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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For annual and transition reports pursuant to sections 13 or 15 (d) of the
Securities Exchange Act of 1934.
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-35118
CENTENNIAL HEALTHCARE CORPORATION
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(Exact name of registrant as specified in its charter)
GEORGIA 58-1839701
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification No.)
400 Perimeter Center Terrace, Suite 650, Atlanta, Georgia 30346
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 770-698-9040
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
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Indicate by check mark whether the registrant, (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 27, 1998 was approximately $166.2 million. As of March
27, 1998, the registrant had 11,877,645 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 21, 1998 are incorporated by Reference in Part III.
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TABLE OF CONTENTS
Part I
Page
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Item 1. Business....................................................
Item 2. Properties..................................................
Item 3. Legal Proceedings...........................................
Item 4. Submission of Matters to a Vote of Security Holders.........
Item 4A. Executive Officers of the Registrant........................
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.........................................
Item 6. Selected Financial Data.....................................
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..
Item 8. Financial Statements and Supplementary Data.................
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................
Part III
Item 10. Directors and Executive Officers of the Registrant..........
Item 11. Executive Compensation......................................
Item 12. Security Ownership of Certain Beneficial Owners
and Management..............................................
Item 13. Certain Relationships and Related Transactions..............
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.........................................
Signatures...........................................................
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Item 1. BUSINESS.
Certain statements in this Form 10-K under the captions "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in certain documents incorporated by reference herein constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "1933 Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "1934 Act"). Those statements include
statements regarding the intent, belief or current expectations of Centennial
HealthCare Corporation and members of its management team. Management cautions
that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Important factors currently known to management that could cause actual results
to differ materially from those in forward-looking statements are set forth in
the Safe Harbor Compliance Statement included as Exhibit 99.1 to this Form 10-K,
and are hereby incorporated herein by reference. Centennial HealthCare
Corporation undertakes no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results over time.
Centennial HealthCare Corporation ("Centennial" or the "Company") provides a
broad range of long-term healthcare 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. The Company was organized in 1989 as a
Georgia corporation and conducts business through its operating subsidiaries. At
December 31, 1997, Centennial operated 84 owned, leased and managed skilled
nursing facilities with 8,850 licensed available beds in 19 states, with its
largest concentration of facilities in North Carolina, Indiana and Michigan. The
Company provides basic and specialty healthcare 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, at December 31, 1997, Centennial provided rehabilitation
therapy services on a contract basis to third-party owned and Company-operated
skilled nursing facilities in 21 states pursuant to 128 contracts and provided
home health care services through 30 offices, primarily located in North
Carolina. References to the Company or Centennial also include the Company's
subsidiaries unless the context indicates otherwise.
COMPANY STRATEGY
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 additional long-term care facilities and related
service providers.
Over the last several years, the Company has grown its operating
base both through acquisitions and internal growth. Total revenues were
$75.2 million, $233.0 million and $304.3 million for the fiscal years ended
December 31, 1995, 1996 and 1997, respectively. Operating income was $3.2
million, $14.5 million, and $25.5 million for the fiscal years ended December
31, 1995, 1996 and 1997, respectively. Licensed available beds increased from
4,302 to 8,850 during the same period. The Company's revenue quality mix
(Medicare, private pay, management fees and other) improved from 41.9% for the
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fiscal year ended December 31, 1995 to 63.4% for the fiscal year ended December
31, 1997, and the Company's revenues from specialty services increased from
14.4% for the fiscal year ended December 31, 1995 to 42.1% for the fiscal year
ended December 31, 1997, reflecting the Company's focus on providing specialty
services to higher acuity patients.
COMPANY GROWTH
As part of its growth strategy, the Company regularly reviews possible
acquisitions within the long-term care continuum. Effective December 31, 1995,
the Company completed an important strategic acquisition by merging with
Transitional Health Services, Inc. ("THS") 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 "THS Merger").
Since the THS Merger, through December 31, 1997 the Company continued to expand
its operations through the acquisition of a company providing home health care
services, the acquisition of a contract rehabilitation therapy company providing
therapy services to affiliated and third-party skilled nursing facilities, the
acquisition of three skilled nursing facilities previously managed by the
Company, and the lease of two rural acute-care hospitals which are located in
markets where the Company operates skilled nursing centers. Additionally, the
Company added a net 13 management agreements for skilled nursing facilities
totaling 1,812 licensed available beds in 3 states.
1997 ACQUISITIONS AND LEASE TRANSACTIONS
Effective May 1, 1997, the Company acquired by merger Total Care Consolidated,
Inc., a provider of home health care services with 25 home health offices
located in North Carolina, where the Company operated 23 facilities as of
December 31, 1997, as well as South Carolina and Louisiana.
In August 1997, the Company acquired substantially all of the business and
assets of Complex Care, Inc., a provider of physical, occupational, and speech
therapy services through approximately 45 contracts with third-party long-term
care facilities in Connecticut and Rhode Island. Combined with the Company's
existing contract rehabilitation therapy business, at December 31, 1997 the
Company provided rehabilitation services pursuant to 128 contracts in 21 states,
to Company-operated and third-party-owned facilities.
In March 1997, the Company assumed the management of a 29-bed rural, acute-
care hospital in northern Florida where the Company currently operates a nursing
home facility and another rural hospital. Following the receipt of necessary
consents and approvals, the management of this facility was converted into a
lease of the facility retroactive to the date of the original management
agreement.
In December 1997, the Company acquired a 58-bed long-term care facility in
Florida that had been managed by the Company since 1991.
As a result of the acquisitions referenced above, Centennial has increased its
range of services in markets in which the Company already has a strong operating
presence.
1997 MANAGEMENT AGREEMENTS
The Company's growth strategy also includes the management of long-term care
facilities for third-party owners. Most management agreements provide for a
management fee equal to 6% of the facility's gross revenues with terms ranging
from 5 to 20 years, with renewal options. Additionally, the Company generally
has a right of first refusal or option to purchase its managed facilities. This
strategy allows the Company to evaluate the operations of potential acquisition
candidate facilities prior to acquisition. During 1997, the Company added 9
managed skilled nursing facilities to its portfolio, totaling 924 licensed
available beds.
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
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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
health care, 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.
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
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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.
In addition, there is a limited supply of long-term care facilities due to the
following factors: (i) state Certificate of Need ("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.
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:
EXPAND NATIONALLY THROUGH REGIONAL DEVELOPMENT. The Company's
expansion efforts to date have been structured to integrate additional
facilities and services within eleven 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 should
allow it to 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. 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. 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.
CONTINUE TO EXPAND SPECIALTY SERVICES. The Company provides a broad range of
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 to 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 has
expended significant resources in the development of management information
systems 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.
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-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
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refusal or option to purchase the facilities. 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.
PATIENT SERVICES
The Company provides basic and specialty health care services as described
below.
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 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 costs associated with
treating a higher-acuity patient. 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. As of December 31, 1997 the Company had contracted to provide
rehabilitation therapy services to patients in 128 facilities, 21 of which are
owned or leased by the Company.
SUBACUTE CARE. The Company's subacute care program has distinct units within
certain of its long-term care facilities that 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, IV therapy, wound care, post-
stroke care, hospice care, post-surgical orthopedic rehabilitation and
peritoneal dialysis services.
HOME HEALTH CARE. At December 31, 1997, Centennial operated 30 home health
care offices, affording the recipients of such care an alternative to a hospital
or long-term care 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.
Centennial provides home health care primarily in markets where it has long-term
care facilities.
OPERATIONS
GENERAL. The Company's facilities are organized into eleven 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. Each region has a nurse consultant with responsibility for providing
guidance on patient care issues, conducting quality assurance audits, training
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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.
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.
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 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.
MANAGEMENT INFORMATION SYSTEMS
The Company 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 to enable management to impact each facility's
financial and operating performance within a short period of time.
ACQUISITIONS
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 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
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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. As evidence
of its ability to acquire previously managed facilities, the Company currently
leases or owns 18 facilities that it previously managed.
FACILITIES
At December 31, 1997, Centennial operated 84 owned, leased and managed skilled
nursing facilities with 8,850 beds in 19 states and the District of Columbia. Of
this number, Centennial owned nine facilities with 897 beds, leased 46
facilities with 4,452 beds and managed 29 facilities with 3,501 beds. Since
December 31, 1997, the Company has added six managed skilled nursing facilities
with 837 beds in the state of North Carolina. At December 31, 1997, the
Company's facilities had an average of 105 beds and an average occupancy rate of
90.7%.
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 December 31, 1997:
<TABLE>
<CAPTION>
Facilities
Number of ------------------------------
State Beds Owned Leased Managed Total Occupancy% (1)
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<S> <C> <C> <C> <C> <C> <C>
Arkansas 70 - - 1 1 91.2
DC 448 - 1 1 2 95.8
Florida 259 1 - 3 4 96.2
Georgia 157 - 1 - 1 96.2
Idaho 166 - 2 - 2 89.0
Illinois 106 - - 1 1(2) 76.2
Indiana 1,315 - 13 - 13 89.0
Kansas 387 - 2 2 4 78.2
Kentucky 356 1 2 - 3 92.3
Louisiana 376 1 3 - 4 90.9
Michigan 1,270 3 7 3 13 92.3
Mississippi 539 - 5 - 5 88.3
Montana 99 - 1 - 1 89.0
North Carolina 2,385 2 8 13 23 92.1
Nebraska 158 1 - - 1 90.2
New Mexico 119 - - 1 1 90.0
Tennessee 119 - - 1 1 97.2
Texas 221 - 1 1 2 87.8
Washington 104 - - 1 1 73.3
Wisconsin 196 - - 1 1 87.3
----------------------------------------------------
Totals 8,850 9 46 29 84 90.7%
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</TABLE>
(1) Occupancy is computed by dividing actual patient day census by actual
patient days available in licensed available operating beds. Does not include
facilities in the start-up phase during 1997, which include The Oaks at Sweeten
Creek (North Carolina); Lafayette Healthcare Center (Florida); Blountstown
Health & Rehabilitation Center (Florida); Crystal Oaks of Pinellas (Florida) and
Mountain Ridge Wellness Center (North Carolina).
(2) Facility management contract terminated as of December 31, 1997.
LEASED FACILITIES. At December 31, 1997, the Company leased 46 skilled nursing
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. Centennial has a right
of first refusal to purchase most of the leased facilities.
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These leases generally have initial terms of ten to 20 years with options to
extend, and lease rates with annual increases tied to fixed schedules, the
Consumer Price Index, or changes in the prime rate.
MANAGED FACILITIES
At December 31, 1997, the Company operated 29 facilities under long-term
management contracts with third parties. Revenues from management contracts
accounted for approximately 2.6% of the Company's total revenues for the fiscal
year ended December 31, 1997. 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. These management agreements typically have initial terms
ranging from five to 20 years and that can be terminated only for cause. Each
such management agreement provides for monthly fees generally at six percent of
gross revenues. 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.
During 1997, five third-party owned facilities for which the Company provided
management services were sold. The Company terminated management agreements on
two of the sold facilities and obtained new management agreements on the other
three from the new owners.
CONTRACT REHABILITATION SERVICES. At December 31, 1997, Centennial provided
contract rehabilitation services under 128 contracts in facilities in 21 states.
Twenty-one of the agreements are with the Company's owned or leased facilities.
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 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.
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. Certain competing companies have greater financial and other resources
and may be more established in their respective communities than the Company.
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.
8
<PAGE>
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.
The following table sets forth the percentage of total revenues by payor
source for the Company for the periods indicated:
<TABLE>
<CAPTION>
Years Ended Years Ended
December 31, May 31,
--------------------- -----------------------
1997 1996 1995 1995 1994 1993
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Percentage of total revenues:
Medicare.......................... 23.8% 25.4% 18.2% 15.0% 6.9% 6.8%
Private pay, management fees
and other (1)..................... 39.6 31.8 23.7 20.5 19.4 40.5
----- ----- ----- ----- ----- -----
63.4 57.2 41.9 35.5 26.3 47.3
Medicaid.......................... 36.6 42.8 58.1 64.5 73.7 52.7
----- ----- ----- ----- ----- -----
Total............................. 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 PRIOR TO 1998. 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
9
<PAGE>
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.
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. The Balanced
Budget Act of 1997 requires states to use a public notice and comment process in
determining rates for hospital services, nursing facility services and services
of intermediate care facilities/mentally retarded (but not for home and
community care). Under this process, states will be required to publish in
proposed and final form the rates, rate methodologies, and justifications for
the rates of hospitals, nursing facilities, and intermediate care
facilities/mentally retarded. Likewise, states must furnish interested parties
with a reasonable opportunity to comment on the proposed rates, rate
methodologies, and justifications. States also must take into account during the
hospital rate-setting process the situation of hospitals which serve a
disproportionate number of low-income patients with special needs.
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.
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.
MEDICARE AND MEDICAID. 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. In fact, as discussed later in this section certain provisions
will change effective in 1998. The Company may be subject to rate reductions as
a result of federal budgetary legislation.
10
<PAGE>
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. 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.
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 statewide 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.
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 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.
11
<PAGE>
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
The Balanced Budget Act of 1997, ("the Act"), enacted in August 1997, has
targeted the Medicare program for reductions in spending growth of approximately
$9.5 billion for skilled nursing facilities over the next five years, primarily
through the implementation of a Medicare prospective payment system for skilled
nursing facility services. The Medicare prospective payment rate, which
reimburses for routine service, ancillary and capital costs, will initially be a
blended rate based on (i) a facility-specific payment rate derived from each
facility's 1995 cost report, adjusted by an inflation factor and (ii) a federal
per diem rate derived from all hospital-based and freestanding (skilled nursing
facility) 1995 cost reports, adjusted to remove geographic, wage-related,
inflationary and case mix differences between facilities. The blended rate will
be further adjusted by a facility-specific case mix (acuity) index. The exact
amount of these adjustments has not yet been determined by the Secretary of the
Department of Health and Human Services.
The Medicare prospective payment system begins for cost reporting periods
starting on or after July 1, 1998. For the Company's facilities, the initial
year of the four-year phase in period will begin January 1, 1999. In 1999, the
blended rate will be based 75% on the facility-specific rate and 25% on the
federal per diem rate. In 2000, the prospective rate will be based 50% on the
facility-specific rate and 50% on the federal per diem rate. In 2001, the
blended rate will be based 25% on the facility-specific rate and 75% on the
federal per diem rate. In the year 2002, the prospective rate will be 100% of
the federal per diem rate. Additionally, the Act imposes fee schedules or per
beneficiary limitations on outpatient supplies and services and requires
consolidated billing for all Medicare beneficiaries residing in a skilled
nursing facility. The Company has already taken steps to comply with the
consolidated billing requirements. The impact of per beneficiary limitations on
outpatient therapy services could adversely affect the Company's skilled nursing
facility revenue and its therapy revenue. Currently, the Company derives
approximately 21% of its revenue from Medicare at its long-term care facilities.
Additionally, the Congressional Budget Office has revised economic projections
which include Medicaid cuts of $1.2 billion to Medicaid long-term care providers
over the next five years. Currently, the Company derives approximately 36% of
its revenues from Medicaid at its long-term care facilities.
The Act provides that by October 1, 1999, home health care will be
reimbursed under a prospective payment system. Specifics of this system have not
yet been defined. For cost reporting periods beginning on or after October 1,
1997, the Act requires home health agencies to be reimbursed the lesser of:
. actual costs;
. per visit limits, reduced to 105% of the national median, or;
. a new blended agency-specific per beneficiary annual limit applied to the
agency's unduplicated census count of Medicare patients, and based on 98% of
1994 costs, trended forward and phased in over four years, (similar to long-
term care provisions).
For the year ended December 31, 1997 Centennial derived 6% of its revenues from
home health care.
12
<PAGE>
Management believes that, due to the cost structure at its facilities, the
Company's overall reimbursement rates should not be lower than current rates and
could possibly be higher. However, until the rates are ultimately determined
under the prospective payment system, the Company will not be able to determine
the exact nature or long term financial impact of the legislative changes. The
Company can give no assurance that payments under such programs in the future
will remain at a level comparable to the present level or increase, and
decreases in the level of payments could have a material adverse effect on the
Company.
