<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
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 000-22771
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CENTENNIAL HEALTHCARE CORPORATION
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(Exact name of registrant as specified in its charter)
Georgia 58-1839701
-------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) (identification No.)
400 Perimeter Center Terrace, Suite 650, Atlanta, Georgia 30346
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 770-698-9040
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Indicate by check mark whether the registrant, (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
There were 11,923,618 shares of Common Stock outstanding as of November 6,
1998
<PAGE>
CENTENNIAL HEALTHCARE INC
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 23
Signatures
<PAGE>
ITEM I - FINANCIAL STATEMENTS
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 7,164 $ 4,011
Patient accounts receivable and
third-party payor settlements, net of
allowance for doubtful accounts of
approximately $3,600 and $3,000................ 87,602 72,222
Other receivables................................ 29,626 14,612
Deferred income taxes............................ 1,311 2,511
Prepaid expenses and other current assets........ 3,501 1,259
-------- --------
Total current assets........................... 129,204 94,615
Property and equipment, net..................... 71,853 74,379
Intangible assets, net.......................... 41,835 51,331
Notes receivable and other assets............... 28,411 23,324
-------- --------
Total assets................................... $271,303 $243,649
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities......... $ 39,008 $ 40,785
Other current liabilities........................ 14,216 8,270
-------- --------
Total current liabilities...................... 53,224 49,055
Long-term debt, less current maturities........... 101,641 78,913
Other long-term liabilities....................... 2,215 2,577
-------- --------
157,080 130,545
Commitments and contingencies
Shareholders' equity:
Common stock with par value of $.01; 50,000,000
shares authorized; 11,923,618 and 11,862,320
shares issued and outstanding.................. 119 119
Paid-in capital.................................. 101,593 101,299
Retained earnings................................ 12,511 12,214
-------- --------
114,223 113,632
Note receivable from shareholder.................. - (528)
-------- --------
Net shareholders' equity....................... 114,223 113,104
-------- --------
Total liabilities and shareholders' equity..... $271,303 $243,649
======== ========
See accompanying notes to condensed consolidated financial statements.
3
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CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
-------- ------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Net patient service revenues............................. $ 85,738 $79,964 $253,159 $212,537
Management fees and other revenues....................... 3,847 1,982 11,398 5,583
-------- ------- -------- --------
Total revenues......................................... 89,585 81,946 264,557 218,120
-------- ------- -------- --------
Expenses:
Facility operating expenses:
Salaries, wages and benefits........................... 49,526 42,468 134,446 110,729
Other operating expenses............................... 18,828 20,365 66,807 57,156
Lease expense............................................ 5,756 5,909 16,911 16,342
Corporate administrative costs........................... 5,837 4,122 16,027 11,336
Depreciation and amortization............................ 1,912 1,811 6,574 4,945
Loss on closure of nursing facility...................... 4,010 - 4,010 -
Provision for asset revaluation.......................... 12,152 - 12,152 -
-------- ------- -------- --------
Total operating expenses.............................. 98,021 74,675 256,927 200,508
-------- ------- -------- --------
(8,436) 7,271 7,630 17,612
-------- ------- -------- --------
Other income (expense):
Interest income.......................................... 540 208 1,461 524
Interest expense......................................... (2,499) (1,807) (6,728) (7,095)
-------- ------- -------- --------
Total other expense.................................. (1,959) (1,599) (5,267) (6,571)
-------- ------- -------- --------
(10,395) 5,672 2,363 11,041
Provision for income taxes................................. (3,123) 2,212 1,852 4,306
-------- ------- -------- --------
Income (loss) before minority interest..................... (7,272) 3,460 511 6,735
Minority interest in net income of subsidiary,
net of income taxes...................................... (91) (77) (214) (227)
-------- ------- -------- --------
Income (loss) before extraordinary loss.................... (7,363) 3,383 297 6,508
Extraordinary loss on extinguishment of debt, net of
income tax benefit....................................... - (537) - (537)
-------- ------- -------- --------
Net income (loss).................................... (7,363) 2,846 297 5,971
