74
<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>
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.
/S/ COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
March 7, 1997 except for Note 9
as to which the date is May 27, 1997
and Note 21 as to which the date is
June 23, 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 and Shareholders of the
Company approved a .6897 for one reverse stock split. 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 this reverse stock
split.
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.
/s/ 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 and shareholders of the Company approved a .6897 for one reverse stock
split. 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 this reverse 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.
/s/ 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 and Selling
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 JULY , 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
July , 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............................................... 46,000.00
Printing and Engraving............................................... 275,000.00
Transfer Agent's Fees and Expenses................................... 5,000.00
Legal Fees and Expenses.............................................. 400,000.00
Accounting Fees and Expenses......................................... 425,000.00
Miscellaneous Disbursements.......................................... $ 119,995.50
-------------
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 transaction from which the director
received an improper personal benefit. Indemnified persons would
II-1
<PAGE>
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") whereby the parties agreed to
settle any and all claims for indemnification by having the THS Holders
II-2
<PAGE>
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 (included in Exhibit
3.1)
4.2 Article VII of Registrant's Third Amended and Restated Articles of Incorporation (included in Exhibit
3.1)
* 4.3 Specimen Common Stock Certificate
* 5.1 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 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
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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
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
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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
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 Form of 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
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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
27.1 Restated Financial Data Schedule
</TABLE>
- --------------
* Filed herewith. All other exhibits were previously filed.
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. 3 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Atlanta, State of Georgia, on July 1, 1997.
CENTENNIAL HEALTHCARE CORPORATION
By: /S/ J. STEPHEN EATON*
-----------------------------------------
J. Stephen Eaton
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
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 July 1, 1997
J. Stephen Eaton (principal executive
officer)
Senior Vice President and
/S/ ALAN C. DAHL Chief Financial Officer
- ------------------------------ (principal financial July 1, 1997
Alan C. Dahl officer and principal
accounting officer)
/S/ ANDREW M. PAUL*
- ------------------------------ Director July 1, 1997
Andrew M. Paul
/S/ JAMES B. HOOVER*
- ------------------------------ Director July 1, 1997
James B. Hoover
/S/ ROBERT A. ORTENZIO*
- ------------------------------ Director July 1, 1997
Robert A. Ortenzio
/S/ BERTIL D. NORDIN*
- ------------------------------ Director July 1, 1997
Bertil D. Nordin
*Signed by Alan C. Dahl pursuant to power of attorney previously filed.
II-7
<PAGE>
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) for the seven months ended
December 31, 1995 and the years ended December 31, 1995 and 1996.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
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
(included in Exhibit 3.1).............................................................
4.2 Article VII of Registrant's Third Amended and Restated Articles of Incorporation
(included in Exhibit 3.1).............................................................
* 4.3 Specimen Common Stock Certificate.......................................................
* 5.1 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 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 Form of 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.......................................................................
27.1 Restated Financial Data Schedule........................................................
</TABLE>
- --------------
* Filed herewith, otherwise previously filed
<PAGE>
4,000,000 Shares
CENTENNIAL HEALTHCARE CORPORATION
Common Stock
($.01 Par Value)
Form of
UNDERWRITING AGREEMENT
----------------------
_______________, 1997
Alex. Brown & Sons Incorporated
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Equitable Securities Corporation
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
One South Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
Centennial HealthCare Corporation, a Georgia corporation (the "Company"),
proposes to sell to the several underwriters (the "Underwriters") named in
Schedule I hereto for whom you are acting as representatives (the
"Representatives") an aggregate of 4,000,000 shares of the Company's Common
Stock, $.01 par value (the "Firm Shares"). The respective amounts of the Firm
Shares to be so purchased by the several Underwriters are set forth opposite
their names in Schedule I hereto. The Company also proposes to sell at the
Underwriters' option an aggregate of up to 600,000 additional shares of the
Company's Common Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Shares set forth opposite their
respective names in Schedule I, plus their pro rata portion of the Option Shares
if you elect to exercise the over-allotment option in whole or in part for the
1
<PAGE>
accounts of the several Underwriters. The Firm Shares and the Option Shares (to
the extent the aforementioned option is exercised) are herein collectively
called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company.
The Company represents and warrants to each of the Underwriters as
follows:
(a) A registration statement on Form S-1 (File No. 333-24267) with
respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the Rules and Regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder and
has been filed with the Commission. Copies of such registration statement,
including any amendments thereto, the preliminary prospectuses (meeting the
requirements of the Rules and Regulations) contained therein and the
exhibits, financial statements and schedules, as finally amended and
revised, have heretofore been delivered by the Company to you. Such
registration statement, together with any registration statement filed by
the Company pursuant to Rule 462 (b) of the Act, herein referred to as the
"Registration Statement," which shall be deemed to include all information
omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of
the date of this Agreement. "Prospectus" means (a) the form of prospectus
first filed with the Commission pursuant to Rule 424(b) or (b) the last
preliminary prospectus included in the Registration Statement filed prior
to the time it becomes effective or filed pursuant to Rule 424(a) under the
Act that is delivered by the Company to the Underwriters for delivery to
purchasers of the Shares, together with the term sheet or abbreviated term
sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act.
Each preliminary prospectus included in the Registration Statement prior to
the time it becomes effective is herein referred to as a "Preliminary
Prospectus."
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Georgia, with
corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement. Each of the
subsidiaries of the Company as listed in Exhibit A hereto (collectively,
the "Subsidiaries") has been duly organized and is validly existing as a
corporation or partnership in good standing under the laws of the
jurisdiction of its organization, with requisite power and authority to own
or lease its properties and conduct its business as described in the
Registration Statement. The Subsidiaries are the only subsidiaries, direct
2
<PAGE>
or indirect, of the Company. The Company and each of the Subsidiaries are
duly qualified to transact business in all jurisdictions in which the
conduct of their business requires such qualification. The outstanding
shares of capital stock or partnership interests of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and non-assessable and to the extent shown in Exhibit A hereto are owned by
the Company or another Subsidiary free and clear of all liens, encumbrances
and equities and claims; and no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to
convert any obligations into shares of capital stock or ownership interests
in the Subsidiaries are outstanding.
(c) The outstanding shares of Common Stock of the Company, have been
duly authorized and validly issued and are fully paid and non-assessable;
the Shares to be issued and sold by the Company have been duly authorized
and when issued and paid for as contemplated herein will be validly issued,
fully paid and non-assessable; and no preemptive rights of stockholders
exist with respect to any of the Shares or the issue and sale thereof.
Neither the filing of the Registration Statement nor the offering or sale
of the Shares as contemplated by this Agreement gives rise to any rights,
other than those which have been waived or satisfied, for or relating to
the registration of any shares of Common Stock.
(d) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. All of the Shares conform to the
description thereof contained in the Registration Statement. The form of
certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation.
(e) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Shares
nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be stated therein by, and
will conform, to the requirements of the Act and the Rules and Regulations.
The Registration Statement and any amendment thereto do not contain, and
will not contain, any untrue statement of a material fact and do not omit,
and will not omit, to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. The Prospectus
and any amendments and supplements thereto do not contain, and will not
contain, any untrue statement of material fact; and do not omit, and will
not omit, to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
Company makes no representations or warranties as to information contained
in or omitted from the Registration Statement or the Prospectus, or any
such amendment or supplement, in reliance upon, and in conformity with,
written information furnished to the Company by or on behalf of any
3
<PAGE>
Underwriter through the Representatives, specifically for use in the
preparation thereof.
(f) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth in the
Registration Statement, present fairly the financial position and the
results of operations and cash flows of the Company and the consolidated
Subsidiaries, at the indicated dates and for the indicated periods. Such
financial statements and related schedules have been prepared in accordance
with generally accepted principles of accounting, consistently applied
throughout the periods involved, except as disclosed herein, and all
adjustments necessary for a fair presentation of results for such periods
have been made. The summary financial and statistical data included in the
Registration Statement presents fairly the information shown therein and
such data has been compiled on a basis consistent with the financial
statements presented therein and the books and records of the Company. The
pro forma financial statements and other pro forma financial information
included in the Registration Statement and the Prospectus present fairly
the information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements, have been properly compiled on the pro forma bases described
therein, and, in the opinion of the Company, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein.
(g) Coopers & Lybrand, L.L.P., who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and
the Rules and Regulations.
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise which
if determined adversely to the Company or any of its Subsidiaries might
result in any material adverse change in the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and of the Subsidiaries taken as a
whole or to prevent the consummation of the transactions contemplated
hereby, except as set forth in the Registration Statement.
(i) The Company and the Subsidiaries have good and marketable title to
all of the properties and assets reflected in the financial statements
(except as indicated in the footnotes thereto)(or as described in the
Registration Statement) hereinabove described, subject to no lien,
mortgage, pledge, charge or encumbrance of any kind except those reflected
in such financial statements (or as described in the Registration
Statement) or which are not material in amount. The Company and the
4
<PAGE>
Subsidiaries occupy their leased properties under valid and binding leases
conforming in all material respects to the description thereof set forth in
the Registration Statement.
(j) The Company and the Subsidiaries have filed all federal, State,
local and foreign income tax returns which have been required to be filed
and have paid all taxes indicated by said returns and all assessments
received by them or any of them to the extent that such taxes have become
due. All tax liabilities have been adequately provided for in the
financial statements of the Company.
(k) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended or supplemented, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise), or prospects of the Company and its Subsidiaries taken as a
whole, whether or not occurring in the ordinary course of business, and
there has not been any material transaction entered into or any material
transaction that is probable of being entered into by the Company or the
Subsidiaries, other than transactions in the ordinary course of business
and changes and transactions described in the Registration Statement, as it
may be amended or supplemented. The Company and the Subsidiaries have no
material contingent obligations which are not disclosed in the Company's
financial statements which are included in the Registration Statement.
(l) Neither the Company nor any of the Subsidiaries is or with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its Articles of Incorporation or Bylaws or under any
agreement, lease, contract, indenture or other instrument or obligation to
which it is a party or by which it, or any of its properties, is bound and
which default is of material significance in respect of the condition,
financial or otherwise of the Company and its Subsidiaries taken as a whole
or the business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and the
Subsidiaries taken as a whole. The execution and delivery of this
Agreement and the consummation of the transactions herein contemplated and
the fulfillment of the terms hereof will not conflict with or result in a
breach of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust or other agreement or instrument to
which the Company or any Subsidiary is a party, or of the Articles of
Incorporation or Bylaws of the Company or any order, rule or regulation
applicable to the Company or any Subsidiary of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
5
<PAGE>
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
herein contemplated (except such additional steps as may be required by the
Commission, the National Association of Securities Dealers, Inc. (the
"NASD") or such additional steps as may be necessary to qualify the Shares
for public offering by the Underwriters under state securities or Blue Sky
laws) has been obtained or made and is in full force and effect.
(n) The Company and each of the Subsidiaries holds all material
licenses, certificates and permits from governmental authorities which are
necessary to the conduct of their businesses; and neither the Company nor
any of the Subsidiaries has infringed any patents, patent rights, trade
names, trademarks or copyrights, which infringement is material to the
business of the Company and the Subsidiaries taken as a whole. The Company
knows of no material infringement by others of patents, patent rights,
trade names, trademarks or copyrights owned by or licensed to the Company.
(o) Neither the Company, nor to the Company's best knowledge, any of
its affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of
the Shares.
(p) Neither the Company nor any Subsidiary is an "investment company"
within the meaning of such term under the Investment Company Act of 1940
and the rules and regulations of the Commission thereunder.
(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(r) The Company and each of its Subsidiaries carry, or are covered by,
insurance in such amounts and covering such risks as is adequate for the
conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar industries.
(s) To the Company's knowledge, the Company and each of the
Subsidiaries is conducting its business in material compliance with all the
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laws, rules and regulations of the jurisdictions in which they are
conducting businesses, including those relating to healthcare. Without
limiting the foregoing, the Company and each of the Subsidiaries owns or
possesses and is operating in compliance with the terms, provisions and
conditions of all authorizations, approvals, orders, licenses,
registrations, certificates and permits of and from all governmental
regulatory officials and bodies necessary to conduct their respective
businesses, except where the failure to comply, individually or in the
aggregate, would not have a material adverse effect on the Company and the
Subsidiaries, taken as a whole; each such authorization, approval, order,
license, registration, other certificate and permit of and from such
governmental regulatory officials and bodies is valid and in full force and
effect and there is no proceeding pending or, to the Company's knowledge,
threatened (or any basis therefor) which may cause any such authorization,
approval, order, license, registration, other certificate or permit of and
from all governmental regulatory officials and bodies that is material to
the conduct of the business of the Company and the Subsidiaries taken as a
whole as present conducted to be revoked, withdrawn, cancelled, suspended
or not renewed.
(t) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
(u) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, An Act Relating to Disclosure of doing Business with Cuba, and the
Company further agrees that if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after
the date the Registration Statement becomes or has become effective with
the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the
Company's business with Cuba or with any person or affiliate located in
Cuba changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable to
the Department.
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2. Purchase, Sale and Delivery of the Firm Shares.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the
Company agrees to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of $_____ per share, the
number of Firm Shares set forth opposite the name of each Underwriter in
Schedule I hereof, subject to adjustments in accordance with Section 9
hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made in
New York Clearing House funds by certified or bank cashier's checks drawn
to the order of the Company against delivery of certificates therefor to
the Representatives for the several accounts of the Underwriters. Such
payment and delivery are to be made at the offices of Alex. Brown & Sons
Incorporated, One South Street, Baltimore, Maryland, at 10:00 a.m.,
Baltimore time, on the third business day after the date of this Agreement
or at such other time and date not later than five business days thereafter
as you and the Company shall agree upon, such time and date being herein
referred to as the "Closing Date." (As used herein, "business day" means a
day on which the New York Stock Exchange is open for trading and on which
banks in New York are open for business and are not permitted by law or
executive order to be closed.) The certificates for the Firm Shares will
be delivered in such denominations and in such registrations as the
Representatives requests in writing not later than the second full business
day prior to the Closing Date, and will be made available for inspection by
the Representatives at least one business day prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth,
the Company hereby grants an option to the several Underwriters to purchase
the Option Shares at the price per share as set forth in the first
paragraph of this Section 2. The option granted hereby may be exercised in
whole or in part by giving written notice (i) at any time before the
Closing Date and (ii) only once thereafter within 30 days after the date of
this Agreement, by you, as Representatives of the several Underwriters, to
the Company setting forth the number of Option Shares as to which the
several Underwriters are exercising the option, the names and denominations
in which the Option Shares are to be registered and the time and date at
which such certificates are to be delivered. The time and date at which
certificates for Option Shares are to be delivered shall be determined by
the Representatives but shall not be earlier than three nor later than 10
full business days after the exercise of such option, nor in any event
prior to the Closing Date (such time and date being herein referred to as
the "Option Closing Date"). If the date of exercise of the option is three
or more days before the Closing Date, the notice of exercise shall set the
Closing Date as the Option Closing Date. The number of Option Shares to be
purchased by each Underwriter shall be in the same proportion to the total
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number of Option Shares being purchased as the number of Firm Shares being
purchased by such Underwriter bears to 4,000,000, adjusted by you in such
manner as to avoid fractional shares. The option with respect to the
Option Shares granted hereunder may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters. You,
as Representatives of the several Underwriters, may cancel such option at
any time prior to its expiration by giving written notice of such
cancellation to the Company. To the extent, if any, that the option is
exercised, payment for the Option Shares shall be made on the Option
Closing Date in New York Clearing House funds by certified or bank
cashier's check drawn to the order of the Company against delivery of
certificates therefor at the offices of Alex. Brown & Sons Incorporated,
One South Street, Baltimore, Maryland.
3. Offering by the Underwriters.
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deems it
advisable to do so. The Firm Shares are to be initially offered to the
public at the initial public offering price set forth in the Prospectus.
The Representatives may from time to time thereafter change the public
offering price and other selling terms. To the extent, if at all, that any
Option Shares are purchased pursuant to Section 2 hereof, the Underwriters
will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for
the Underwriters in the offering and sale of the Shares in accordance with
a Master Agreement Among Underwriters entered into by you and the several
other Underwriters.
4. Covenants of the Company.
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule
430A of the Rules and Regulations is followed, to prepare and timely file
with the Commission under Rule 424(b) of the Rules and Regulations a
Prospectus in a form approved by the Representatives containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A of the Rules and Regulations and (B) not
file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been
advised and furnished with a copy or to which the Representatives shall
have reasonably objected in writing or which is not in compliance with the
Rules and Regulations.
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(b) The Company will advise the Representatives promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission, (C)
of any request of the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, and (D) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of
the Prospectus or of the institution of any proceedings for that purpose.
The Company will use its best efforts to prevent the issuance of any such
stop order preventing or suspending the use of the Prospectus and to obtain
as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representatives in endeavoring
to qualify the Shares for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company
will, from time to time, prepare and file such statements, reports, and
other documents, as are or may be required to continue such qualifications
in effect for so long a period as the Representatives may reasonably
request for distribution of the Shares.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period
when delivery of a Prospectus is required under the Act, as many copies of
the Prospectus in final form, or as thereafter amended or supplemented, as
the Representatives may reasonably request. The Company will deliver to
the Representatives at or before the Closing Date, four signed copies of
the Registration Statement and all amendments thereto including all
exhibits filed therewith, and will deliver to the Representatives such
number of copies of the Registration Statement (including such number of
copies of the exhibits filed therewith that may reasonably be requested),
and of all amendments thereto, as the Representatives may reasonably
request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act"),
and the rules and regulations of the Commission thereunder, so as to permit
the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus
is required by law to be delivered by an Underwriter or dealer, any event
shall occur as a result of which, in the judgment of the Company or in the
reasonable opinion of the Underwriters, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
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<PAGE>
light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend
or supplement the Prospectus to comply with any law, the Company promptly
will prepare and file with the Commission an appropriate amendment to the
Registration Statement or supplement to the Prospectus so that the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with the law.