Although management believes that a prospective pay system will benefit
companies, such as Centennial, that have sophisticated information systems
allowing them to track and document acuity levels and costs, there can be no
assurance that the Company will recognize any such benefits. The Company
currently operates in many states having Medicaid programs with acuity-based
reimbursements levels and incentives for efficient, quality operations. The
Company has effectively operated in these programs utilizing both its patient
care information systems, for the documentation of patient acuity levels for
maximum reimbursement, and its management information systems, to control
expenses. In many instances, the Company's revenues have increased under this
form of reimbursement, although there can be no assurance that such results will
be achieved under the payment systems described above. Prior to the enactment
of the Act, the Company anticipated that regulation and market changes would
result in a flattening of growth of its third party contract therapy business.
The latest legislative changes do not alter these views.
Effective April 1, 1998, regulations were adopted by Health Care Financing
Administration, which temporarily change the basis of reimbursement for
contract therapy services including physical therapy, respiratory therapy,
occupational therapy and speech language pathology. During 1997, the Company
derived 7% of its revenue from third-party contract therapy services. These
regulations impose regionally-adjusted salary equivalency rates as reimbursement
caps for occupational, speech and physical therapy. In most locations the
reduced rates have the effect of reducing the amount of reimbursement for a unit
of occupational or speech therapy and increasing the amount of reimbursement for
a unit of physical therapy. The Company believes that such rate reductions will
be completely or partially offset by cost reductions and changes in the method
of delivering such services. Due to these changes in operations and cost
structure and the relative size of the Company's therapy business, the Company
does not expect these reimbursement changes to have a material adverse effect on
the Company.
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.
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
13
<PAGE>
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.
ENVIRONMENTAL AND OTHER. The Company is 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 operator 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.
14
<PAGE>
PERSONNEL
As of December 31, 1997, the Company employed, directly or indirectly,
approximately 10,100 persons, including approximately 8,100 full-time and 2,000
part-time employees. As of December 31, 1997, collective bargaining agreements
were in effect related to 11 facilities covering approximately 804 employees and
negotiations were in progress with bargaining units at seven 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.
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. There can
be no assurance that any claims agianst the Company will not be successful, or
if successful will not exceed the limits of available coverage, or that such
coverage will continue to be available at acceptable rates.
ITEM 2. PROPERTIES
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 office space is 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. THS leases approximately 18,000
square feet of office space in Louisville, Kentucky, which was THS's corporate
headquarters prior to the THS 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.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1997, the Company did not have any pending legal
proceedings that separately, or in the aggregate, if adversely determined, would
have a material adverse effect on the Company. The Company is, and may be, from
time to time, party to litigation or administrative proceedings which arise in
the normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's executive officers and key employees are as follows:
<TABLE>
<CAPTION>
OFFICERS Age Position
- -------- ---------- -----------------------------------------------------
<S> <C> <C>
J. Stephen Eaton 46 Chairman of the Board, President and Chief Executive
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 38 Executive Vice President of Business Development
Laurence W. Lepley, Jr. 53 President of Paragon Rehabilitation, Inc.
KEY EMPLOYEES
- -------------
Wayne H. Mayo 54 Eastern Division Vice President
Clay F. Crosson 40 Western Division Vice President
John P. Cobb 67 Senior Vice President of Reimbursement
</TABLE>
16
<PAGE>
J. Stephen Eaton is Chairman of the Board and the founder of the Company
----------------
and has served as its President and Chief Executive Officer since founding the
Company in 1989. From 1982 and 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, 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 the Company in 1990 and served as the
Company's senior vice president of operations until January 1996. Mr. Fosha has
over 23 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 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 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.
Randall J. Bufford served as Executive Vice President-Business
------------------
Development of the Company from January 1996 until March 31, 1998, when he
resigned from such position. Mr. Bufford currently serves as a consultant to the
Company. From 1993 to December 1995, Mr. Bufford served as General Manager/Chief
Executive Officer of Transitional Health Services. Mr. Bufford served as an
officer of The Cardinal Group, Inc. from 1982 until 1993, and he organized and
led a management buy-out and recapitalization through which Transitional Health
Services 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 the Company ("Paragon"), since its
inception in 1989. Mr. Lepley has 32 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 the
-------------
Company since January 1997. Prior to becoming the Eastern Division Vice
President, Mr. Mayo served as regional vice president from 1991 to 1996, and he
was responsible for the Company'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
Health Care Administrators.
17
<PAGE>
Clay F. Crosson has served as Western Division President of the Company
---------------
since February 1997. Prior to joining the Company 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
HeatlhCorp, L.P. in various capacities, including regional vice president. Mr.
Crosson has a masters of business administration degree and 18 years of
experience in long-term care, subacute care, home health care, managed care and
assisted living. Mr. Crosson is a Fellow of the American College of Health Care
Administrators, and holds certifications in SubAcute Administration and Nursing
Home Administration. He presently serves as National Treasurer of ACHCA and is a
Board member of Georgia's Nursing Home Administrators Licensure Board.
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
(a) The Company's Common Stock is traded on The Nasdaq Stock Market's
National Market System under the symbol "CTEN." The high and low bids for the
Company's Common Stock as reported on The Nasdaq Stock Market during each
quarter from July 2, 1997 are shown below:
1997 High Low
---- ---- ---
Fourth Quarter 25.125 18.125
Third Quarter 23.000 16.000
At March 27, 1998, the last reported sale price of the Common Stock was
$23.00 per share and there were approximately 74 record holders of Common Stock.
Except for the payment of cash dividends to the holders of the Company's
preferred stock series, which were converted into shares of Common Stock or
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<PAGE>
redeemed upon the completion of the Offering, the Company has not declared any
cash dividends on its Common Stock. The Company expects that future earnings, if
any, will be retained for the growth and development of the Company's business
and, accordingly, the Company does not anticipate that any dividends will be
declared or paid on the Common Stock for the foreseeable future. The
declaration, payment and amount of future dividends, if any, will depend upon
the future earnings, results of operations, financial position and capital
requirements of the Company, among other factors, and are limited by the
Company's Credit Agreement with CoreStates Bank, N.A. and NationsBank, N.A.
as agents for the lenders named therein.
Recent Sales of Unregistered Securities.
- ---------------------------------------
The share numbers presented below do not reflect the conversion of such
shares into Common Stock or redemption thereof or the .6897-for-1.0 reverse
stock split that occurred on the effective date of the Offering 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 THS in connection with the
THS merger with and into a wholly-owned subsidiary of the Company, with THS
surviving. At the effective time of the THS Merger, each outstanding share of
THS'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 THS
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 THS
Merger. These shares were placed into an escrow account to be held as
indemnification for the settlement of post-closing purchase price adjustments
resulting from, imposed upon or incurred by either the Company or THS.
The Company's shareholders before the THS Merger (the "Centennial Holders")
placed 232,164 shares of Common Stock and the shareholders of THS before the THS
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 transfer shares of Special Voting
Common Stock or cash in lieu thereof at a value of such
19
<PAGE>
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 the Company 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.
The Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock were automatically converted into shares of Common Stock and
the Series E Preferred Stock was redeemed upon the completion of the
Offering.
20
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data has been derived from the Company's
Consolidated Financial Statements. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the notes thereto
included elsewhere herein. The selected consolidated financial data set forth
below for the Company as of December 31, 1997 and 1996 and for each of the three
years in the period ended December 31, 1997, is derived from the audited
financial statements included elsewhere herein, with the exception of the
proforma information which is unaudited. The selected consolidated financial
data set forth below for the seven months ended December 31, 1995 and for the
years ended May 31, 1995, 1994 and 1993 has been derived from financial
statements not included elsewhere herein.
<TABLE>
<CAPTION>
Seven Months
For the year ended Ended For the year ended
December 31, December 31, May 31,
-------------------------------- ------------ ---------------------------
1997 1996 1995(1) 1995 1995 1994 1993
-------- -------- -------- ------------ ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net patient service revenues.................. $296,321 $227,387 $ 71,862 $ 42,103 $61,856 $ 38,115 $ 6,863
Management fee and other revenues............. 7,952 5,661 3,364 2,108 3,362 3,384 4,435
-------- -------- -------- -------- ------- -------- --------
Total revenues............................. 304,273 233,048 75,226 44,211 65,218 41,499 11,298
Facility operating expenses................... 234,596 183,324 58,565 35,262 48,872 29,510 5,331
Lease expense................................. 21,403 18,777 7,702 4,651 6,901 4,823 927
Corporate administrative costs................ 16,055 11,400 5,027 3,526 3,396 2,927 3,004
Depreciation and amortization................. 6,760 5,012 738 429 290 82 48
-------- -------- -------- -------- ------- -------- --------
Operating income before net interest
expense and equity in income (loss) of
unconsolidated partnerships.............. 25,459 14,535 3,194 343 5,759 4,157 1,988
Interest income (expense), net................ (8,022) (9,373) (176) (116) 57 131 32
Equity in income (loss) of
unconsolidated partnerships................. - (108) 448 25 (28) 1,733 (2,766)
-------- -------- -------- -------- ------- -------- --------
Income (loss) before income taxes and
minority interest and extraordinary item.. 17,437 5,054 3,466 252 5,788 6,021 (746)
Provision (benefit) for income taxes.......... 6,800 2,092 1,389 328 2,106 2,230 (160)
-------- -------- -------- -------- ------- -------- --------
Income (loss) before minority
interest and extraordinary item............ 10,637 2,962 2,077 (76) 3,682 3,791 (586)
Minority interest in net income of
subsidiary, net of income taxes............ (252) (183) (201) (82) (207) - -
-------- -------- -------- -------- ------- -------- --------
Net income (loss) before extraordinary item.... 10,385 2,779 1,876 (158) 3,475 3,791 (586)
Extraordinary item - forgiveness of
debt, net of income taxes.................. - - - - 250 1,598 -
Extraordinary item - loss on extinguishment
of debt, net of income taxes............... (537) - - - - - -
-------- -------- -------- -------- ------- -------- --------
Net income (loss)............................. $ 9,848 $ 2,779 $ 1,876 $ (158) $ 3,725 $ 5,389 $ (586)
======== ======== ======== ======== ======= ======== ========
Per common share information:
Diluted:
Income (loss) before extraordinary item....... $ 0.54 $ 0.12 $ 0.72 $ (0.06) $ 1.35 $ 1.60 $ (0.26)
Extraordinary item - forgiveness of
debt, net of taxes......................... - - - - 0.10 0.68 -
Extraordinary item - loss on extinguishment
of debt, net of income taxes............... (0.06) - - - - - -
-------- -------- -------- -------- ------- -------- --------
Net income (loss) (2)......................... $ 0.48 $ 0.12 $ 0.72 $ (0.06) $ 1.45 $ 2.28 $ (0.26)
======== ======== ======== ======== ======= ======== ========
Weighted average number of common and common
stock equivalents outstanding.............. 8,462 4,782 2,601 2,601 2,576 2,363 2,267
======== ======== ======== ======== ======= ======== ========
Proforma (unaudited) (4):
Net income.................................... $ 1.03 $ 0.53 N/A N/A N/A N/A N/A
======== ========
Weighted average number of common and
common stock-equivalents outstanding......... 11,993 11,420 N/A N/A N/A N/A N/A
======== ========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of May 31,
------------------------------------ ----------------------------------
1997 1996 1995 1995 1994 1993
-------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital............................ $ 45,560 $ 8,702 $ 3,984 $ 4,805 $ 5,540 $ 4,208
Total assets............................... 243,649 193,448 155,018 25,499 14,172 4,392
Long-term debt and subordinated debt,
less current maturities................. 78,913 107,795 83,559 4,558 676 264
Preferred stock (3)........................ - 21,305 19,455 9,187 4,300 1,650
Net shareholders' equity (deficit)......... 113,104 11,952 10,869 2,082 1,527 (1,051)
----------------------------------------
</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.
(2) Net income (loss) per common share for the fiscal years ended December
31, 1997 and 1996 excludes dividends and accretion on preferred stock of
$5.9 million and $2.2 million, respectively.
(3) Carried at estimated redemption value with accretion of dividends
charged against shareholders' equity.
(4) Proforma assumes the Offering occurred as of the beginning of each period
presented, and reflects the estimated reduction in interest expense, net
of the related tax effect, and the reduction in preferred dividends and
accretion. Proforma also excludes the extraordinary loss on early
extinguishment of debt recorded in the third quarter of 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
Consolidated Statements of Operations for the year ended December 31, 1997.
GENERAL
At December 31, 1997, the Company operated 84 long-term care facilities
(8,850 beds), two hospitals (65 beds), 30 home health offices and a contract
therapy business providing physical, speech and occupational rehabilitation
services under approximately 128 contracts. During 1997 the Company grew both
through same store growth and through acquisitions.
During the year the Company added 9 new facility management contracts,
acquired a provider of home health services in North Carolina where the Company
operated 23 facilities, acquired the assets of a therapy service provider and
began operating, through lease arrangements, two rural acute care hospitals.
During 1996, the Company grew through the acquisition of two facilities
previously managed by the Company and the acquisition of THS, which closed
effective December 31, 1995.
In August 1997, the Company acquired substantially all of the business and
assets of Complex Care, Inc. ("CCI"), a provider of physical, occupational and
speech therapy services through approximately 45 contracts with long-term care
facilities in Connecticut and Rhode Island. Total revenues associated with CCI
approximated $6.1 million during 1997. In May 1997, the Company acquired Total
Care Consolidated, Inc. ("TCC"), a provider of home health services, with 25
home health offices located primarily in North Carolina. Total revenues
associated with TCC approximated $18.6 million during 1997. During March and
June 1997, the Company began operating two rural hospitals providing acute care
services with a total of 65 beds. The hospitals are located in north Florida and
are operated under operating leases. In October 1996, the Company acquired two
previously managed long- term care facilities located in Michigan with a total
of 185 beds. Effective December 1995, the Company acquired all of the capital
stock of Transitional Health Services, Inc. ("THS") which operated 36 long-term
care facilities (3,776 beds) and provided therapy rehabilitation services
through its subsidiary Paragon Rehabilitation, Inc. under 35 contracts.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NET PATIENT SERVICE REVENUES. Net patient service revenues increased from
$227.4 million in 1996 to $296.3 million in 1997, an increase of $68.9 million
or 30.3%, of which approximately $20.7 million was attributable to the addition
of the operations of three long-term care facilities and two rural hospitals.
TCC and the CCI contracts added revenues of approximately $18.6 million and $6.1
million, respectively during the year ended December 31, 1997. The remaining
increase of $23.5 million was attributable to growth in existing facility
revenues and therapy services contract revenues. The increase in existing
facility revenues during 1997 of $14.9 million resulted primarily from a shift
in payor mix from Medicaid to Medicare resources and commercial payors,
increases in Medicaid rates over those experienced in 1996, and favorable
settlements of prior year open cost reports. During 1997, occupancy levels at
the Company's long-term care facilities remained consistent with 1996 at
approximately 92%. The increase in revenues at the Company's subsidiary
providing therapy services of $8.6 million, exclusive of the CCI contracts,
resulted from the net addition of 19 rehabilitation therapy services contracts
during 1997 as well as an overall increase in therapy revenue related to
existing contracts.
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<PAGE>
MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues
increased from $5.7 million in 1996 to $8.0 million in 1997, an increase of $2.3
million, or 40.5%, which was primarily attributable to the Company's addition of
facility management agreements during 1997.
FACILITY OPERATING EXPENSES. Facility operating expenses increased from $183.3
million in 1996 to $234.6 million in 1997, an increase of $51.3 million or
28.0%, of which approximately $16.4 million was attributable to the addition of
the operations of three long-term care facilities and two hospitals. TCC and the
CCI therapy contracts added approximately $17.0 million and $5.2 million,
respectively, to operating expenses during 1997. The Company's expenses from
existing contract therapy services increased $9.3 million over the prior year
period related primarily to growth in therapy contracts during 1997. The
remaining $3.4 million was attributable primarily to an increase in costs at
existing long-term care facilities and to providing care for higher acuity
patients during the current year period.
LEASE EXPENSE. Lease expense increased from $18.8 million in 1996 to $21.4
million in 1997, an increase of $2.6 million, or 14.0%, of which approximately
$1.2 million was attributable to the addition of one leased long-term care
facility and two leased hospitals. The remaining $1.4 million increase was due
primarily to an expansion of the Company's corporate office lease, and rent
escalations in certain facility leases, which are tied to increases in operating
revenue and income.
CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased from
$11.4 million in 1996 to $16.1 million in 1997, an increase of $4.7 million, or
40.8%, which was primarily attributable to additional overhead to accommodate
the expansion in therapy services contracts, including the acquisition of the 45
CCI contracts, the addition of long-term care facility management agreements and
the Company's new home health and hospital operations.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$5.0 million in 1996 to $6.8 million in 1997, an increase of $1.7 million, or
34.9%, which was primarily attributable to facility acquisitions during the
fourth quarter of 1996.