Dividends and accretion on preferred stock................. - 4,654 - 5,873
-------- ------- -------- --------
Income (loss) applicable to common stock................... $ (7,363) $(1,808) $ 297 $ 98
======== ======= ======== ========
Income (loss) applicable to common stock per common
stock and common stock equivalent share:
Basic.................................................... $ (0.62) $ (0.16) $ 0.02 $ 0.01
======== ======= ======== ========
Diluted.................................................. $ (0.62) $ (0.15) $ 0.02 $ 0.02
======== ======= ======== ========
Weighted average number of common stock and
common stock equivalents outstanding:
Basic.................................................... 11,924 11,579 11,900 7,084
======== ======= ======== ========
Diluted.................................................. 11,942 11,870 12,123 7,206
======== ======= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTE
COMMON STOCK RECEIVABLE
--------------- PAID-IN RETAINED FROM
SHARES AMOUNT CAPITAL EARNINGS SHAREHOLDER NET
------ ------ -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997................... 11,862 $119 $101,299 $12,214 $(528) $113,104
Exercise of stock options...................... 61 - 294 - - 294
Proceeds from shareholder note receivable...... - - - - 528 528
Net income..................................... - - - 297 - 297
------ --- -------- ------- ----- --------
Balance at September 30, 1998.................. 11,923 $119 $101,593 $12,511 $ - $114,223
====== ==== ======== ======= ===== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1998 1997
-------- --------
Operating Activities:
Net income............................................. $ 297 $ 5,971
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization...................... 6,574 4,945
Amortization of discount on subordinated debt...... - 62
Extraordinary loss on extinguishment of debt....... - 880
Deferred income taxes.............................. (1,100) 3,978
Consulting expenses offset against
note receivable.................................. 94 63
Minority interest.................................. 350 374
Provision for doubtful accounts.................... 1,144 347
Provision for asset revaluation.................... 12,152 -
Change in assets and liabilities:
Accounts receivable............................. (16,431) (16,846)
Prepaid expenses and other assets............... (7,471) (5,674)
Accounts payable, accrued liabilities and
other current liabilities..................... 3,301 (1,824)
Other........................................... (930) 113
-------- --------
Cash used in operating activities........... (2,020) (7,611)
-------- --------
Investing Activities:
Purchases of property and equipment.................... (5,046) (4,354)
Notes and advances receivable, net of repayments....... (9,422) 280
Acquisitions, net of cash acquired..................... (591) (13,857)
(Increase) decrease in restricted cash................. (531) 4,647
Other.................................................. (1,964) (982)
-------- --------
Cash used in investing activities........... (17,554) (14,266)
-------- --------
Financing Activities:
Proceeds from issuance of preferred stock.............. - 10,000
Proceeds from the exercise of stock options............ 294 23
Proceeds from borrowings............................... 24,200 13,000
Public offering of Common Stock........................ - 68,448
Payment of stock offering costs........................ - (1,420)
Distributions paid to minority partners................ (222) (222)
Payments of dividends to preferred shareholders........ - (462)
Payments on amounts due to related party............... (480) (202)
Redemption of Series E Preferred Stock................. - (5,000)
Repurchase of Series C Preferred Stock................. - (1,009)
Principal payments on subordinated debt................ - (25,300)
Principal payments on long-term debt................... (1,065) (35,743)
-------- --------
Cash provided by financing activities....... 22,727 22,113
-------- --------
Net increase in cash and cash equivalents................ 3,153 236
Cash and cash equivalents, beginning of period........... 4,011 6,030
-------- --------
Cash and cash equivalents, end of period................. $ 7,164 $ 6,266
======== ========
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1--BASIS OF PRESENTATION AND OTHER INFORMATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnote disclosures required by generally accepted accounting principles for
complete financial statements. In the opinion of management, the financial
statements reflect all adjustments considered necessary for a fair statement of
the results of operations and financial position for the interim periods
presented. All such adjustments are of a normal recurring nature. These
unaudited interim financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 1997
and notes thereto contained in Centennial HealthCare Corporation's Annual Report
on Form 10-K filed with the Securities and Exchange Commission (Commission File
No. 001-35118).