(f) The Company will make generally available to its security holders,
as soon as it is practicable to do so, but in any event not later than 15
months after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a
period of at least 12 consecutive months beginning after the effective date
of the Registration Statement, which earning statement shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been so
made available.
(g) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies of
all other documents, reports and information furnished by the Company to
its stockholders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or
the Securities Exchange Act of 1934, as amended. The Company will deliver
to the Representatives similar reports with respect to significant
subsidiaries, as that term is defined in the Rules and Regulations, which
are not consolidated in the Company's financial statements.
(h) No offering, sale, short sale or other disposition of any shares
of Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivative of
Common Stock (or agreement for such) will be made for a period of 180 days
after the date of this Agreement, directly or indirectly, by the Company
otherwise than hereunder or with the prior written consent of Alex. Brown
& Sons Incorporated.
(i) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on The NASDAQ Stock Market.
(j) The Company has caused each officer and director and specific
shareholder of the Company to furnish to you, on or prior to the date of
this agreement, a letter or letters, in form and substance satisfactory to
the Underwriters, pursuant to which each such person shall agree not to
offer, sell, sell short or otherwise dispose of any shares of Common Stock
of the Company or other capital stock of the Company, or any other
securities convertible, exchangeable or exercisable for Common Shares or
derivative of Common Shares owned by such person or request the
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registration for the offer or sale of any of the foregoing (or as to which
such person has the right to direct the disposition of) for a period of 180
days after the date of this Agreement, directly or indirectly, except with
the prior written consent of Alex. Brown & Sons Incorporated ("Lockup
Agreements").
(k) The Company shall apply the net proceeds of its sale of the Shares
as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of
the proceeds therefrom as may be required in accordance with Rule 463 under
the Act.
(l) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as
would require the Company or any of the Subsidiaries to register as an
investment company under the Investment Company Act of 1940, as amended
(the "1940 Act").
(m) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
(n) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any securities of the Company.
5. Costs and Expenses.
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement,
including, without limiting the generality of the foregoing, the following:
accounting fees of the Company; the fees and disbursements of counsel for
the Company; the cost of printing and delivering to, or as requested by,
the Underwriters copies of the Registration Statement, Preliminary
Prospectuses, the Prospectus, this Agreement, the Underwriters' internal
selling memorandum, the Underwriters' Invitation Letter, the Blue Sky
Survey and any supplements or amendments thereto; the filing fees of the
Commission; the filing fees and expenses (including legal fees and
disbursements) incident to securing any required review by the National
Association of Securities Dealers, Inc. (the "NASD") of the terms of the
sale of the Shares; the Listing Fee of The NASDAQ Stock Market; and the
expenses, including the fees and disbursements of counsel for the
Underwriters, incurred in connection with the qualification of the Shares
under State securities or Blue Sky laws. The Company agrees to pay all
costs and expenses of the Underwriters, including the fees and
disbursements of counsel for the Underwriters, incident to the offer and
sale of directed shares of the Common Stock by the Underwriters to
employees and persons having business relationships with the Company and
its Subsidiaries. The Company shall not, however, be required to pay for
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any of the Underwriters expenses (other than those related to qualification
under NASD regulation and State securities or Blue Sky laws) except that,
if this Agreement shall not be consummated because the conditions in
Section 6 hereof are not satisfied, or because this Agreement is terminated
by the Representatives pursuant to Section 11 hereof, or by reason of any
failure, refusal or inability on the part of the Company to perform any
undertaking or satisfy any condition of this Agreement or to comply with
any of the terms hereof on its part to be performed, unless such failure to
satisfy said condition or to comply with said terms be due to the default
or omission of any Underwriter, then the Company shall reimburse the
several Underwriters for reasonable out-of-pocket expenses, including fees
and disbursements of counsel, reasonably incurred in connection with
investigating, marketing and proposing to market the Shares or in
contemplation of performing their obligations hereunder; but the Company
shall not in any event be liable to any of the several Underwriters for
damages on account of loss of anticipated profits from the sale by them of
the Shares.
6. Conditions of Obligations of the Underwriters.
The several obligations of the Underwriters to purchase the Firm
Shares on the Closing Date and the Option Shares, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the
Option Closing Date, as the case may be, of the representations and
warranties of the Company contained herein, and to the performance by the
Company of its covenants and obligations hereunder and to the following
additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable
satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been
issued and no proceedings for that purpose shall have been taken or, to the
knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing
Date which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinions of Nelson Mullins
Riley & Scarborough, L.L.P. counsel for the Company, dated the Closing Date
or the Option Closing Date, as the case may be, addressed to the
Underwriters (and stating that it may be relied upon by counsel to the
Underwriters) to the effect that:
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(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of
Georgia, with corporate power and corporate authority to own or lease
its properties and conduct its business as described in the
Registration Statement; each of the Subsidiaries has been duly
organized and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, with
corporate power and corporate authority to own or lease its properties
and conduct its business as described in the Registration Statement;
the Company and each of the Subsidiaries are duly qualified to
transact business in all jurisdictions in which the conduct of their
business requires such qualification, or in which the failure to
qualify would have a materially adverse effect upon the business of
the Company and the Subsidiaries taken as a whole; and the outstanding
shares of capital stock of each of the Subsidiaries have been duly
authorized and validly issued and are fully paid and non-assessable
and are owned by the Company or a Subsidiary; and, to such counsel's
knowledge, the outstanding shares of capital stock of each of the
Subsidiaries is owned free and clear of all liens, encumbrances and
equities and claims, and no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to
convert any obligations into any shares of capital stock or of
ownership interests in the Subsidiaries are outstanding.
(ii) As of the date specified therein, the Company had
authorized and outstanding capital stock as set forth under the
caption "Capitalization" in the Prospectus; the authorized shares of
the Company's Common Stock have been duly authorized; the outstanding
shares of the Company's Common Stock, have been duly authorized and
validly issued and are fully paid and non-assessable; all of the
Shares conform to the description thereof contained in the Prospectus;
the certificates for the Shares, assuming they are in the form filed
with the Commission, are in due and proper form; the shares of Common
Stock, including the Option Shares, if any, to be sold by the Company
pursuant to this Agreement have been duly authorized and will be
validly issued, fully paid and non-assessable when issued and paid for
as contemplated by this Agreement; and no preemptive rights of
stockholders exist with respect to any of the Shares or the issue or
sale thereof.
(iii) Except as described in or contemplated by the Prospectus,
to the knowledge of such counsel, there are no outstanding securities
of the Company convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of capital stock of the
Company and there are no outstanding or authorized options, warrants
or rights of any character obligating the Company to issue any shares
of its capital stock or any securities convertible or exchangeable
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into or evidencing the right to purchase or subscribe for any shares
of such stock; and except as described in the Prospectus, to the
knowledge of such counsel, no holder of any securities of the Company
or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to
sell or otherwise issue to them, or to permit them to underwrite the
sale of, any of the Shares or the right to have any Common Shares or
other securities of the Company included in the Registration Statement
or the right, as a result of the filing of the Registration Statement,
to require registration under the Act of any shares of Common Stock or
other securities of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the knowledge of such counsel, based on a confirming
telephone call to the Commission on the Closing Date, no stop order
proceedings with respect thereto have been instituted or are pending
or threatened under the Act.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto as of their respective issue or
effective date complied as to form in all material respects with the
requirements of the Act and the applicable rules and regulations
thereunder (except that such counsel need express no opinion as to the
financial statements, data and related schedules and "Underwriting"
section therein).
(vi) The statements under the captions "Description of Capital
Stock" and "Shares Eligible for Future Sale" in the Prospectus,
insofar as such statements constitute a summary of documents referred
to therein or matters of law, fairly summarize in all material
respects the information required to be stated with respect to such
documents and matters.
(vii) Such contracts and documents as are summarized in the
Registration Statement or the Prospectus are fairly summarized in all
material respects.
(viii) Such counsel knows of no legal or governmental
proceedings pending or threatened against the Company or any of the
Subsidiaries which could have a material adverse effect on the
financial condition of the Company except as set forth in the
Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will
not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Articles of
Incorporation or by-laws of the Company, or any agreement or
instrument known to such counsel to which the Company or any of the
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Subsidiaries is a party or by which the Company or any of the
Subsidiaries may be bound where such conflict or breach would have a
material adverse effect on the financial condition of the Company.
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution
and delivery of this Agreement and the consummation of the
transactions herein contemplated (other than as may be required by the
NASD or as required by State securities and Blue Sky laws as to which
such counsel need express no opinion) except such as have been
obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of
the consummation of the transactions contemplated by this Agreement,
and application of the net proceeds therefrom as described in the
Prospectus, required to register as an investment company under the
1940 Act.
In rendering such opinion letter, Nelson Mullins Riley & Scarborough,
L.L.P. may rely as to matters governed by the laws of states other than
Georgia or Federal laws on local counsel in such jurisdictions, provided
that in each case Nelson Mullins Riley & Scarborough, L.L.P. shall state
that they believe that they and the Underwriters are justified in relying
on such other counsel. Such opinion letter may be limited by, and be in
accordance with, the Interpretive Standards Applicable to Legal Opinions to
Third Parties, a copy of which has been provided to the Representatives.
In addition to the matters set forth above, such opinion letter shall also
include a statement to the effect that nothing has come to the attention of
such counsel which leads them to believe that (i) the Registration
Statement, at the time it became effective under the Act (but after giving
effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, and (ii) the Prospectus, or
any supplement thereto, on the date it was filed pursuant to the Rules and
Regulations and as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements, in the
light of the circumstances under which they are made, not misleading
(except that such counsel need express no view as to financial statements,
schedules and statistical information and "Underwriting" section therein).
With respect to such statement, Nelson Mullins Riley & Scarborough, L.L.P.
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<PAGE>
may state that their belief is based upon the procedures set forth therein,
but is without independent check and verification.
(c) The Representatives shall have received from Waller Lansden
Dortch & Davis, A Professional Limited Liability Company, counsel for the
Underwriters, an opinion dated the Closing Date or the Option Closing Date,
as the case may be, substantially to the effect specified in subparagraphs
(ii), (iii), (iv), (ix) and (xi) of Paragraph (b) of this Section 6, and
that the Company is a duly organized and validly existing corporation under
the laws of the State of Georgia. In rendering such opinion Waller Lansden
Dortch & Davis, A Professional Limited Liability Company may rely as to all
matters governed other than by the laws of the State of Tennessee or
Federal laws on the opinion of counsel referred to in Paragraph (b) of this
Section 6. In addition to the matters set forth above, such opinion shall
also include a statement to the effect that nothing has come to the
attention of such counsel which leads them to believe that (i) the
Registration Statement, or any amendment thereto, as of the time it became
effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) as of the Closing
Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and (ii) the Prospectus, or any supplement thereto, on the date
it was filed pursuant to the Rules and Regulations and as of the Closing
Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact, necessary
in order to make the statements, in the light of the circumstances under
which they are made, not misleading (except that such counsel need express
no view as to financial statements, schedules and statistical information
therein). With respect to such statement, Waller Lansden Dortch & Davis, A
Professional Limited Liability Company, may state that their belief is
based upon the procedures set forth therein, but is without independent
check and verification.
(e) The Representatives shall have received, on each of the dates
hereof, the Closing Date and the Option Closing Date, as the case may be, a
letter dated the date hereof, the Closing Date or the Option Closing Date,
as the case may be, in form and substance satisfactory to you, of Coopers &
Lybrand, L.L.P. and BDO Seidman, LLP confirming that they are independent
public accountants within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating that in their
opinion the financial statements and schedules examined by them and
included in the Registration Statement comply in form in all material
respects with the applicable accounting requirements of the Act and the
related published Rules and Regulations; and containing such other
statements and information as is ordinarily included in accountants'
"comfort letters" to Underwriters with respect to the financial statements
17
<PAGE>
and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or certificates
of the Chief Executive Officer and the Chief Financial Officer of the
Company to the effect that, as of the Closing Date or the Option Closing
Date, as the case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the
Registrations Statement has been issued, and no proceedings for such
purpose have been taken or are, to his knowledge, contemplated by the
Commission;
(ii) The representations and warranties of the Company contained
in Section 1 hereof are true and correct as of the Closing Date or the
Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
(iv) He or she has carefully examined the Registration Statement
and the Prospectus and, in his or her opinion, as of the effective
date of the Registration Statement, the statements contained in the
Registration Statement were true and correct, and such Registration
Statement and Prospectus did not omit to state a material fact
required to be stated therein or necessary in order to make the
statements therein not misleading, and since the effective date of the
Registration Statement, no event has occurred which should have been
set forth in a supplement to or an amendment of the Prospectus which
has not been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Company and its Subsidiaries taken as a whole or the
earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the
Company and the Subsidiaries taken as a whole, whether or not arising
in the ordinary course of business.
(g) The Company shall have furnished to the Representatives such
further certificates and documents confirming the representations and
18
<PAGE>
warranties, covenants and conditions contained herein and related matters
as the Representatives may reasonably have requested.
(h) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on The NASDAQ Stock Market.
(i) The Lockup Agreements described in Section 4 (j) are in full
force and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in
all material respects satisfactory to the Representatives and to Waller
Lansden Dortch & Davis, A Professional Limited Liability Company, counsel
for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated
by the Representatives by notifying the Company of such termination in
writing or by telegram at or prior to the Closing Date or the Option
Closing Date, as the case may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. Conditions of the Obligations of the Company.
The obligations of the Company to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing
Date, as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of the Act, against any losses, claims, damages or liabilities
to which such Underwriter or any such controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of or
are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or (ii)
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
19
<PAGE>
misleading; and will reimburse each Underwriter and each such controlling
person upon demand for any legal or other expenses reasonably incurred by
such Underwriter or such controlling person in connection with
investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding; provided,
however, that the Company will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement, or omission or
alleged omission made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or such amendment or supplement, in reliance
upon and in conformity with written information furnished to the Company by
or through the Representatives specifically for use in the preparation
thereof. This indemnity agreement will be in addition to any liability
which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who
have signed the Registration Statement and each person, if any, who
controls the Company within the meaning of the Act, against any losses,
claims, damages or liabilities to which the Company or any such director,
officer, or controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or (ii) the omission or
the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made; and will reimburse
any legal or other expenses reasonably incurred by the Company or any such
director, officer, or controlling person in connection with investigating
or defending any such loss, claim, damage, liability, action or proceeding;
provided, however, that each Underwriter will be liable in each case to the
extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement
will be in addition to any liability which such Underwriter may otherwise
have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to this Section 8, such person (the "indemnified party")
shall promptly notify the person against whom such indemnity may be sought
(the "indemnifying party") in writing. No indemnification provided for in
Section 8(a) or (b) shall be available to any party who shall fail to give
20
<PAGE>
notice as provided in this Section 8(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related
and was materially prejudiced by the failure to give such notice, but the
failure to give such notice shall not relieve the indemnifying party or
parties from any liability which it or they may have to the indemnified
party for contribution or otherwise than on account of the provisions of
Section 8(a) or (b). In case any such proceeding shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party and shall pay as
incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel at its own expense. Notwithstanding the
foregoing, the indemnifying party shall pay as incurred (or within 30 days
of presentation) the fees and expenses of the counsel retained by the
indemnified party in the event (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such
counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified
party and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them
or (iii) the indemnifying party shall have failed to assume the defense and
employ counsel acceptable to the indemnified party within a reasonable
period of time after notice of commencement of the action. It is
understood that the indemnifying party shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for
the reasonable fees and expenses of more than one separate firm for all
such indemnified parties. Such firm shall be designated in writing by you
in the case of parties indemnified pursuant to Section 8(a) and by the
Company in the case of parties indemnified pursuant to Section 8(b). The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees
to indemnify the indemnified party from and against any loss or liability
by reason of such settlement or judgment. In addition, the indemnifying
party will not, without the prior written consent of the indemnified party,
settle or compromise or consent to the entry of any judgment in any pending
or threatened claim, action or proceeding of which indemnification may be
sought hereunder (whether or not any indemnified party is an actual or
potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
21
<PAGE>
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) in
such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company on the
one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by
the Company on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the
total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriters on
the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
The Company, and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section
8(d). The amount paid or payable by an indemnified party as a result of
the losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) referred to above in this Section 8(d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of this subsection (d), (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares purchased
by such Underwriter, and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
22
<PAGE>
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process issuing
from such court may be served upon him or it by any other contributing
party and consents to the service of such process and agrees that any other
contributing party may join him or it as an additional defendant in any
such proceeding in which such other contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or officers,
or any person controlling the Company, shall be entitled to the benefits of
the indemnity, contribution and reimbursement agreements contained in this
Section 8.
9. Default by Underwriters.
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such
date (otherwise than by reason of any default on the part of the Company),
you, as Representatives of the Underwriters, shall use your reasonable
efforts to procure within 36 hours thereafter one or more of the other
Underwriters, or any others, to purchase from the Company such amounts as
may be agreed upon and upon the terms set forth herein, the Firm Shares or
Option Shares, as the case may be, which the defaulting Underwriter or
Underwriters failed to purchase. If during such 36 hours you, as such
Representatives, shall not have procured such other Underwriters, or any
others, to purchase the Firm Shares or Option Shares, as the case may be,
agreed to be purchased by the defaulting Underwriter or Underwriters, then
(a) if the aggregate number of shares with respect to which such default
shall occur does not exceed 10% of the Firm Shares or Option Shares, as the
23
<PAGE>
case may be, covered hereby, the other Underwriters shall be obligated,
severally, in proportion to the respective numbers of Firm Shares or Option
Shares, as the case may be, which they are obligated to purchase hereunder,
to purchase the Firm Shares or Option Shares, as the case may be, which
such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case
may be, with respect to which such default shall occur exceeds 10% of the
Firm Shares or Option Shares, as the case may be, covered hereby, the
Company or you as the Representatives of the Underwriters will have the
right, by written notice given within the next 36-hour period to the
parties to this Agreement, to terminate this Agreement without liability on
the part of the non-defaulting Underwriters or of the Company except to the
extent provided in Section 8 hereof. In the event of a default by any
Underwriter or Underwriters, as set forth in this Section 9, the Closing
Date or Option Closing Date, as the case may be, may be postponed for such
period, not exceeding seven days, as you, as Representatives, may determine
in order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The
term "Underwriter" includes any person substituted for a defaulting
Underwriter. Any action taken under this Section 9 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
10. Notices.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows: if to the Underwriters, to Alex.
Brown & Sons Incorporated, One South Street, Baltimore, Maryland 21202,
Attention: Steven R. Schuh, with a copy to Alex. Brown & Sons Incorporated,
One South Street, Baltimore, Maryland 21202, Attention: General Counsel; if
to the Company to
Centennial Healthcare Corporation
400 Perimeter Center Terrace, Suite 650
Atlanta, Georgia 30346
Attn: J. Stephen Eaton
Centennial Healthcare Corporation
400 Perimeter Center Terrace, Suite 650
Atlanta, Georgia 30346
Attn: Alan C. Dahl
with copies to: Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, Suite 1400
24
<PAGE>
Atlanta, Georgia 30309
Attn: Paul A. Quiros, Esq.
