<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
[X] Filed by the Registrant
[ ] Filed by a Party other than the Registrant
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
---------------------------
CENTENNIAL HEALTHCARE CORPORATION
(Name of Registrant as Specified In Its Charter)
--------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
CENTENNIAL HEALTHCARE CORPORATION
400 PERIMETER CENTER TERRACE, SUITE 650
ATLANTA, GEORGIA 30346
April 23, 1998
Dear Shareholder:
You are cordially invited to attend the first Annual Meeting of
Shareholders of Centennial HealthCare Corporation (the "Company") to be held on
Thursday, May 21, 1998 at The South Terraces Conference Center Classroom, 115
Perimeter Center Place, Atlanta, Georgia 30346. The meeting will begin promptly
at 10:00 a.m., local time, and we hope that it will be possible for you to
attend.
The items of business to be addressed at the Annual Meeting are listed
in the attached Notice of Annual Meeting of Shareholders and are more fully
described in the Proxy Statement provided herewith. In addition to these
matters, members of management will report on the Company's operations, followed
by a period for questions and discussion.
Management hopes that you will be able to attend the Annual Meeting.
However, whether or not you plan to attend the Annual Meeting, please date,
sign, and return your proxy card in the enclosed envelope as soon as possible to
assure that your shares will be represented and voted at the Annual Meeting. If
you do attend the Annual Meeting, you may vote your shares in person even though
you have previously signed and returned your proxy card.
On behalf of your Board of Directors, thank you for your continued
support and interest in Centennial HealthCare Corporation.
Sincerely,
/s/ J. Stephen Eaton
J. Stephen Eaton
Chairman, President and
Chief Executive Officer
<PAGE> 3
[LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON THURSDAY, MAY 21, 1998
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
Centennial HealthCare Corporation (the "Company") will be held at The South
Terraces Conference Center Classroom, 115 Perimeter Center Place, Atlanta,
Georgia 30346 on Thursday, May 21, 1998 at 10:00 a.m., local time, for the
following purposes as more fully described in the Proxy Statement provided
herewith:
(i) To elect two directors to serve until the 2001 Annual Meeting
of Shareholders;
(ii) To consider and act upon a proposal to amend the Company's
1997 Stock Plan to increase the number of shares of Common
Stock authorized to be issued pursuant to grants under the
1997 Stock Plan from 482,790 shares to 800,000 shares.
(iii) To ratify the appointment of Coopers & Lybrand, L.L.P. as
independent auditors; and
(iv) To transact such other business as may properly come before
the meeting or any adjournment thereof.
Only the holders of record of Common Stock of the Company at the close
of business on April 3, 1998 are entitled to notice of and to vote at the Annual
Meeting of Shareholders and any adjournment thereof. A list of Shareholders as
of the close of business on April 3, 1998, will be available at the Annual
Meeting of Shareholders for examination by any Shareholder, his agent, or his
attorney.
By Order of the Board of Directors,
/s/ Alan C. Dahl
Alan C. Dahl
Executive Vice President, Chief
Financial Officer and Treasurer
Atlanta, Georgia
April 23, 1998
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED STAMPED
AND ADDRESSED ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY REVOKE THE PROXY AND
VOTE YOUR SHARES IN PERSON.
<PAGE> 4
CENTENNIAL HEALTHCARE CORPORATION
400 PERIMETER CENTER TERRACE, SUITE 650
ATLANTA, GEORGIA 30346
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON THURSDAY, MAY 21, 1998
The 1998 Annual Meeting of Shareholders (the "Annual Meeting") of
Centennial HealthCare Corporation (the "Company") will be held on Thursday, May
21, 1998, for the purposes set forth in the Notice of Annual Meeting of
Shareholders attached hereto and as described herein. The enclosed form of proxy
is solicited by the Board of Directors of the Company (the "Board" or "Board of
Directors") and the cost of the solicitation will be borne by the Company. When
a proxy is properly executed and returned, the shares of the Company's Common
Stock, $.01 par value per share (the "Common Stock"), represented thereby will
be voted as directed at the Annual Meeting or any adjournment thereof or, if no
direction is indicated, such shares of Common Stock will be voted in favor of
the proposals set forth in the Notice of Annual Meeting of Shareholders attached
hereto (collectively, the "Proposals") and any other matter that may properly
come before the Annual Meeting. Any Shareholder giving a proxy has the power to
revoke it at any time before it is voted. All proxies delivered pursuant to this
solicitation are revocable at any time at the option of the persons executing
them by giving written notice to the Secretary of the Company, by delivering a
later-dated proxy to the Company or by voting in person at the Annual Meeting.
Only holders of Common Stock of record as of the close of business on
April 3, 1998 (the "Record Date") will be entitled to vote at the Annual
Meeting. As of the Record Date, the Company had outstanding 11,877,645 shares of
Common Stock. Holders of Common Stock of record as of the close of business on
the Record Date are entitled to cast one vote for each share of Common Stock
held. No cumulative voting rights are authorized and dissenters' rights for
Shareholders are not applicable to the matters being proposed. It is anticipated
that this Proxy Statement and the accompanying proxy will first be mailed to
holders of Common Stock of the Company on or about April 24, 1998.
The presence in person or by proxy of holders of a majority of the
shares of Common Stock outstanding on the Record Date will constitute a quorum
for the transaction of business at the Annual Meeting or any adjournment
thereof. The affirmative vote of a plurality of the shares of Common Stock
present in person or by proxy and entitled to vote is required to elect
directors. With respect to the other Proposals and any other matter that may
properly come before the Annual Meeting, the approval of such Proposals or such
other matter requires the affirmative vote of a majority of the shares of Common
Stock present in person or by proxy and entitled to vote thereon. The NASDAQ
Stock Market National Market permits brokers who hold shares of Common Stock in
street name for beneficial owners to exercise discretionary voting power with
respect to the Proposals, including the election of directors, if voting
instructions have not been received from the beneficial owners within ten (10)
days before the Annual Meeting. Abstentions with respect to a Proposal are
counted for purposes of establishing a quorum. If a quorum is present,
abstentions have no effect on the outcome of any vote, including the election of
directors.
<PAGE> 5
PROPOSAL 1:
ELECTION OF DIRECTORS
The Company's Third Amended and Restated Articles of Incorporation (the
"Articles") and Amended and Restated Bylaws (the "Bylaws") provide for the Board
of Directors to determine the number of directors on the Board. There are
currently six directors serving on the Board. The Articles divide the Board into
three classes with the directors in each class serving a term of three years.
The terms of J. Stephen Eaton and Andrew M. Paul, the Class I members, expire at
the Annual Meeting. Messrs. Eaton and Paul have been nominated by the Board to
stand for re-election as directors at the Annual Meeting to serve until the 2001
Annual Shareholders' Meeting or until their successors are duly elected and
qualified.