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 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. The
results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1998 or any interim period.
Certain amounts in the 1997 financial statements of Centennial HealthCare
Corporation ("Centennial" or the "Company") have been reclassified for
comparative purposes.
7
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NOTE 2--EARNINGS PER SHARE
The calculation of earnings per share is as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Income (loss) before dividends
and accretion on preferred stock.................... $(7,363) $ 3,383 $ 297 $ 6,508
Dividends and accretion on preferred stock............ - (4,654) - (5,873)
------- ------- ------- -------
Income (loss) applicable to common stock
before extraordinary loss........................... (7,363) (1,271) 297 635
Extraordinary loss on extinguishment of
debt (net of tax)................................... - (537) - (537)
------- ------- ------- -------
Income (loss) applicable to common stock.............. $(7,363) $(1,808) $ 297 $ 98
Weighted average common shares outstanding............ 11,924 11,579 11,900 7,084
Basic earnings (loss) per common share:
Income (loss) applicable to common stock
before extraordinary loss........................... $ (0.62) $ (0.11) $ 0.02 $ 0.09
Extraordinary loss on extinguishment of debt.......... - (0.05) - (0.08)
------- ------- ------- -------
Basic Earnings (Loss) Per Common Share................ $ (0.62) $ (0.16) $ 0.02 $ 0.01
======= ======= ======= =======
Income (loss) applicable to common stock
before extraordinary loss........................... $(7,363) $(1,271) $ 297 $ 635
Interest savings on convertible debt (net of tax)..... - 24 - 41
Extraordinary loss on extinguishment of debt
(net of tax)........................................ - (537) (537)
------- ------- ------- -------
Income (loss) applicable to common stock.............. $(7,363) $(1,784) $ 297 $ 139
Weighted average common shares outstanding............ 11,924 11,579 11,900 7,084
Dilutive effect of stock options...................... 18 166 223 80
Conversion of convertible debt........................ - 125 - 42
------- ------- ------- -------
Average diluted common shares outstanding............. 11,942 11,870 12,123 7,206
Diluted earnings (loss) per common share:
Income (loss) applicable to common stock before
extraordinary loss.................................. $ (0.62) $ (0.10) $ 0.02 $ 0.09
Extraordinary loss on extinguishment of debt.......... - (0.05) - (0.07)
------- ------- ------- -------
Diluted Earnings (Loss) Per Common Share.............. $ (0.62) $ (0.15) $ 0.02 $ 0.02
======= ======= ======= =======
</TABLE>
8
<PAGE>
NOTE 3--CERTAIN THIRD QUARTER TRANSACTIONS
In December 1995, as part of the Company's merger with Transitional Health
Services, Inc., (the "THS Merger"), the Company assumed operations of THS of
South Bend, a 191-bed skilled nursing facility located in South Bend, Indiana.
Prior to its acquisition by the Company, this facility had a history of
operating losses, had received negative state licensure surveys, and was in
jeopardy of losing its license. At the time of the acquisition, the Company
recorded a $3.0 million reserve against a future loss on the disposition of the
facility, which the Company intended to complete within two years. The Company
has been unable to sell the facility, and as a result, management has
determined that the best course of action is to close the facility. All
necessary notices for closure have been sent and it is anticipated that the
facility will close during late November 1998. During the third quarter of 1998,
the Company recorded an estimated loss of $4.0 million associated with the
closure of this facility and the relocation of its residents. The Company will
continue to market the facility for sale with disposition expected during the
second quarter of 1999. As of September 30, 1998, the carrying value of this
facility was approximately $1.8 million. The Company suspended depreciation on
these assets in August of 1998. Depreciation on these assets would have
approximated $15,000 during the third quarter. The action filed by the local
county prosecutor's office during the third quarter of 1998 remains pending. The
Company continues to believe that this action is without merit.
During the third quarter of 1998, the Company completed its review of the
effects of the upcoming prospective payment system ("PPS") on its operations.