11. Termination.
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change
in or affecting the condition, financial or otherwise, of the Company and
its Subsidiaries taken as a whole or the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise)
or prospects of the Company and its Subsidiaries taken as a whole, whether
or not arising in the ordinary course of business, (ii) any outbreak or
escalation of hostilities or declaration of war or national emergency or
other national or international calamity or crisis or change in economic or
political conditions if the effect of such outbreak, escalation,
declaration, emergency, calamity, crisis or change on the financial markets
of the United States would, in your reasonable judgment, make it
impracticable to market the Shares or to enforce contracts for the sale of
the Shares, or (iii) suspension of trading in securities generally on the
New York Stock Exchange or the American Stock Exchange or limitation on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such Exchange, (iv) the enactment, publication, decree
or other promulgation of any statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects or may materially and adversely affect the business or
operations of the Company, (v) declaration of a banking moratorium by
United States or New York State authorities, (vi) the suspension of trading
of the Company's common stock by the Commission on The NASDAQ Stock Market
or (vii) the taking of any action by any governmental body or agency in
respect of its monetary or fiscal affairs which in your reasonable opinion
has a material adverse effect on the securities markets in the United
States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. Successors.
25
<PAGE>
This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and
controlling persons referred to herein, and no other person will have any
right or obligation hereunder. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign merely because of such
purchase.
13. Information Provided by Underwriters.
The Company, and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company
for inclusion in any Prospectus or the Registration Statement consists of
the information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), legends required
by Item 502(d) of Regulation S-K under the Act and the information under
the caption "Underwriting" in the Prospectus.
14. Miscellaneous.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any
investigation made by or on behalf of any Underwriter or controlling person
thereof, or by or on behalf of the Company or its directors or officers and
(c) delivery of and payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
CENTENNIAL HEALTHCARE CORPORATION
By:----------------------------------------
President and Chief Executive Officer
26
<PAGE>
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
ALEX. BROWN & SONS INCORPORATED
- -----------------------------
- -----------------------------
As Representatives of the several
Underwriters listed on Schedule I
By: Alex. Brown & Sons Incorporated
By:-----------------------------------
Authorized Officer
<PAGE>
SCHEDULE I
Schedule of Underwriters
Number of Firm Shares
Underwriter to be Purchased
Alex. Brown & Sons Incorporated
Dean Witter Reynolds, Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
Equitable Securities Corporation
__________
Total 4,000,000
28
<PAGE>
SCHEDULE II
Schedule of Option Shares
Maximum Number Percentage of
of Option Shares Total Number of
Name of Seller to be Sold Option Shares
------- ------
Total 600,000 100%
------- ------
29
<PAGE>
THIRD AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
CENTENNIAL HEALTHCARE CORPORATION
ARTICLE I
The name of the Corporation is CENTENNIAL HEALTHCARE CORPORATION.
ARTICLE II
The Corporation is organized pursuant to the provisions of the Georgia
Business Corporation Code.
ARTICLE III
A. Generally. The Corporation shall have the authority, exercisable by its
Board of Directors, to issue up to 50,000,000 shares of common stock, $.01
par value per share ("Common Stock"), and 50,000,000 shares of preferred
stock, $.01 par value per share (the "Preferred Stock").
The designations and the preferences, conversions and other rights,
voting powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption of the shares of each class of stock are
as follows:
B. Preferred Stock. The Preferred Stock may be issued from time to time by
the Board of Directors as shares of one or more series. The description of
shares of each series of Preferred Stock, including any preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends,
<PAGE>
qualifications, and terms and conditions of redemption shall be as set forth
in resolutions adopted by the Board of Directors, and articles of amendment
shall be filed with the Georgia Secretary of State as required by law with
respect to issuance of such Preferred Stock, prior to the issuance of any
shares of such series.
The Board of Directors is expressly authorized, at any time, by adopting
resolutions and filing articles of amendment with the Georgia Secretary of
State, which are effective without shareholder action, to (i) provide for the
issuance of, or provide for a change in the number of, shares of any
particular series of Preferred Stock; (ii) increase or decrease the number of
shares included in each series of Preferred Stock, but not below the number
of shares then issued; and (iii) to set or change in any one or more respects
the designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms and
conditions of redemption relating to the shares of each such series.
Notwithstanding the foregoing, the Board of Directors shall not be authorized
to change the rights of holders of the Common Stock of the Corporation,
including, but not limited to, the right to vote one vote per share on all
matters submitted for shareholder action. The authority of the Board of
Directors with respect to each series of Preferred Stock shall include, but
not be limited to, setting or changing the following:
1. the annual dividend rate, if any, on shares of such series, the times
of payment and the date from which dividends shall be accumulated, if
dividends are to be cumulative;
2. whether the shares of such series shall be redeemable and, if so, the
redemption price and the terms and conditions of such redemption;
3. the obligation, if any, of the Corporation to redeem shares of such
series pursuant to a sinking fund;
4. whether shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or classes and, if so,
the terms and conditions of such conversion or exchange, including the price
or prices or the rate or rates of conversion or exchange and the terms of
adjustment, if any;
5. whether the shares of such series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the extent of such
voting rights;
6. the rights of the shares of such series in the event of voluntary or
involuntary liquidation, dissolution or winding-up of the Corporation; and
7. any other relative rights, powers, preferences, qualifications,
limitations or restrictions thereof relating to such series.
The shares of Preferred Stock of any one series shall be identical with
each other in all respects except as to the dates from and after which
dividends thereon shall cumulate, if cumulative.
C. Common Stock.
Subject to all the rights of the Preferred Stock as expressly provided
herein, by law or by the Board of Directors pursuant to this Article III, the
Common Stock of the Corporation shall possess all such rights and privileges
as are afforded to capital stock by applicable law in the absence of any
express grant of rights or privileges in the Corporation's Articles of
Incorporation, including, but not limited to, the following rights and
privileges:
<PAGE>
1. dividends may be declared and paid or set apart for payment upon the
Common Stock out of any assets or funds of the Corporation legally available
for the payment of dividends;
2. the holders of Common Stock shall have the right to vote for the
election of directors and on all other matters requiring stockholder action,
each share being entitled to one vote; and
3. upon the voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation, the net assets of the Corporation available
for distribution shall be distributed pro rata to the holders of the Common
Stock in accordance with their respective rights and interests.
ARTICLE IV
A. Number of Directors. The number of directors of the Corporation shall be
up to nine (9) directors, the exact number to be fixed in accordance with the
Bylaws of the Corporation.
B. Classification of Directors. The directors shall be divided into three
classes as nearly equal in number as possible, with respect to the first time
for which they shall severally hold office. Directors of the first class
chosen shall hold office until the first annual meeting of the shareholders
following their election; directors of the second class first chosen shall
hold office until the second annual meeting following their election; and
directors of the third class first chosen shall hold office until the third
annual meeting following their election. At each annual meeting of
shareholders held thereafter, directors shall be chosen for a term of three
(3) years to succeed those whose terms expire.
1. Any vacancy in the Board of Directors resulting from the death,
resignation, retirement or removal of a director, unless the shareholders
have elected a successor, may be filled by a majority vote of the remaining
directors, though less than a quorum, for a term corresponding to the
unexpired term of his or her predecessor in office.
2. Newly created directorships resulting from any increase in the
authorized number of directors shall be filled by a majority vote of the
remaining directors, though less than a quorum, and any director so chosen
shall hold office for a term expiring at the next annual meeting of
shareholders at which a successor shall be elected and shall qualify.
3. At any meeting of the shareholders called for the purpose, the entire
board of directors or any individual director may, by the affirmative vote of
a majority of all the shares of the Corporation outstanding and entitled to
vote for election of directors, be removed from office, with or without cause.
4. Notwithstanding anything contained in these Articles of Incorporation
to the contrary, the affirmative vote of the holders of at least fifty (50%) of
the shares of the Corporation entitled to vote for election of directors shall
be required to amend or repeal, or to adopt any provision inconsistent with,
this Article IV.
ARTICLE V
A director of the Corporation shall, to the fullest extent permitted by
Section 14-2-202(b)(4) of the Code as it exists now or as it may hereafter be
amended, or by any successor provision, not have personal liability to the
Corporation or to its shareholders for monetary damages for breach of duty of
care or other duty as a director, by reason of any act of omission occurring
subsequent to the date when this provision becomes effective, except that
this provision shall not eliminate or limit the liability of a director for
any of the following: (a) any appropriation, in violation of his duties, of
any business
<PAGE>
opportunity of the Corporation; (b) acts or omissions which involve
intentional misconduct or a knowing violation of the law; (c) liabilities of
a director imposed by Section 14-2-832 of the Code, or any successor
provision; or (d) any transaction from which the director derived an improper
personal benefit.
ARTICLE VI
A. Each person who is or was a director, officer, employee or agent of the
Corporation, and each person who is or was a director, officer, employee or
agent of the Corporation who at the request of the Corporation is serving or
has served as an officer, director, partner, joint venturer or trustee of
another corporation, partnership, joint venture, trust or other enterprise
(any such person being hereinafter referred to as an "Indemnified Person")
shall be indemnified by the Corporation against those expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement which are
allowed to be paid, advanced or reimbursed by the Corporation under the laws
of the State of Georgia and which are actually and reasonably incurred in
connection with any action, suit, or proceeding, pending or threatened,
whether civil, criminal, arbitrative, administrative or investigative,
whether formal or informal, in which such person may be involved by reason of
his being or having been an Indemnified Person. Such indemnification,
reimbursement or advance shall be made only in accordance with the laws of
the State of Georgia, including the Code, subject to the conditions
prescribed under such statutory provisions.
B. In any instance where the laws of the State of Georgia permit
indemnification, reimbursement or advances to be provided to an Indemnified
Person only on a determination that certain specified standards of conduct
have been met, that all statutory requirements and procedures have been
satisfied, and that upon application for indemnification, reimbursement or
advances by any such person the Corporation shall promptly cause such
determination to be made in accordance with the statutory procedures of
Georgia law.
C. Nothing in this Article shall be construed as limiting the applicability
and scope of Georgia law with respect to indemnification, reimbursement and
advances for expenses; further, as a condition to any such right of
indemnification, the Corporation may require that it be permitted to
participate in the defense of any such action or proceeding through legal
counsel designated by the Corporation and at the expense of the Corporation.
D. In accordance with the laws of the State of Georgia, the Corporation may
purchase and maintain insurance on behalf of any Indemnified Persons whether
or not the Corporation would have the power to indemnify such Indemnified
Persons against its liability under the laws of the State of Georgia. For
any expenses or other amounts that are paid by way of insurance, or by
indemnification, reimbursement, or advances of funds other than by court
order or action by shareholders, the Corporation shall provide notice of such
payment to the shareholders in accordance with the applicable provisions of
the laws of the State of Georgia.
ARTICLE VII
Notwithstanding any provision of law to the contrary, the affirmative
vote of greater than fifty percent (50%) of all of the votes entitled to be
cast on the matter shall be necessary, after due authorization, approval or
advice of such action by the Board of Directors, as required by law, to
approve and authorize the following acts of the Corporation:
1. amendment of the Articles of Incorporation of the Corporation;
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2. a Change of Control of the Corporation. "Change of Control" shall
mean (x) any merger or consolidation of the Corporation with any other
business entity (other than a merger in which the Corporation is the
surviving corporation and as a result of which persons who owned beneficially
a majority in voting power of the outstanding voting capital stock of the
Corporation immediately prior to the merger continue to own beneficially, in
substantially the same proportions, a majority in voting power of the
outstanding voting capital stock of the Corporation immediately after such
merger), or (z) any sale, lease, transfer or other disposition of all or
substantially all the assets of the Corporation;
3. the voluntary liquidation, dissolution or winding-up of the
Corporation; or
4. any other transaction that Section 14-2-1110 of the Georgia Business
Corporation Code defines as a "Business Combination."
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EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
CENTENNIAL HEALTHCARE CORPORATION
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References in these Bylaws to "Articles of Incorporation" are to the Third
Amended and Restated Articles of Incorporation of CENTENNIAL HEALTHCARE
CORPORATION, a Georgia corporation (the "Corporation"), as amended and restated
from time to time (the "Articles").
All of these Bylaws are subject to contrary provisions, if any, of the
Articles (including provisions designating the preferences, limitations, and
relative rights of any class or series of shares), the Georgia Business
Corporation Code (the "Code"), and other applicable law, as in effect on and
after the effective date of these Bylaws. References in these Bylaws to
"Sections" shall refer to sections of the Bylaws, unless otherwise indicated.
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ARTICLE ONE
Office
1.1 Registered Office and Agent. The Corporation shall maintain a
registered office and shall have a registered agent whose business office is the
same as the registered office.
1.2 Principal Office. The principal office of the Corporation shall be at
the place designated in the Corporation's annual registration with the Georgia
Secretary of State.
1.3 Other Offices. In addition to its registered office and principal
office, the Corporation may have offices at other locations either in or outside
the State of Georgia, as the Board of Directors may determine from time to time
and the business of the Corporation may make desirable.
ARTICLE TWO
Shareholders' Meetings
2.1 Place of Meetings. Meetings of the Corporation's shareholders may be
held at any location inside or outside the State of Georgia designated by the
Board of Directors or any other person or persons who properly call the meeting,
or if the Board of Directors or such other person or persons do not specify a
location, at the Corporation's principal office.
2.2 Annual Meetings. The Corporation shall hold an annual meeting of
shareholders, at a time determined by the Board of Directors, to elect directors
and to transact any business that properly may come before the meeting. The
annual meeting may be combined with any other meeting of shareholders, whether
annual or special.
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2.3 Special Meetings. Special meetings of shareholders of one or more
classes or series of the Corporation's shares may be called at any time by the
Board of Directors, the Chairman of the Board, or the President, and shall be
called by the corporation upon the written request (in compliance with
applicable requirements of the Code) of the holders of shares representing ten
percent (10%) or more of the votes entitled to be cast on each issue proposed to
be considered at the special meeting. The business that may be transacted at
any special meeting of shareholders shall be limited to that proposed in the
notice of the special meeting given in accordance with Section 2.4 (including
related or incidental matters that may be necessary or appropriate to effectuate
the proposed business).
2.4 Notice of Meetings. In accordance with Section 9.5 and subject to
waiver by a shareholder pursuant to Section 2.5, the Corporation shall give
written notice of the date, time, and place of each annual and special
shareholders' meeting no fewer than 10 days nor more than 60 days before the
meeting date to each shareholder of record entitled to vote at the meeting. The
notice of an annual meeting need not state the purpose of the meeting unless
these Bylaws require otherwise. The notice of a special meeting shall state the
purpose for which the meeting is called. If an annual or special shareholders'
meeting is adjourned to a different date, time, or location, the Corporation
shall give shareholders notice of the new date, time, or location of the
adjourned meeting, unless a quorum of shareholders was present at the meeting
and information regarding the adjournment was announced before the meeting was
adjourned; provided, however, that if a new record date is or must be fixed in
accordance with Section 7.6, the Corporation must give notice of the adjourned
meeting to all shareholders of record as of the new record date who are entitled
to vote at the adjourned meeting.
2.5 Waiver of Notice. A shareholder may waive any notice required by the
Code, the Articles, or these Bylaws, before or after the date and time of the
matter to which the notice relates, by delivering to the Corporation a written
waiver of notice signed by the shareholder entitled to the notice. In addition,
a shareholder's attendance at a meeting shall constitute: (a) a waiver of
objection to lack of notice or defective notice of the meeting, unless the
shareholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting, and (b) a waiver of objection to
consideration of a particular matter at the meeting that is not within the
purpose stated in the meeting notice, unless the shareholder objects to
considering the matter when it is presented. Except as otherwise required by
the Code, neither the purpose of nor the business transacted at the meeting need
be specified in any waiver.
2.6 Voting Group: Quorum; Vote Required to Act. (a) Unless otherwise
required by the Code or the Articles, all classes or series of the Corporation's
shares entitled to vote generally on a matter shall for that purpose be
considered a single voting group (a "Voting Group"). If either the Articles or
the Code requires separate voting by two or more Voting Groups on a matter,
action on that matter is taken only when voted upon by each such Voting Group
separately. At all meetings of shareholders, any Voting Group entitled to vote
on a matter may take action on the matter only if a quorum of that Voting Group
exists at the meeting, and if a quorum exists, the Voting Group may take action
on the matter notwithstanding the absence of a quorum of any other Voting Group
that may be entitled to vote separately on the matter. Unless the Articles,
these Bylaws, or the Code provides otherwise, the presence (in person or by
proxy) of shares representing a majority of votes
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<PAGE>
entitled to be cast on a matter by a Voting Group shall constitute a quorum of
that Voting Group with regard to that matter. Once a share is present at any
meeting other than solely to object to holding the meeting or transacting
business at the meeting, the share shall be deemed present for quorum purposes
for the remainder of the meeting and for any adjournments of that meeting,
unless a new record date for the adjourned meeting is or must be set pursuant to
Section 7.6 of these Bylaws.