Except as otherwise provided herein, the proxy solicited hereby cannot
be voted for the election of a person to fill a directorship for which no
nominee is named in this Proxy Statement. The Board has no reason to believe
that either director nominee will be unavailable to serve as a director, if
elected. However, if at the time of the Annual Meeting any nominee should be
unable to serve or, for good cause, will not serve, the persons named proxies
will vote as recommended by the Board to elect a substitute nominee recommended
by the Board. In no event, however, will a proxy be voted to elect more than two
directors.
Set forth below is information concerning the incumbent directors and
the nominees for reelection to the Board to serve until the 2001 Annual Meeting
of Shareholders or until their successors are duly elected and qualified. Such
information includes for the nominees, and for each of the incumbent directors,
certain biographical information, a brief description of each such individual's
principal occupation and business experience during the past five years, and
directorships of companies (other than the Company) presently held, which
information has been provided by the respective individuals.
NOMINEES FOR ELECTION -- CURRENT TERM EXPIRING 1998
J. STEPHEN EATON (age 46) is Chairman of the Board of the Company 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 the Company acquired
CRCA in 1990, CRCA 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.
ANDREW M. PAUL (age 42) has served as a Director of the Company since
January 1996. Mr. Paul serves as a general partner of the sole general partner
of Welsh, Carson, Anderson & Stowe, VI, L.P. ("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 Housecall Medical
Resources, Inc., Lincare Holdings, Inc. and MedCath, Inc.
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<PAGE> 6
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR J. STEPHEN EATON AND ANDREW
M. PAUL TO HOLD OFFICE UNTIL THE 2001 ANNUAL MEETING OF SHAREHOLDERS OR UNTIL
THEIR SUCCESSORS ARE ELECTED AND QUALIFIED.
INCUMBENT DIRECTORS -- TERM EXPIRING 1999
JAMES B. HOOVER (age 43) has served as a Director of the Company since
January 1996. Mr. Hoover has served as a general partner of the sole general
partner of WCAS VI since 1992. From 1984 to 1992, Mr. Hoover served as a general
partner of Robertson, Stephens & Co. ("RS&Co."), 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 (age 63) has served as a Director of the Company since
March 1997. Mr. Nordin 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, and the Atlanta Symphony
Orchestra.
INCUMBENT DIRECTORS -- TERM EXPIRING 2000
ALAN C. DAHL (age 37) has served as Executive Vice President, Chief
Financial Officer, Treasurer and Director of the Company 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 12 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.
ROBERT A. ORTENZIO (age 39) has served as a Director of the Company
since January 1996. Mr. Ortenzio has served as President and director 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 Concentra Managed Care,
Inc.
With the exception of Messrs. Eaton and Dahl, none of the directors
are, or have been, employed by any parent, subsidiary or other affiliate of the
Company. There are no family relationships between any directors or executive
officers.
MEETINGS OF THE BOARD OF DIRECTORS
During 1997, the Board met 4 times (including regularly scheduled and
special meetings). All of the directors attended at least 75% of all meetings of
the Board and the committees on which they served in 1997.
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<PAGE> 7
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Board of Directors has established an Audit
Committee that consists of Messrs. Hoover and Ortenzio. Mr. Hoover is chairman
and Mr. Eaton is an ex-officio, non-voting member of the Audit Committee. The
Audit Committee is responsible for (a) recommending to the Board the firm to be
employed as independent auditors of the Company, and (b) meeting with the
Company's independent auditors at least annually to review (i) the scope of
audit and non-audit assignments and related fees, (ii) accounting principles
used by the company in financial reporting, and (iii) the adequacy of the
Company's internal control procedures. During 1997, the Audit Committee held one
meeting.
COMPENSATION COMMITTEE. The Board of Directors has established a
Compensation Committee that consists of Messrs. Eaton, Paul and Ortenzio. Mr.
Paul is chairman of the Compensation Committee. The Compensation Committee is
responsible for (a) reviewing, approving, recommending and reporting to the
Chief Executive Officer and the Board of Directors matters regarding the
compensation of the Company's executive officers and other key employees and
compensation levels or plans affecting the compensation of the Company's other
employees and (b) administering the Company's 1994 Stock Option Plan, 1996
Executive Stock Plan, 1996 Employee Stock Option Plan and 1997 Stock Plan
(collectively, the "Stock Plans"). During 1997, the Compensation Committee held
no meetings and acted by unanimous written consent in lieu of a meeting on one
occasion.
Nominations for directors are made by the Board of Directors. The
Bylaws require an advance notice procedure for the nomination, other than by or
at the direction of the Board of Directors 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 that notice of the annual
meeting of Shareholders was given in the preceding year and must 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 if the Company is then subject 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. 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
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 of
Directors an opportunity to consider the qualifications of the proposed nominees
or the merits
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<PAGE> 8
of other Shareholder proposals and, to the extent deemed necessary or desirable
by the Board of Directors, to inform Shareholders about those matters. Although
the advance notice provisions do not give the Board of Directors 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 the effect 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.
COMPENSATION OF DIRECTORS
All members of the Board of Directors are reimbursed for their
reasonable out-of-pocket expenses incurred in connection with attendance at
Board and committee meetings. Non-Employee Directors (as defined pursuant to
Rule 16b-3 under the Exchange Act) 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 Non-Employee
Directors. Pursuant to the Company's 1997 Stock Plan, Non-Employee Directors
receive automatic grants of options to purchase 10,345 shares of Common Stock
upon their election to the Board and, beginning in 1998, Non-Employee Directors
who are serving as such on July 1 of each year receive automatic grants of
options to purchase 2,069 shares of Common Stock. Options issued to Non-Employee
Directors under such Plan become exercisable on the first anniversary of the
date of the grant. All options granted to Non-Employee Directors are
non-qualified stock options and are exercisable for ten years from the date of
each grant. The exercise price is equal to the average closing bid price for the
20 trading days before the date of the Company's annual meeting of shareholders
preceding the grant date.
PROPOSAL 2:
AMENDMENT TO THE 1997 STOCK PLAN
The primary purpose of the 1997 Stock Plan (the "Plan"), which was
previously approved by the Board of Directors and the Company's shareholders, is
to advance the interests of the Company, its subsidiaries and its shareholders
by affording certain officers and employees of the Company and its subsidiaries
and Non-Employee Directors an opportunity to acquire or increase their
proprietary interests in the Company. The Board has adopted and recommends that
the Shareholders approve an amendment to the Plan to increase the number of
shares of Common Stock which may be issued subject to options granted under the
Plan from 482,790 shares to 800,000 shares, subject to certain anti-dilution
provisions set forth in the Plan. All other provisions of the Plan will remain
unchanged.
The material features of the Plan are described below.