INTEREST EXPENSE. Interest expense decreased from $10.1 million in 1996 to $8.7
million in 1997, a decrease of approximately $1.4 million or 14.0%, which was
attributable to the reduction of debt by approximately $60.4 million as a result
of the Offering, net of the additional expense incurred as a result of
borrowings for the acquisition of two long-term care facilities.
PROVISION FOR INCOME TAXES. The Company's effective tax rate decreased from
41.4% in 1996 to 39.0% in 1997, a decrease in the rate of 2.4%. This decrease
was attributable primarily to an expected decline in the Company's average state
tax rate and a proportional decrease in non-deductible expenses for federal tax
purposes.
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 THS 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 THS Merger.
Occupancy rates, excluding THS'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 THS Merger, and the addition of a management agreement
for a rural hospital, 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.
23
<PAGE>
FACILITIES 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 THS 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.
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 THS 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 THS 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 THS Merger. 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 THS 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 in the rate of 1.3%. This increase
was primarily attributable to the THS 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash have been proceeds from the sales of
its stock and borrowings under its Second Amended and Restated Credit Facility
with CoreStates Bank, N.A. and NationsBank, N.A., as agents and lender and the
other lenders named therein (the "Senior Credit Facility"). Cash has been used
by the Company for acquisitions, capital improvements at several existing
facilities and the day-to-day operations of the Company's business. The Company
anticipates using borrowings under the Senior Credit Facility to fund the growth
in operations of its existing facilities, the expansion and development of
specialty services, and the acquisition or management of additional long-term
care facilities and related service providers. As detailed below, the Company
used proceeds from the Offering to reduce debt and redeem its Series E
Redeemable Preferred Stock.
Working capital increased from $8.7 million at December 31, 1996 to $45.6
million at December 31, 1997, primarily due to increases in patient accounts
receivable. Patient accounts receivable increased from $39.9 million at December
31, 1996 to $72.2 million at December 31, 1997, an increase of $32.3 million,
of which $19.7 million was attributable to the Company's long-term care
facilities. Approximately $8.8 million of this increase relates to the addition
of the operations of three long-term care facilities and two rural hospitals
during 1997. The remaining increase in existing long-term care facility
receivables of $10.9 million was due primarily to a shift in payor mix toward
Medicare resources associated with the Company's continued expansion in
specialty services. Costs incurred under the Medicare program are reimbursed on
24
<PAGE>
a retroactive basis, which extends the collection time of these receivables.
Increases in accounts receivable associated with the Company's contract therapy
business totaled approximately $9.7 million and resulted from the net addition
of 64 rehabilitation therapy contracts (including the 45 contracts purchased
from CCI) as well as growth in existing contracts. The remaining $2.9 million
increase in accounts receivable relates primarily to receivables associated with
TCC.
The Company continued to invest in its leased and owned facilities through
capital expenditures of approximately $7.6 million or approximately $1,300 per
bed. These expenditures included the expansion of existing facilities, the
selected rehabilitation of certain facilities and ordinary repairs and
maintenance. In May, the Company acquired TCC for $8.0 million, consisting of
$6.0 million in cash, which was funded under the Senior Credit Facility, and
$2.0 million in the form of a convertible promissory note. In August, the
Company acquired the CCI contracts for total consideration of $7.0 million,
utilizing borrowings under its Senior Credit Facility. Additional consideration
of up to $500,000 may be paid by the Company under an earn-out agreement. In
December 1997, Centennial acquired a previously managed long-term care facility
located in Florida (the "Florida Facility") for approximately $3.3 million,
utilizing borrowings of $1.1 million under its Senior Credit Facility.
The Company financed its activities during 1997 with $10.0 million in proceeds
from the issuance of two series of preferred stock, $8.0 million in borrowings
for the TCC acquisition, including $6.0 million in borrowings under the Senior
Credit Facility, and $7.0 million and $1.1 million in borrowings for the
acquisition of the CCI therapy contracts and the acquisition of a previously
managed long-term care facility, respectively, from its Senior Credit Facility.
In addition, Centennial borrowed $14.5 million in working capital loans under
the Senior Credit Facility which were utilized primarily to finance capital
expenditures at existing facilities and to provide working capital. During the
third quarter, the Company completed its initial public offering (the
"Offering") through the issuance of 4.6 million shares of Common Stock
(including exercise of the underwriters overallotment option). The Company
received proceeds of approximately $66.8 million, net of underwriting discounts
and commissions and Offering expenses. These proceeds were used to repay two
subordinated promissory notes aggregating $25.3 million, to redeem the Series E
Redeemable Preferred Stock for $5.0 million, to repurchase approximately 84,000
shares of Common Stock, which were received by the former holders of the
Company's Series C Preferred Stock, for approximately $1.3 million, and to repay
approximately $35.1 million outstanding under the Company's Senior Credit
Facility. Amounts repaid under the Senior Credit Facility are available for re-
borrowing.
On December 16, 1997, the Company expanded its Senior Credit Facility through
an amendment to its existing Amended and Restated Credit Agreement. Through the
amendment, the Company's maximum aggregated advance limit was increased from
$65.0 million to $125.0 million. Company advances under the Senior Credit
Facility may be used for acquisitions, capital expenditures, working capital and
general corporate purposes. At December 31, 1997, the Company had $41.3 million
outstanding under its Senior Credit Facility. The Company's borrowing capacity
under the Senior Credit Facility is dependent upon its ability to satisfy
certain financial covenants that are impacted by its debt and capital structure.
At December 31, 1997, the Company was in compliance with all of its debt
covenants.
The Company believes that operating cash flow and availability under the
Senior Credit Facility will be sufficient to finance its activities and to fund
future acquisitions.
HEALTH CARE REFORM
The Balanced Budget Act of 1997, (the "Act"), enacted in August 1997, has
targeted the Medicare program for reductions in spending growth for skilled
nursing facilities over the next five years, primarily through the
implementation of a Medicare prospective payment system for skilled nursing
facility services. While the methodology for the prospective payment rates have
been generally established, actual rates have not been released.
25
<PAGE>
Management believes that, due to the cost structure at its facilities in 1995
and its costs as compared to other facilities in its markets, the Company's
overall reimbursement rates should not be lower than current rates and could
possibly be higher. However, until the rates are ultimately determined under the
prospective payment system, the Company will not be able to determine the exact
nature or long term financial impact of the legislative changes. The Company can
give no assurance that payments under such programs in the future will remain at
a level comparable to the present level or increase, and decreases in the level
of payments could have a material adverse effect on the Company.
Effective April 1, 1998, regulations were adopted by Health Care Financing
Administration, which temporarily change the basis of reimbursement for contract
therapy services including physical therapy, respiratory therapy, occupational
therapy and speech language pathology. During 1997, the Company derived 7% of
its revenue from third-party contract therapy services. These regulations impose
regionally-adjusted salary equivalency rates as reimbursement caps for
occupational, speech and physical therapy. In most locations the reduced rates
have the effect of reducing the amount of reimbursement for a unit of
occupational or speech therapy and increasing the amount of reimbursement for a
unit of physical therapy. The Company believes that such rate reductions will be
completely or partially offset by cost reductions and changes in the method of
delivering such services. Due to these changes in operations and cost structure
and the relative size of the Company's therapy business, the Company does not
expect these reimbursement changes to have a material adverse effect on the
Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In the fourth quarter of 1997, Centennial adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share", (SFAS No. 128). Prior year
amounts have been restated in accordance with SFAS No. 128. Basic earnings per
share is computed by dividing income applicable to common stock by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed similarly but reflects the potential dilution that could
occur if options were exercised or convertible securities were converted into
common stock. 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 was deducted from net income in the computation of net income applicable
to common stock in 1997 and 1996. See Note 20 to the Consolidated Financial
Statements for a computation of basic earnings per share and diluted earnings
per share.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" and Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information". Both Statements are
effective for fiscal years beginning after December 15, 1997. The Company has
not yet determined the effect, if any, of these statements on its consolidated
financial statements.
IMPACT OF THE YEAR 2000 ISSUE
The "Year 2000 Issue" resulted from the use of two digits rather than four
digits to define the applicable year in certain computer programs. With the
coming millennium, any of the Company's computer programs that have two digit
data-sensitive software may interpret a date of "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
Management is in the process of evaluating the effect of the Year 2000 Issue
on the Company. Based on preliminary findings, the total cost of addressing the
Year 2000 Issue is not expected to have a material effect on the Company's
business, financial condition or results of operations. However, management is
in the process of completing its assessment of the potential impact of the Year
2000 Issue on the Company and the potential exposure of the Company to related
problems of its customers and supplies. There can be no assurance that such
exposures on the costs of remediating any problems associated therewith will not
materially affect the Company's future business, financial condition or results
of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, together with the report
thereon of Coopers & Lybrand L.L.P., dated March 27, 1998, begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the heading "Information Concerning
Directors" in the Company's definitive proxy statement for its annual meeting
of stockholders to be held on May 21, 1998 (the "1998 Proxy Statement") is
incorporated herein by reference. See Item 4A of Part I hereof for
information regarding the Company's executive officers.
26
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive Compensation" in
the 1998 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the headings "Information Concerning
Directors" and "Principal Stockholders" in the 1998 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Transactions" in
the 1998 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
Listed on the Index to the Financial Statements and Schedules on page F-
1 of this Report.
(2) Financial Statement Schedules
Listed on the Index to the Financial Statements and Schedules on page F-
1 of this Report.
(3) Exhibits
27
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
- ------- ---------------------------------------------------------------------------------
<S> <C>
3.1 -- Third Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-1, Registration No. 333-24267, as amended).
3.2 -- Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit
3.2 of the Company's Registration Statement on Form S-1 Registration No.
333-24267, as amended).
4.1 -- Third Amended and Restated Articles of Incorporation of the Company, including,
without limitation Article III and Articel VII (incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement on Form S-1, Registration
No. 333-24267, as amended).
10.1 -- WelCare International, Inc. 1994 Employee Stock Option Plan (incorporated by
reference to Exhibit 10.1 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended)
10.2 -- WelCare International, Inc. 1996 Executive Stock Plan (incorporated by reference
to Exhibit 10.2 of the Company's Registration Statement on Form S-1, Registration
No. 333-24267, as amended)
10.3 -- WelCare International, Inc. 1996 Employee Stock Option Plan (incorporated by
reference to Exhibit 10.3 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended)
10.4 -- Centennial HealthCare Corporation 1997 Stock Plan (incorporated by reference to
Exhibit 10.4 of the Company's Registration Statement on Form S-1, Registration No.
333-24267, as amended)
10.5 -- Second Amended and Restated Credit Agreement dated December 16, 1997 by and
among Centennial HealthCare Corporation and the Borrowers named therein, the
Lenders named therein, and Core States Bank, N.A. and NationsBank, N.A., as
lenders and agents for the Lenders
10.6 -- Amended and Restated Employment Agreement between WelCare International, Inc.
and J. Stephen Eaton dated December 31, 1995 (incorporated by reference to
Exhibit 10.6 of the Company's Registration Statement on Form S-1, Registration No.
333-24267, as amended)
10.7 -- Amended and Restated Employment Agreement between Paragon Rehabilitation, Inc. and Laurence
W. Lepley, Jr. dated as of January 1, 1998.
10.8 -- Registration Rights Agreement dated December 31, 1995 by and between the Company
and the Shareholders as defined therein, as amended (incorporated by reference
to Exhibit 10.8 of the Company's Registration Statement on Form S-1, Registration
No. 333-24267, 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
(incorporated by reference to Exhibit 10.9 of the Company's Registration Statement
on Form S-1, Registration No. 333-24267, as amended)
10.10 -- 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 (incorporated by
reference to Exhibit 10.11 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended)
10.11 -- Amended and Restated Lease Agreement by and between EBT Healthcare Properties,
L.P. and CHPC dated July 6, 1994 (incorporated by reference to Exhibit 10.12 of the
Company's Registration Statement on Form S-1, Registration No. 333-24267, as
amended)
10.12 -- 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. (incorporated by reference
to Exhibit 10.13 of the Company's Registration Statement on Form S-1, Registration
No. 333-24267, as amended)
10.13 -- 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 Agreement, Consent and Release dated March 1, 1994
(incorporated by reference to Exhibit 10.16 of the Company's Registration Statement
on Form S-1, Registration No. 333-24267, as amended)
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
10.14 -- Lease Agreement by and between House Investments - Nursing Homes Partners I and
THP dated November 1, 1993 (incorporated by reference to Exhibit 10.18 of the
Company's Registration Statement on Form S-1, Registration No. 333-24267, as
amended)
10.15 -- Operating Lease by and between HCPI Charlotte, Inc. and THP dated June 19, 1995
(incorporated by reference to Exhibit 10.20 of the Company's Registration Statement
on Form S-1, Registration No. 333-24267, as amended)
10.16 -- Amended and Restated Management Agreement by and between Montclair Medical
Investors, Ltd., and CHMC dated January 1, 1995 (incorporated by reference to
Exhibit 10.28 of the Company's Registration Statement on Form S-1, Registration No.
333-24267, as amended)
11.1 -- Statement Regarding Computation of Per Share Earnings
21.1 -- List of Subsidiaries
23.1 -- Consent of Coopers & Lybrand, L.L.P.
27.1 -- Financial Data Schedule
27.2 -- Restated Financial Data Schedule (Annual)
27.3 -- Restated Financial Data Schedule (Quarterly)
99.1 -- Cautionary Statements Regarding Forward-Looking Statements
</TABLE>
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the fourth
quarter of 1997.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the 1934 Act, the
Company has duly caused this Form 10-K to be signed on behalf of the
undersigned, thereunto duly authorized, on March 30, 1998.
CENTENNIAL HEALTHCARE CORPORATION
/s/ J. Stephen Eaton
By:____________________________________________
J. Stephen Eaton
Chairman, President and Chief Executive Officer
Pursuant to the Requirements of the 1934 Act, this Form 10-K has been
signed below by the following persons in the capacities indicated on March
30, 1998.
Signatures
/s/ J. Stephen Eaton Chairman, President and Chief Executive Officer
- -----------------------------
J. Stephen Eaton
/s/ Alan C. Dahl Senior Vice President, Chief Financial
- ----------------------------- Officer and Director
Alan C. Dahl
/s/ Andrew M. Paul Director
- -----------------------------
Andrew M. Paul
/s/ James B. Hoover Director
- -----------------------------
James B. Hoover
/s/ Robert A. Ortenzio Director
- -----------------------------
Robert A. Ortenzio
/s/ Bertil D. Nordin Director
- -----------------------------
Bertil D. Nordin
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
----------
<S> <C>
Report of Independent Accountants.......................................................................
Consolidated Balance Sheets at December 31,1997 and 1996 ...............................................
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995.........................................................................................
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995........................................................................................
Notes to Consolidated Financial Statements..............................................................
Quarterly Consolidated Financial Information (Unaudited)................................................
Financial Statement Schedules (a):
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1996 and 1995......................................................................
- ----------
(a) All other schedules have been omitted because the required information is
not present or not present in material amounts.