(b) If a quorum exists, action on a matter by a Voting Group is approved
by that Voting Group if the votes cast within the Voting Group favoring the
action exceed the votes cast opposing the action, unless the Articles, a
provision of these Bylaws that has been adopted pursuant to Section 14-2-1021 of
the Code (or any successor provision), or the Code requires a greater number of
affirmative votes.
2.7 Voting of Shares. Unless otherwise required by the Code or the
Articles, each outstanding share of any class or series having voting rights
shall be entitled to one vote on each matter that is submitted to a vote of
shareholders.
2.8 Proxies. A shareholder entitled to vote on a matter may vote in
person or by proxy pursuant to an appointment executed in writing by the
shareholder or by his attorney-in-fact. An appointment of a proxy shall be
valid for 11 months from the date of its execution, unless a longer or shorter
period is expressly stated in the proxy.
2.9 Presiding Officer. Except as otherwise provided in this Section 2.9,
the Chairman of the Board, and in his absence or disability the President, shall
preside at every shareholders' meeting (and any adjournment thereof) as its
chairman, if either of them is present and willing to serve. If neither the
Chairman of the Board nor the President is present and willing to serve as
chairman of the meeting, and if the Chairman of the Board has not designated
another person who is present and willing to serve, then a majority of the
Corporation's directors present at the meeting shall be entitled to designate a
person to serve as chairman. If no director of the Corporation is present at
the meeting or if a majority of the directors who are present cannot be
established, then a chairman of the meeting shall be selected by a majority vote
of (a) the shares present at the meeting that would be entitled to vote in an
election of directors, or (b) if no such shares are present at the meeting, then
the shares present at the meeting comprising the Voting Group with the largest
number of shares present at the meeting and entitled to vote on a matter
properly proposed to be considered at the meeting. The chairman of the meeting
may designate other persons to assist with the meeting.
2.10 Adjournments. At any meeting of shareholders (including an adjourned
meeting), a majority of shares of any Voting Group present and entitled to vote
at the meeting (whether or not those shares constitute a quorum) may adjourn the
meeting, but only with respect to that Voting Group, to reconvene at a specific
time and place. If more than one Voting Group is present and entitled to vote
on a matter at the meeting, then the meeting may be continued with respect to
any such Voting Group that does not vote to adjourn as provided above, and such
Voting Group may proceed to vote on any matter to which it is otherwise
entitled; provided, however, that if (a) more than one Voting Group is required
to take action on a matter at the meeting and (b) any one of those Voting Groups
votes to adjourn the meeting (in accordance with the preceding sentence), then
the action shall not be deemed to have been taken until the requisite vote of
any adjourned Voting
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<PAGE>
Group is obtained at its reconvened meeting. The only business that may be
transacted at any reconvened meeting is business that could have been transacted
at the meeting that was adjourned, unless further notice of the adjourned
meeting has been given in compliance with the requirements for a special meeting
that specifies the additional purpose or purposes for which the meeting is
called. Nothing contained in this Section 2.10 shall be deemed or otherwise
construed to limit any lawful authority of the chairman of a meeting to adjourn
the meeting.
2.11 Conduct of the Meeting. At any meeting of shareholders, the chairman
of the meeting shall be entitled to establish the rules of order governing the
conduct of business at the meeting.
2.12 Action of Shareholders Without a Meeting. Action required or
permitted to be taken at a meeting of shareholders may be taken without a
meeting if the action is taken by all shareholders entitled to vote on the
action or, if permitted by the Articles, by persons who would be entitled to
vote at a meeting shares having voting power to cast the requisite number of
votes (or numbers, in the case of voting by groups) that would be necessary to
authorize or take the action at a meeting at which all shareholders entitled to
vote were present and voted. The action must be evidenced by one or more
written consents describing the action taken, signed by shareholders entitled to
take action without a meeting, and delivered to the Corporation for inclusion in
the minutes or filing with the corporate records. Where required by Section
14-2-704 or other applicable provision of the Code, the Corporation shall
provide shareholders with written notice of actions taken without a meeting.
2.13 Nominations of Directors and Shareholder Proposals.
(a) Nominations by the Board of Directors. The Board of Directors or
a committee thereof shall have exclusive jurisdiction over the selection of the
management nominees for election from time to time as directors.
(b) Nominations by Shareholders. Only persons who are nominated by,
or at the direction of, the Board of Directors or by a shareholder who has given
timely written notice to the Secretary prior to the meeting at which directors
are to be elected will be eligible for election as directors of the Corporation.
For notice of shareholder nominations to be timely, such notice must be received
by the Corporation not less than 120 nor more than 150 days prior to the first
anniversary of the previous year's annual meeting. Such notification shall
contain the following information:
(i) the name and record address of the shareholder who intends to
make the nomination;
(ii) the name, age and business and residence addresses of each
proposed nominee;
(iii) the principal business, occupation or employment of each
proposed nominee during the last five years;
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<PAGE>
(iv) 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, as amended (the "Exchange Act"), 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;
(v) the name and record address of the notifying shareholder if
different from (i) above; and
(vi) 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.
(c) Shareholder Proposals. At annual and special meetings only such
business may be conducted as has been brought before the meeting by, or at the
direction of, the Board of Directors or by a shareholder who has given timely
written notice to the Secretary of the Corporation of such shareholder's
intention to bring such business before such meeting. For notice of business to
be conducted at an annual or special meeting to be timely, such notice must be
received by the Corporation, in the case of an annual meeting, not less than 120
nor more than 150 days prior to the first anniversary of the previous year's
annual meeting or, in the case of a special meeting, not less than 90 days prior
to the date of the meeting as set forth in the written request to the
Corporation provided pursuant to Section 2 hereof. Such notification shall
contain the following information:
(i) a brief description of the business desired to brought
before the meeting and the reasons for conducting such business at the
meeting;
(ii) the name and address, as they appear on the Corporation's
books, of the shareholder proposing such business;
(iii) the class, series and number of shares of the Corporation's
capital 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 persons (naming such person or persons)
in connection with the proposing of such business by the shareholder;
and
(v) any material interest of such shareholder in such business.
(d) Certain Procedures. The Chairman of the Board, or his designee,
at any meeting of shareholders at which one or more directors are to be elected
may disregard any nomination not made in accordance with this Section 2.13, and
upon the instructions of the Chairman of the Board, or his designee, the voting
inspectors shall disregard all votes cast for such nominees. In addition, the
Chairman of the Board, or his designee, at any annual or special meeting of
shareholders may disregard any shareholder proposals not made in
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<PAGE>
accordance with this Section 2.13. The Chairman of the Board, of his designee,
for good cause shown and with proper regard for the orderly conduct of business
at the meeting, may waive in whole or in part the operation of this
Section 2.13.
(e) Section 14 of the Exchange Act. Notwithstanding anything to the
contrary in this Section 2.13, any shareholder requesting that a proposal be
included in the Corporation's proxy statement must also meet all of the
requirements of Section 14 of the Exchange Act and Regulation 14A promulgated
thereunder.
ARTICLE THREE
Board of Directors
3.1 General Powers. All corporate powers shall be exercised by or under
the authority of, and the business and affairs of the Corporation shall be
managed by, the Board of Directors, subject to any limitation set forth in the
Code, Articles, in bylaws approved by the shareholders, or any legal agreement
among shareholders.
3.2 Number, Election and Term of Office. The Board of Directors of the
Corporation shall consist of up to nine (9) directors, the exact number to be
determined by resolution of the Board of Directors from time to time.
3.3 Classification of Board of Directors; Election. The directors shall
be divided into three classes, as nearly equal in number as possible, with
respect to the times for which they shall severally hold office. Directors of
the first class first chosen shall hold office until the first annual meeting of
shareholders following their election; directors of the second class first
chosen shall hold office until the second annual meeting of shareholders
following their election; and directors of the third class first chosen shall
hold office until the third annual meeting of shareholders following their
election. At each annual meeting of the shareholders after such first annual
meeting of the shareholders, the successors to the class of directors whose
terms shall expire at the time shall be elected to hold office until the third
succeeding annual meeting after their election, so that the term of office of
one class of directors shall expire in each year. Each director elected shall
hold office until his or her successor shall be elected and shall qualify.
3.4 Removal of Directors. At any shareholders' meeting for which notice
of such purpose has been given, the entire Board of Directors or any individual
director may be removed, with or without cause, by the affirmative vote of a
majority of the shares of the Corporation then outstanding and entitled to vote
at an election of directors, except that any director who has been elected by
the holders of the shares of any class or series may be removed, with or without
cause, by the affirmative vote of a majority of the outstanding shares of that
class or series and not by vote of the outstanding shares as a whole.
3.5 Change in Number of Directors. Any increase or decrease in the number
of directors shall be so apportioned among the classes as to make all classes
authorized by the requisite vote of shareholders as nearly equal in number as
possible. When any directorships are created pursuant to an increase in the
number of directorships are filled by the Board of Directors, the directors so
chosen shall hold office for a term expiring at the next annual meeting of
shareholders at which a successor shall be elected and qualify.
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3.6 Vacancies in Board of Directors. Any vacancy in the Board of
Directors occurring as a result of the removal of a director as provided in
Section 14-2-808 of the Georgia Business Corporation Code shall be filled by the
shareholders, or if authorized by the shareholders, by the remaining
director(s), but only for a term of the office continuing until the next
election of directors by shareholders and until the election and qualification
of the successor. Any vacancies in the Board of Directors resulting from death,
resignation or retirement of a director, or any other cause other than removal
by the shareholders or increase in the number of directors shall be filled by a
majority vote of the remaining directors, though less than a quorum, for a term
corresponding to the unexpired term of his or her predecessor in office.
3.7 Compensation. Directors may receive such compensation for their
services as directors as may be fixed by the Compensation Committee (hereinafter
provided for) of the Board of Directors from time to time. Directors shall be
entitled to be reimbursed for all reasonable out-of-pocket expenses incurred in
connection with their services as directors. A director may also serve the
Corporation in one or more capacities other than that of director and receive
compensation for services rendered in those other capacities as may be approved
by the Compensation Committee from time to time.
3.8 Committees of the Board of Directors. (a) The Board of Directors may
designate by resolution, from among its members, one or more standing or ad hoc
committees, each consisting of one or more directors, who serve at the pleasure
of the Board of Directors. Subject to the limitations imposed by the Code, each
committee shall have the authority set forth in the resolution establishing the
committee or in any other resolution of the Board of Directors specifying,
enlarging, or limiting the authority of the committee; provided, however, that
no such resolution shall specify and no such committee shall have any of the
authority of the Compensation Committee, the Audit Committee nor any authority
customarily delegated to an executive committee.
(b) There shall be a Compensation Committee consisting of not more than
four directors appointed by the Board of Directors. A quorum for meetings of
the Compensation Committee shall be two. The Compensation Committee shall have
the authority to do the things provided for it to do in any resolution of the
Board of Directors and in these Bylaws.
(c) There shall be an Audit Committee consisting of not more than four
directors. In addition to the foregoing committee members, the President of the
Corporation shall be an ex-officio, non-voting member of the Audit Committee.
The Audit Committee shall have the authority to select the Corporation's
auditors, to review the audit and to have all other authority customary for an
audit committee.
3.9 Qualification of Directors. No person elected to serve as a director
of the Corporation shall assume office and begin serving unless and until duly
qualified to serve, as determined by reference to the Code, the Articles, and
any further eligibility requirements established in these Bylaws.
3.10 Dealings with Insiders. The Board of Directors shall make the
determination whether to allow or permit any director, officer, personnel,
consultant or shareholder or persons actually or constructively related to any
of the foregoing (within the meaning of
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section 267(c) of the Internal Revenue Code) to have either directly or
indirectly an interest in any corporation, partnership, proprietorship,
association or other person or entity which furnishes or sells services or
products to the Company or in any corporation, partnership, proprietorship,
association or other person or entity to which services or products are
furnished or sold by the Company. For the purposes of this Section, there shall
be disregarded any interest which arises solely from the ownership of less than
a five percent (5%) equity interest in any corporation whose stock is regularly
traded on any national securities exchange or in the over-the-counter market and
in which such person has no management role.
ARTICLE FOUR
Meetings of the Board of Directors
4.1 Regular Meetings. A regular meeting of the Board of Directors shall
be held in conjunction with each annual meeting of shareholders. In addition,
the Board of Directors may, by prior resolution, hold regular meetings at other
times. In addition, until a majority of all members of the Board shall
determine otherwise, there shall be a regular meeting of the Board of Directors
each quarter on a date and at a time determined by the Board of Directors.
4.2 Special Meetings. Special meetings of the Board of Directors may be
called by or at the request of the Chairman of the Board, the President, or any
directors in office at that time.
4.3 Place of Meetings. Directors may hold their meetings at any place in
or outside the State of Georgia that the Board of Directors may establish from
time to time.
4.4 Notice of Meetings. Directors need not be provided with notice of any
regular meeting of the Board of Directors. Unless waived in accordance with
Section 4.10, the Corporation shall give at least two days' notice to each
director of the date, time, and place of each special meeting. Notice of a
meeting shall be deemed to have been given to any director in attendance at any
prior meeting at which the date, time, and place of the subsequent meeting was
announced.
4.5 Quorum. At meetings of the Board of Directors, a majority of the
directors in office shall constitute a quorum for the transaction of business.
4.6 Vote Required for Action. If a quorum is present when a vote is taken,
the vote of a majority of the directors present at the time of the vote will be
the act of the Board of Directors, unless the vote of a greater number is
required by the Code, the Articles, or these Bylaws. A director who is present
at a meeting of the Board of Directors when corporate action is taken is deemed
to have assented to the action taken unless (a) he or she objects at the
beginning of the meeting (or promptly upon his or her arrival) to holding the
meeting or transacting business at such meeting; (b) his or her dissent or
abstention from the action taken is entered in the minutes of the meeting; or
(c) he or she delivers written notice of his or her dissent or abstention to the
presiding officer of the meeting before its adjournment or to the Corporation
immediately after adjournment of the meeting. The right of dissent or
abstention is not available to a director who votes in favor of the action
taken.
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4.7 Participation by Conference Telephone. Members of the Board of
Directors may participate in a meeting of the Board by means of conference
telephone or similar communications equipment through which all persons
participating may hear and speak to each other. Participation in a meeting
pursuant to this Section 4.7 shall constitute presence in person at the meeting.
4.8 Action by Directors Without a Meeting. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting if a written consent, describing the action taken, is signed
by each director and delivered to the Corporation for inclusion in the minutes
or filing with the corporate records. The consent may be executed in
counterpart, and shall have the same force and effect as a unanimous vote of the
Board of Directors at a duly convened meeting.
4.9 Adjournments. A meeting of the Board of Directors, whether or not a
quorum is present, may be adjourned by a majority of the directors present to
reconvene at a specific time and place. It shall not be necessary to give
notice to the directors of the reconvened meeting or of the business to be
transacted, other than by announcement at the meeting that was adjourned, unless
a quorum was not present at the meeting that was adjourned, in which case notice
shall be given to directors in the same manner as for a special meeting. At any
such reconvened meeting at which a quorum is present, any business may be
transacted that could have been transacted at the meeting that was adjourned.
4.10 Waiver of Notice. A director may waive any notice required by the
Code, the Articles, or these Bylaws before or after the date and time of the
matter to which the notice relates, by a written waiver signed by the director
and delivered to the Corporation for inclusion in the minutes or filing with the
corporate records. Attendance by a director at a meeting shall constitute
waiver of notice of the meeting, except where a director at the beginning of the
meeting (or promptly upon his or her arrival) objects to holding the meeting or
to transacting business at the meeting and does not thereafter vote for or
assent to action taken at the meeting.
ARTICLE FIVE
Officers
5.1 Officers. The officers of the Corporation shall consist of a
President, a Secretary, and a Treasurer, each of whom shall be elected or
appointed by the Board of Directors. The Board of Directors may also elect a
Chairman of the Board from among its members. The Board of Directors from time
to time may create and establish the duties of other offices and may elect or
appoint, or authorize specific senior officers to appoint, the persons who shall
hold such other offices, including, without limitation, one or more Vice
Presidents (including Executive Vice Presidents, Senior Vice Presidents,
Assistant Vice Presidents, and the like), one or more Assistant Secretaries, and
one or more Assistant Treasurers. Whether or not so provided by the Board of
Directors, the Chairman of the Board may appoint one or more Assistant
Secretaries and one or more Assistant Treasurers. Any two or more offices may
be held by the same person.
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5.2 Term. Each officer shall serve at the pleasure of the Board of
Directors until his or her death, resignation, or removal, or until his or her
replacement is elected or appointed in accordance with this Article Five.
5.3 Compensation. The compensation of the President of the Corporation
and the Executive Vice Presidents of the Corporation shall be approved by the
Compensation Committee. Officers may serve without compensation.
5.4 Removal. All officers (regardless of how elected or appointed) may be
removed, with or without cause, by the Board of Directors, and any officer
appointed by another officer may also be removed, with or without cause, by any
senior officer authorized to have appointed the officer to be removed. Removal
will be without prejudice to the contract rights, if any, of the person removed,
but shall be effective notwithstanding any damage claim that may result from
infringement of such contract rights.
5.5 Chairman of the Board. The Chairman of the Board (if there be one)
shall preside at and serve as chairman of meetings of the shareholders and of
the Board of Directors (unless another person is selected under Section 2.9 to
act as chairman). The Chairman of the Board shall perform other duties and have
other authority as may from time to time be delegated by the Board of Directors.