ADMINISTRATION
Except for self-governing for grants of Non-Discretionary Options (as
hereinafter defined) to Non-Employee Directors, the Plan is administered by the
Compensation Committee. The Compensation Committee has the power to (i) grant
Discretionary Options (as hereinafter defined) in accordance with the Plan, (ii)
determine those persons to whom options will be granted, subject to the
provisions of the Plan, (iii) interpret the Plan, (iv) promulgate rules and
regulations relating to the Plan,
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<PAGE> 9
and (v) make all other determinations and take all other actions necessary or
desirable for the administration of the Plan. Decisions of the Compensation
Committee regarding the interpretation and administration of the Plan are
binding upon all interested persons.
TERMS
The Plan provides for automatic grants of options ("Non-Discretionary
Options") to Non-Employee Directors and options to be granted to officers and
employees at the discretion of the Compensation Committee ("Discretionary
Options").
Non-Discretionary Options to purchase 10,345 shares of Common Stock are
made to each Non-Employee Director on the date such person is initially elected
or appointed to the Board as a Non-Employee Director. As long as Common Stock is
available for grants of Non-Discretionary Options, an annual grant of a
Non-Discretionary Option to purchase 2,069 shares of Common Stock will be made
on July 1 to each person who is a Non-Employee Director on such date. The
exercise price of each Non-Discretionary Option shall be the average closing bid
price on the Nasdaq National Market (or other exchange) for the Common Stock for
the twenty (20) trading days immediately preceding the date of the annual
meeting preceding such July 1. All Non-Discretionary Options granted under the
Plan vest and become exercisable on the first anniversary of the grant date and
expire and cease to be exercisable after the expiration of ten (10) years from
such grant date.
Under the Plan, the Compensation Committee may grant Discretionary
Options intended to qualify as incentive stock options ("ISOs") under the
Internal Revenue Code (as defined below) or options that do not qualify as ISOs
("NSOs"). ISOs involve certain tax implications under the Internal Revenue Code
of 1986, as amended (the "Internal Revenue Code"). The Compensation Committee
establishes the exercise period for each Discretionary Option; provided,
however, that the exercise period for Discretionary Options intended to be ISOs
may not exceed ten years.
The Plan provides that the exercise price for each share of Common
Stock subject to an ISO shall be no less than the fair market value of a share
of Common Stock on the date the ISO is granted or, if the ISO is granted to a
key employee who is a ten percent shareholder of Common Stock, the exercise
price for each share of Common Stock subject to such ISO shall be no less than
one hundred and ten percent (110%) of the fair market value of a share of Common
Stock on the date the ISO is granted. In addition, the exercise price for each
share of Common Stock subject to a NSO shall be no less than the fair market
value of a share of Common Stock on the date the NSO is granted.
An option granted under the Plan is not transferable other than by will
or by the laws of descent and distribution.
TERMINATION AND AMENDMENT
The Plan may be terminated or amended at any time and from time to time
by the Board. The Board may not, however, amend the Plan without the approval or
ratification of the Shareholders of the Company if such amendment would (i)
increase the total number of shares of Common Stock issuable pursuant to ISOs
under the Plan or materially increase the number of shares of Common Stock
subject to the Plan, (ii) change the class of employees eligible to receive ISOs
that may participate in the Plan or materially change the class of persons that
may participate in the Plan, or (iii) otherwise materially increase the benefits
accruing to participants in the Plan.
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<PAGE> 10
ELIGIBILITY
The class of persons eligible to participate in the Plan consists of
all Non-Employee Directors and all persons whose participation in the Plan the
Compensation Committee determines to be in the best interests of the Company,
including, without limitation, all officers and employees of the Company or any
subsidiary, as well as key consultants and advisors to the Company or any
subsidiary; provided, however, that Non-Employee Directors are only eligible to
receive Non-Discretionary Options. At April 3, 1998, subject to shareholder
approval of the amendment to the Plan, 75 individuals held or will hold options
to purchase 524,594 shares of Common Stock under the Plan.
STOCK SUBJECT TO THE PLAN
As of December 31, 1997, an aggregate of 482,790 shares of Common Stock
was reserved for issuance upon exercise of options previously granted under the
Plan and an aggregate of 437,196 shares of Common Stock remained available for
the grant of future options to purchase such shares under the Plan. Of the
437,196 shares of Common Stock available for the grant of options, up to 93,100
shares were reserved for issuance pursuant to the exercise of Non-Discretionary
Options and up to 344,096 shares were reserved for issuance pursuant to the
exercise of Discretionary Options. If the amendment is approved, 93,100 shares
of Common Stock will be available for the future grant of Non-Discretionary
Options under the Plan and 182,306 shares of Common Stock will be available for
the future grant of Discretionary Options under the Plan (exclusive of the
grants for 524,594 shares described above).
FEDERAL INCOME TAX CONSEQUENCES
NSOs. An individual receiving a NSO under the Plan does not recognize
taxable income on the date of grant of the option, assuming that the option does
not have a readily ascertainable fair market value at the time it is granted.
However, the individual must generally recognize ordinary income at the time of
exercise of the NSO in the amount of the difference between the option exercise
price and the fair market value of the stock on the date of exercise. The amount
of ordinary income recognized by an individual is deductible by the Company in
the year that the income is recognized by the individual. Upon subsequent
disposition, any further gain or loss is taxable either as a short-term or
long-term capital gain or loss, depending upon the length of time that the
shares of stock are held.
ISOs. An individual who is granted an ISO under the Plan does not
recognize taxable income either on the date of grant or on the date of its
timely exercise. However, the excess of the fair market value of the stock
received upon the exercise of the ISO over the option exercise price is
includable in such individual's alternative minimum taxable income and may be
subject to the alternative minimum tax ("AMT"). For AMT purposes only, the basis
of stock acquired by the exercise of an ISO is increased by the amount of such
excess.
Upon the disposition of the stock acquired upon exercise of an ISO,
long-term capital gain or loss will be recognized in an amount equal to the
difference between the sales price and the option exercise price (except that
for AMT purposes, the gain or loss would be the difference between the sales
price and the individual's basis increased as described in the preceding
paragraph), provided that such individual has not disposed of the stock within
the later of two years after the date of grant or one year from the date of
exercise. If an individual disposes of the stock without satisfying the holding
period requirements (a "Disqualifying Disposition"), the individual will
generally recognize ordinary income at
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<PAGE> 11
the time of such Disqualifying Disposition to the extent of the lesser of (i)
the difference between the exercise price and the fair market value of the stock
on the date the ISO is exercised or (ii) the difference between the exercise
price and the amount realized on such Disqualifying Disposition. Any remaining
gain or any net loss is treated as a short-term or long-term gain or loss,
depending upon the length of time that the stock is held. Unlike the case in
which a NSO is exercised, the Company is not entitled to a tax deduction upon
either the timely exercise of an ISO or upon disposition of the stock acquired
pursuant to such exercise, except to the extent that the individual recognizes
ordinary income in a Disqualifying Disposition.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE AMENDMENT TO THE 1997
STOCK PLAN.