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Centennial HealthCare Corporation
We have audited the accompanying consolidated balance sheets of Centennial
HealthCare Corporation and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed on page F-1. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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, 1997 and
1996 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
March 27, 1998
F-2
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 4,011 $ 6,030
Patient accounts receivable and third-party payor settlements, net
of allowance for doubtful accounts of approximately $3,000 and $2,500.................... 72,222 39,854
Other receivables......................................................................... 14,612 5,986
Deferred income taxes..................................................................... 2,511 3,883
Prepaid expenses and other current assets................................................. 1,259 2,665
-------- --------
Total current assets.................................................................. 94,615 58,418
Property and equipment, net............................................................... 74,379 67,409
Notes and advances receivable, net........................................................ 11,301 11,152
Refundable deposits, including amounts due from affiliates of $2,875...................... 4,399 4,335
Intangible assets, less accumulated amortization of $2,642 and $1,110..................... 51,331 36,297
Other assets.............................................................................. 7,624 15,837
-------- --------
Total assets.......................................................................... $243,649 $193,448
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................................................... $ 1,576 $ 1,711
Accounts payable and accrued expenses..................................................... 25,253 27,120
Accrued payroll........................................................................... 11,773 8,269
Accrued lease payable..................................................................... 3,759 2,716
Estimated merger closure costs............................................................ 3,391 3,391
Other liabilities......................................................................... 3,303 6,509
-------- --------
Total current liabilities............................................................. 49,055 49,716
Long-term debt, less current maturities..................................................... 78,913 83,438
Subordinated debt, less current maturities.................................................. - 24,357
Other long-term liabilities................................................................. 2,577 2,680
-------- --------
130,545 160,191
Commitments and contingencies
Redeemable preferred stock.................................................................. - 21,305
Shareholders' equity:
Common stock with par value of $.01; 50,000,000 shares
authorized; 11,862,320 and 2,044,306 shares issued;
11,862,320 and 1,804,446 shares outstanding.............................................. 119 20
Special voting common stock with no par value; 5,000,000 shares
authorized; -0- and 2,941,325 shares issued and outstanding............................. - -
Paid-in capital........................................................................... 101,299 5,707
Retained earnings......................................................................... 12,214 8,240
Treasury stock, at cost; -0- and 239,860 shares of common stock.......................... - (1,487)
-------- --------
113,632 12,480
Note receivable from shareholder............................................................ (528) (528)
-------- --------
Net shareholders' equity.............................................................. 113,104 11,952
-------- --------
Total liabilities and shareholders' equity............................................ $243,649 $193,448
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the year ended
December 31,
---------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Revenues:
Net patient service revenues........................................................ $296,321 $227,387 $71,862
Management fees and other revenues.................................................. 7,952 5,661 3,364
-------- -------- -------
Total revenues.................................................................... 304,273 233,048 75,226
-------- -------- -------
Expenses:
Facility operating expenses:
Salaries, wages and benefits.................................................... 154,841 107,038 31,651
Other operating expenses........................................................ 79,755 76,286 26,914
Lease expense....................................................................... 21,403 18,777 7,702
Corporate administrative costs...................................................... 16,055 11,400 5,027
Depreciation and amortization....................................................... 6,760 5,012 738
-------- -------- -------
Total operating expenses......................................................... 278,814 218,513 72,032
-------- -------- -------
25,459 14,535 3,194
-------- -------- -------
Other income (expense):
Interest income.................................................................... 636 695 414
Interest expense................................................................... (8,658) (10,068) (590)
Equity in income (loss) of unconsolidated partnerships............................. - (108) 448
-------- -------- -------
Total other expense............................................................. (8,022) (9,481) 272
-------- -------- -------
17,437 5,054 3,466
Provision for income taxes............................................................ 6,800 2,092 1,389
-------- -------- -------
Income before minority interest and extraordinary loss................................ 10,637 2,962 2,077
Minority interest in net income of subsidiary, net of income taxes.................... (252) (183) (201)
-------- -------- -------
Income before extraordinary loss...................................................... 10,385 2,779 1,876
Extraordinary loss on extinguishment of debt, net of income tax benefit............... (537) - -
-------- -------- -------
Net income...................................................................... 9,848 2,779 1,876
Dividends and accretion on preferred stock............................................ 5,874 2,192 -
-------- -------- -------
Income applicable to common stock..................................................... $ 3,974 $ 587 $ 1,876
Net income per common and common equivalent share:
Basic:
Income applicable to common stock before extraordinary loss......................... $ 0.54 $ 0.12 $ 1.25
Extraordinary loss on extinguishment of debt........................................ (0.06) - -
-------- -------- -------
Income applicable to common stock................................................. $ 0.48 $ 0.12 $ 1.25
======== ======== =======
Diluted:
Income applicable to common stock before extraordinary loss......................... $ 0.54 $ 0.12 $ 0.72
Extraordinary loss on extinguishment of debt........................................ (0.06) - -
-------- -------- -------
Income applicable to common stock................................................. $ 0.48 $ 0.12 $ 0.72
======== ======== =======
Weighted average number of common stock and common stock equivalents outstanding
Basic............................................................................... 8,289 4,742 1,506
======== ======== =======
Diluted............................................................................. 8,462 4,782 2,601
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Special Voting Note
Common Stock Common Stock Receivable
----------------- --------------- Paid-In Retained Treasury From
Shares Amount Shares Amount Capital Earnings Stock Shareholder Net
------- -------- ------ ------ --------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994... 1,505 $ 17 - $ - $ - $ 1,953 $(1,487) $ - $ 483
Dividends paid on Series A and
B preferred stock........... - - - - - (341) - - (341)
Exercise of stock options...... 96 1 - - 359 - - - 360
Special voting common stock
issued in connection with
merger....................... - - 2,941 - 4,854 - - (528) 4,326
Accretion of preferred stock to
estimated redemption value... - - - - - 4,165 - - 4,165
Net income..................... - - - - - 1,876 - - 1,876
------ ------- ------- ------ -------- ------- ------- ------ --------
Balance at December 31, 1995... 1,601 18 2,941 - 5,213 7,653 (1,487) (528) 10,869
Dividends paid on Series A and
B preferred stock.......... - - - - - (341) - - (341)
Dividends accrued on
Series C preferred stock.... - - - - - (1,470) - - (1,470)
Exercise of stock options...... 203 2 - - 170 - - - 172
Exercise of special voting
stock options................ - - 1 - 6 - - - 6
Tax benefit on options
exercised.................... - - - - 318 - - - 318
Accretion of preferred stock to
estimated redemption value.. - - - - - (381) - - (381)
Net income..................... - - - - - 2,779 - - 2,779
------ ------- ------- ------ -------- ------- ------- ------ --------
Balance at December 31, 1996... 1,804 20 2,942 - 5,707 8,240 (1,487) (528) 11,952
Dividends paid on Series A, B
and E preferred stock...... - - - - - (462) - - (462)
Dividends accrued on
Series C preferred stock.... - - - - - (865) - - (865)
Exercise of stock options...... 3 - 1 - 36 - - - 36
Accretion of preferred stock to
estimated redemption value.. - - - - - (106) - - (106)
Issuance of common shares...... 64 1 - - 777 - - - 778
Public offering of
common stock................ 4,600 44 - - 66,917 - 1,487 - 68,448
Offering costs for
common stock................ - - - - (1,679) - - - (1,679)
Conversion of special voting
common stock
due to Offering............. 2,943 29 (2,943) - (29) - - - -
Redemption of Series E
preferred stock............. - - - - - (715) - - (715)
Conversion of Series A, B,
C and D preferred stock..... 2,532 25 - - 30,912 (3,726) - - 27,211
Repurchase of Series C
preferred stock............. (84) - - - (1,342) - - - (1,342)
Net income..................... - - - - - 9,848 - - 9,848
------ ------- ------- ------ -------- ------- ------- ------ --------
Balance at December 31, 1997... 11,862 $ 119 - $ - $101,299 $12,214 $ - $ (528) $113,104
====== ======= ======= ====== ======== ======= ======= ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the year ended
December 31,
---------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Operating Activities:
Net income................................................................................... $ 9,848 $ 2,779 $ 1,876
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization............................................................ 6,760 5,012 738
Amortization of discount on subordinated debt............................................ 62 114 -
Extraordinary loss on extinguishment of debt............................................. 880 - -
Deferred income taxes.................................................................... 3,881 1,698 (1,096)
Consulting expenses offset against note receivable....................................... 78 125 125
Equity in income of unconsolidated partnerships.......................................... - (145) (449)
Minority interest........................................................................ 413 305 335
Provision for doubtful accounts.......................................................... 863 852 1,035
Loss on sale of equipment................................................................ - 25 -
Loss on sale of investment in unconsolidated partnerships................................ - 253 -
Change in assets and liabilities:
Accounts receivable................................................................... (29,167) (15,733) (6,315)
Prepaid expenses and other assets..................................................... (1,525) 1,364 2,645
Refundable deposits................................................................... (28) (29) -
Accounts payable, accrued liabilities and other current liabilities................... (935) 11,322 4,313
Other................................................................................. (140) 165 (534)
-------- -------- -------
Cash provided by (used in) operating activities................................... (9,010) 8,107 2,673
-------- -------- -------
Investing Activities:
Purchases of property and equipment.......................................................... (7,567) (6,686) (5,399)
Proceeds from the sale of equipment.......................................................... - 600 -
Notes and advances receivable, net of repayments............................................. (8,232) (13,381) (1,270)
Distributions received from unconsolidated partnerships...................................... - - 300
Acquisitions, net of cash acquired........................................................... (17,355) (9,100) 2,248
Other........................................................................................ 3,127 (1,763) (3,113)
-------- -------- -------
Cash used in investing activities................................................. (30,027) (30,330) (7,234)
-------- -------- -------
Financing Activities:
Proceeds from the exercise of stock options.................................................. 36 178 360
Proceeds from issuance of preferred stock.................................................... 10,000 - -
Proceeds from borrowings..................................................................... 28,750 47,047 6,750
Public offering of Common Stock.............................................................. 68,448 - -
Payment of stock offering costs.............................................................. (1,679) - -
Distributions paid to minority partners...................................................... (494) (299) (85)
Payments of dividends to preferred shareholders.............................................. (462) (341) (341)
Payments on amounts due to related party..................................................... (528) (361) -
Redemption of Series E Preferred Stock....................................................... (5,000) - -
Repurchase of Series C Preferred Stock....................................................... (1,343) - -
Principal payments on subordinated debt...................................................... (25,300) - -
Principal payments on long-term debt......................................................... (35,410) (22,865) (1,581)
-------- -------- -------
Cash provided by financing activities............................................. 37,018 23,359 5,103
-------- -------- -------
Net increase (decrease) in cash and cash equivalents........................................... (2,019) 1,136 542
Cash and cash equivalents, beginning of period................................................. 6,030 4,894 4,352
-------- -------- -------
Cash and cash equivalents, end of period....................................................... $ 4,011 $ 6,030 $ 4,894
======== ======== =======
Supplemental disclosure:
Income taxes paid............................................................................ $ 1,289 $ 1,058 $ 1,363
Interest paid................................................................................ $ 9,236 $ 9,840 $ 533
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Centennial HealthCare Corporation ("Centennial" or 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 post acute setting. At
December 31, 1997, subsidiaries of the Company operated 84 owned, leased and
managed long-term care facilities with 8,850 licensed available beds in 19
states and the District of Columbia. In addition, through its subsidiaries, the
Company provided comprehensive contract rehabilitation services to Company-owned
and third party long-term care facilities pursuant to 128 contracts, as well as
home health services through 30 licensed home health offices.
In July 1997, Centennial completed an initial public offering of 4,000,000
shares of the Company's Common Stock (the "Offering"). In connection with the
Offering, the Company granted the underwriters an option to purchase up to
600,000 additional shares of the Company's Common Stock. This option was
exercised and closed in July 1997, (see Note 2).
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. Centennial's general partner
interests in those partnerships ranged from .49% to 3.992%. Certain subsidiaries
which owned these partnership interests were sold on January 30, 1997.
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. Prior to the merger with THS, the Company
operated 39 long-term care facilities through either management contracts, lease
agreements or direct ownership.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries, and a majority-owned (55%) affiliated limited
partnership.
The Company accounted for its investments in certain other limited
partnerships in which the Company served as a general partner under the equity
method. The investments were recorded at cost and adjusted for Centennial's
share of earnings or losses and cash distributions.
All significant intercompany accounts have been eliminated.
REVENUES
Revenues to be received from patients at Centennial'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
F-7
<PAGE>
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 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, 1997 and 1996 includes $44.4 million
and $28.4 million, 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. The Balanced Budget Act of 1997, ("the Act"), enacted in
August 1997, has targeted the Medicare program for reductions in spending growth
of approximately $49.2 billion for skilled nursing facilities over the next five
years, primarily through the implementation of a Medicare prospective payment
system for skilled services (see Note 19). In addition to the Act, there have
been, and the Company expects that there will continue to be, a number of
additional proposals to limit reimbursements to long-term care facilities under
the Medicare and Medicaid programs. Centennial cannot predict whether any of
these additional proposals will be adopted, or if adopted and implemented, what
effect such proposals would have on the Company. Approximately 60%, 68%, and 76%
of the Company's total revenues for the years ended December 31, 1997, 1996 and
1995, respectively, are from the Medicare and Medicaid programs. While the
Company operates long-term care facilities in 18 states and the District of
Columbia, 33 of its 55 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 medical and pharmacy supplies, food,
utilities, and the cost of rehabilitation therapies.
INCOME TAXES
Income taxes are calculated using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Deferred taxes are provided for the differences between the tax and
accounting bases of the Company's assets and liabilities. For Federal income tax
purposes, the Company and its subsidiaries file a consolidated income tax
return.
F-8
<PAGE>
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.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line method over the estimated useful
lives of five to ten years for equipment, five to 15 years for furniture and 30
to 40 years for buildings and improvements.
INTANGIBLE ASSETS
Intangible assets consist primarily of costs in excess of the fair value of
identifiable net assets of acquired entities, and are amortized using the
straight-line method, primarily over a 30 to 40 year period.
ASSESSMENT OF LONG-LIVED ASSETS
The Company periodically reviews the carrying values of its long-lived assets
(primarily property 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, 1997, the Company does not believe there is any indication
that the amortization period of its long-lived assets needs to be adjusted.
INCOME PER SHARE
In June 1997, the Board of Directors and Shareholders of the Company approved
a reverse stock split of .6897 for one. All references to shares and weighted
shares outstanding used in the calculation of net income per share and per share
amounts have been retroactively adjusted to reflect this reverse stock split.
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share". See Note 20 below.
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.
RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been reclassified for
comparative purposes.
2. INITIAL PUBLIC OFFERING
In July 1997, Centennial completed an initial public offering of 4,000,000
shares of the Company's Common Stock at a price of $16.00 per share. In
connection with the Offering, the Company granted the underwriters an option to
purchase up to 600,000 additional shares of the Company's Common Stock at the
F-9
<PAGE>
Offering price of $16.00 per share. This option was exercised and closed in
July 1997. Proceeds to Centennial from the Offering and the exercise of the
underwriters' option totaled approximately $66.8 million, net of underwriting
discounts and commissions and approximately $1.7 million in Offering expenses.
The net proceeds of the Offering available to the Company were used to repay
two subordinated promissory notes aggregating $25.3 million, to redeem the
Series E Redeemable Preferred Stock for $5.0 million, to repurchase
approximately 84,000 shares of Common Stock, which were received by the former
holders of the Company's Series C Preferred Stock, for approximately $1.3
million (see Note 10), and to repay approximately $35.1 million outstanding
under the Company's Senior Credit Facility with CoreStates Bank N.A. as agent
(the "Senior Credit Facility", see Note 8).
Concurrently with the closing of the Offering, the Company's Series A, B, C
and D Preferred Stock were converted into approximately 2.5 million shares of
Common Stock, net of the stock repurchase noted above; the Company's Special
Voting Common Stock was converted into Common Stock; and Centennial's Treasury
Stock, discussed in Note 10, was converted into Common Stock.
3. MERGERS AND ACQUISITIONS
In May 1997, the Company acquired by merger Total Care Consolidated, Inc.,
("TCC"), a provider of home health services, with 25 home health offices located
primarily in North Carolina. Total consideration of $8.0 million consisted of
$6.0 million in cash, which was funded under the Senior Credit Facility, and
$2.0 million in the form of a convertible promissory note due April 30, 1999.
The transaction was accounted for under the purchase method and the Company's
Consolidated Financial Statements include TCC from the effective date of the
merger.
In August 1997, Centennial acquired substantially all of the business and
assets of Complex Care, Inc., ("CCI"), a provider of physical, occupational and
speech therapy services through 45 contracts with long-term care facilities in
Connecticut and Rhode Island. The Company paid total consideration of $7.0
million, utilizing borrowings under its Senior Credit Facility. Additional
consideration of up to $500,000 may be paid by the Company under an earn-out
agreement. The transaction was accounted for under the purchase method and the
Company's Consolidated Financial Statements include CCI from the effective date
of the acquisition.
The Company recorded intangible assets of approximately $8.0 million and $7.5
million related to the acquisitions of TCC and CCI, respectively.
In December 1997, Centennial acquired a 58-bed skilled nursing facility in St.
Petersburg, Florida, which had previously been managed by the Company since June
1991. The facility was formerly owned by an affiliate of the President of the
Company. Total consideration of approximately $3.3 million included borrowings
under the Senior Credit Facility of approximately $1.1 million, and the
reduction of a note receivable to the Company from the facility of
F-10
<PAGE>
approximately $2.2 million. The transaction was accounted for under the
purchase method and the Company's Consolidated Financial Statements include this
facility from the effective date of the acquisition.