5.6 President. Unless otherwise provided in these Bylaws or by resolution
of the Board of Directors, the President shall be the chief executive officer of
the Corporation, shall be charged with the general and active management of the
business of the Corporation, shall see that all orders and resolutions of the
Board of Directors are carried into effect, shall have the authority to select
and appoint employees and agents of the Corporation, and shall, in the absence
or disability of the Chairman of the Board, perform the duties and exercise the
powers of the Chairman of the Board. The President shall perform any other
duties and have any other authority as may be delegated from time to time by the
Board of Directors, and shall be subject to the limitations fixed from time to
time by the Board of Directors.
5.7 Vice Presidents. The Vice President (if there be one) shall, in the
absence or disability of the President, or at the direction of the President,
perform the duties and exercise the powers of the President, whether the duties
and powers are specified in these Bylaws or otherwise. If the Corporation has
more than one Vice President, the one designated by the Board of Directors or
the President (in that order of precedence) shall act in the event of the
absence or disability of the President. Vice Presidents shall perform any other
duties and have any other authority as from time to time may be delegated by the
Board of Directors or the President.
5.8 Secretary. The Secretary shall be responsible for preparing minutes
of the meetings of shareholders, directors, and committees of directors and for
authenticating records of the Corporation. The Secretary or any Assistant
Secretary shall have authority to give all notices required by law or these
Bylaws. The Secretary shall be responsible for the custody of the corporate
books, records, contracts, and other documents. The Secretary or any Assistant
Secretary may affix the corporate seal to any lawfully executed documents
requiring it, may attest to the signature of any officer of the Corporation, and
shall sign any instrument that requires the Secretary's signature. The
Secretary or any Assistant Secretary
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shall perform any other duties and have any other authority as from time to time
may be delegated by the Board of Directors or the President.
5.9 Treasurer. Unless otherwise provided by the Board of Directors, the
Treasurer shall be the chief financial officer of the Corporation and shall be
responsible for the custody of all funds and securities belonging to the
Corporation and for the receipt, deposit, or disbursement of these funds and
securities under the direction of the Board of Directors. The Treasurer shall
cause full and true accounts of all receipts and disbursements to be maintained
and shall make reports of these receipts and disbursements to the Board of
Directors and President upon request. The Treasurer or any Assistant Treasurer
shall perform any other duties and have any other authority as from time to time
may be delegated by the Board of Directors or the President.
ARTICLE SIX
Distributions and Dividends
Unless the Articles provide otherwise, the Board of Directors, from time to
time in its discretion, may authorize or declare distributions or share
dividends in accordance with the Code.
ARTICLE SEVEN
Shares
7.1 Share Certificates. The interest of each shareholder in the
Corporation shall be evidenced by a certificate or certificates representing
shares of the Corporation, which shall be in such form as the Board of Directors
from time to time may adopt in accordance with the Code. Share certificates
shall be in registered form and shall indicate the date of issue, the name of
the Corporation, that the Corporation is organized under the laws of the State
of Georgia, the name of the shareholder, and the number and class of shares and
designation of the series, if any, represented by the certificate. Each
certificate shall be signed by the President or a Vice President (or in lieu
thereof, by the Chairman of the Board or Chief Executive Officer, if there be
one) and may be signed by the Secretary or an Assistant Secretary; provided,
however, that where the certificate is signed (either manually or by facsimile)
by a transfer agent, or registered by a registrar, the signatures of those
officers may be facsimiles.
7.2 Rights of Corporation With Respect to Registered Owners. Prior to due
presentation for transfer of registration of its shares, the Corporation may
treat the registered owner of the shares (or the beneficial owner of the shares
to the extent of any rights granted by a nominee certificate on file with the
Corporation pursuant to any procedure that may be established by the Corporation
in accordance with the Code) as the person exclusively entitled to vote the
shares, to receive any dividend or other distribution with respect to the
shares, and for all other purposes; and the Corporation shall not be bound to
recognize any equitable or other claim to or interest in the shares on the part
of any other person, whether or not it has express or other notice of such a
claim or interest, except as otherwise provided by law.
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7.3 Transfers of Shares. Transfers of shares shall be made upon the books
of the Corporation kept by the Corporation or by the transfer agent designated
to transfer the shares, only upon direction of the person named in the
certificate or by an attorney lawfully constituted in writing. Before a new
certificate is issued, the old certificate shall be surrendered for cancellation
or, in the case of a certificate alleged to have been lost, stolen, or
destroyed, the provisions of Section 7.5 of these Bylaws shall have been
complied with.
7.4 Duty of Corporation to Register Transfer. Notwithstanding any of the
provisions of Section 7.3 of these Bylaws, the Corporation is under a duty to
register the transfer of its shares only if: (a) the share certificate is
endorsed by the appropriate person or persons; (b) reasonable assurance is given
that each required endorsement is genuine and effective; (c) the Corporation has
no duty to inquire into adverse claims or has discharged any such duty; (d) any
applicable law relating to the collection of taxes has been complied with; (e)
the transfer is in fact rightful or is to a bona fide purchaser; and (f) the
transfer is in compliance with applicable provisions of any transfer
restrictions of which the Corporation shall have notice.
7.5 Lost, Stolen, or Destroyed Certificates. Any person claiming a share
certificate to be lost, stolen, or destroyed shall make an affidavit or
affirmation of this claim in such a manner as the Corporation may require and
shall, if the Corporation requires, give the Corporation a bond of indemnity in
form and amount, and with one or more sureties satisfactory to the Corporation,
as the Corporation may require, whereupon an appropriate new certificate may be
issued in lieu of the one alleged to have been lost, stolen or destroyed.
7.6 Fixing of Record Date. For the purpose of determining shareholders
(a) entitled to notice of or to vote at any meeting of shareholders or, if
necessary, any adjournment thereof, (b) entitled to receive payment of any
distribution or dividend, or (c) for any other proper purpose, the Board of
Directors may fix in advance a date as the record date. The record date may not
be more than 70 days (and, in the case of a notice to shareholders of a
shareholders' meeting, not less than 10 days) prior to the date on which the
particular action, requiring the determination of shareholders, is to be taken.
A determination of shareholders of record entitled to notice of or to vote at a
meeting of shareholders shall apply to any adjournment of the meeting, unless
the Board of Directors shall fix a new record date for the reconvened meeting,
which it must do if the meeting is adjourned to a date more than 120 days after
the date fixed for the original meeting.
7.7 Record Date if None Fixed. If no record date is fixed as provided in
Section 7.6. then the record date for any determination of shareholders that may
be proper or required by law shall be, as appropriate, the date on which notice
of a shareholders' meeting is mailed, the date on which the Board of Directors
adopts a resolution declaring a dividend or authorizing a distribution, or the
date on which any other action is taken that requires a determination of
shareholders.
7.8 Conflicting Requirements. To the extent any portion of this Article
Seven is in conflict with any provision of the Articles or the Code, the
Articles or the Code shall control. To the extent any portion of this Article
Seven is not in conflict but deals with the same matter as a provision of the
Articles, such portion shall be deemed supplementary to such provision.
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<PAGE>
ARTICLE EIGHT
Indemnification
8.1 Indemnification of Directors. The Corporation shall indemnify and
hold harmless any person (an "Indemnified Person") who was or is 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,
whether formal or informal, including any action or suit by or in the right of
the Corporation (for purposes of this Article Eight, collectively, a
"Proceeding") because he or she is or was a director, officer, employee or agent
of the Corporation or because he or she is or was serving at the Corporation's
request as a director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against any judgment, settlement, penalty, fine, or reasonable
expenses (including, but not limited to, attorneys' fees and disbursements,
court costs, and expert witness fees) incurred with respect to the Proceeding
(for purposes of this Article Eight, a "Liability"), if he or she acted in a
manner he or she believed in good faith to be in or not opposed to the best
interests of the Corporation, and, in the case of any criminal proceeding, had
no reasonable cause to believe his or her conduct was unlawful; provided,
however, that no indemnification shall be made for any Liability for which,
under the Code, indemnification may not be authorized by action of the Board of
Directors, the shareholders, or otherwise, including, but not limited to, any
Liability of a director to the Corporation for: (a) any appropriation by a
director, in violation of the director's duties, of any business opportunity of
the Corporation; (b) any acts or omissions of a director that involve
intentional misconduct or a knowing violation of law; (c) the types of liability
set forth in Code Section 14-2-832; or (d) any transaction from which the
director received an improper personal benefit. Indemnification in connection
with a Proceeding brought by or in the right of the Corporation is limited to
reasonable expenses incurred in connection with the Proceeding.
8.2 Determination. Notwithstanding any judgment, order, settlement,
conviction, or plea in any Proceeding, an Indemnified Person shall be entitled
to indemnification as provided in section 8.1 if a determination that such
Indemnified Person is entitled to such indemnification shall be made (a) by the
Board of Directors by a majority vote of a quorum consisting of directors who
are not at the time parties to the Proceeding; (b) if a quorum cannot be
obtained under (a) above, by majority vote of a committee duly designated by the
Board of Directors (in which designation directors who are parties may
participate), consisting solely of two or more directors who are not at the time
parties to the Proceeding; (c) in a written opinion by special legal counsel
selected as required by the Code; or (d) by the shareholders; provided, however,
that shares owned by or voted under the control of directors who are at the time
parties to the Proceeding may not be voted on the determination.
8.3 Advances. To the extent the Corporation has funds reasonably
available to be used for this purpose, expenses (including, but not limited to,
attorneys' fees and disbursements, court costs, and expert witness fees)
incurred by the Indemnified Person in defending any Proceeding of the kind
described in Section 8.1 shall be paid by the Corporation in advance of the
final disposition of such Proceeding as set forth herein. The Corporation shall
promptly pay the amount of such expenses to the Indemnified Person, but
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<PAGE>
in no event later than 10 days following the Indemnified Person's delivery to
the Corporation of a written request for an advance pursuant to this Section
8.3, together with a reasonable accounting of such expenses; provided, however,
that the Indemnified Person shall furnish the Corporation a written affirmation
of his good faith belief that he has met the standard of conduct set forth in
the Code and a written undertaking and agreement to repay to the Corporation any
advances made pursuant to this Section 8.3 if it shall be determined that the
Indemnified Person is not entitled to be indemnified by the Corporation for such
amounts. The Corporation may make the advances contemplated by this Section 8.3
regardless of the Indemnified Person's financial ability to make repayment. Any
advances and undertakings to repay pursuant to this Section 8.3 may be unsecured
and interest-free.
8.4 Non-Exclusivity. Subject to any applicable limitation imposed by the
Code or the Articles, the indemnification and advancement of expenses provided
by or granted pursuant to this Article Eight shall not be deemed exclusive of
any other rights to which a person seeking indemnification or advancement of
expenses may be entitled under any provision of the Articles, or any Bylaw,
resolution, or agreement specifically or in general terms approved or ratified
by the affirmative vote of holders of a majority of the shares entitled to be
voted thereon.
8.5 Insurance. The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee, or agent of the Corporation, or who, while serving in such a capacity,
is also or was also serving at the request of the Corporation as a director,
officer, trustee, partner, employee, or agent of any corporation, partnership,
joint venture, trust, employee benefit plan, or other enterprise, against any
Liability that may be asserted against him or her or incurred by him or her in
any such capacity, or arising out of his or her status as such, whether or not
the Corporation would have the power to indemnify him or her against such
liability under the provisions of this Article Eight.
8.6 Notice. If the Corporation indemnifies or advances expenses to a
director under any of Sections 14-2-851 through 14-2-854 of the Code (or any
equivalent provision of these Bylaws) in connection with a Proceeding by or in
the right of the Corporation, the Corporation shall, to the extent required by
Section 14-2-1621 or any other applicable provision of the Code, report the
indemnification or advance in writing to the shareholders with or before the
notice of the next shareholders' meeting.
8.7 Security. The Corporation may designate certain of its assets as
collateral, provide self-insurance, establish one or more indemnification
trusts, or otherwise secure or facilitate its ability to meet its obligations
under this Article Eight, or under any indemnification agreement or plan of
indemnification adopted and entered into in accordance with the provisions of
this Article Eight, as the Board of Directors deems appropriate.
8.8 Amendment. Any amendment to this Article Eight that limits or
otherwise adversely affects the right of indemnification, advancement of
expenses, or other rights of any Indemnified Person hereunder shall, as to such
Indemnified Person, apply only to Proceedings based on actions, events, or
omissions occurring after such amendment and after delivery of notice of such
amendment to the Indemnified Person so affected (collectively, "Post Amendment
Events"). Any Indemnified Person shall, as to any Proceeding based on actions,
events, or omissions occurring prior to the date of receipt of such notice,
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<PAGE>
be entitled to the right of indemnification, advancement of expenses, and other
rights under this Article Eight to the same extent as if such provisions had
continued as part of the Bylaws of the Corporation without such amendment. This
Section 8.8 cannot be altered, amended, or repealed in a manner effective as to
any Indemnified Person (except as to Post Amendment Events) without the prior
written consent of such Indemnified Person.
8.9 Agreements. The provisions of this Article Eight shall be deemed to
constitute an agreement between the Corporation and each Indemnified Person
hereunder. In addition to the rights provided in this Article Eight, the
Corporation shall have the power, upon authorization by the Board of Directors,
to enter into an agreement or agreements providing to any Indemnified Person
indemnification rights substantially similar to those provided in this Article
Eight.
8.10 Continuing Benefits. The rights of indemnification and advancement of
expenses permitted or authorized by this Article Eight shall, unless otherwise
provided when such rights are granted or conferred, continue as to a person who
has ceased to be a director, officer, employee, or agent and shall inure to the
benefit of the heirs, executors, and administrators of such person.
8.11 Successors. For purposes of this Article Eight, the term
"Corporation" shall include any corporation, joint venture, trust, partnership,
or unincorporated business association that is the successor to all or
substantially all of the business or assets of this Corporation, as a result of
merger, consolidation, sale, liquidation, or otherwise, and any such successor
shall be liable to the persons indemnified under this Article Eight on the same
terms and conditions and to the same extent as this Corporation.
8.12 Severability. Each of the Sections of this Article Eight, and each of
the clauses set forth herein, shall be deemed separate and independent, and
should any part of any such Section or clause be declared invalid or
unenforceable by any court of competent jurisdiction, such invalidity or
unenforceability shall in no way render invalid or unenforceable any other part
thereof or any separate Section or clause of this Article Eight that is not
declared invalid or unenforceable.
8.13 Additional Indemnification. In addition to the specific
indemnification rights set forth herein, the Corporation shall indemnify each of
its directors and such of its officers as have been designated by the Board of
Directors to the full extent permitted by action of the Board of Directors
without shareholder approval under the Code or other laws of the State of
Georgia as in effect from time to time.
ARTICLE NINE
Miscellaneous
9.1 Inspection of Books and Records. The Board of Directors shall have
the power to determine which accounts, books, and records of the Corporation
shall be available for shareholders to inspect or copy, except for those books
and records required by the Code to be made available upon compliance by a
shareholder with applicable requirements, and shall have the power to fix
reasonable rules and regulations (including confidentiality restrictions and
procedures) not in conflict with applicable law for the inspection and copying
of
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<PAGE>
accounts, books, and records that by law or by determination of the Board of
Directors are made available. Unless required by the Code or otherwise provided
by the Board of Directors, a shareholder of the Corporation holding less than
two percent of the total shares of the Corporation then outstanding shall have
no right to inspect the books and records of the Corporation.
9.2 Fiscal Year. The fiscal year of the Corporation shall be the year
ending December 31.
9.3 Corporate Seal. The corporate seal will be in such form as the Board
of Directors may from time to time determine. The Board of Directors may
authorize the use of one or more facsimile forms of the corporate seal. The
corporate seal need not be used unless its use is required by law, by these
Bylaws, or by the Articles.
9.4 Annual Statements. Not later than one hundred twenty (120) days after
the close of each fiscal year, and in any case prior to the next annual meeting
of shareholders, the Corporation shall prepare (a) a balance sheet showing in
reasonable detail the financial condition of the Corporation as of the close of
its fiscal year, and (b) a profit and loss statement showing the results of its
operations during its fiscal year. Upon receipt of written request or as
required by the Exchange Act, the Corporation promptly shall mail to any
shareholder of record a copy of the most recent such balance sheet and profit
and loss statement, in such form and with such information as the Code or the
Exchange Act may require.
9.5 Notice. (a) Whenever these Bylaws require notice to be given to any
shareholder or to any director, the notice may be given by mail, in person, by
courier delivery, by telephone, or by telecopier, telegraph, or similar
electronic means. Whenever notice is given to a shareholder or director by
mail, the notice shall be sent by depositing the notice in a post office or
letter box in a postage-prepaid, sealed envelope addressed to the shareholder or
director at his or her address as it appears on the books of the Corporation.
Any such written notice given by mail shall be effective: (i) if given to
shareholders, at the time the same is deposited in the United States mail; and
(ii) in all other cases, at the earliest of (x) when received or when delivered,
properly addressed, to the addressees last known principal place of business or
residence, (y) five days after its deposit in the mail, as evidenced by the
postmark, if mailed with first-class postage prepaid and correctly addressed, or
(z) on the date shown on the return receipt, if sent by registered or certified
mail, return receipt requested, and the receipt is signed by or on behalf of the
addressee. Whenever notice is given to a shareholder or director by any means
other than mail, the notice shall be deemed given when received.
(b) In calculating time periods for notice, when a period of time measured
in days, weeks, months, years, or other measurement of time is prescribed for
the exercise of any privilege or the discharge of any duty, the first day shall
not be counted but the last day shall be counted.
9.6 Fair Price Requirements; Business Combinations. All of the
requirements of Part 2 of Article 11 and all of the requirements of Article 11A
of the Code, as the same may
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be amended from time to time, and any successor provision of the Code, shall be
applicable to the Corporation.
ARTICLE TEN
Amendments
Except as otherwise provided under the Code, the Board of Directors shall
have the power to alter, amend, or repeal these Bylaws or adopt new Bylaws. Any
Bylaws adopted by the Board of Directors may be altered, amended, or repealed,
and new Bylaws adopted, by the shareholders. The shareholders may prescribe in
adopting any Bylaw or Bylaws that the Bylaw or Bylaws so adopted shall not be
altered, amended, or repealed by the Board of Directors.