PROPOSAL 3:
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Coopers & Lybrand, L.L.P. has audited the accounts of the Company and
its subsidiaries for fiscal year 1997 and has been appointed by the Audit
Committee to continue in that capacity for the Company's fiscal year ending
December 31, 1998, subject to ratification by the Shareholders at the Annual
Meeting. Should this firm be unable to perform the requested services for any
reason or not be ratified by the Shareholders, the Audit Committee will appoint
other independent auditors to serve for the remainder of the year. A
representative of Coopers & Lybrand, L.L.P. will be present at the Annual
Meeting, will have the opportunity to make a statement and will be available to
respond to appropriate questions.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF COOPERS & LYBRAND, L.L.P. AS THE COMPANY'S INDEPENDENT AUDITORS.
COMMON STOCK OWNERSHIP BY MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of shares of
Common Stock as of April 3, 1998 for (i) directors of the Company, (ii) the
Chief Executive Officer and each of the four most highly compensated executive
officers of the Company (collectively the "Named Executive Officers"), (iii) the
directors and executive officers of the Company as a group and (iv) each person
who is a Shareholder of the Company holding more than a five percent interest in
the Company.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENT OF COMMON
COMMON STOCK STOCK BENEFICIALLY
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) OWNED
- ------------------------ ---------------------- -----
<S> <C> <C>
Welsh, Carson, Anderson & Stowe VI, L.P. 2,520,193(2) 21.2%
WCAS Capital Partners II, L.P. 246,896(3) 2.1
WCAS Healthcare Partners L.P. 81,384(4) *
J. Stephen Eaton 1,191,525(5) 10.0
Putnam Investments, Inc. 843,600(6) 7.1
</TABLE>
- 8 -
<PAGE> 12
<TABLE>
<S> <C> <C>
Provident Investment Counsel, Inc. 815,147(7) 6.9
South Atlantic Venture Fund II, Limited Partnership 798,963(8) 6.7
South Atlantic Venture Fund III, Limited Partnership 206,214(9) 1.7
Randall J. Bufford 180,543(10) 1.5
Laurence W. Lepley, Jr. 107,673(11) *
Alan C. Dahl 86,794(12) *
Kent C. Fosha, Sr. 64,556(13) *
Horizon Investment Associates II 39,719(14) *
James B. Hoover 13,464(15) *
Andrew M. Paul 24,707(16) *
Robert A. Ortenzio 1,299(17) *
Bertil D. Nordin 10,345(18) *
All directors and executive officers as a group 1,737,771 14.4
(14 persons)
</TABLE>
- ----------------------------
* Less than 1.0%.
(1) Based on an aggregate of 11,877,645 shares of Common Stock issued and
outstanding as of April 3, 1998. Includes shares of Common Stock that
may be acquired upon the exercise of stock options exercisable within
60 days. Each person named above has sole voting and dispositive power
with respect to all shares listed opposite such person's name, except
as otherwise noted.
(2) The shareholder's address is 320 Park Avenue, Suite 2500, New York, New
York 10022-6815. Information obtained from Form 4 filed with the
Securities and Exchange Commission ("SEC") for February, 1998.
(3) The shareholder's address is 320 Park Avenue, Suite 2500, New York, New
York 10022-6815. Information obtained from Form 4 filed with the SEC
for February, 1998.
(4) The shareholder's address is 320 Park Avenue, Suite 2500, New York, New
York 10022-6815. Information obtained from Schedule 13G filed on
February 13, 1998 by WCAS VI, for itself and WCAS Capital and WCAS
Healthcare.
(5) Includes 76,154 shares purchasable upon exercise of stock options that
are currently exercisable or will become exercisable within 60 days.
Does not include options to acquire 73,279 shares that are not
exercisable within 60 days. The shareholder's address is 400 Perimeter
Center Terrace, Suite 650, Atlanta, Georgia 30346.
(6) With respect to 206,600 shares, shareholder's wholly-owned subsidiary
Putnam Advisory Company, Inc. ("Advisory") has shared voting power over
these shares held by institutional clients. Putnam Investment
Management, Inc. ("Investment") and Advisory hold 637,386 shares for
which each fund's trustees have voting power. With respect to 626,300
shares, shareholder shares investment control with Investment. With
respect to 217,300 shares, shareholder shares investment control with
Advisory. This information obtained from Schedule 13G filed on January
21, 1998 by Putnam Investments, Inc. for itself and Marsh & McLennan
Companies, Inc.; Putnam Investment Management, Inc.; and Putnam
Advisory Company, Inc. The shareholder's address is One Post Office
Square, Boston, Massachusetts 02109.
- 9 -
<PAGE> 13
(7) With respect to 765,847 shares, the shareholder has sole voting power.
With respect to 815,147 shares, the shareholder has sole investment
control. With respect to 49,300 shares, the shareholder has no voting
control. This information obtained from Schedule 13G filed on February
10, 1998 by the shareholder. The shareholder's address is 300 North
Lake Avenue, Pasadena, California 91101-4022.
(8) The shareholder's address is 614 West Bay Street, Suite 200, Tampa,
Florida 33606-2704.
(9) The shareholder's address is 614 West Bay Street, Suite 200, Tampa,
Florida 33606-2704.
(10) Includes 55,052 shares purchasable upon exercise of stock options that
are currently exercisable or will become exercisable within 60 days and
59,615 shares which are pledged to the Company to secure repayment of a
promissory note in the amount of $528,480. Does not include options to
acquire 23,657 shares that are not exercisable within 60 days. The
shareholder's address is 400 Perimeter Center Terrace, Suite 650,
Atlanta, Georgia 30346.
(11) Includes shares 7,659 purchasable upon exercise of stock options that
are currently exercisable. Does not include options to acquire 2,685
shares that are not exercisable within 60 days. The shareholder's
address is 400 Perimeter Center Terrace, Suite 650, Atlanta, Georgia
30346. Information obtained from Form 4 filed with the SEC for
September, 1997.
(12) Includes 27,302 shares purchasable upon the exercise of stock options
that are currently exercisable or will become exercisable within 60
days and 2,000 shares beneficially owned by Mr. Dahl's sons. Mr. Dahl
disclaims beneficial ownership of these shares. Does not include
options to acquire 28,256 shares that are not exercisable within 60
days. The shareholder's address is 400 Perimeter Center Terrace, Suite
650, Atlanta, Georgia 30346. Information obtained from Form 4 filed
with the SEC for December, 1997.
(13) Includes 38,797 shares purchasable upon exercise of stock options that
are currently exercisable or will become exercisable within 60 days.
Does not include options to acquire 28,256 shares that are not
exercisable within 60 days. The shareholder's address is 400 Perimeter
Center Terrace, Suite 650, Atlanta, Georgia 30346.