During 1997, the Company acquired leasehold interests in two rural hospitals.
In October 1996, the Company entered into a management agreement and a lease
agreement with the owner of both a 36-bed hospital and three licensed home
health care offices, located in Northern Florida. The agreement provided that
the Company would manage the hospital until all necessary approvals and licenses
were obtained, at which time the Company would operate the hospital under a
long-term lease. The Company accounted for the transaction as a management
agreement beginning in October 1996; in June 1997, all necessary approvals and
licenses were obtained, and the Company has operated the hospital under a long-
term lease since that date. The Company's Consolidated Financial Statements
include the hospital from the effective date of the transaction. In March 1997,
the Company entered into another lease of a rural hospital, also located in
Northern Florida, having a term of ten years with two five-year renewal options.
In October 1996, the Company acquired two previously managed long-term care
facilities located in Michigan with a total of 185 beds. The purchase price,
totaling approximately $9.1 million, was financed with the Company's Senior
Credit Facility. Centennial had managed these facilities under long-term
management agreements since 1991.
Effective December 31, 1995, the Company acquired all of the capital stock of
THS, valued at $19.0 million, through the issuance of 2,940,639 shares of
Special Voting Common Stock and 144,086 shares of Series C Preferred Stock, (the
"THS Merger"). In connection with this transaction, 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. During the year ended December 31, 1996, the Company
disposed of one of the identified facility leases at its previously estimated
fair value. The Company was not successful in its efforts to dispose of the
remaining facility lease in 1997; however, based on improvements made to the
operations of the facility, the Company expects that it will be disposed of
during 1998. As of December 31, 1997 and 1996, remaining accrued merger closure
costs of $3.4 million included the accrual for the lease buyout and estimated
losses on the sublease of the THS headquarters facility. Any additional costs
incurred to operate and ultimately dispose of the remaining facility will be
charged to earnings.
Proforma information for the 1997 and 1996 acquisitions has not been
presented, as the effects of the acquisitions on the consolidated financial
statements was not considered significant.
4. OPERATING LEASES
The Company leases 39 long-term care facilities, as well as two hospitals,
which are accounted for as operating leases. The leases have various expiration
dates through 2014. Two of the long-term care facility leases are with
affiliated entities, of which the Company or an affiliate of one of the
Company's officers serves as a general partner.
The leases with affiliated entities expire in 2002 and 2008 with both having
two five-year extensions. Total lease expense to the Company as a result of
these two leases was $3.2 million, $3.3 million and $2.9 million for the years
ended December 31, 1997, 1996 and 1995 respectively. In connection with one
F-11
<PAGE>
lease, the Company paid the affiliated lessor a deposit of $2.9 million, which
is refundable upon the termination of the lease. The Company owed the other
affiliated lessor approximately $340,000 and $700,000 at December 31, 1997 and
1996, respectively.
Twenty-three of the long-term care facility leases were obtained in connection
with the THS Merger. These leases 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 the long-term care facility and hospital operating
lease agreements approximated $19.9 million, $17.7 million, and $7.4 million for
the years ended December 31, 1997, 1996 and 1995, respectively.
Minimum future rent payments under the facility leases and related equipment
and office space are summarized as follows (in thousands):
Year Amount
---- -----------
1998............................................ $ 21,369
1999............................................ 21,517
2000............................................ 21,739
2001............................................ 21,675
2002............................................ 20,766
Thereafter...................................... 80,120
-----------
$187,186
-----------
5. TOTAL REVENUE
The distribution of total revenue by class of payor for the years ended
December 31, 1997, 1996 and 1995 was as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
CLASS OF PAYOR 1997 1996 1995
- ------------------------------------------------------ --------- -------
<S> <C> <C> <C>
Private pay, management fee and
other.................................... $ 120,371 $ 74,075 $17,798
Medicaid................................... 111,380 99,803 43,735
Medicare................................... 72,522 59,170 13,693
--------- --------- -------
$ 304,273 $ 233,048 $75,226
--------- --------- -------
</TABLE>
The above revenue amounts are net of third-party contractual allowances of
$54.2 million, $44.7 million and $7.6 million for the years ended December 31,
1997, 1996 and 1995, respectively.
Included in other operating expenses is bad debt expense of approximately
$863,000, $852,000, and $1.0 million for the years ended December 31, 1997, 1996
and 1995, respectively.
F-12
<PAGE>
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1997 and
1996, (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land................................................. $ 4,595 $ 4,243
Buildings and improvements........................... 63,681 55,166
Furniture and equipment.............................. 15,633 12,294
Construction in progress - improvements to
facilities......................................... 1,087 1,945
--------- ---------
84,996 73,648
Less accumulated depreciation ....................... (10,617) (6,239)
--------- ---------
$ 74,379 $ 67,409
--------- ---------
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
totaled $4.5 million, $3.2 million, and approximately $548,000 respectively.
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 served as a general partner were accounted for
using the equity method. For the years ended December 31,1996 and 1995, the
Company recognized income from its share of the partnerships' operations of
approximately $145,000 and $448,000, 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 approximately $253,000, in connection with the sale of the corporate
general partners.
8. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Bank credit facilities...................... $ 41,250 $ 47,000
Mortgage notes payable...................... 17,792 17,427
Other notes................................. 2,650 697
-------- --------
61,692 65,124
Capital lease obligations................... 18,797 20,025
-------- --------
80,489 85,149
Current maturities of long-term debt........ 1,576 1,711
-------- --------
$ 78,913 $ 83,438
-------- --------
</TABLE>
F-13
<PAGE>
On December 16, 1997, the Company expanded its Senior Credit Facility with
CoreStates Bank, N.A. and NationsBank, N.A., as agents, through an amendment to
its existing amended and restated credit agreement. Through the amendment, the
Company's maximum aggregated advance limit was increased from $65.0 million to
$125.0 million. Company advances under the Senior Credit Facility may be used
for acquisitions, capital expenditures, working capital and general corporate
purposes. Centennial's borrowing capacity is dependent upon its ability to
satisfy certain financial covenants that are impacted by its debt and capital
structure. The Company had approximately $41.3 million outstanding under the
Senior Credit Facility at December 31, 1997, as well as issued standby letters
of credit totaling approximately $7.0 million.
Interest accrues at varying rates dependent upon underlying interest rates
and the Company's selection of loan amounts and periods. The Company can elect a
rate based on CoreStates Bank, N.A.'s prime rate or LIBOR, each increased by an
Applicable Margin, as defined in the Senior Credit Facility, 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, 1997 was approximately
1.58% over LIBOR or 7.2%.
Interest is generally paid monthly on prime based borrowings and quarterly
on LIBOR based borrowings. The Company's outstanding borrowings are due to be
repaid on December 16, 2000, upon termination of the Senior Credit Facility.
Under certain circumstances, proceeds from additional equity issuances, sales of
Company assets and other debt instruments must be used to repay a portion of the
outstanding borrowings under the Senior Credit Facility.
The Senior Credit Facility is collateralized by the stock of the Company's
subsidiaries. The Company is required to pay a fee on the average unused portion
of the commitment.
The Senior Credit Facility includes various negative covenants including
restrictions on additional loans and advances, guaranties, stock repurchases and
redemptions, and the payment of dividends. Terms of the Senior Credit Facility
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, 1997, the Company
was in compliance with all of its debt covenants.
At December 31, 1997 and 1996, the Company had $17.8 million and $17.4
million, respectively, of mortgage notes outstanding, including a current
portion of approximately $259,000 and $181,000 respectively. The mortgage notes
require monthly payments of principal and interest of approximately $157,000.
The debt agreements are for five to twenty-year periods with amortization
periods covering twenty to twenty-five years. At December 31, 1997, interest
rates on the mortgages range from 7.33% to 10.50%. These debts are
collateralized by real property.
Future maturities of mortgage notes are summarized as follows (in thousands):
1998 $ 259
1999 277
2000 304
2001 334
2002 367
Thereafter 16,251
-------
$17,792
-------
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.
F-14
<PAGE>
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, 1997 (in thousands):
Nursing
Year ending December 31 Equipment Facilities Total
---------- ---------- ----------
1998.................................... $ 661 $ 2,468 $ 3,129
1999.................................... 83 2,468 2,551
2000.................................... - 2,468 2,468
2001.................................... - 2,468 2,468
2002.................................... - 2,468 2,468
Thereafter.............................. - 21,086 21,086
---------- ---------- ----------
Total minimum lease payments............ 744 33,426 34,170
Less amount representing interest....... 43 15,330 15,373
---------- ---------- ----------
Present value of minimum lease payments. 701 18,096 18,797
Current portion......................... 620 697 1,317
---------- ---------- ----------
Noncurrent portion...................... $ 81 $ 17,399 $ 17,480
---------- ---------- ----------
The interest rate on the capital leases is based on the Company's borrowing
rate at the time a lease is executed. The average interest rate on nursing
facilities and equipment was 10.47% and 13.15%, respectively.
9. SUBORDINATED DEBT
At December 31, 1996, the Company had $25.3 million, carried net of
unamortized offering discounts of approximately $943,000, of subordinated debt.
This debt was issued to certain shareholders in two instruments, which were both
due on October 30, 2002 and had effective interest rates between 10.8% and
11.7%. These notes were repaid in 1997 using proceeds from the Offering, which
resulted in a loss on early extinguishment of debt of approximately $537,000,
net of income tax benefit of approximately $343,000.
10. 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 earned cumulative dividends of $.88 per share per annum and were
convertible to common at any time at the holder's option at a conversion
multiple of 2.9388. The shares were subject to mandatory conversion by the
Company in limited circumstances, and were converted into approximately 604,000
shares of common stock concurrently with the closing of the Offering in July
1997.
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 earned cumulative dividends at $.49 per annum and were convertible into
.7663 share of Common Stock at the holder's option. The shares were also subject
to mandatory conversion in certain limited circumstances, and were converted
into approximately 252,000 shares of common stock concurrently with the closing
of the Offering in July 1997.
The Series A and B Preferred Stock was reflected on the December 31,1996
balance sheet at its estimated redemptive value, including accrued and unpaid
dividends.
As stated in Note 3, in connection with the THS Merger, the Company issued
144,086 shares of $1 par value Series C Preferred Stock. The shares of Series C
Preferred Stock earned cumulative dividends of $12 per share per annum. The
Company was 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 was reflected on the
accompanying December 31, 1996 balance sheet at its fair value increased by
periodic accretions, using the interest method, so that the carrying amount
would equal the mandatory redemption amount at the mandatory redemption date.
F-15
<PAGE>
Accretion on the Series C Preferred Stock totaled approximately $259,000 for the
year ended December 31, 1996. As stated in Note 2, after the closing of the
Offering, with the net proceeds of the exercise of the underwriters
overallotment option, Centennial offered the former holders of the Company's
Series C Preferred Stock pro-rata repurchase to the extent of such proceeds of
their shares of Common Stock received upon the conversion of their Series C
Preferred Stock at the Offering price of $16.00 per share. The Company made this
repurchase offer as consideration for the agreement by these former holders to
the conversion of the Series C Preferred Stock into Common Stock. Holders of
approximately 84,000 shares of the approximately 1.3 million shares available
for pro-rata repurchase elected to have such shares repurchased by Centennial.
Centennial repurchased the 84,000 shares of common stock during 1997 for
approximately $1.3 million.
In January 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 Preferred Stock and 1.7873
shares of Common Stock of the Company for $10.0 million. The Series D Preferred
Stock was 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 was convertible into 8.2106 shares
of Common Stock, at the holder's option. All outstanding shares of Series D
Preferred Stock were converted into approximately 411,000 shares of Common Stock
concurrently with the closing of the Offering in July 1997.
The Series E Preferred Stock was subject to 10% dividends and was redeemable
at any time at the option of the Company. The Series E Preferred Stock was
redeemed concurrently with the closing of the Offering in July 1997.
11. EQUITY TRANSACTIONS
The Company has stock options outstanding under the 1994 Stock Option Plan,
the 1996 Executive Stock Plan, the 1996 Employee Stock Option Plan, and the 1997
Stock 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; options vest
based upon either years of service, or at various intervals from 1996 through
2000. The 1996 Employee Stock Option Plan provides that options may be granted
to certain employees; options vest at various intervals through 1998. The 1997
Stock Plan provides that options 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. The options granted to date pursuant to the 1997 Stock Plan vest
over various schedules from 1998 through 2001.
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 compensation
committee.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1997 1996
----------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- -------- --------
<S> <C> <C> <C> <C>
Options outstanding-beginning of period...... 355,160 $ 12.09 515,346 $ 8.13
Granted.................................... 183,340 16.00 64,330 8.74
Exercised.................................. (4,115) (8.74) (203,761) (0.88)
Forfeited.................................. (7,603) (11.68) (20,755) (13.08)
------- ------- -------- -------
Options outstanding-end of period............ 526,782 $ 13.47 355,160 $ 12.09
======= ======= ======== =======
Weighted average fair value of options
granted during the period.................... $6.40 $2.51
</TABLE>
F-16
<PAGE>
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:
1997 1996
---------- ----------
Expected volatility......................... 41.0% 41.1%
Risk-free interest rate..................... 6.15% 5.33%
Expected term............................... 4 years 5 years
Dividend yield.............................. 0% 0%
The following table summarizes information about outstanding and exercisable
stock options at December 31, 1997:
<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 4.5 years 58,236 $ 7.83
8.74.................................................................. 55,309 8.0 years 40,248 $ 8.74
14.03.................................................................. 229,897 8.1 years 114,949 $ 14.03
16.00.................................................................. 183,340 9.0 years 6,847 $ 16.00
</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 years ended December 31, 1997, 1996 and 1995
would have been reduced to the proforma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Proforma net income (in thousands)............................................ $9,582 $2,650 $1,876
Proforma income applicable to common stock:
Basic....................................................................... $0.45 $0.10 $1.25
Diluted..................................................................... $0.44 $0.10 $0.72
</TABLE>
As of December 31, 1996, the Company had repurchased 239,860 shares of Common
Stock for $1.5 million. These shares were held as treasury stock at December 31,
1996 and were accounted for under the cost method. As noted in Note 2, these
shares were converted into Common Stock as a result of the Offering.
As previously mentioned, the Company issued Special Voting Common Stock in
connection with the THS Merger. The Special Voting Common Stock was similar to
the Company's Common Stock, except that each share of Special Voting Common
Stock carried 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 issued and outstanding shares of both Special Voting
Common Stock and Common Stock by 11.11% (the "Stock Dividend"). The shares
issued by the
F-17
<PAGE>
Stock Dividend totaled 294,038 shares of Special Voting Common Stock and 160,124
shares of Common Stock. As noted in Note 2, the Special Voting Common Stock was
converted to Common Stock as a result of the Offering.
In connection with the THS 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 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
was recorded as a reduction in goodwill effective at the merger date with a
corresponding decrease to the value of the Special Voting Common Stock.
12. INCOME TAXES
The components of the income tax provision for the years ended December 31,
1997, 1996 and 1995 are as follows (in thousands):
Year ended December 31,
1997 1996 1995
Current ------- ------- -------
Federal.................. $ 525 $ 103 $ 1,959
State.................... 2,394 291 526
------- ------- -------
2,919 394 2,485
------- ------- -------
Deferred
Federal.................. 4,849 1,781 (1,041)
State.................... (968) (83) (55)
------- ------- -------
3,881 1,698 (1,096)
------- ------- -------
Total provision............ $ 6,800 $ 2,092 $ 1,389
======= ======= =======
Reconciliations of the differences between income taxes computed at federal
statutory tax rates and consolidated provisions for income taxes for the years
ended December 31, 1997, 1996 and 1995 are as follows, (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Tax at U.S. statutory rate........... $ 5,929 $ 1,719 $ 1,179
State income taxes................... 598 202 298
Goodwill amortization................ 253 142 -
Other................................ 20 29 (88)
-------- -------- --------
Provision for income taxes......... $ 6,800 $ 2,092 $ 1,389
-------- -------- --------
<PAGE>
Deferred tax assets and liabilities are comprised of the following at
December 31, 1997 and 1996, (in thousands):
1997 1996
-------- --------
Current deferred income tax assets:
Allowances for uncollectible receivables.......... $ (542) $ 1,814
Liabilities not deductible for tax purposes....... 3,053 2,069
-------- --------
Current deferred income taxes.................. $ 2,511 $ 3,883
======== ========
Noncurrent deferred income tax assets:
Net operating loss and tax credit carryforwards... $ 845 $ 4,456
Tax basis receivables in excess of book........... 2,167 2,549
Net effects of capital leases..................... 1,394 1,046
-------- --------
4,406 8,051
-------- --------
Noncurrent deferred income tax liabilities:
Temporary goodwill................................ (693) (353)
Write-up of property and equipment................ (1,848) (1,951)
Other, including depreciation..................... (110) (850)
Tax losses from investment in unconsolidated
partnerships in excess of book................. (163) (796)
-------- --------
(2,814) (3,950)
-------- --------
Net noncurrent deferred income tax assets... $ 1,592 $ 4,101
======== ========
</TABLE>
F-18
<PAGE>
As of December 31, 1997, the Company had approximately $455,000 of federal net
operating loss carryforwards available to offset future taxable income through
2010. In addition, the Company had $305,000 of federal targeted jobs tax credit
carryforwards, various state net operating loss carryforwards, and approximately
$385,000 of AMT credit carryforwards.