Dated as of June 23, 1997
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<PAGE>
CENTENNIAL HEALTHCARE CORPORATION
COMMON STOCK COMMON STOCK
INCORPORATED UNDER THE LAWS OF THE STATE OF GEORGIA
CUSIP 150937 10 0
This Certifies that
SEE REVERSE FOR
CERTAIN DEFINITIONS
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF
THE COMMON STOCK, $.01 PAR VALUE, OF
CENTENNIAL HEALTHCARE CORPORATION
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned and registered
by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
SECRETARY PRESIDENT AND
CHIEF EXECUTIVE OFFICER
[CORPORATE SEAL]
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ............... Custodian ...............
(Cust) (Minor)
under Uniform Gifts to Minors
Act......................................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated --------------------------------
- ---------------------------------------------------------------------NOTICE:
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
- ----------------------------------------------------------------SIGNATURE(S)
GUARANTEED: THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT
UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED.
<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,
/s/ NELSON MULLINS RILEY & SCARBOROUGH, L.L.P.
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION
1997 STOCK PLAN
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION
1997 STOCK PLAN
ARTICLE I
DEFINITIONS
As used herein, the following terms have the following meanings unless the
context clearly indicates to the contrary:
"Award" shall mean a grant of Restricted Stock or a SAR under the
Plan.
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall mean the occurrence of either of the
following events:
(a) A change in the composition of the Board as a result of which
fewer than one-half of the incumbent Directors are Directors who
either:
(i) were Directors of the Company twenty-four (24) months prior
to such change; or
(ii) were elected, or nominated for election, to the Board with
the affirmative votes of at least a majority of the
Directors who had been Directors of the Company twenty-four
(24) months prior to such change and who were still in
office at the time of the election or nomination; or
(b) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), who, by the acquisition or aggregation of
securities is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing fifty
percent (50%) or more of the combined voting power of the
Company's then outstanding securities ordinarily (and apart from
rights accruing under special circumstances) having the right to
vote at elections of directors (the "Base Capital Stock"); except
that any change in the relative beneficial ownership of the
Company's securities by any person resulting solely from a
reduction in the aggregate number of outstanding shares of Base
Capital Stock, and any decrease thereafter in such person's
ownership of securities, shall be disregarded until such person
increases in any manner, directly or indirectly, such person's
beneficial ownership of any securities of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended,
including effective date and transition rules (whether or not
codified). Any reference herein to a specific section of the Code
shall be deemed to include a reference to any applicable corresponding
provision of future law.
<PAGE>
"Committee" shall mean a committee of at least three (3) Directors
appointed from time to time by the Board, having the duties and
authority set forth herein in addition to any other authority granted
by the Board; provided, however, that with respect to any Options or
Awards granted to an individual who is also a Section 16 Insider, the
Committee shall consist of at least two (2) Directors (who need not be
members of the Committee with respect to Options or Awards granted to
any other individuals) who are Non-Employee Directors, and all
authority and discretion shall be exercised by such Non-Employee
Directors, and references herein to the "Committee" shall mean such
Non-Employee Directors insofar as any actions or determinations of the
Committee shall relate to or affect Options or Awards made to or held
by any Section 16 Insider. At any time that the Board shall not have
appointed a committee as described above, any reference herein to the
Committee shall mean a reference to the Board.
"Company" shall mean Centennial HealthCare Corporation, a Georgia
corporation.
"Director" shall mean a member of the Board and any person who is an
advisory, honorary or emeritus director of the Company if such person
is considered a director for the purposes of Section 16 of the
Exchange Act, as determined by reference to such Section 16 and to the
rules, regulations, judicial decisions, and interpretative or
"no-action" positions with respect thereto of the Securities and
Exchange Commission, as the same may be in effect or set forth from
time to time.
"Disabled Optionee" shall mean an Optionee who suffers a Disability.
"Disability" shall mean shall mean a physical or mental infirmity
which impairs an Optionee's ability to substantially perform his
duties with the Company or a Subsidiary for a period of 180
consecutive days, as determined by an independent physician selected
by agreement between the Company and the Optionee or, failing such
agreement, selected by two physicians (one of which shall be selected
by the Company and the other by the Optionee); provided, however, that
"Disability" shall have the meaning set forth in Code Section 22(e)(3)
and the regulations promulgated thereunder with respect to an Optionee
granted Incentive Stock Options.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended. Any reference herein to a specific section of the Exchange
Act shall be deemed to include a reference to any applicable
corresponding provision of future law.
"Exercise Price" shall mean the price at which an Optionee may
purchase a share of Stock under a Stock Option Agreement.
"Fair Market Value" on any date shall mean (i) the average closing
sales price of the Stock on such date on the national securities
exchange having the greatest volume of trading in the Stock during the
thirty (30) day period preceding such date; (ii) if the Stock is not
traded on any national securities
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<PAGE>
exchange, the average of the closing high bid and low asked prices of
the Stock on the over-the-counter market during the thirty (30) day
period preceding such date; or (iii) if the Stock is traded on neither
a national securities exchange nor on the over-the-counter market, the
fair market value as determined in good faith by the Board or the
Committee based on such relevant facts as may be available, including,
without limitation, the price at which recent sales of Stock have been
made, the book value of the Stock and the Company's current and future
earnings.
"For Cause" termination shall mean the termination of an Optionee's
employment as a result of: (i) any act on the part of the Optionee
that constitutes fraud, dishonesty, gross malfeasance of duty, or
conduct grossly inappropriate to the Optionee's position of
employment; or (ii) the conviction of the Optionee of a felony.
"Grantee" shall mean an Optionee (or his permitted assign) or a person
who has received a SAR.
"Incentive Stock Option" shall mean an option to purchase Stock
of the Company which complies with and is subject to the terms,
limitations, and conditions of Section 422 of the Code and any
regulations promulgated with respect thereto.
"Non-Employee Director" shall have the meaning set forth in Rule 16b-3
under the Exchange Act or in any successor rule thereto, and shall be
determined for all purposes under the Plan according to interpretative
or "no-action" positions with respect thereto issued by the Securities
and Exchange Commission.
"Officer" shall mean a person who constitutes an officer of the
Company for the purposes of Section 16 of the Exchange Act, as
determined by reference to such Section 16 and to the rules,
regulations, judicial decisions, and interpretative or "no-action"
positions with respect thereto of the Securities and Exchange
Commission, as the same may be in effect or set forth from time to
time.
"Option" shall mean an option, including an Incentive Stock Option, to
purchase Stock granted pursuant to the provisions of Article VI
hereof.
"Optionee" shall mean a person to whom an Option has been granted
hereunder or his permitted assign.
"Plan" shall mean the Centennial HealthCare Corporation 1997 Stock
Plan, the terms of which are set forth herein.
"Purchasable" shall refer to Stock which may be purchased by an
Optionee under the terms of the Plan on or after a certain date
specified in an applicable Stock Option Agreement.
"Reload Option" shall have the meaning set forth in Section 6.8
hereof.
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"SAR" shall mean a stock appreciation right, which is the right to
receive an amount equal to the SAR Spread.
"SAR Agreement" shall mean a written agreement setting forth the terms
of an Award of a SAR, as provided in Section 8.1 hereof.
"SAR Price" shall mean the base value established by the Committee for
a SAR on the date the SAR is granted and which is used in determining
the amount of benefit, if any, paid to a Grantee.
"SAR Spread" shall mean, with respect to any SAR, an amount equal to
(a) the Fair Market Value of a share of Stock on the date such SAR is
exercised, less (b) the SAR Price of such SAR.
"Section 16 Insider" shall mean any person who is subject to the
provisions of Section 16 of the Exchange Act.
"Stock" shall mean the common stock, no par value per share, of the
Company, subject to applicable provisions of Section 5.2.
"Stock Option Agreement" shall mean a written agreement between the
Company and an Optionee under which the Optionee may purchase Stock
hereunder, as provided in Article VI hereof.
"Subsidiary" shall mean any corporation in which the Company directly
or indirectly owns stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock of such
corporation.
ARTICLE II
THE PLAN
2.1 Name. The Plan shall be known as the "Centennial HealthCare
Corporation 1997 Stock Plan."
2.2 Purpose. The purpose of the Plan is to advance the interests of the
Company, its Subsidiaries and its shareholders by affording certain employees of
the Company and its Subsidiaries, as well as key consultants and advisors to the
Company or any Subsidiary, an opportunity to acquire or increase their
proprietary interests in the Company. The objective of the Options and Awards
is to promote the growth and profitability of the Company and its Subsidiaries
by providing Optionees with an additional incentive to achieve the Company's
objectives through participation in its success and growth and by encouraging
their continued association with or service to the Company and its Subsidiaries.
2.3 Effective Date. The effective date of the Plan is March 13, 1997,
subject to shareholder approval of the Plan on or before March 13, 1998.
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ARTICLE III
PARTICIPANTS
The class of persons eligible to participate in the Plan shall consist of
all persons whose participation in the Plan the Committee determines to be in
the best interests of the Company, which shall include, but not be limited to,
all employees of the Company or any Subsidiary, as well as key consultants and
advisors to the Company or any Subsidiary, but shall not include Directors who
are not also employees of the Company or a Subsidiary.
ARTICLE IV
ADMINISTRATION
4.1 Duties and Powers of the Committee. The Plan shall be administered by
the Committee. The Chairman of the Board of the Company shall be a member of
the Committee. The Committee shall select one of its members as its Chairman
and shall hold its meetings at such times and places as it may determine. The
Committee shall keep minutes of its meetings and shall make such rules and
regulations for the conduct of its business as it may deem necessary. The
Committee shall have the power to act by unanimous written consent in lieu of a
meeting, and to meet telephonically. In administering the Plan, the Committee's
actions and determinations shall be binding on all interested parties. The
Committee shall have the power to grant Options or Awards in accordance with the
provisions of the Plan, and may grant Options or Awards singularly, in
combination, or in tandem. Subject to the provisions of the Plan, the Committee
shall have the discretion and authority to determine those persons to whom
Options or Awards will be granted and whether such Options or Awards will be
accompanied by the right to receive Reload Options, the number of shares of
Stock subject to each Option, such other matters as are specified herein, and
any other terms and conditions of a Stock Option Agreement or a SAR Agreement.
To the extent not inconsistent with the provisions of the Plan, the Committee
may give an Optionee an election to surrender an Option in exchange for the
grant of a new Option, and shall have the authority to amend or modify an
outstanding Stock Option Agreement or SAR Agreement or to waive any provision
thereof, provided that the Optionee consents to such action.
4.2 Interpretation; Rules. Subject to the express provisions of the Plan,
the Committee shall have complete authority to interpret the Plan, to prescribe,
amend and rescind rules and regulations relating to it, to determine the details
and provisions of each Stock Option Agreement and SAR Agreement, and to make all
other determinations necessary or advisable for the administration of the Plan,
including, without limitation, the amending or altering of the Plan and any
Options or Awards granted hereunder as may be required to comply with or to
conform to any federal, state or local laws or regulations.
4.3 No Liability. Neither any Director nor any member of the Committee
shall be liable to any person for any act or determination made in good faith
with respect to the Plan or any Option granted hereunder.
4.4 Majority Rule. A majority of the members of the Committee shall
constitute a quorum, and any action taken by a majority of those present at a
meeting at which a quorum is present, or any action taken without a meeting
evidenced by a writing executed by all the members of the Committee, shall
constitute the action of the Committee.
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4.5 Company Assistance. The Company shall supply full and timely
information to the Committee on all matters relating to eligible persons, their
employment, death, retirement, disability, or other termination of employment,
and such other pertinent facts as the Committee may require. The Company shall
furnish the Committee with such clerical and other assistance as is necessary in
the performance of its duties.
ARTICLE V
SHARES OF STOCK SUBJECT TO PLAN
5.1 Limitations. Subject to any antidilution adjustment pursuant to the
provisions of Section 5.2 hereof, the maximum number of shares of Stock that may
be issued hereunder pursuant to Option Grants and Awards shall be seven hundred
thousand (700,000). Any or all shares of Stock subject to the Plan may be
issued in any combination of Options or Awards, and the amount of Stock subject
to the Plan may be increased from time to time in accordance with Article IX
hereof; provided, however, that the total number of shares of Stock issuable
pursuant to Incentive Stock Options shall not exceed 700,000 (other than
pursuant to anti-dilution adjustments) without shareholder approval. Shares
subject to an Option or issued as an Award may be either authorized and unissued
shares or shares issued and later acquired by the Company. The shares covered
by any unexercised portion of an Option that has terminated for any reason
(except as set forth in the following paragraph), or any forfeited portion of an
Award, may again be optioned under the Plan, and (until again optioned under the
Plan) such shares shall not be considered as having been optioned or issued in
computing the number of shares of Stock remaining available for Options or
Awards hereunder.
If Options or Awards are issued in respect of options to acquire stock of
any entity acquired, by merger or otherwise, by the Company or any Subsidiary,
to the extent that such issuance shall not be inconsistent with the terms,
limitations and conditions of Code Section 422 (only with respect to Options
which are Incentive Stock Options) or Rule 16b-3 under the Exchange Act, the
aggregate number of shares of Stock for which Options may be granted hereunder
shall automatically be increased by the number of shares subject to the Options
so issued.
5.2 Antidilution.
(a) If (i) the outstanding shares of Stock are increased, decreased
or changed into or exchanged for a different number or kind of shares or other
securities of the Company by reason of merger, consolidation, reorganization,
recapitalization, reclassification, combination or exchange of shares, or stock
split or stock dividend, (ii) any spin-off, split-off or other distribution of
assets materially affects the price of the Company's stock, or (iii) there is
any assumption and conversion to the Plan by the Company of an acquired
company's outstanding option grants, then:
(A) the aggregate number and kind of shares of Stock for which
Options or Awards may be granted hereunder shall be adjusted
appropriately by the Committee; and
(B) the rights of Optionees (concerning the number of shares of
Stock subject to Options or Awards and the Exercise Price) under
outstanding Options and the rights of holders of Awards (concerning
the terms and conditions of the
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lapse of any then remaining restrictions) shall be adjusted
appropriately by the Committee.
(b) If the Company is a party to any reorganization in which it does
not survive involving merger, consolidation or acquisition of the stock or
substantially all the assets of the Company, the Committee, in its discretion,
may:
(i) notwithstanding other provisions hereof, declare that all
Options granted under the Plan shall become exercisable immediately,
notwithstanding the provisions of the respective Stock Option
Agreements regarding exercisability, and declare that all such Options
shall terminate thirty (30) days after the Committee gives written
notice of the immediate right to exercise all such Options and of the
decision to terminate all Options not exercised within such 30-day
period, and that all then remaining restrictions pertaining to Awards
under the Plan shall immediately lapse; and/or
(ii) notify all Optionees that all Options and Awards granted
under the Plan shall be assumed by the successor corporation or
substituted on an equitable basis with options issued by such
successor corporation.
(c) If the Company is to be liquidated or dissolved in connection
with a reorganization described in Section 5.2(b), the provisions of Section
5.2(b) shall apply. In all other instances, the adoption of a plan of
dissolution or liquidation of the Company shall, notwithstanding other
provisions hereof, cause all then-remaining restrictions pertaining to Options
or Awards under the Plan to lapse, and shall cause every Option outstanding
under the Plan to terminate to the extent not exercised prior to the adoption of
the plan of dissolution or liquidation by the shareholders; provided, however,
that, notwithstanding any other provisions hereof, the Committee may, in its
discretion, declare all Options granted under the Plan to be exercisable at any
time on or before the fifth (5th) business day following such adoption,
notwithstanding the provisions of the respective Stock Option Agreements or SAR
Agreements regarding exercisability.
(d) The adjustments described in paragraphs (a) through (c) of this
Section 5.2, and the manner of their application, shall be determined solely by
the Committee, and any such adjustment may provide for the elimination of
fractional share interests; provided, however, that any adjustment made by the
Committee shall be made in a manner that will not cause an Incentive Stock
Option to be other than an Incentive Stock Option under applicable statutory and
regulatory provisions. The adjustments required under this Article V shall
apply to any successors of the Company and shall be made regardless of the
number or type of successive events requiring such adjustments.
ARTICLE VI
OPTIONS
6.1 Types of Options Granted. The Committee may, under the Plan, grant
either Incentive Stock Options or Options which do not qualify as Incentive
Stock Options. Within the limitations provided in the Plan, both types of
Options may be granted to the same person at the same time, or at different
times, under different terms and conditions, as long as the terms and conditions
of each Option are consistent with the provisions of the Plan. Without
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limiting the foregoing, Options may be granted subject to conditions based on
the financial performance of the Company or any other factor the Committee
deems relevant. Neither the Company, nor any Subsidiary or any other person
warrants or otherwise represents that (i) any Option granted under the Plan
shall be considered an Incentive Stock Option for applicable tax purposes, or
(ii) favorable or desirable tax treatment or characterization will be
applicable in respect of any Option or Award.
6.2 Option Grant and Agreement. Each Option granted hereunder shall be
evidenced by minutes of a meeting or the written consent of the Committee and by
a written Stock Option Agreement executed by the Company and the Optionee. The
terms of the Option, including the Option's duration, time or times of exercise,
exercise price and whether the Option is to be accompanied by the right to
receive a Reload Option, shall be stated in the Stock Option Agreement. No
Incentive Stock Option may be granted more than ten (10) years after the earlier
to occur of the effective date of the Plan or the date the Plan is approved by
the Company's shareholders. Every Optionee shall be given a copy of the Plan.
6.3 Optionee Limitations. The Committee shall not grant an Incentive
Stock Option to any person who, at the time the Incentive Stock Option is
granted:
(a) is not an employee of the Company or any of its Subsidiaries; or
(b) owns or is considered to own stock possessing at least 10% of the
total combined voting power of all classes of stock of the Company or any of its
Subsidiaries (within the meaning of Code Sections 422 and 424); provided,
however, that this limitation shall not apply if at the time an Incentive Stock
Option is granted the Exercise Price is at least 110% of the Fair Market Value
of the Stock subject to such Option and such Option by its terms would not be
exercisable after five (5) years from the date on which the Option is granted.