(14) The shareholder's address is 4718 Old Gettysburg Road, Mechanicsburg,
Pennsylvania 17055.
(15) Includes 13,464 shares held by Mr. Hoover or by the James Hoover IRA.
Does not include 2,848,473 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. Information obtained
from Form 4 filed with the SEC for February, 1998.
(16) Includes 24,707 shares owned directly. Does not include 2,848,473
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. Information obtained from Form 4 filed with
the SEC for March, 1998.
(17) Does not include 39,719 shares held by Horizon Investment Associates
II, of which Mr. Ortenzio's father is an affiliate; 3,551 shares
acquired pursuant to a distribution by WCAS VI to its limited partners,
in one of which Mr. Ortenzio holds a remainderman interest in a life
estate of which his father is the life tenant; or 77 shares acquired
pursuant to a distribution by WCAS Capital to Camp Hill Associates,
L.P., a limited partner of WCAS Capital, in which Mr. Ortenzio has a
10% ownership interest. Mr. Ortenzio disclaims beneficial ownership of
all such shares. Information obtained from Form 4 filed with the SEC
for February 1998. The shareholder's address is 4718 Old Gettysburg
Road, Mechanicsburg, Pennsylvania 17055.
(18) Includes options to acquire 10,345 shares that are currently
exercisable. Does not include 206,214 shares held by South Atlantic
Venture Fund III, Limited Partnership ("South Atlantic") 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.
- 10 -
<PAGE> 14
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the
compensation paid to the Company's Chief Executive Officer and each of the Named
Executive Officers whose salary and bonus compensation for the year ended
December 31, 1997 exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------------------------- ---------------------------
OTHER SECURITIES
NAME AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($)(2) COMPENSATION($) OPTIONS(#) COMPENSATION($)
------------------ ---- ------------ ----------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
J. Stephen Eaton..................... 1997 $309,000 $ ---- $ 6,931(4) 34,485 $ ----
President and Chief 1996 300,000 50,000 324,359(3)(4) ------- ----
Executive Officer 1995 224,631 ---- 5,331(4) 114,948 ----
Kent C. Fosha, Sr.................... 1997 180,250 ---- 3,059(4) 17,242 ----
Executive Vice President 1996 175,000 25,000 163,041(3)(4) ------- ----
1995 136,853 ---- 3,053(4) 38,316 ----
Randall J. Bufford(5)................ 1997 257,500 ---- 5,639(4) 10,345 ----
Executive Vice President 1996 250,000 ---- 100,000(6) 30,048(7) ----
1995 224,614 90,000 450(10) 38,316 ----
Alan C. Dahl......................... 1997 180,250 ---- 10,118(4) 17,242 ----
Executive Vice President and 1996 175,000 35,000 158,498(3) ---- ----
Chief Financial Officer 1995 132,475 ---- 5,331(4) 38,316 ----
Laurence W. Lepley, Jr. (8) 1997 158,295 116,000 9,392(9) 4,028 ----
President of Paragon 1996 132,341 65,575 6,794(9) 6,316(7) ----
Rehabilitation, Inc. 1995 122,115 ---- 9,419(9) ---- ----
</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, Fosha, Bufford and Dahl 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 (as defined below) and resigned as an officer
effective March 31, 1998.
(6) Consists of a moving allowance in the amount of $100,000.
- 11 -
<PAGE> 15
(7) These stock options were granted in replacement of options from
Transitional Health Services, Inc.
(8) Mr. Lepley remained as president of Paragon after the Transitional
Merger.
(9) Includes $704, $794 and $677 as matching 401(k) contribution and an
automobile allowance of $8,715, $6,000 and $8,715 for 1995, 1996 and
1997, respectively.
(10) Includes for 1995 $450 as a matching 401(k) contribution.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock option grants
for the year ended December 31, 1997 to the Chief Executive Officer and each of
the Named Executive Officers. No stock appreciation rights were granted during
such year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (1)
------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
GRANTED FISCAL 1997 SHARE DATE 5% ($) 10% ($)
---------- ------------ ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
J. Stephen Eaton............. 34,485 19.9% $16.00 3/1/07 $346,999 $879,363
Kent C. Fosha, Sr............ 17,242 10.0% $16.00 3/1/07 173,494 439,669
Alan C. Dahl................. 17,242 10.0% $16.00 3/1/07 173,494 439,669
Randall J. Bufford .......... 10,345 6.0% $16.00 3/1/07 104,094 263,796
Laurence W. Lepley, Jr....... 4,028 2.3% $16.00 3/1/07 40,531 102,714
</TABLE>
- -----------------------
(1) The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the SEC. There can be no
assurance provided to any executive officer or any other holder of
the Company's securities that the actual stock price appreciation
over the term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of the Common Stock
appreciates over the option term, no value will be realized from the
option grants made to the Chief Executive Officer or the Named
Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
The following table sets forth certain information concerning option
holdings for the fiscal year ended December 31, 1997, with respect to the Chief
Executive and each of the Named Executive Officers of the Company. No options or
stock appreciation rights ("SARs") were exercised during such year and no SARs
were outstanding at the end of such year.
- 12 -
<PAGE> 16
<TABLE>
<CAPTION>
SECURITIES UNDERLYING VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FY-END (#) AT FY-END ($) (1)
------------- -----------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
J. Stephen Eaton 76,154 73,279 $641,417 $593,703
Kent C. Fosha, Sr. 38,797 28,256 398,257 223,747
Alan C. Dahl 27,302 28,256 226,752 223,747
Randall J. Bufford 55,052 23,657 632,213 192,704
Laurence W. Lepley, Jr. 7,659 2,685 97,552 18,124
</TABLE>
- ---------------------
(1) BASED ON A CLOSING PRICE OF $22.75 PER SHARE OF COMMON STOCK ON
DECEMBER 31, 1997.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-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 base
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 Compensation Committee of 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 ("Consumer Price Index"). In addition, each of these employees is
eligible to participate in the 1996 Executive Stock 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. Mr. Bufford resigned from the Company effective March
31, 1998 and his Employment Agreement was terminated.
The Company can terminate such agreements upon the death or disability of
an employee or for cause as defined therein. Each employee may terminate his
employment for any reason within a 90-day period beginning on the 30th day after
a Change in Control of the Company (as defined below) or within a 90-day period
beginning on the one-year anniversary of a Change in Control. If the Company
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
- 13 -
<PAGE> 17
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 such as 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.
Effective January 1, 1998, Paragon Rehabilitation, Inc., a subsidiary of
the Company ("Paragon"), entered into an Amended and Restated Employment
Agreement with Laurence W. Lepley, Jr., who serves as president of Paragon (the
"Lepley Agreement"). The Lepley Agreement provides for an annual base salary of
$184,000 reviewable annually on January 1 and subject to annual increases (as
described above with respect to the Employment Agreements) and annual bonus. The
Lepley Agreement allows participation in the Company's stock option plans and
provides health, dental and short and long-term disability insurance and an
automobile allowance. The initial term ends on December 31, 2000, but beginning
on the second anniversary of the effective date extends automatically each day
for an additional day so that the remaining term continues to be two years.