13. MANAGEMENT AGREEMENTS
As of December 31, 1997, the Company provided operational management services
for 29 facilities and two hospitals under long-term management contracts having
remaining effective terms ranging from 5 to 19 years. Twenty-five of these
agreements are with third-party owners and are noncancelable without cause. One
of these agreements, with fees totaling approximately $145,000, $142,000, and
$124,000 respectively, during the years ended December 31, 1997, 1996 and 1995
was with an affiliate; the facility was purchased by the Company in December
1997, (see Note 3). Five of the management agreements, with fees totaling
approximately $898,000, $939,000 and $995,000, respectively, during the years
ended December 31, 1997, 1996 and 1995 were 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. Two of
these agreements were terminated during the fourth quarter while three of these
facilities were transferred to third party owners. The management agreements
provide for the Company to receive annual fees ranging from 6% to 6.5% 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.
In connection with the Company's facility management agreements for several
facilities located primarily in North Carolina and Florida, the Company has made
certain advances for working capital needs. The majority of these centers are
start-up or development projects and require additional funding for personnel
and other operating costs prior to stabilization. The advances are to be repaid
from available cash flows from the respective facilities and from other funds
provided by the owners of the facilities and earn interest at varying rates
based on the prime lending rate. Advances outstanding as of December 31, 1997
and 1996 were $11.3 million and $2.8 million, respectively, and are included in
other receivables in the accompanying balance sheets.
During 1996, the Company advanced approximately $10.0 million pursuant to two
promissory notes in the amounts of $5.5 million and $4.5 million, to
unaffiliated owners of eight managed facilities in North Carolina. The advances
were utilized by the owners to purchase the related facilities or facility
leasehold interest with respect to these facilities that are managed by the
Company. The promissory notes are due on December 31, 2006 and earn interest at
the greater of a specified prime rate plus 3%,or 12%. Both notes are
collateralized by receivables and the pledge of the stock of the respective
owners and are included in notes and advances receivable in the accompanying
balance sheets.
F-19
<PAGE>
14. TRANSACTIONS WITH RELATED PARTIES
At December 31, 1997 the Company had employment agreements with five officers
which provided for salary continuation and non-competition with the Company,
subject to certain conditions.
The Company leases two long-term care facilities from affiliated lessors (see
Note 4).
The Company managed five long-term care facilities for affiliated limited
partnerships in which the Company served as a general partner (see Note 13).
Centennial leases its facilities' employees on a total pass through basis from
an affiliated company which is owned by the president of the Company. The total
payroll costs and reimbursements from the Company totaled $37.2 million, $29.2
million, and $23.1 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Such costs are billed by the related entity at cost.
In December 1997, Centennial acquired a 58-bed skilled nursing facility in St.
Petersburg, Florida, which had previously been managed by the Company since June
1991. The facility was formerly owned by an affiliate of the President of the
Company. Total consideration of approximately $3.3 million included borrowings
under the Senior Credit Facility of approximately $1.1 million, and the
reduction of a note receivable to the Company from the facility of approximately
$2.2 million. The transaction was accounted for under the purchase method and
the Company's Consolidated Financial Statements include this facility from the
effective date of the acquisition.
15. COMMITMENTS AND CONTINGENCIES
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 $1.9 million at December 31, 1997. The market value of this
facility, based on an independent appraisal and the Company's estimate,
substantially exceeds the total amount of the mortgage note. All principal and
interest payments are paid currently by the obligors.
The Company has guaranteed $17.0 million of mortgage indebtedness of two
unrelated entities that lease five nursing facilities to the Company. The
outstanding principal balance of the debt was approximately $15.7 million at
December 31, 1997. All principal and interest payments are paid currently by the
obligors. Based on the Company's estimate, the market value of these facilities
exceeded the outstanding mortgage notes at December 31, 1997.
F-20
<PAGE>
Centennial 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. Centennial recognized as an expense
and accrued for estimated workers' compensation and health benefit claims
incurred but not reported as of December 31, 1997 and 1996.
16. CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. Centennial 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.
17. 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. In two of these plans the
Company matches employee contributions subject to a maximum limit. The Company
funded approximately $363,000 and $92,000 during the years ended
December 31, 1997 and 1996, respectively, as a match to the employee
contributions.
18. 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 restricted cash reflected on the balance sheet
under the caption "Other Assets."
NOTES RECEIVABLE
The carrying amount approximates fair value for the notes receivable. The fair
value is estimated as the net present value of cash flows that would be received
on the notes over the remaining term of the notes using current market interest
rates rather than stated interest rates.
LONG-TERM DEBT
The carrying amount of the Senior Credit Facility approximates fair value
since the Senior Credit Facility 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.
19. HEALTH CARE REFORM
The Balanced Budget Act of 1997, ("the Act"), enacted in August 1997, has
targeted the Medicare program for reductions in spending growth for skilled
nursing facilities over the next five years, primarily through the
implementation of a Medicare prospective payment system for skilled nursing
facility services. While the methodology for the prospective payment rates have
been generally established, actual rates have not been released.
F-21
<PAGE>
Management believes that, due to the cost structure at its facilities as
compared to other facilities in its markets, the Company's overall reimbursement
rates should not be lower than current rates and could possibly be higher.
However, until the rates are ultimately determined under the prospective payment
system, the Company will not be able to determine the exact nature or long term
financial impact of the legislative changes. The Company can give no assurance
that payments under such programs in the future will remain at a level
comparable to the present level or increase, and decreases in the level of
payments could have a material adverse effect on the Company.
Effective April 1, 1998 regulations were adopted by HealthCare Financing
Administration, which temporarily changes the basis of reimbursement for
contract therapy services including physical therapy, respiratory therapy,
occupational therapy and speech language pathology. During 1997, the Company
derived 7% of its revenue from third-party contract therapy services. These
regulations impose regionally-adjusted salary equivalency rates as reimbursement
caps for occupational, speech and physical therapy. In most locations the
reduced rates have the effect of reducing the amount of reimbursement for a unit
of occupational or speech therapy and increasing the amount of reimbursement for
a unit of physical therapy. The Company believes that such rate reductions will
be completely or partially offset by cost reductions and changes in the method
of delivering such services. Due to these changes in operations and cost
structure and the relative size of the Company's therapy business, the Company
does not expect these reimbursement changes to have a material adverse effect on
the Company.
20. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In the fourth quarter of 1997, Centennial adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share", (SFAS No. 128). Prior year
amounts have been restated in accordance with SFAS No. 128. Basic earnings per
share is computed by dividing income applicable to common stock by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed similarly but reflects the potential dilution that could
occur if options were exercised or convertible securities were converted into
common stock. 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 was deducted from net income in the computation of net income applicable
to common stock in 1997 and 1996. The following table calculates basic earnings
per share and diluted earnings per share at December 31:
F-22
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income before extraordinary loss.......................... $ 10,385 $ 2,779 $ 1,876
Deduct: dividends and accretion of preferred stock........ 5,874 2,192 -
-------- -------- --------
Income applicable to common stock
before extraordinary loss............................... 4,511 587 1,876
Extraordinary loss on extinguishment
of debt................................................. (537) - -
-------- -------- --------
Income applicable to common stock......................... $ 3,974 $ 587 $ 1,876
Average common shares outstanding (in thousands).......... 8,289 4,742 1,506
Basic earnings per common share:
Income applicable to common stock
before extraordinary loss............................... $ 0.54 $ 0.12 $ 1.25
Extraordinary loss on extinguishment
of debt................................................. (0.06) - -
-------- -------- --------
BASIC EARNINGS PER COMMON SHARE........................... $ 0.48 $ 0.12 $ 1.25
======== ======== ========
Income applicable to common stock
before extraordinary loss............................... $ 4,511 $ 587 $ 1,876
Add: Interest savings on convertible debt................. 65 - -
-------- -------- --------
4,576 587 1,876
Extraordinary loss on extinguishment
of debt................................................. (537) - -
-------- -------- --------
Income applicable to common stock......................... $ 4,039 $ 587 $ 1,876
Average common shares outstanding (in thousands).......... 8,289 4,742 1,506
Add: options (in thousands).............................. 173 40 1,095
-------- -------- --------
Average diluted common shares outstanding (in thousands).. 8,462 4,782 2,601
Diluted earnings per common share:
Income applicable to common stock
before extraordinary loss............................... $ 0.54 $ 0.12 $ 0.72
Extraordinary loss on extinguishment
of debt................................................. (0.06) - -
-------- -------- --------
DILUTED EARNINGS PER COMMON SHARE......................... $ 0.48 $ 0.12 $ 0.72
======== ======== ========
</TABLE>
F-23
<PAGE>
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" and Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information". Both Statements are
effective for fiscal years beginning after December 15, 1997. The Company has
not yet determined the effect, if any, of these statements on its consolidated
financial statements.
21. SUBSEQUENT EVENTS
In January 1998, the Company signed management contracts for six skilled
nursing facilities located in North Carolina, totaling 837 licensed available
beds. Also in January 1998, the Centennial signed a management contract for a
59-bed acute care hospital in Northern Florida.
22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The table below sets forth summarized quarterly financial data for the years
ended December 31, 1997 and 1996, (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Total revenues........................................ $ 64,235 $ 71,939 $ 81,946 $ 86,153
Income before extraordinary loss...................... 1,241 1,884 3,383 3,877
Extraordinary loss.................................... - - (537) -
Net income ........................................... 1,241 1,884 2,846 3,877
Net income (loss) applicable to common
shareholders........................................ $ 454 $ 1,452 $ (1,808) $ 3,877
======== ======== ======== =========
Net income per common and common
equivalent share:
Basic:
Income (loss) applicable to common stock
before extraordinary loss....................... $ 0.09 $ 0.30 $ (0.11) $ 0.33
Extraordinary loss on extinguishment of debt...... - - (0.05) -
-------- -------- -------- ---------
Income (loss) applicable to common stock.......... $ 0.09 $ 0.30 $ (0.16) $ 0.33
======== ======== ======== =========
Diluted:
Income (loss) applicable to common stock
before extraordinary loss...................... $0.09 $0.30 $ (0.10) $ 0.32
Extraordinary loss on extinguishment of debt..... - - (0.05) -
-------- -------- -------- ---------
Income (loss) applicable to common stock......... $ 0.09 $ 0.30 $ (0.15) $ 0.32
======== ======== ======== =========
Proforma(1):
Income applicable to common stock.............. $ 0.18 $ 0.23 $ 0.30 $ 0.32
======== ======== ======== =========
Weighted average number of common stock and
common stock equivalents outstanding:
Basic.............................................. 4,789 4,789 11,579 11,864
Diluted............................................ 4,827 4,828 11,870 12,188
Proforma(1)........................................ 11,738 11,876 12,026 12,186
Common stock market prices:
High............................................... N/A N/A $ 23.000 $ 25.125
Low................................................ N/A N/A $ 16.000 $ 18.125
<PAGE>
1996
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------
Revenues............................................. $ 55,935 $ 56,345 $ 58,341 $ 62,427
Net income (loss).................................... (105) 1,034 744 1,106
Net income (loss) applicable to common
shareholders....................................... $ (577) $ 562 $ 96 $ 506
======== ======== ======== =========
Net income per common and common
equivalent share:
Income (loss) applicable to common
stock--basic..................................... $ (0.12) $ 0.12 $ 0.02 $ 0.11
======== ======== ======== =========
Income (loss) applicable to common
stock--diluted................................... $ (0.12) $ 0.12 $ 0.02 $ 0.11
======== ======== ======== =========
Income applicable to common stock--
proforma(1)...................................... $ 0.06 $ 0.16 $ 0.14 $ 0.17
======== ======== ======== =========
Weighted average number of common stock and
common stock equivalents outstanding:
Basic.............................................. 4,734 4,742 4,746 4,746
Diluted............................................ 4,777 4,782 4,784 4,784
Proforma(1)........................................ 11,415 11,420 11,422 11,422
Common stock market prices:
High............................................... N/A N/A N/A N/A
Low................................................ N/A N/A N/A N/A
</TABLE>
- ------------
(1) Proforma assumes the Offering took place at the beginning of each period
presented, and reflects the estimated reduction in interest expense, net of the
related tax effect, and the reduction in preferred dividends and accretion.
Proforma also excludes the extraordinary loss on early extinguishment of debt
recorded in the third quarter of 1997.
F-24
<PAGE>
<TABLE>
<CAPTION>
CENTENNIAL HEALTHCARE CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COST AND OTHER END OF
DESCRIPTIONS YEAR EXPENSE ACCOUNTS OTHER YEAR
- ---------------------------------------- ------------ ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1997
Allowance for doubtful
accounts (deducted
from accounts
receivable)........................... $ 2,472 $ 863 $ (637)(1) $ 300(2) $ 2,998
========= ========= ========= ========= =========
Year ended
December 31, 1996
Allowance for doubtful
accounts (deducted
from accounts
receivable)........................... $ 5,912 $ 851 $ (2,983)(1) $ (1,308)(3) $ 2,472
========= ========= ========= ========= =========
Year ended
December 31, 1995
Allowance for doubtful
accounts (deducted
from accounts
receivable)........................... $ 71 $ 1,035 $ (348)(1) $ 5,154(4) $ 5,912
========= ========= ========= ========= =========
</TABLE>
- -----------------
(1) Accounts receivable that were previously reserved that were directly
written-off to allowance for doubtful accounts.
(2) Allowance transferred from notes receivable.
(3) Due to reclassification of accounts receivable to notes receivable and
related reserve.
(4) 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 and reclassification of account receivable to notes
receivable and stated reserve totaling $(337).
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- ---------------------------------------------------------------------------------
<S> <C>
3.1 -- Third Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-1, Registration No. 333-24267, as amended).
3.2 -- Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit
3.2 of the Company's Registration Statement on Form S-1 Registration No.
333-24267, as amended).
4.1 -- Third Amended and Restated Articles of Incorporation of the Company, including,
without limitation Article III and Articel VII (incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement on Form S-1, Registration
No. 333-24267, as amended).
10.1 -- WelCare International, Inc. 1994 Employee Stock Option Plan (incorporated by
reference to Exhibit 10.1 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended)
10.2 -- WelCare International, Inc. 1996 Executive Stock Plan (incorporated by reference
to Exhibit 10.2 of the Company's Registration Statement on Form S-1, Registration
No. 333-24267, as amended)
10.3 -- WelCare International, Inc. 1996 Employee Stock Option Plan (incorporated by
reference to Exhibit 10.3 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended)
10.4 -- Centennial HealthCare Corporation 1997 Stock Plan (incorporated by reference to
Exhibit 10.4 of the Company's Registration Statement on Form S-1, Registration No.
333-24267, as amended)
10.5 -- Second Amended and Restated Credit Agreement dated December 16, 1997 by and
among Centennial HealthCare Corporation and the Borrowers named therein, the
Lenders named therein, and Core States Bank, N.A. and NationsBank, N.A.,
as lenders and agents for the Lenders
10.6 -- Amended and Restated Employment Agreement between WelCare International, Inc.
and J. Stephen Eaton dated December 31, 1995 (incorporated by reference to
Exhibit 10.6 of the Company's Registration Statement on Form S-1, Registration No.