For the purpose of this subsection (b), a person shall be considered to own
(i) the Stock owned, directly or indirectly, by or for his or her brothers and
sisters (whether by whole or half blood), spouse, ancestors and lineal
descendants; (ii) the stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust in proportion to such person's stock
interest, partnership interest or beneficial interest therein; (iii) the stock
which such person may purchase under any outstanding options of the Company or
of any Subsidiary; and (iv) or stock otherwise considered to be owned by such
person pursuant to Code Sections 422 and 424.
6.4 $100,000 Limitation. Except as provided below, the Committee shall
not grant an Incentive Stock Option to, or modify the exercise provisions of,
any outstanding Incentive Stock Option held by any person who, at the time the
Incentive Stock Option is granted (or modified), would thereby receive or hold
any Incentive Stock Options of the Company and any Subsidiary, such that the
aggregate Fair Market Value (determined as of the respective dates of grant or
modification of each Option) of the Stock with respect to which such Incentive
Stock Options are exercisable for the first time during any calendar year is in
excess of $100,000 (or such other limit as may be prescribed by the Code from
time to time); provided, that the foregoing restriction on modification of
outstanding Incentive Stock Options shall not preclude the Committee from
modifying an outstanding Incentive Stock Option if, as a result of such
modification and with the consent of the Optionee, such Option no longer
constitutes an Incentive Stock Option; and provided further that, if the
$100,000 limitation (or such other limitation prescribed by the Code) described
in this Section 6.4 is exceeded, the Incentive
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Stock Option, the granting or modification of which resulted in the exceeding
of such limit, shall be treated as an Incentive Stock Option up to the
limitation and the excess shall be treated as an Option not qualifying as an
Incentive Stock Option.
6.5 Exercise Price. The Exercise Price of the Stock subject to each
Option shall be determined by the Committee. Subject to the provisions of
Section 6.3(b) hereof, the Exercise Price of an Incentive Stock Option shall not
be less than the Fair Market Value of the Stock as of the date such Option is
granted (or in the case of an Incentive Stock Option that is subsequently
modified, on the date of such modification).
6.6 Exercise Period. The period for the exercise of each Option granted
hereunder shall be determined by the Committee, but the Stock Option Agreement
with respect to each Option intended to be an Incentive Stock Option shall
provide that such Option shall not be exercisable after the expiration of ten
(10) years from the date of grant (or modification) of the Option. In addition,
no Option granted to a Section 16 Insider shall be exercisable prior to the
expiration of six (6) months from the date such Option is granted, other than in
the case of the death or Disability of the Optionee.
6.7 Option Exercise.
(a) Unless otherwise provided in the Stock Option Agreement or
Section 6.6 hereof, an Option may be exercised at any time or from time to time
during the term of the Option as to any or all full shares which have become
Purchasable under the provisions of the Option, but not at any time as to less
than one hundred (100) shares unless the remaining shares that have become so
Purchasable are less than one hundred (100) shares. The Committee shall have
the authority to prescribe in any Stock Option Agreement that the Option may be
exercised only in accordance with a vesting schedule during the term of the
Option.
(b) An Option shall be exercised by (i) delivery to the Company at
its principal office a written notice of exercise with respect to a specified
number of shares of Stock and (ii) payment to the Company at that office of the
full amount of the Exercise Price for such number of shares in accordance with
Section 6.7(c). If requested by an Optionee, an Option may be exercised with
the involvement of a stockbroker in accordance with the federal margin rules set
forth in Regulation T (in which case the certificates representing the
underlying shares will be delivered by the Company directly to the stockbroker).
(c) The Exercise Price is to be paid in full in cash upon the
exercise of the Option and the Company shall not be required to deliver
certificates for the shares purchased until such payment has been made;
provided, however, that the Committee may provide in a Stock Option Agreement
(or may otherwise determine in its sole discretion at the time of exercise) that
in lieu of cash, all or any portion of the Exercise Price may be paid by
tendering to the Company shares of Stock duly endorsed for transfer and owned by
the Optionee, or by authorization to the Company to withhold shares of Stock
otherwise issuable upon exercise of the Option, in each case to be credited
against the Exercise Price at the Fair Market Value of such shares on the date
of exercise (however, no fractional shares may be so transferred, and the
Company shall not be obligated to make any cash payments in consideration of any
excess of the aggregate Fair Market Value of shares transferred over the
aggregate Exercise Price); provided further, the Committee may provide in a
Stock Option Agreement (or may
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otherwise determine in its sole discretion at the time of exercise) that, in
lieu of cash or shares, all or a portion of the Exercise Price may be paid by
the Optionee's execution of a promissory note the principal amount of which
shall be equal to at least the Exercise Price or relevant portion thereof,
subject to compliance with applicable state and federal laws, rules and
regulations.
(d) In addition to and at the time of payment of the Exercise Price,
the Company may withhold, or require the Optionee to pay to the Company in cash,
the amount of any federal, state and local income, employment or other
withholding taxes which the Committee determines are required to be withheld
under federal, state or local law in connection with the exercise of an Option;
provided, however, the Committee may provide in a Stock Option Agreement (or may
otherwise determine in its sole discretion at the time of exercise) that all or
any portion of such tax obligations may, upon the election of the Optionee, be
paid by tendering to the Company whole shares of Stock duly endorsed for
transfer and owned by the Optionee, or by authorization to the Company to
withhold shares of Stock otherwise issuable upon exercise of the Option, in
either case in that number of shares having a Fair Market Value on the date of
exercise equal to the amount of such taxes thereby being paid, and subject to
such restrictions as to the approval and timing of any such election as the
Committee may from time to time determine to be necessary or appropriate to
satisfy the conditions of the exemption set forth in Rule 16b-3 under the
Exchange Act, if such rule is applicable. To the extent tax withholding is
required at an applicable time with respect to Options or Awards acquired under
the Plan by an Optionee, the Company, applicable Subsidiary or other entity upon
which such withholding obligation arises shall be entitled to withhold from such
Optionee's compensation (derived from the Plan or otherwise) the applicable
amount required to be withheld).
(e) The holder of an Option shall not have any of the rights of a
shareholder with respect to the shares of Stock subject to the Option until such
shares have been issued and transferred to the Optionee upon the exercise of the
Option.
(f) Notwithstanding anything to the contrary herein or in a Stock
Option Agreement, a given Option shall not be exercisable to the extent the
exercise thereof would cause the Company to be a reporting company under the
Exchange Act.
6.8 Reload Options.
(a) The Committee may specify in a Stock Option Agreement (or may
otherwise determine in its sole discretion) that a Reload Option shall be
granted (except to a Section 16 Insider), without further action of the
Committee, (i) to an Optionee who exercises an Option (including a Reload
Option) by surrendering shares of Stock in payment of amounts specified in
Sections 6.7(c) or 6.7(d) hereof, (ii) for the same number of shares as are
surrendered to pay such amounts, (iii) as of the date of such payment and at an
Exercise Price equal to the Fair Market Value of the Stock on such date, and
(iv) otherwise on the same terms and conditions as the Option whose exercise has
occasioned such payment, except as provided below and subject to such other
contingencies, conditions, or other terms as the Committee shall specify at the
time such exercised Option is granted; provided that the shares surrendered by a
Section 16 Insider in payment as provided above must have been held by the
Optionee for at least six (6) months prior to such surrender.
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(b) Unless provided otherwise in the Stock Option Agreement, a Reload
Option may not be exercised by an Optionee (i) prior to the end of a 2-year
period from the date that the Reload Option is granted, and (ii) unless the
Optionee retains beneficial ownership of the shares of Stock issued to such
Optionee upon exercise of the Option referred to above in Section 6.8(a) for a
period of one (1) year from the date of such exercise.
6.9 Nontransferability of Option. No Option shall be transferable by an
Optionee other than by will or the laws of descent and distribution; provided,
however, that no Option shall be transferable by an Optionee who is a Section 16
Insider prior to shareholder approval of the Plan. During the lifetime of an
Optionee, Options shall be exercisable only by such Optionee (or by such
Optionee's guardian or legal representative, should one be appointed).
6.10 Termination of Employment or Service. The Committee shall have the
power to specify, with respect to the Options granted to a particular Optionee,
the effect upon such Optionee's right to exercise an Option upon termination of
such Optionee's employment or service under various circumstances, which effect
may include immediate or deferred termination of such Optionee's rights under an
Option, or acceleration of the date at which an Option may be exercised in full;
provided, however, that in no event may an Incentive Stock Option be exercised
after the expiration of ten (10) years from the date of grant thereof.
6.11 Employment Rights. Nothing in the Plan or in any Stock Option
Agreement shall confer on any person any right to continue in the employ of the
Company or any of its Subsidiaries, or shall interfere in any way with the right
of the Company or any of its Subsidiaries to terminate such person's employment
at any time.
6.12 Certain Successor Options. To the extent not inconsistent with the
terms, limitations and conditions of Code Section 422 and any regulations
promulgated with respect thereto, an Option issued in respect of an option held
by an employee to acquire stock of any entity acquired, by merger or otherwise,
by the Company (or any Subsidiary of the Company) may contain terms that differ
from those stated in this Article VI, but solely to the extent necessary to
preserve for any such employee the rights and benefits contained in such
predecessor option, or to satisfy the requirements of Code Section 424(a).
6.13 Effect of Change in Control. The Committee may determine, at the time
of granting an Option or thereafter, that such Option shall become exercisable
on an accelerated basis in the event that a Change in Control occurs with
respect to the Company (and the Committee shall have the discretion to modify
the definition of Change in Control in a particular Stock Option Agreement). If
the Committee finds that there is a reasonable possibility that, within the
succeeding six (6) months, a Change in Control will occur with respect to the
Company, then the Committee may determine that all outstanding Options shall be
exercisable on an accelerated basis.
ARTICLE VII
STOCK APPRECIATION RIGHTS
7.1 SAR Awards. The Committee may grant Awards of SARs under the Plan
upon such restrictions, terms and conditions as the Committee may prescribe.
Each Award shall be governed by a SAR Agreement between the Company and the
Grantee which shall contain the restrictions, terms and conditions prescribed by
the Committee, including, without
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limitation, restrictions on the time of exercise of the SAR to specified
periods as may be necessary to satisfy the requirements of Rule 16b-3.
Awards of SARs may be granted singularly, or in combination or in tandem with
Options granted under the Plan, and may be granted at the same time as or
later than the grant of the Option to which it relates.
7.2 Determination of Price. The SAR Price shall be established by the
Committee in its sole discretion. The SAR Price shall not be less than one
hundred percent (100%) of the Fair Market Value of the Stock on the date the SAR
is granted for a SAR issued in tandem with an Incentive Stock Option.
7.3 Exercise of a SAR. A SAR shall be exercisable at such time as may be
determined by the Committee, provided that a SAR issued in tandem with an Option
shall be exercisable to the extent that the related Option is exercisable. Upon
exercise of a SAR, the Grantee shall be entitled, subject to the terms and
conditions of the Plan and the SAR Agreement, to receive an amount equal to the
SAR Spread.
7.4 Payment of a SAR Spread. Payment of the SAR Spread for any SAR shall
be made, at the sole discretion of the Committee, in (a) cash, (b) shares of
Stock, or (c) a combination of both. Shares of Stock used for this payment
shall be valued at their Fair Market Value on the date of exercise of the
applicable SAR.
7.5 Effect of SARs on Stock Subject to Plan. Stock issued in payment of
the SAR Spread shall reduce the number of shares of Stock remaining available
for issuance under the Plan. The exercise of a SAR which results in the
termination of an unexercised Option issued in tandem with such SAR shall also
reduce the number of shares of Stock remaining available for issuance under the
Plan by the number of shares of Stock subject to the terminated Option.
7.6 Termination of SARs. A SAR may be terminated as follows:
(a) During the period of a Grantee's continuous employment with the
Company or a Subsidiary, a SAR will be terminated only if it has been fully
exercised or it has expired by its terms.
(b) Upon termination of a Grantee's employment with the Company or a
Subsidiary, the SAR will terminate upon the earliest of (i) the full
exercise of the SAR, (ii) the expiration of the SAR by its terms, and
(iii) not more than three (3) months following the date of employment
termination; provided, however, should termination of employment (A) result
from the death or Disability of the Grantee, the period referenced in
clause (iii) hereof shall be one (1) year, or (B) be For Cause, the SAR
will terminate on the date of employment termination. For purposes of the
Plan, a leave of absence approved by the Company shall not be deemed to be
termination of employment unless otherwise provided in the SAR Agreement or
by the Company on the date of the leave of absence.
(c) Subject to the terms of the SAR Agreement with the Grantee, if a
Grantee should die or become subject to a Disability prior to the
termination of employment with the Company or any Subsidiary and prior to
the termination of a SAR, such SAR may be exercised to the extent that the
Grantee shall have been entitled to exercise it at the time of death or
Disability, as the case may be, by the Grantee, the
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estate of the Grantee or the person or persons to whom the SAR shall have
been transferred by will or by the laws of descent and distribution.
(d) Except as otherwise expressly provided in the SAR Agreement with
the Grantee, in no event will the continuation of the term of a SAR beyond
the date of termination of employment allow the Grantee or his
beneficiaries or heirs, to accrue additional rights under the Plan, have
additional SARs available for exercise, or receive a higher benefit than
the benefit payable as if the SAR had been exercised on the date of
employment termination.
7.7 Nontransferability. No SAR shall be transferable by a Grantee;
provided, however, that a SAR issued in tandem with an Option shall be
transferable, if at all, to the same extent and upon the same terms and
conditions as the related Option.
7.8 No Shareholder Rights. The Grantee of a SAR shall have no rights as a
shareholder with respect to such SAR. In addition, no adjustment shall be made
for dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or rights except as provided in Section 5.2 hereof.
ARTICLE VIII
STOCK CERTIFICATES
The Company shall not be required to issue or deliver any certificate for
shares of Stock purchased upon the exercise of any Option granted hereunder or
any portion thereof, or deliver any certificate for shares of Restricted Stock
granted hereunder, prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which the Stock is then listed;
(b) The completion of any registration or other qualification of such
shares which the Committee shall deem necessary or advisable under any federal
or state law or under the rulings or regulations of the Securities and Exchange
Commission or any other governmental regulatory body;
(c) The obtaining of any approval or other clearance from any federal
or state governmental agency or body which the Committee shall determine to be
necessary or advisable; and
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Board from time to time may establish for reasons
of administrative convenience.
Stock certificates issued and delivered to Optionees shall bear such
restrictive legends as the Company shall deem necessary or advisable pursuant to
applicable federal and state securities laws.
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<PAGE>
ARTICLE IX
TERMINATION AND AMENDMENT OF PLAN
9.1 Termination and Amendment. The Board may at any time terminate the
Plan, and may at any time and from time to time and in any respect amend the
Plan; provided, however, that the Board (unless its actions are approved or
ratified by the shareholders of the Company within twelve (12) months of the
date that the Board amends the Plan) may not amend the Plan to:
(a) Increase the total number of shares of Stock issuable pursuant to
Incentive Stock Options under the Plan or materially increase the number of
shares of Stock subject to the Plan, in each case except as contemplated in
Section 5.2 hereof;
(b) Change the class of employees eligible to receive Incentive Stock
Options that may participate in the Plan or materially change the class of
persons that may participate in the Plan; or
(c) Otherwise materially increase the benefits accruing to
participants under the Plan.
9.2 Effect on Optionee's Rights. No termination or amendment modification
of the Plan shall affect adversely an Optionee's rights under a Stock Option
Agreement or SAR Agreement without the consent of the Optionee or his legal
representative.
ARTICLE X
RELATIONSHIP TO OTHER COMPENSATION PLANS
The adoption of the Plan shall not affect any other stock option,
incentive, or other compensation plans in effect for the Company or any of its
Subsidiaries; nor shall the adoption of the Plan preclude the Company or any of
its Subsidiaries from establishing any other form of incentive or other
compensation plan for employees or Directors of the Company or any of its
Subsidiaries.
ARTICLE XI
MISCELLANEOUS
11.1 Replacement or Amended Grants. At the sole discretion of the
Committee, and subject to the terms of the Plan, the Committee may modify
outstanding Options or Awards or accept the surrender of outstanding Options or
Awards and grant new Options or Awards in substitution for them. However no
modification of an Option shall adversely affect a Grantee's rights under a
Stock Option Agreement or SAR Agreement without the consent of the Grantee or
his legal representative.
11.2 Plan Binding on Successors. The Plan shall be binding upon the
successors and assigns of the Company.
11.3 Singular, Plural; Gender. Whenever used herein, nouns in the singular
shall include the plural and the masculine pronoun shall include the feminine
gender and vice versa.
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<PAGE>
11.4 Headings Not Part of Plan. Headings of Articles and Sections hereof
are inserted for convenience and reference and do not constitute part of the
Plan.
11.5 Interpretation. With respect to Section 16 Insiders, transactions
under the Plan, are intended to comply with all applicable conditions of Rule
16b-3 or its successors under the Exchange Act, and shall be interpreted
consistent therewith. To the extent any provision of the Plan or action by the
Plan administrators fails to so comply, it shall be deemed void to the extent
permitted by law and deemed advisable by the Plan administrators.
11.6 Governing Law. The Plan shall be governed by, and construed in
accordance with, the laws of the State of Georgia, without regard to conflicts
of laws principles.
* * * *
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<PAGE>
Centennial HealthCare Corporation
1997 Stock Plan
Form of Stock Option Agreement
CENTENNIAL HEALTHCARE CORPORATION
FORM OF STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement"), entered into as of this
_____ day of ________________, 199 by and between Centennial HealthCare
Corporation, a Georgia corporation (the "Company"), and _________________ (the
"Optionee").