Paragon may terminate the Lepley Agreement upon the death or disability
of Mr. Lepley or for cause as defined therein, or after the vote of a majority
of the Company's Board of Directors in favor of termination. Mr. Lepley may
terminate his employment for Good Reason (as defined below) within a 90-day
period beginning on the 30th day after a Change in Control of the Company (as
defined above) or within a 90-day period beginning on the one-year anniversary
of a Change in Control of the Company. If Paragon terminates the Lepley
Agreement for reasons other than for cause, or if Mr. Lepley terminates his
employment for Good Reason, then Paragon must pay Mr. Lepley (or, in the case of
death, his estate) for 12 consecutive months thereafter one-twelfth of his
salary at the rate in effect on his termination date. If the Lepley Agreement is
terminated due to death or disability, or by Mr. Lepley for Good Reason, then
the restrictions on any outstanding incentive awards, including stock options,
would lapse and such incentive awards would immediately vest. Mr. Lepley agrees
to maintain the confidentiality of Paragon's trade secrets and agrees, for a
period of one year following termination, not to compete with or solicit
employees or customers of Paragon. For the purposes of the Lepley Agreement,
Good Reason includes an occurrence after a Change in Control such as 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 Lepley Agreement.
- 14 -
<PAGE> 18
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Messrs. Eaton, Paul and
Ortenzio. Neither Mr. Paul or Mr. Ortenzio is or has been an officer or employee
of the Company or any of its subsidiaries. Mr. Eaton is the Chairman of the
Board, President and Chief Executive Officer of the Company.
Transactions with Mr. Paul and Affiliates. Mr. Paul, an affiliate of
WCAS VI, WCAS Capital Partners II, L.P. ("WCAS Capital") and WCAS Healthcare
Partners, L.P. ("WCAS Healthcare"), is a director of the Company and the
chairman of the Compensation Committee.
In January 1996, pursuant to the merger between the Company and
Transitional Health Services, Inc. ("Transitional"), effective December 31, 1995
(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 the Company's Special
Voting Common Stock (reflecting the settlement agreement as described 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 was converted into 2,315,507 shares of
Common Stock and the Series C Preferred Stock was converted into 1,052,770
shares of Common Stock upon the closing of the Company's initial public offering
of shares of its Common Stock (the "Offering"). Mr. Paul sold 1,241 shares of
Common Stock received upon the conversion of the Series C Preferred Stock to the
Company pursuant to the Stock Repurchase Agreement (as defined below).
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 the Company's 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 the Company's 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 was converted into 348,503
shares of Common Stock and the Series E Redeemable Preferred Stock was redeemed
upon the closing of the Offering, and accrued but unpaid dividends thereon were
paid upon redemption.
The Company believes, based on available information regarding the
Company and its financial condition and prospects and sales of the Company's
securities at the time of the above transactions, 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 held approximately 96.2% of two subordinated
promissory notes accruing interest at 10.8% and 11.7% per annum, respectively
(the "Subordinated Debt"), that were repaid with a portion of the proceeds of
the Offering ($25.3 million).
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 Series C Preferred Stock was
converted into 13,910 shares of Common Stock upon the closing of the Offering,
and Horizon sold 6,131 shares of Common Stock received upon such conversion to
the Company pursuant to the Stock Repurchase Agreement.
- 15 -
<PAGE> 19
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 share. See "Certain Transactions." These shares of Series D Preferred
Stock were 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 sales of the Company's
securities at the time of the above transaction, 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.
Transactions with Mr. Eaton and Affiliates. Transactions involving Mr.
Eaton and his affiliates are described in the following section entitled
"Certain Transactions."
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 certain facilities managed by the Company. The
accounting rules that govern the Company had required it to include in its
financial statements certain 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.
Mr. Eaton owns 100% of the common stock of Centennial Employee Management
Corporation ("CEMC"). The Company 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 costs 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 owned The Health and
Rehabilitation Centre at Dolphins View ("Dolphins View"), which was managed by
the Company. Services exercised its right of first refusal and purchased the
property from an unaffiliated owner in 1994. Dolphins View paid the Company
approximately $145,000 as management fees in 1997. The Company acquired Dolphins
View from Services effective December 1, 1997 for approximately $3.3 million as
the purchase price. After payment of the underlying mortgage debt and repayment
of advances and accrued interest owed to the Company, Mr. Eaton and the other
shareholders at Services did not receive any of the proceeds from the sale of
Dolphins View to the Company.
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. Mr. Dahl is
Executive Vice President, Chief Financial Officer, Treasurer and a director of
the Company.
- 16 -
<PAGE> 20
A portion of the Subordinated Debt, which was repaid with a portion of
the proceeds of the Offering, was held by WCAS Capital. Messrs. Paul and Hoover,
directors of the Company, serve as general partners of the sole general partner
of WCAS Capital.
WCAS VI, WCAS Healthcare, Mr. Hoover (individually and through his IRA)
and Mr. Paul held shares of Series D Preferred Stock which were automatically
converted into shares of Common Stock upon the closing of the Offering. 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 were
parties to a Stock Repurchase Agreement, which provided that the Company would
acquire, to the extent net proceeds were received from the sale of Common Stock
pursuant to the exercise of the underwriters' over-allotment option in the
Offering, shares of Common Stock received upon the conversion of the Series C
Preferred Stock into Common Stock, at $16.00 a share pro rata from the former
holders of the Series C Preferred Stock (including WCAS VI, WCAS Capital, WCAS
Healthcare, Mr. Paul and Mr. Hoover) (the "Stock Repurchase Agreement"). Messrs.
Paul and Hoover sold 1,241 and 1,552 shares, respectively, under the Stock
Repurchase Agreement.
WCAS VI held 44,250 shares of Series E Redeemable Preferred Stock, which
was 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
1.27665 shares of Common Stock) and received $4,425,000 for the Series E
Redeemable Preferred Stock upon the closing of the Offering, exclusive of
dividends accrued at 10% from January 31, 1997 to the date of the closing of the
Offering, which were paid from operating cash flow. Messrs. Paul and Hoover are
general partners of the sole general partner of WCAS VI.
In connection with the Transitional Merger, the holders of shares of
Special Voting Common Stock received in the Transitional Merger (the "THS
Holders") and the holders of Common Stock before the Transitional Merger (the
"Centennial Holders") entered into an escrow agreement whereby shares
representing a stock dividend of 11.11%, effective January 6, 1996, issued to
all shareholders and option holders as a condition to the Transitional Merger
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 Mr. Eaton
as representative of the Centennial Holders (the "Centennial Agent") and Mr.