333-24267, as amended)
10.7 -- Amended and Restated Employment Agreement between Paragon Rehabilitation, Inc. and Laurence
W. Lepley, Jr. dated as of January 1, 1998.
10.8 -- Registration Rights Agreement dated December 31, 1995 by and between the Company
and the Shareholders as defined therein, as amended (incorporated by reference
to Exhibit 10.8 of the Company's Registration Statement on Form S-1, Registration
No. 333-24267, 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
(incorporated by reference to Exhibit 10.9 of the Company's Registration Statement
on Form S-1, Registration No. 333-24267, as amended)
10.10 -- 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 (incorporated by
reference to Exhibit 10.11 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended)
10.11 -- Amended and Restated Lease Agreement by and between EBT Healthcare Properties,
L.P. and CHPC dated July 6, 1994 (incorporated by reference to Exhibit 10.12 of the
Company's Registration Statement on Form S-1, Registration No. 333-24267, as
amended)
10.12 -- 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. (incorporated by reference
to Exhibit 10.13 of the Company's Registration Statement on Form S-1, Registration
No. 333-24267, as amended)
10.13 -- 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 Agreement, Consent and Release dated March 1, 1994
(incorporated by reference to Exhibit 10.16 of the Company's Registration Statement
on Form S-1, Registration No. 333-24267, as amended)
10.14 -- Lease Agreement by and between House Investments - Nursing Homes Partners I and
THP dated November 1, 1993 (incorporated by reference to Exhibit 10.18 of the
Company's Registration Statement on Form S-1, Registration No. 333-24267, as
amended)
10.15 -- Operating Lease by and between HCPI Charlotte, Inc. and THP dated June 19, 1995
(incorporated by reference to Exhibit 10.20 of the Company's Registration Statement
on Form S-1, Registration No. 333-24267, as amended)
10.16 -- Amended and Restated Management Agreement by and between Montclair Medical
Investors, Ltd., and CHMC dated January 1, 1995 (incorporated by reference to
Exhibit 10.28 of the Company's Registration Statement on Form S-1, Registration No.
333-24267, as amended)
11.1 -- Statement Regarding Computation of Per Share Earnings
21.1 -- List of Subsidiaries
23.1 -- Consent of Coopers & Lybrand, L.L.P.
27.1 -- Financial Data Schedule
27.2 -- Restated Financial Data Schedule (Annual)
27.3 -- Restated Financial Data Schedule (Quarterly)
99.1 -- Cautionary Statements Regarding Forward-Looking Statements
</TABLE>
<PAGE>
Exhibit 10.7
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") dated as
of January 1, 1998, is made by and between PARAGON REHABILITATION, INC., a
Delaware corporation ("Employer"), and LAWRENCE W. LEPLEY, an individual
resident of Tennessee ("Executive").
WHEREAS, Employer recognizes that Executive's contribution to the growth
and success of Employer in future years will be a significant factor in the
success of Employer and Employer's parent corporation, Centennial HealthCare
Corporation, a Georgia corporation ("Centennial");
WHEREAS, Employer desires to provide for the employment of Executive in a
manner which will reinforce and encourage the dedication of Executive to
Employer and promote the best interests of Employer, Centennial and its
shareholders;
WHEREAS, Executive is willing to serve Employer on the terms and conditions
herein provided. Certain terms used in this Agreement are defined in Section 17
hereof; and
WHEREAS, Employer has no publicly registered securities eligible for
distribution to Executive and Centennial does have employee stock programs
available for employees of its subsidiary corporations.
NOW THEREFORE, in consideration of the foregoing, the mutual covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, hereby agree as follows:
1. EMPLOYMENT. Employer shall employ Executive, and Executive shall serve
Employer, as President and Chief Executive Officer of Employer upon the terms
and conditions set forth herein. In such capacity he shall have full authority
to manage the operations of Employer, including, without limitation, the
discretion over personnel, facilities, budgets, and other operational matters,
subject to the direction of the sole member of the Board of Directors of
Employer (the "Board"). Executive shall devote his full business time,
attention, skill and efforts to the performance of his duties hereunder, except
during periods of illness or periods of vacation and leaves of absence
consistent with Employer policy. Executive may devote reasonable periods to
service as a director or advisor to other organizations, to charitable and
community activities, and to managing his personal investments, PROVIDED that
such activities do not materially interfere with the performance of his duties
hereunder and are not in conflict or competitive with, or adverse to, the
interests of Employer.
2. TERM. Unless earlier terminated as provided herein, Executive's
employment under this Agreement shall be for an initial term (the "Term") of
three (3) years which, beginning on the second anniversary of the effective
date of this Agreement, shall be extended automatically (without further action
of Employer or Executive) each day for an additional day so that the remaining
term shall continue to be (2) two years.
1
<PAGE>
3. COMPENSATION AND BENEFITS.
(a) As compensation for his services hereunder, Employer shall pay to
Executive a base salary of $ 184,000 per year, payable in bi-weekly or semi-
monthly installments. Such base salary shall be reviewed at least annually on
January 1 of each year by the Board to determine whatever increase may be
merited; PROVIDED, HOWEVER, that the minimum annual increase shall be 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 (or, in
the case of the first such review, the date of this Agreement).
(b) Executive shall participate in Centennial's management incentive
program and shall be eligible to receive annual payments based upon achievement
of targeted levels of performance and such other criteria as the Board of
Directors of Centennial (the "Centennial Board") or an appropriate committee
thereof shall establish from time to time.
(c) Executive shall participate in Centennial's long-term equity
incentive program and be eligible for the grant of stock options as determined
by the Centennial Board or a committee thereof.
(d) Executive shall participate in all retirement, welfare and other
benefit plans or programs of Employer (including, at Employer's sole expense,
health, dental and hospitalization insurance coverage for Executive, his spouse
and dependents) now or hereafter applicable generally to employees of Employer
or to a class of employees that includes senior executives of Employer; PROVIDED
that during any period during the Term that Executive is subject to a
Disability, and during the one-hundred-eighty (180) day period of physical or
mental infirmity leading up to Executive's Disability, the amount of Executive's
compensation provided under this Section 3 shall be reduced by the sum of the
amounts, if any, paid to Executive for the same period under any disability
benefit or pension plan of Employer or any of its subsidiaries.
(e) Employer shall reimburse Executive for reasonable travel and other
expenses related to Executive's duties which are incurred and accounted for in
accordance with the normal practices of Employer.
(f) Executive shall be entitled to and Employer shall provide for
Executive's personal use access to up to $ 10,000 in the aggregate of legal,
accounting or other professional advice ordinarily available to Employer which,
subject to professional responsibility requirements, will be provided to
Executive by Employer's primary legal counsel, accountants or other appropriate
professionals.
(g) Executive shall receive an automobile allowance of $500 per month
during the term of this Agreement.
2
<PAGE>
4. TERMINATION.
(a) Executive's employment under this Agreement may be terminated
prior to the end of the Term only as follows:
(i) upon the death of Executive;
(ii) by Employer due to the Disability of Executive upon delivery
of a Notice of Termination to Executive;
(iii) by Employer for Cause upon delivery of a Notice of
Termination to Executive;
(iv) by Executive for Good Reason upon delivery of a Notice of
Termination to Employer within a ninety (90) day period beginning on the
30th day after the occurrence of a Change in Control or within a ninety
(90) day period beginning on the one- year anniversary of the occurrence of
a Change in Control;
(v) by Employer at any time upon delivery of a Notice of
Termination to Executive after a vote of a majority of Employer's Board in
favor of the termination of Executive, other than termination pursuant to
clause (i), (ii) or (iii) of this paragraph 4(a); and
(vi) by Executive effective upon the 90th day after delivery of a
Notice of Termination.
(b) If Executive's employment with Employer shall be terminated during
the Term pursuant to clause (i), (ii) or (iv) of paragraph 4(a) , Executive (or,
in the case of his death, Executive's estate) shall be entitled to the
following:
(i) Employer shall pay Executive in cash within fifteen (15) days
of the Termination Date an amount equal to all Accrued Compensation;
(ii) Employer shall pay to Executive in cash at the end of each
of the twelve (12) consecutive months following the Termination Date the
Base Amount divided by (12) twelve; and
(iii) the restrictions on any outstanding incentive awards
granted to Executive under Centennial's long-term equity incentive program
or under any other incentive plan or arrangement shall lapse and such
incentive awards shall become 100% vested, and all stock options and stock
appreciation rights granted to Executive shall become immediately
exercisable and shall become 100% vested.
3
<PAGE>
(c) If Executive's employment with Employer shall be terminated during
the Term pursuant to clause (v) of paragraph 4(a), Executive (or, in the case of
his death, Executive's estate) shall be entitled to the following:
(i) Employer shall pay Executive in cash within fifteen (15) days
of the Termination Date an amount equal to all Accrued Compensation; and
(ii) Employer shall pay to Executive in cash at the end of each
of the twelve (12) consecutive months following the Termination Date the
Base Amount, divided by (12) twelve.
(d) If Executive's employment with Employer shall be terminated during
the Term pursuant to clause (iii) or clause (vi) of the foregoing paragraph (a),
Executive shall be entitled to be paid by Employer in cash within fifteen (15)
days of the Termination Date an amount equal to all Accrued Compensation.
(e) Executive shall be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise and such
payment shall be offset or reduced by the amount of any compensation or benefits
provided to Executive in any subsequent employment.
(f) In the event that any payment or benefit (within the meaning of
Section 280(b)(2) of the Code) to Executive or for his benefit paid or payable
or distributed or distributable pursuant to the terms of this Agreement or
otherwise in connection with, or arising out of, his employment with Employer or
a change in ownership or effective control of Employer or of a substantial
portion of its assets (a "Payment" or "Payments"), would be subject to the
excise tax imposed by Section 4999 of the Code or any interest or penalties are
incurred by Executive with respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereinafter collectively referred to
as the "Excise Tax"), then Executive will be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by Executive
of all taxes (including any interest or penalties, other than interest and
penalties imposed by reason of Executive's failure to file timely a tax return
or pay taxes shown due on his return, imposed with respect to such taxes and the
Excise Tax), including any Excise Tax imposed upon the Gross-Up Payment,
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.
(g) The severance pay and benefits provided for in this Section 4
shall be in lieu of any other severance or termination pay to which Executive
may be entitled under any Employer severance or termination plan, program,
practice or arrangement. Executive's entitlement to any other compensation or
benefits shall be determined in accordance with Employer's employee benefit
plans and other applicable programs, policies and practices then in effect.
4
<PAGE>
5. TRADE SECRETS.
(a) Executive agrees to keep confidential, and agrees that he shall
not, at any time, either during the Term of his employment or after the
Termination Date, use or disclose any Trade Secrets of the Employer, except in
fulfillment of his duties as Executive during his employment, for so long as the
pertinent information or data remain Trade Secrets, whether or not the Trade
Secrets are in written or tangible form.
(b) Executive agrees to maintain in strict confidence and, except as
necessary to perform his or her duties for Employer, not to use or disclose any
Confidential Business Information of Employer during his employment.
(c) Executive agrees that upon termination of his employment for any
reason, Executive shall forthwith return to or leave with Employer all business
records, contracts, calendars, telephone lists and other materials relating to
Employer, its business or its clientele, including all copies thereof, whether
or not Executive prepared them himself or they were provided by Employer.
6. NON-COMPETITION AND NON-SOLICITATION COVENANTS.
(a) Executive recognizes that Executive is expected to be a key
employee whose specialized skills, abilities and contacts are considered
essential for the success of Employer. Executive further recognizes that
Employer specifically would not enter into this Agreement if it could not rely
on obtaining Executive's exclusive and undivided loyalty and attention and
Executive's compliance with the terms of this Agreement.
(b) During the Term and following any termination of his employment,
Executive shall not, directly or indirectly, (as a director, officer, employee,
manager, consultant, independent contractor, agent, advisor, equity or debt
holder or otherwise) engage in competition with, or own any interest in, perform
any services for, participate in or be connected with any business or
organization which provides rehabilitative therapy services including, but not
limited to, physical therapy, occupational therapy and speech therapy in the
Territory; PROVIDED, HOWEVER, that the provisions of this paragraph (b) shall
not prohibit Executive's ownership of not more than 5% of the total shares of
all classes of stock outstanding of any publicly held company.
(c) During the Term and following any termination of his employment,
Executive shall not solicit, directly or indirectly, any Customers (as
hereinafter defined) of Employer with whom Executive had material contact during
his employment.
(d) During the Term and following any termination of his employment,
Executive shall not, directly or indirectly, solicit for employment or advise or
recommend to any other person that he, she or it employ or solicit for
employment, any employee of Employer.
5
<PAGE>
(e) The restrictions set forth in Sections 6(b), (c) and (d) shall
last for one (1) year following any termination of Executive's employment
pursuant to Section 4 hereof.
(f) For purposes of this Agreement:
"Customers" shall mean the companies that lease, manage or own the nursing
home facilities that currently contract with Employer for the provision of
rehabilitative therapy services during the one (1) year period preceding the
Termination Date.
The "Territory" shall mean the area located within the 10-mile radius of
any skilled nursing care or other facility at which Employer provides
rehabilitative therapy services, on the Termination Date. Set forth on the
attached Schedule I, which is incorporated herein by reference, is the name and
street address of each such facility on the date of this Agreement. The
Employer shall, with the consent of Executive (which consent shall not be
unreasonably withheld), revise Schedule I from time to time to reflect any
additions, deletions, or changes in the facilities operated by Employer. It is
mutually acknowledged that Executive has significant management and operations
responsibility with respect to the provision of rehabilitative therapy at such
facilities.
7. SUCCESSORS; BINDING AGREEMENT.
(a) This Agreement shall be binding upon and shall inure to the
benefit of Employer, its Successors and Assigns and Employer shall require any
Successors and Assigns to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that Employer would be required to
perform it if no such succession or assignment had taken place.
(b) Neither this Agreement nor any right or interest hereunder shall
be assignable or transferable by Executive, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by Executive's legal
personal representative.
8. PUBLICITY. Except as set forth below, after the Termination Date (a)
no disclosure, public or otherwise, shall be made by Executive or Employer, as
the case may be, with respect to the terms and conditions of this Agreement or
the severance of Executive's employment relationship with Employer, except as
may be required by law, (b) Executive further agrees that Executive will not
demean or disparage Employer or Centennial or its subsidiaries, publicly or
otherwise, and (c) any inquiries made of Employer, its officers, employees or
representatives concerning Executive shall be answered only with a "neutral
reference." The phrase "neutral reference" as used herein shall mean only the
inclusive dates of Executive's tenure with Employer, the positions Executive
held with Employer during Executive's employment, and the rate at which
Executive was compensated for Executive's positions with Employer. Employer
shall not provide any additional information about Executive whatsoever;
PROVIDED, HOWEVER, that Employer shall explain in response to such inquiries
that "Company policy requires us to refrain from making any further response."
6
<PAGE>
9. NOTICE. Any notice and all other communications provided for in the
Agreement (including the Notice of Termination) shall be in writing and
delivered by personal delivery, courier, telecopier (transmission confirmed),
overnight delivery service or certified mail (return receipt requested, postage
prepaid) addressed as follows:
If to Employer:
Paragon Rehabilitation, Inc.
c/o Centennial HealthCare Corporation
400 Perimeter Center Terrace
Suite 650
Atlanta, Georgia 30346
Attention: J. Stephen Eaton, Chairman
Telecopier: (770) 730-1300
Telephone: (770) 730-1100
with a copy to:
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303
Attention: Paul A. Quir\s, Esq.
Telecopier: (404) 572-5146
Telephone: (404)572-4604
If to Executive:
Mr. Lawrence W. Lepley
c/o Paragon Rehabilitation, Inc.
3100 West End Avenue
Suite 850
Nashville, Tennessee 37203
Telecopier: (615) 345-2215
Telephone: (615) 345-2200
or to such other addresses or numbers as shall be specified by like notice. A
notice shall be deemed to have been given to a party to whom it is directed (i)
if by courier, personal delivery, or certified mail, upon actual receipt by such
party, (ii) if by telecopier or overnight delivery service, one business day
after such notice was sent.
10. SETTLEMENT OF CLAIMS. Employer's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder may be affected by circumstances, including, without limitation, any
7
<PAGE>
set-off, counterclaim, recoupment, defense or other right which Employer may
have against Executive or others. Employer may withhold from any benefits
payable under this Agreement all federal, state, city, or other taxes as shall
be required pursuant to any law or governmental regulation or ruling.
11. MODIFICATION AND WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by Executive and Employer. No waiver by any
party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
12. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Georgia without giving
effect to the conflict of laws principles thereof. Employer and Executive agree
that venue for any dispute that may arise concerning this agreement shall be in
DeKalb County, Georgia, or Fulton County, Georgia.
13. SEVERABILITY. 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.
14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto and supersedes all prior agreements, understandings
and arrangements, oral or written, between the parties hereto with respect to
the subject matter hereof, including without limitation that certain Employment
Agreement dated as of December 1, 1994 by and among Executive and Transitional
Health Services, Inc., a Delaware corporation and Transitional Health Partners,
a Delaware general partnership.