WHEREAS, on ______________, 1997, the Board of Directors of the Company
adopted a stock option plan known as the "Centennial Healthcare Corporation 1997
Stock Plan" (the "Plan") and recommended that the Plan be approved by the
Company's shareholders; and
WHEREAS, the shareholders of the Company must approve the Plan on or before
_________________, 1998; and
WHEREAS, the Committee has granted the Optionee an Option (as described
below) to purchase the number of shares of the Company's Common Stock (the
"Stock") as set forth below, and in consideration of the granting of the Option
the Optionee intends to remain in the employ of the Company; and
WHEREAS, the Company and the Optionee desire to enter into a written
agreement with respect to the Option in accordance with the Plan; and
WHEREAS, capitalized terms not defined herein shall have the meanings
ascribed to them in the Plan;
NOW, THEREFORE, as an employment incentive and to encourage stock
ownership, and also in consideration of the mutual covenants contained herein,
the parties hereto agree as follows.
1. Incorporation of Plan. This Option is granted pursuant to the
provisions of the Plan and the terms and definitions of the Plan are
incorporated herein by reference and made a part hereof. A copy of the Plan has
been delivered to, and receipt is hereby acknowledged by, the Optionee.
Notwithstanding anything in this Agreement to the contrary, to the extent the
terms of this Agreement conflict with or otherwise attempt to exceed the
authority set forth under the Plan, the Plan shall govern and control in all
respects.
2. Grant of Option. Subject to the terms, restrictions, limitations, and
conditions stated herein and the terms of the Plan, the Company hereby evidences
its grant to the Optionee, not in lieu of salary or other compensation, of the
right and option to purchase all or any part of the number of shares of Stock
(as defined under the Plan), set forth on Schedule A attached hereto and
incorporated herein by reference (the "Option"). The Option shall be
exercisable in the amounts and at the times specified on Schedule A. The Option
shall expire and shall not be exercisable after the date specified on Schedule A
as the expiration
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<PAGE>
date or on such earlier date as determined pursuant to the Plan. Schedule A
states whether or not the Option is intended to be an Incentive Stock Option.
Neither the Company nor any Subsidiary or any other person warrants or
otherwise represents that favorable or desirable tax treatment or
characterization will be applicable in respect of any Option or Award.
3. Purchase Price. The price per share to be paid by the Optionee for
the shares subject to this Option (the "Exercise Price") shall be as specified
on Schedule A, which price shall be an amount not less than the Fair Market
Value of a share of Stock as of the Date of Grant (as defined in Section 11
below) if the Option is an Incentive Stock Option.
4. Exercise Terms. The Optionee must exercise the Option for at least
the lesser of 100 shares or the number of shares of Purchasable Stock as to
which the Option remains unexercised. In the event this Option is not exercised
with respect to all or any part of the shares subject to this Option prior to
its expiration, the shares with respect to which this Option was not exercised
shall no longer be subject to this Option.
5. Restrictions on Transferability. No Option shall be transferable by
an Optionee other than by will or the laws of descent and distribution;
provided, however, that no Option shall be transferable by an Optionee who is a
Section 16 Insider prior to shareholder approval of the Plan. During the
lifetime of an Optionee, Options shall be exercisable only by such Optionee (or
by such Optionee's guardian or legal representative, should one be appointed).
6. Notice of Exercise of Option. This Option may be exercised by the
Optionee, or by the Optionee's administrators, executors or personal
representatives, by a written notice (in substantially the form of the Notice of
Exercise attached hereto as Schedule B) signed by the Optionee, or by such
administrators, executors or personal representatives, and delivered or mailed
to the Company as specified in Section 15 hereof to the attention of the Chief
Financial Officer or such other officer as the Company may designate. Any such
notice shall (a) specify the number of shares of Stock which the Optionee or the
Optionee's administrators, executors or personal representatives, as the case
may be, then elects to purchase hereunder, (b) contain such information as may
be reasonably required pursuant to Section 12 hereof, and (c) be accompanied by
(i) a certified or cashier's check payable to the Company in payment of the
total Exercise Price applicable to such shares as provided herein, (ii) shares
of Stock owned by the Optionee and duly endorsed or accompanied by stock
transfer powers having a Fair Market Value equal to the total Exercise Price
applicable to such shares purchased hereunder, or (iii) a certified or cashier's
check accompanied by the number of shares of Stock whose Fair Market Value when
added to the amount of the check equals the total Exercise Price applicable to
such shares purchased hereunder. Upon receipt of any such notice and
accompanying payment, and subject to the terms hereof, the Company agrees to
issue to the Optionee or the Optionee's administrators, executors or personal
representatives, as the case may be, stock certificates for the number of shares
specified in such notice registered in the name of the person exercising this
Option.
7. Adjustment in Option. The number of shares of Stock subject to this
Option, the Exercise Price and other matters are subject to adjustment during
the term of this Option in accordance with the Plan.
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<PAGE>
8. Termination of Employment.
I. Except as otherwise specified in Schedule A hereto, in the event of the
termination of the Optionee's employment with the Company or any of its
Subsidiaries, other than a termination that is either (i) For Cause, or (ii) for
reasons of death or Disability or retirement, the Optionee (or his or her
personal representative) must exercise this Option at any time within sixty (60)
days after such termination to the extent of the number of shares which were
Purchasable hereunder at the date of such termination.
(a) Except as specified in Schedule A, in the event of a termination
of the Optionee's employment that is For Cause, this Option, to the extent not
previously exercised, shall terminate immediately and shall not thereafter be or
become exercisable.
(b) Unless and to the extent otherwise provided in Schedule A, in the
event of the retirement of the Optionee at the normal retirement date as
prescribed from time to time by the Company or any Subsidiary, the Optionee
shall continue to have the right to exercise any Options for shares which were
Purchasable at the date of the Optionee's retirement until the expiration date
of such Option. This Option does not confer upon the Optionee any right with
respect to continuance of employment by the Company or by any of its
Subsidiaries. This Option shall not be affected by any change of employment so
long as the Optionee continues to be an employee of the Company or any of its
Subsidiaries.
9. Disabled Optionee. In the event of termination of employment
because of the Optionee's becoming a Disabled Optionee, the Optionee (or his
or her legal representative) may exercise this Option within a period ending
on the earlier of (a) the last day of the one (1) year period following the
beginning of the Optionee's Disability or (b) the expiration date of this
Option, to the extent of the number of shares which were Purchasable
hereunder at the date of such termination.
10. Death of Optionee. Except as otherwise set forth in Schedule A
with respect to the rights of the Optionee upon termination of employment
under Section 8(a) above, in the event of the Optionee's death, the
appropriate persons described in Section 6 hereof or persons to whom all or a
portion of this Option is transferred in accordance with Section 5 hereof may
exercise this Option at any time within a period ending on the earlier of (a)
the last day of the one (1) year period following the Optionee's death or (b)
the expiration date of this Option. If the Optionee was an employee of the
Company at the time of death, this Option may be so exercised to the extent
of the number of shares that were Purchasable hereunder at the date of death.
If the Optionee's employment terminated prior to his or her death, this
Option may be exercised only to the extent of the number of shares covered by
this Option which were Purchasable hereunder at the date of such termination.
11. Date of Grant. This Option was granted by the Board or Committee on
the date set forth in Schedule A (the "Date of Grant").
12. Compliance with Regulatory Matters. The Optionee acknowledges that
the issuance of capital stock of the Company is subject to limitations imposed
by federal and state law and the Optionee hereby agrees that the Company shall
not be obligated to issue any
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<PAGE>
shares of Stock upon exercise of this Option that would cause the Company to
violate law or any rule, regulation, order or consent decree of any
regulatory authority (including without limitation the Securities and
Exchange Commission) having jurisdiction over the affairs of the Company. The
Optionee agrees that he or she will provide the Company with such information
as is reasonably requested by the Company or its counsel to determine whether
the issuance of Stock complies with the provisions described by this Section.
13. Restriction on Disposition of Shares. The shares of Stock purchased
pursuant to the exercise of this Option shall not be transferred by the Optionee
except pursuant to the Optionee's will or the laws of descent and distribution
until such date which is the later of two (2) years after the Date of Grant or
one (1) year after the transfer of the shares of Stock to the Optionee pursuant
to the exercise of such Option.
14. Investment Representation of Optionee
(a) The Optionee agrees that the exercise of this Option and the delivery
of the shares of Stock in accordance herewith shall be contingent upon the
Company being furnished by Optionee a representation and warranty that the
Optionee is acquiring the shares purchased pursuant to this Option for
investment for the Optionee's account and not with a view toward distribution.
(b) THIS OPTION AND ALL SHARES OF STOCK ACQUIRED PURSUANT TO THE EXERCISE
OF THIS OPTION HAVE BEEN ISSUED OR SOLD IN RELIANCE ON AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
AND ON AN EXEMPTION PURSUANT TO THE APPLICABLE STATE SECURITIES LAWS AND
CONSEQUENTLY HAVE NOT BEEN REGISTERED. THE OPTIONEE ACKNOWLEDGES THAT THIS
OPTION AND ALL SHARES OF STOCK ACQUIRED PURSUANT TO THE EXERCISE OF THIS OPTION
ARE DEEMED TO BE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144 PROMULGATED
PURSUANT TO THE ACT AND MAY NOT BE SOLD OR TRANSFERRED, NOR WILL ANY ASSIGNEE OR
ENDORSEE HEREOF BE RECOGNIZED AS AN OWNER HEREOF BY THE COMPANY FOR ANY PURPOSE,
EXCEPT IN A TRANSACTION WHICH IS ESTABLISHED TO THE SATISFACTION OF THE COMPANY
TO BE EXEMPT FROM REGISTRATION UNDER FEDERAL AND STATE SECURITIES LAWS OR
PURSUANT TO AN EFFECTIVE REGISTRATION UNDER SUCH LAWS.
(c) The Optionee understands and agrees that the certificate or
certificates representing any shares of Stock acquired hereunder may bear an
appropriate legend relating to registration and resale under federal and state
securities laws.
(d) The Optionee shall not have any rights of a shareholder of the Company
with respect to the shares of Stock which may be purchased upon exercise of this
Option, unless and until such shares shall have been issued and delivered and
his/her name has been entered as a shareholder on the stock transfer records of
the Company.
15. Miscellaneous.
(a) This Agreement shall be binding upon the parties hereto and their
representatives, successors and assigns.
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<PAGE>
(b) This Agreement is executed and delivered in, and shall be
governed by the laws of, the State of Georgia, without regard to conflicts of
laws principles.
(c) Any notice, request, document or other communication given
hereunder shall be deemed to be sufficiently given upon personal delivery to the
other party or upon the expiration of three (3) days after depositing same in
the United States mail, return receipt requested, properly addressed to the
respective parties or such other address as they may give to the other party in
writing in the same manner as follows:
Company: Centennial HealthCare Corporation
400 Perimeter Center Terrace
Suite 650
Atlanta, Georgia 30346
Attention: Alan C. Dahl
Executive Vice President
and Chief Financial Officer
Optionee: ___________________________________
___________________________________
___________________________________
___________________________________
(d) This Agreement may not be modified except in writing executed by
each of the parties hereto.
(e) This Agreement, together with the Plan, contains the entire
understanding of the parties hereto and supersedes any prior understanding
and/or written or oral agreement between them respecting the subject matter
hereof.
(f) The parties agree that the provisions of this Agreement are
severable and the invalidity or unenforceability of any provision in whole or
part shall not affect the validity or enforceability of any enforceable part of
such provision or any other provisions hereof.
(g) The headings with Sections herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
(h) No waiver of any breach or default hereunder shall be considered
valid unless in writing, and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or similar nature.
(i) This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together shall constitute
one and the same instrument.
-5-
<PAGE>
IN WITNESS WHEREOF, the Board or Committee has caused this Stock
Option Agreement to be executed on behalf of the Company and attested by the
Secretary or an Assistant Secretary of the Company, and the Optionee has
executed this Stock Option Agreement, all as of the day and year first above
written.
COMPANY:
CENTENNIAL HEALTHCARE CORPORATION
Attest:
- ------------------------ By:------------------------------
Paul A. Quir[caad 214]os Alan C. Dahl, Executive Vice President
Secretary and Chief Financial Officer
OPTIONEE:
- ------- By:------------------------------
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<PAGE>
SCHEDULE A
TO
STOCK OPTION AGREEMENT
BETWEEN
CENTENNIAL HEALTHCARE CORPORATION
AND
[Name of Optionee]
Dated ________________
1. Number of Shares Subject to Option: ________________ shares of Stock.
2. This Option (Check one) [ ] is [ ] is not an Incentive Stock Option.
3. Option Exercise Price: $ per share.
4. Date of Grant: ________________________
5. Option Vesting Schedule:
Check one:
( ) Options are exercisable with respect to all shares of Stock on or
after the date hereof.
( ) Options are exercisable with respect to the number of shares of
Stock indicated below on or after the date indicated next to the
number of shares:
No. of Shares Vesting Date
6. Option Exercise Period: Options shall expire and shall not be exercisable
after ten years from the Date of Grant or on such earlier date as
determined in accordance with the provisions of the Plan and the Stock
Option Agreement.
<PAGE>
SCHEDULE B
TO
STOCK OPTION AGREEMENT
BETWEEN
CENTENNIAL HEALTHCARE CORPORATION
AND
[Name of Optionee]
Dated ________________
NOTICE OF EXERCISE
The undersigned hereby notifies Centennial HealthCare Corporation (the
"Company") of this election to exercise the undersigned's stock option to
purchase ________________ shares of Stock (as defined under the Plan) pursuant
to the Stock Option Agreement (the "Agreement") between the undersigned and the
Company dated ________________. Accompanying this Notice is (1) a certified or
a cashier's check in the amount of $________________ payable to the Company,
and/or (2) _______________ shares of Stock (as defined under the Plan) presently
owned by the undersigned and duly endorsed or accompanied by stock transfer
powers, having an aggregate Fair Market Value (as defined under the Plan) as of
the date hereof of $__________________, such amounts being equal, in the
aggregate, to the purchase price per share set forth in Section 3 of the
Agreement multiplied by the number of shares being purchased hereby (in each
instance subject to appropriate adjustment pursuant to Section 7 of the
Agreement).
The undersigned represents and warrants that he/she is purchasing shares of
Stock for purposes of investment for his/her own account, and without any
present intention to resell or dispose of said Stock or otherwise to participate
directly or indirectly in a distribution thereof, and hereby agrees that all
certificates representing shares of Stock may bear a restrictive legend to this
effect.
The undersigned is a resident of the State of .
IN WITNESS WHEREOF, the undersigned has set his/her hand and seal,
this ________ day of ________________, ______.
OPTIONEE [OR OPTIONEE'S ADMINISTRATOR,
EXECUTOR OR PERSONAL REPRESENTATIVE]
-------------------------------------
Name:
--------------------------------
Position (if other than Optionee):
<PAGE>
Form of Stock Repurchase Agreement
June 27, 1997
This Stock Repurchase Agreement is being sent to all holders (the
"Holders") of Series C Preferred Stock of Centennial HealthCare Corporation, a
Georgia corporation ("Centennial"). As you are aware, pursuant to an amendment
to Centennial's Second Amended and Restated Articles of Incorporation the shares
of Series C Preferred Stock will be converted at the closing of the initial
public offering ("Initial Public Offering") of Common Stock by Centennial into
shares of Common Stock (the "Conversion Shares"). Enclosed herewith for your
review is a copy of the Preliminary Prospectus of Centennial dated June 6, 1997,
which is subject to completion. This Preliminary Prospectus contains
information about Centennial and the Initial Public Offering. If you have
additional questions, please feel free to contact Alan C. Dahl at (770)
698-9040.
Centennial hereby offers to purchase, on the terms and conditions set forth
herein, certain of the Conversion Shares to be owned by you. The purchase by
Centennial of any of your Conversion Shares is conditioned upon the sale of
shares of Common Stock by Centennial to the underwriters of the Initial Public
Offering as a result of the exercise by such underwriters of their
over-allotment option (the "Underwriter Option"). Centennial agrees to use the
net proceeds resulting from the exercise of the Underwriter Option to purchase
from the Holders an aggregate number of Conversion Shares equal to the quotient
obtained by dividing the net proceeds of the Underwriter Option by the price per
share of the Common Stock to the public in the Initial Public Offering (such
aggregate number of shares, the "Repurchased Shares"). If you accept this
offer, Centennial agrees to purchase, and you agree to sell, that number of
Conversion Shares (rounded down to the nearest whole share) equal to your pro
rata share of the Repurchased Shares.
Promptly after the consummation of the sale of shares of Common Stock
pursuant to the Underwriter Option, Centennial agrees to send to you a notice
setting forth the net proceeds to Centennial as a result of such sale, the
number of Repurchased Shares, and the number of Conversion Shares to be
purchased from you. You agree to duly execute and deliver in a prompt manner
all documents, instruments and agreements reasonably requested by Centennial or
its transfer agent in connection with the purchase of your Conversion Shares
described herein. Centennial's obligation to purchase your Conversion Shares
described
<PAGE>
herein is subject to the receipt by Centennial or its transfer agent of
all documents, instruments and agreements that are reasonably requested by
Centennial.
If the terms of the offer described herein are acceptable to you, please
indicate your acceptance by your signature below and (i) transmit this agreement
by facsimile to Centennial's counsel at (404) 817-6219, Attention: Lynn S.
Scott and (ii) return this agreement in the enclosed pre-addressed envelope on
or before July 15, 1997.
Centennial HealthCare Corporation
By:______________________________
J. Stephen Eaton,
President and Chief Executive Officer
Accepted and agreed to as of
July ____, 1997.
________________________________
Name:
2
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
reports dated March 7, 1997, except for Note 9 as to which the date is May 27,
1997, and Note 21 as to which the date is June 23, 1997, on our audit of
the financial statements and financial statement schedule 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 30, 1997
/s/ COOPERS & LYBRAND L.L.P.
<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. 3 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 30, 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 30, 1997