Paul as representative of the THS Holders (the "THS Agent"), in order to adjust
the proportionate ownership interest each group of holders received.
In January 1997, the Centennial Agent and the THS Agent entered into a
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 held in escrow 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 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. The remaining 122,115 shares of
Special Voting Common Stock 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
- 17 -
<PAGE> 21
Common Stock released from escrow pursuant to the settlement agreement. Each
share of Special Voting Common Stock was converted into .6897 shares of Common
Stock (reflecting the Reverse Split).
Prior to consummation of the Transitional Merger, Mr. Bufford, Executive
Vice President of the Company, borrowed $528,480 from Transitional to purchase
330,300 shares of Transitional's common stock pursuant to his exercise of a
stock option, 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. During 1997 and
at March 31, 1998, the full principal amount was outstanding and no accrued
interest had been paid. Interest accrues at an annual rate equal to the prime
rate (as announced by CoreStates Bank, N.A. 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.
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for ensuring that a proper
system of short and long-term compensation is in place to provide
performance-oriented incentives to management.
The Compensation Committee administers the Company's executive
compensation program, including determination of salary and bonus compensation
for the Chief Executive Officer and the Named Executive Officers and
determination of the nature, time and amounts of option grants to such executive
officers under the Company's Stock Plans. The Compensation Committee's report
for 1997 is as follows:
COMPENSATION POLICY
Generally, the Company's executive compensation is designed to be
competitive with compensation offered by other companies against which the
Company competes for executive resources. The executive compensation plans are
designed to attract and retain highly qualified executives critical to the
Company's long-term success. The Compensation Committee intends for the
executive compensation program to satisfy the following guidelines:
- Recognize and reward high performance and extraordinary results.
- Have a portion of total compensation bear a direct relationship
to the Company's operating performance and achievement of
short-term and long-term goals.
- Provide opportunity to acquire additional direct ownership in
the Company and provide motivation to build shareholder value by
aligning executives' interests with shareholder interests.
Executive compensation is composed of base salary, bonus awards and
long-term incentive compensation.
BASE SALARY
In the case of Messrs. Eaton, Dahl, Fosha and Bufford base salary is paid
pursuant to the Employment Agreements or the Lepley Agreement in the case of Mr.
Lepley; in the case of all other executive officers,
- 18 -
<PAGE> 22
base salary is determined and fixed by management based on the policies of the
Compensation Committee. The Employment Agreements require the Compensation
Committee to review base salaries of the executives who are parties thereto on
May 1 (or January 1 with respect to Mr. Lepley) of each year and provide for an
annual increase as determined by the Compensation Committee, but not less than
the increase in the Consumer Price Index. The Compensation Committee reviews the
individual contributions and performance of each such executive officer and
takes into account various qualitative and quantitative factors in determining
the increases in base salaries. In particular, the Compensation Committee
considers several financial performance measures, including business
development, earnings growth and stock price, as well as the individual's work
experience, level of responsibility and contribution to the Company's long-term
success. The Compensation Committee does not, however, apply any specific
quantitative formula in making compensation decisions with respect to base
salary, annual bonus awards or long-term incentive compensation.
BONUS AWARDS
Bonus payments are awarded to the Company's executives at the discretion
of the Compensation Committee, which considers the achievement of certain
performance targets and new business development.
LONG-TERM INCENTIVE COMPENSATION
The Company's long-term incentive compensation strategy is focused on the
grant or award of (i) options to purchase shares of Common Stock, (ii) stock
appreciation rights, (iii) reload options and (iv) restricted stock pursuant to
the Stock Plans. Except for grants to Non-Employee Directors pursuant to the
1997 Stock Plan, the Compensation Committee determines who receives grants or
awards, the grant or award date, the number of shares subject to the grant or
award, the exercise price (based on the closing price of the Common Stock on the
date of grant or award), the vesting schedule and other matters as specified in
the Stock Plans. The Compensation Committee believes that these grants or awards
reward executive officers for their efforts in improving long-term performance
of the Common Stock and creating value for the Company's shareholders, thereby
aligning the financial interests of such executives with those of the Company's
shareholders.
CHIEF EXECUTIVE OFFICER COMPENSATION
Based on its assessment of the performance of the Company and Mr. Eaton's
performance during 1997, the Compensation Committee (composed of Messrs. Paul
and Ortenzio for this purpose) increased Mr. Eaton's base salary from $300,000
to $309,000 and granted Mr. Eaton options to purchase 34,385 shares of Common
Stock. The Compensation Committee considered the same factors described above in
determining Mr. Eaton's base salary for 1997 and the option grant. The
Compensation Committee also noted the significant growth in the Company due to
the Transitional Merger and the increase in Mr. Eaton's responsibilities related
thereto.
- 19 -
<PAGE> 23
SECTION 162(M)
Section 162(m) of the Internal Revenue Code generally disallows tax
deduction by a public company for compensation in excess of $1,000,000 paid to
such company's chief executive officer and four other most highly compensated
executive officers. Qualifying performance-based compensation is not subject to
the deduction limit if certain requirements are met. The Compensation Committee
intends to attempt to structure future compensation of the Company's Chief
Executive Officer and Named Executive Officers so as to preserve the
deductibility of such compensation under Section 162(m).
COMPENSATION COMMITTEE
Andrew M. Paul, Chairman
Robert A. Ortenzio
J. Stephen Eaton
THE FOREGOING REPORT SHOULD NOT BE DEEMED INCORPORATED BY REFERENCE BY
ANY GENERAL STATEMENT INCORPORATING BY REFERENCE THIS PROXY STATEMENT INTO ANY
FILING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE EXCHANGE ACT
(TOGETHER, THE "ACTS"), EXCEPT TO THE EXTENT THAT THE COMPANY SPECIFICALLY
INCORPORATES THIS INFORMATION BY REFERENCE, AND SHALL NOT OTHERWISE BE DEEMED
FILED UNDER SUCH ACTS.
STOCK PRICE PERFORMANCE GRAPH
The following line graph compares the yearly percentage change in
cumulative shareholder return on the Common Stock with (a) the performance of a
broad equity market indicator, and (b) the performance of a peer group index.
The graph compares the percentage change in the return on the Common Stock since
July 2, 1997 with the cumulative total return on the NASDAQ Index and the Peer
Group identified by the Company (which group includes Beverly Enterprises, Inc.,
Genesis Health Ventures Inc., Health Care and Retirement Corp., Integrated
Health Services, Inc., Mariner Health Group, Sun Healthcare Group Inc., Vencor
Inc., Advocat Inc., Paragon Health Newworks, Harborside Healthcare Corp.,
National Healthcare L.P., and Manor Care Inc.) over such period. The Peer Group
companies include the long-term care organizations most similar to the Company,
and most of the other major publicly traded long-term care organizations. The
commencement date for this comparison is the date on which the Company's Common
Stock was first publicly traded. The stock price performance graph assumes an
investment of $100 in the Company on July 2, 1997 and an investment of $100 in
the two indexes on July 2, 1997 and further assumes the reinvestment of all
dividends. The stock price performance, presented monthly for the period from
July 2, 1997 through December 31, 1997 is not necessarily indicative of future
results. Information used in this graph was obtained from Zack's Investment
Research, a source believed to be reliable, but the Company is not responsible
for errors or omissions in such information.