15. HEADINGS. The headings of 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.
16. COUNTERPARTS. 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.
17. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the following meanings:
(a) "Accrued Compensation" shall mean an amount which shall include
all amounts earned or accrued through the Termination Date but not paid as of
the Termination Date including (i) base salary, (ii) reimbursement for
reasonable and necessary expenses incurred by Executive on behalf of Employer
during the period ending on the Termination Date, and (iii) bonuses and
incentive compensation which has been awarded or which has vested.
8
<PAGE>
(b) "Base Amount" shall mean the greater of Executive's annual base
salary (i) at the rate in effect on the Termination Date or (ii) at the highest
rate in effect at any time during the ninety day period prior to the Change in
Control, and shall include all amounts of his base salary that are deferred
under the qualified and non-qualified employee benefit plans of Employer or any
other agreement or arrangement.
(c) The termination of Executive's employment shall be for "Cause" if
it is a result of:
(i) any act that constitutes, on the part of Executive, fraud,
dishonesty, negligence or malfeasance of duty, or conduct inappropriate to
Executive's office; or
(ii) the conviction (from which no appeal may be or is timely
taken) of Executive of a felony, or a misdemeanor involving moral
turpitude.
(d) A "Change in Control" shall mean the occurrence during the Term of
any of the following events:
(i) An acquisition (other than directly from Centennial) of any
voting securities of Centennial (the "Voting Securities") by any "Person"
(as the term person is used for purposes of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934 (the "1934 Act")) immediately after which
such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3
promulgated under the 1934 Act) of 60% or more of the combined voting power
of Centennial's then outstanding Voting Securities; PROVIDED, HOWEVER, that
in determining whether a Change in Control has occurred, Voting Securities
which are acquired in a "Non-Control Acquisition" (as hereinafter defined)
shall not constitute an acquisition which would cause a Change in Control.
A "Non-Control Acquisition" shall mean an acquisition by (1) an employee
benefit plan (or a trust forming a part thereof) maintained by (x)
Centennial or (y) any corporation or other Person of which a majority of
its voting power or its equity securities or equity interest is owned
directly or indirectly by Centennial (a "Subsidiary"), (2) Centennial or
any Subsidiary, or (3) any Person in connection with a "Non-Control
Transaction" (as hereinafter defined); or
(ii) Approval by shareholders of Centennial of:
(A) A merger, consolidation or reorganization involving
Centennial, unless
(1) the shareholders of Employer, immediately before
such merger, consolidation or reorganization, own,
directly or indirectly, immediately following such
9
<PAGE>
merger, consolidation or reorganization, at least
two-thirds of the combined voting power of the
outstanding voting securities of the corporation
resulting from such merger or consolidation or
reorganization (the "Surviving Corporation") in
substantially the same proportion as their
ownership of the Voting Securities immediately
before such merger, consolidation or
reorganization, and
(2) the individuals who were members of the incumbent
board immediately prior to the execution of the
agreement providing for such merger, consolidation
or reorganization constitute at least two-thirds
of the members of the board of directors of the
Surviving Corporation.
A transaction described in clauses (1) and (2) shall
herein be referred to as a "Non-Control Transaction;"
(B) A complete liquidation or dissolution of Centennial; or
(C) An agreement for the sale or other disposition of all
or substantially all of the assets of Centennial to any
Person (other than a transfer to a Subsidiary).
(e) "Confidential Business Information" shall mean any internal, non-
public information (other than Trade Secrets) concerning Employer's,
Centennial's and its subsidiaries' financial position and results of operations
(including revenues, margins, assets, net income, etc.); annual and long-range
business plans; service and product plans; marketing plans and methods; account
invoices; training, educational and administrative manuals; customer
information, including names, addresses, telephones, customer requirements and
purchase histories; and employee lists.
(f) "Disability" shall mean a physical or mental infirmity as defined
by Employer's long-term disability insurance policy provided as a benefit to
Executive.
10
<PAGE>
(g) "Good Reason" shall mean the occurrence after a Change in Control
of any of the following events or conditions:
(i) a change in Executive's status, title, position or
responsibilities (including reporting responsibilities) which, in
Executive's reasonable judgment, represents a material adverse change from
his status, title, position or responsibilities as in effect at any time
within ninety days preceding the date of a Change in Control or at any time
thereafter;
(ii) a reduction in Executive's base salary or any failure to pay
Executive any compensation or benefits to which he is entitled within
twenty (20) days of the date due;
(iii) Employer's requiring Executive to be based at any place
outside a thirty (30) mile radius from the executive offices occupied by
Executive immediately prior to the Change in Control, except for reasonably
required travel on Employer's business which is not materially greater than
such travel requirements prior to the Change in Control;
(iv) the failure by Employer or Centennial, or its or their
successors, to (A) continue in effect (without reduction in benefit level
and/or reward opportunities) any material compensation or employee benefit
plan in which Executive was participating at any time within ninety days
preceding the date of a Change in Control or at any time thereafter, unless
such plan is replaced with a plan that provides substantially equivalent
compensation or benefits to Executive or (B) provide Executive with
compensation and benefits, in the aggregate, at least equal (in terms of
benefit levels and/or reward opportunities) to those provided for under
each other employee benefit plan, program and practice in which Executive
was participating at any time within ninety days preceding the date of a
Change in Control or at any time thereafter;
(v) the insolvency or the filing by Employer of a petition for
bankruptcy of Employer, which petition is not dismissed within sixty (60)
days;
(vi) any material breach by Employer of any provision of this
Agreement;
(vii) any purported termination of Executive's employment for
Cause by Employer which does not comply with the terms of this Agreement;
or
(viii) the failure of Employer to obtain an agreement,
satisfactory to Executive, from any Successors and Assigns of Employer to
assume and agree to perform this Agreement, as contemplated in Section 7
hereof.
(h) "Notice of Termination" shall mean a written notice of termination
from Employer or Executive which specifies an effective date of termination,
indicates the specific termination provision in this Agreement relied upon, and
sets forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Executive's employment under the provision so
indicated.
11
<PAGE>
(i) "Successors and Assigns" shall mean Employer or a corporation or
other entity acquiring all or substantially all the assets and business of
Employer (including this Agreement), whether by operation of law or otherwise.
(j) "Termination Date" shall mean, in the case of Executive's death,
his date of death, and in all other cases, the date specified in the Notice of
Termination.
(k) "Trade Secrets" shall mean any information relating to Employer,
Centennial and its subsidiaries, including but not limited to technical or non-
technical data, a formula, a pattern, a compilation, a program, a device, a
method, a technique, a drawing, a process, financial data, financial plans,
product plans, information on customers, or a list of actual or potential
customers or suppliers, which: (i) derives economic value, actual or potential,
from not being generally known to, and not being readily ascertainable by proper
means by, other persons who can obtain economic value from its disclosure or
use, and (ii) is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy. Some of the information that Employer
,Centennial and its subsidiaries treat as trade secrets includes financial
information (revenues, margins, assets, net income, etc.); annual and long-range
business plans; product plans; marketing plans and methods; account invoices;
training, educational, and administrative manuals; customer information;
employee lists; suppliers; wholesalers; and future business plans of Employer,
Centennial and its subsidiaries.
IN WITNESS WHEREOF, Employer has executed this Agreement and its seal to be
affixed hereunto by its officers thereunto duly authorized, and Executive has
signed and sealed this Agreement, effective as of the date first above written.
EMPLOYER:
CENTENNIAL HEALTHCARE CORPORATION
By: /s/ J. Stephen Eaton
----------------------------------------------
J. Stephen Eaton, President and
Chief Executive Officer
EXECUTIVE:
LAWRENCE W. LEPLEY
/s/ Lawrence W. Lepley (SEAL)
-----------------------------------------
Lawrence W. Lepley
12
<PAGE>
EXHIBIT 21.1
CENTENNIAL HEALTHCARE CORPORATION
Subsidiaries of Centennial HealthCare Corporation
-------------------------------------------------
CENTENNIAL HEALTHCARE MANAGEMENT CORPORATION
A Georgia corporation
CENTENNIAL HEALTHCARE PROPERTIES CORPORATION
A Georgia corporation
CENTENNIAL/ASHTON PROPERTIES CORPORATION
A Georgia corporation
CENTENNIAL PROFESSIONAL THERAPY SERVICES CORPORATION
A Georgia corporation
CENTENNIAL ACQUISITION CORPORATION
A Georgia corporation
TRANSITIONAL HEALTH SERVICES, INC.
A Delaware corporation
Subsidiaries of Centennial HealthCare Properties Corporation
------------------------------------------------------------
CENTENNIAL HEALTHCARE INVESTMENT CORPORATION
A Georgia corporation
Subsidiaries of Centennial Acquisition Corporation
--------------------------------------------------
CENTENNIAL SERVICE CORPORATION - GRANT PARK
A Georgia corporation
CENTENNIAL SERVICE CORPORATION - MONTCLAIR
A Georgia corporation
<PAGE>
Subsidiaries of Transitional Health Services, Inc.
--------------------------------------------------
THS PARTNERS I, INC.
A Delaware corporation
THS PARTNERS II, INC.
A Delaware corporation
PARAGON REHABILITATION, INC.
A Delaware corporation
TRANSITIONAL FINANCIAL SERVICES, INC.
A Delaware corporation
Subsidiaries of Paragon Rehabilitation, Inc.
--------------------------------------------
Total Care Consolidated, Inc.
Subsidiaries of Total Care Consolidated, Inc.
---------------------------------------------
Total Care, Inc.
Total Health Care Services, Inc.
HCC Home Health of Louisiana, Inc.
Subsidiaries of Total Health Care Services, Inc.
------------------------------------------------
Total Care of the Carolinas, Inc.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this annual report on Form 10-K
of our report 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
consolidated financial statements of Centennial HealthCare Corporation as of
December 31, 1995 and 1996, and for the seven months ended December 31, 1995 and
the years ended December 31, 1995 and 1996, appearing in the registration
statement on Form S-1 (SEC File No. 333-24267) of Centennial HealthCare
Corporation filed with the Securities and Exchange Commission pursuant to the
Securities Act of 1933.
/s/ COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
March 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10K PERIOD
ENDING DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,011
<SECURITIES> 0
<RECEIVABLES> 89,834
<ALLOWANCES> 3,000
<INVENTORY> 0
<CURRENT-ASSETS> 94,615
<PP&E> 84,996
<DEPRECIATION> (10,617)
<TOTAL-ASSETS> 243,649
<CURRENT-LIABILITIES> (49,055)
<BONDS> (78,913)
0
0
<COMMON> (119)
<OTHER-SE> (112,985)
<TOTAL-LIABILITY-AND-EQUITY> (243,649)
<SALES> 0
<TOTAL-REVENUES> (304,273)
<CGS> 0
<TOTAL-COSTS> 277,951
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 863
<INTEREST-EXPENSE> 8,658
<INCOME-PRETAX> (17,437)
<INCOME-TAX> 6,800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 537
<CHANGES> 0
<NET-INCOME> (9,848)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.48)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 6,030 4,894
<SECURITIES> 0 0
<RECEIVABLES> 48,340 35,712
<ALLOWANCES> 2,500 5,912
<INVENTORY> 0 0
<CURRENT-ASSETS> 58,418 42,083
<PP&E> 73,495 58,417
<DEPRECIATION> (6,086) (3,080)
<TOTAL-ASSETS> 193,448 155,018
<CURRENT-LIABILITIES> (49,716) (38,098)
<BONDS> (107,795) (83,559)
(21,305) (19,455)
0 0
<COMMON> (20) (18)
<OTHER-SE> (11,932) (10,851)
<TOTAL-LIABILITY-AND-EQUITY> (193,448) (155,018)
<SALES> 0 0
<TOTAL-REVENUES> (233,048) (75,226)
<CGS> 0 0
<TOTAL-COSTS> 217,755 70,997
<OTHER-EXPENSES> 108 448
<LOSS-PROVISION> 758 1,035
<INTEREST-EXPENSE> 10,068 590
<INCOME-PRETAX> (5,054) (3,466)
<INCOME-TAX> 2,092 1,389
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,779) (1,876)
<EPS-PRIMARY> (0.12) (1.25)
<EPS-DILUTED> (0.12) (0.72)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 10,507 13,533 6,266
<SECURITIES> 0 0 0
<RECEIVABLES> 45,751 50,790 62,554
<ALLOWANCES> 2,200 2,300 2,200
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 63,762 72,797 79,336
<PP&E> 75,039 75,974 78,561
<DEPRECIATION> (7,810) (8,655) (9,871)
<TOTAL-ASSETS> 201,142 213,585 224,055
<CURRENT-LIABILITIES> (46,541) (50,167) (48,748)
<BONDS> (107,173) (114,797) (63,027)
(31,800) (31,498) 0
0 0 0
<COMMON> (21) (21) (119)
<OTHER-SE> (12,601) (14,625) (109,688)
<TOTAL-LIABILITY-AND-EQUITY> (201,142) (213,585) (224,055)
<SALES> 0 0 0
<TOTAL-REVENUES> (64,235) (71,939) (81,946)
<CGS> 0 0 0
<TOTAL-COSTS> 59,498 66,038 74,623
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 146 150 51
<INTEREST-EXPENSE> 2,629 2,659 1,807
<INCOME-PRETAX> (2,110) (3,259) (5,673)
<INCOME-TAX> 786 1,270 2,212
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 537
<CHANGES> 0 0 0
<NET-INCOME> (1,241) (1,884) (2,846)
<EPS-PRIMARY> (0.09) (0.30) 0.16
<EPS-DILUTED> (0.09) (0.30) 0.15
</TABLE>
<PAGE>
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K, including information set forth under the
captions "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations", constitute "Forward-Looking Statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"1933 Act"), and Section 21E of the Securities Exchange Act of 1934, as amended
(the "1934 Act"). The Company desires to take advantage of certain "safe
harbor" provisions of the 1933 Act and 1934 Act and is including this special
note to enable the Company to do so. Forward-looking statements included in
this Form 10-K or in documents incorporated by reference, or hereafter included
in other publicly available documents filed with the Securities and Exchange
Commission, reports to the Company's stockholders and other publicly available
statements issued or released by the Company involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ materially from
the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. The Company believes
the following risks, uncertainties and other factors could cause such material
differences to occur:
1. The Company's ability to grow through the acquisition and development of
long-term care facilities or the acquisition of ancillary businesses.
2. The Company's ability to identify suitable acquisition candidates or to
profitably operate or successfully integrate acquired operations into the
Company's other operations.
3. The occurrence of changes in the mix of payment sources utilized by the
Company's patients to pay for the Company's services.
4. The adoption of cost containment measures by private pay sources such as
commercial insurers and managed care organizations, as well as efforts by
governmental reimbursement sources to impose cost containment measures.
5. Changes in the United States health care system, including the Balanced
Budget Act of 1997, changes in reimbursement levels under Medicaid and Medicare,
and other changes in applicable government regulations that might affect the
profitability of the Company.
6. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a number of
potentially adverse consequences, such as the imposition of fines, temporary
suspension of admission of patients, restrictions on the ability to acquire new
facilities, suspension or decertification from Medicaid or Medicare programs,
and in extreme cases, revocation of a facility's license or the closure of a
facility, including as a result of unauthorized activities by employees.
<PAGE>
7. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and development,
as well as internal growth.
8. Changes in certificate of need laws that might increase competition in the
Company's industry, including, particularly, in the states in which the Company
currently operates or anticipates operating in the future.
9. Changes in federal or state legislation or budgetary controls that may
negatively impact the amount and method of Medicaid payments, especially in
North Carolina, Michigan and Indiana, in which states a majority of the
Company's facilities are located.
10. The Company's ability to staff its facilities appropriately with qualified
health care personnel (including administrators), including in times of
shortages of such personnel and to maintain a satisfactory relationship with
labor unions.
11. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers of
assisted and independent living and providers of home health care and changes in
the regulatory system in the states in which the Company operates that
facilitate such competition.
12. The continued availability of insurance for the inherent risks of liability
of providing services in the health care industry.
13. Price increases in medical supplies, durable medical equipment and other
items.
14. The Company's reputation for delivering high-quality care and its ability
to attract and retain patients, including patients with relatively high acuity
levels.
15. Changes in general economic conditions, including changes that pressure
governmental reimbursement sources to reduce the amount and scope of health care
coverage.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company.