- 20 -
<PAGE> 24
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
7/2/97 7/97 8/97 9/97 10/97 11/97 12/97
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Centennial 100 112.13 125.78 143.75 129.69 132.42 142.19
- ---------------------------------------------------------------------------------------
Nasdaq 100 110.56 110.39 116.92 110.84 111.39 109.65
- ---------------------------------------------------------------------------------------
Peer Group 100 99.02 99.94 105.11 94.32 98.43 97.75
- ---------------------------------------------------------------------------------------
</TABLE>
THE STOCK PRICE PERFORMANCE GRAPH SHALL NOT BE DEEMED INCORPORATED BY
REFERENCE BY ANY GENERAL STATEMENT INCORPORATING BY REFERENCE THIS PROXY
STATEMENT INTO ANY FILING UNDER THE ACTS EXCEPT TO THE EXTENT THAT THE COMPANY
SPECIFICALLY INCORPORATES THIS INFORMATION BY REFERENCE, AND SHALL NOT OTHERWISE
BE DEEMED FILED UNDER SUCH ACT.
OTHER MATTERS
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires executive officers and
directors of the Company and persons who beneficially own more than ten percent
of the Company's Common Stock to file with the Securities and Exchange
Commission certain reports, and to furnish copies thereof to the Company, with
respect to each such person's beneficial ownership of the Company's equity
securities. Based solely upon a review of the copies of such reports furnished
to the Company and certain representations of such persons, the Company believes
that all filings were timely.
ANNUAL REPORT TO SHAREHOLDERS
The Annual Report of the Company for the year ended December 31, 1997,
including audited financial statements, accompanies this Proxy Statement. The
Annual Report does not form any part of the material for the solicitation of
proxies.
- 21 -
<PAGE> 25
ANNUAL REPORT ON FORM 10-K
THE COMPANY WILL PROVIDE WITHOUT CHARGE, AT THE WRITTEN REQUEST OF ANY
RECORD HOLDER OF COMMON STOCK AS OF THE CLOSE OF BUSINESS ON THE RECORD DATE, A
COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL
STATEMENTS AND FINANCIAL STATEMENT SCHEDULES, AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, EXCEPT EXHIBITS THERETO. The Company will provide copies of
the exhibits, should they be requested by eligible Shareholders, and the Company
may impose a reasonable fee for providing such exhibits. Request for copies of
the Company's Annual Report on Form 10-K should be mailed to:
Centennial HealthCare Corporation
400 Perimeter Center Terrace
Suite 650
Atlanta, Georgia 30346
Attention: Shareholder Relations Department
SHAREHOLDER PROPOSALS
Any Shareholder proposals intended to be presented at the Company's
1999 Annual Meeting of Shareholders must be received by the Company on or before
December 26, 1998 to be eligible for inclusion in the Proxy Statement and form
of proxy to be distributed by the Board of Directors in connection with such
meeting.
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before
the Annual Meeting. However, should any additional matters come before the
Annual Meeting, the enclosed proxy grants discretionary authority to the proxies
named therein with respect to any such matters.
EXPENSES OF SOLICITATION
The cost of solicitation of proxies will be borne by the Company. In an
effort to have as large a representation at the meeting as possible, special
solicitation of proxies may, in certain instances, be made personally or by
telephone, telegraph or mail by one or more employees of the Company. The
Company also will reimburse brokers, banks, nominees and other fiduciaries for
postage and reasonable clerical expenses of forwarding the proxy material to
their principals who are beneficial owners of the Company's Common Stock.
By Order of the Board of Directors,
/s/ Alan C. Dahl
Alan C. Dahl
Executive Vice President,
Chief Financial Officer and Treasurer
Atlanta, Georgia
April 23, 1998
- 22 -
<PAGE> 26
APPENDIX
CENTENNIAL HEALTHCARE CORPORATION
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF SHAREHOLDERS ON MAY 21, 1998
The undersigned hereby appoints Alan C. Dahl and Kent C. Fosha, Sr.,
and each of them, with full power of substitution and resubstitution, as proxies
for and in the name of the undersigned, to vote all shares of common stock of
Centennial HealthCare Corporation (the "Company"), which the undersigned would
be entitled to vote if personally present at the Annual Meeting of Shareholders
to be held on Thursday, May 21, 1998, at 10:00 a.m. local time, at The South
Terraces Conference Center Classroom, 115 Perimeter Center Place, Atlanta,
Georgia 30346, and at any adjournment thereof, upon the matters described in the
accompanying Notice of Annual Meeting of Shareholders and Proxy Statement,
receipt of which is hereby acknowledged, and upon any other business that may
properly come before the meeting or any adjournment thereof. Said proxies are
directed to vote on the matters described in the Notice of Annual Meeting of
Shareholders and Proxy Statement as follows, and otherwise in their discretion
upon such other business as may properly come before the meeting or any
adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS LISTED
BELOW.
1. To elect two (2) directors to the Board of Directors to serve until the
2001 Annual Meeting of Shareholders:
J. Stephen Eaton Andrew M. Paul
[ ] FOR ALL NOMINEES [ ] WITHHOLD AUTHORITY
(except as marked to to vote for all nominees listed
the contrary below)
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST ABOVE.)
2. To amend the Company's 1997 Stock Plan to increase the number of
shares of Common Stock authorized to be issued pursuant to grants
under the 1997 Stock Plan from 482,790 shares to 800,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To ratify the action of the Board of Directors of the Company
appointing Coopers & Lybrand, L.L.P. as the Company's independent
auditors for the year ending December 31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED, AND TO BE SIGNED, ON THE OTHER SIDE)
<PAGE> 27
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO DIRECTION IS
INDICATED, THIS PROXY WILL BE VOTED FOR THE PROPOSALS ON THE OTHER SIDE.
Date: , 1998
--------------------------------
---------------------------------------
(Signature)
---------------------------------------
(Signature if held jointly)
---------------------------------------
(Title or authority, if applicable)
Please sign exactly as your name or names
appear hereon. Where more than one owner is
shown above, each should sign. When signing
in a fiduciary or representative capacity,
please give full title. If this proxy is
submitted by a corporation, it should be
executed in the full corporate name by a
duly authorized officer. If a partnership,
please sign in partnership name by
authorized person.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. IF YOU ATTEND
THE MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY
RETURNED YOUR PROXY.