Based upon the Company's projections of future revenue and expense changes
associated with the phase-in of PPS, the Company determined that profitability
at certain of its nursing centers acquired in the THS Merger would be less than
expected. In addition, the Company has experienced continued declines in
revenue at Total Care, Inc., ("TC"), the Company's subsidiary providing home
health services, due to decreases in home health visits during 1998 and
decreases in Medicare reimbursement for home health services. Accordingly,
during the third quarter of 1998, the Company recorded write-downs of property
and equipment and goodwill at its nursing centers of approximately $3.4 million
and $7.6 million respectively. In addition, the Company wrote off approximately
$1.2 million of goodwill associated with Total Care, Inc.
NOTE 4--FACILITY ACQUISITIONS
In June 1998 the Company signed an agreement to lease ten skilled nursing
facilities totaling 1,024 licensed available beds, located throughout Arkansas,
Florida, Kansas, Wisconsin and North Carolina. The leases, with an initial
fourteen-year term and two ten-year renewal options, were effective upon
transfer of the licenses to the Company. Two of the licenses transferred on
August 1, 1998, six of the licenses transferred on October 1, 1998 and the
two remaining facility licenses transferred on November 1, 1998.
In August 1998, the Company financed three skilled nursing facilities under the
lease component of its expanded Senior Credit Facility with First Union National
Bank (First Union), and NationsBank, N.A., (NationsBank), as agents and lenders
and the other lenders named therein, (the "Senior Credit Facility" see Note 5).
Royal Terrace Nursing and Rehabilitation center, a 147-bed facility located in
Kansas, was previously leased by the Company. Chenal Rehabilitation and
Healthcare Center, a 70-bed facility located in Arkansas, was previously managed
by the Company. The third facility, 82-bed Riley Nursing Center, is
Centennial's sixth skilled nursing facility in Mississippi.
NOTE 5--COMMITMENTS AND CONTINGENCIES
On December 16, 1997, the Company expanded its Senior Credit Facility through an
amendment to its existing credit agreement. The Company's maximum aggregated
advance limit was increased from $65.0 million to $125.0 million. 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.
In July 1998, the Company refinanced and expanded the Senior Credit Facility
from $125 million to $160 million through syndication with an expanded bank
9
<PAGE>
group led by NationsBank and First Union as agents. Under the expansion, an
initial amount of $40.0 million has been reserved for leases of existing and
future facilities. The Company has the ability to expand the lease portion of
the commitment up to $80.0 million, and in October 1998 the lease portion was
expanded to $70.0 million.
Under the provisions of the Senior Credit Facility, Centennial is required to
hedge a portion of its floating rate debt outstanding under the Senior Credit
Facility. Effective April 20, 1998, the Company entered into an interest rate
swap agreement with First Union. Through the agreement, the Company has
exchanged its floating rate interest obligations on $18.0 million in principal
at a fixed rate of 5.65% per annum for a period of five years. First Union has
the option of canceling the agreement on April 19, 2001. The fixing of interest
rates for this period reduces in part the Company's exposure to the uncertainty
of floating interest rates. The differential paid or received on the interest
rate swap agreement is recognized as an adjustment to interest expense.
Effective October 1998, the Company entered into two additional interest rate
swap agreements, one with NationsBank, and one with Credit Lyonnais
Americas, whereby the Company exchanged its floating rate interest obligations
on a total of $20.0 million in principal at a fixed rate of 5.57% per annum for
a period of five years. Both NationsBank and Credit Lyonnais Americas have the
option of canceling their respective agreements at the end of three years from
the effective dates.
NOTE 6--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS No.
133"), "Accounting for Derivative Instruments and Hedging Activities," was
issued. This statement requires that all derivatives be recognized in the
statement of financial position as either assets or liabilities and measured at
fair value. In addition, all hedging relationships must be designated,
reassessed and documented pursuant to the provisions of SFAS No. 133. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The effect on
the financial statements upon adoption of SFAS No. 133 has not been determined.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information", ("SFAS
No. 131"). SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual and interim
financial statements. SFAS No. 131 is required to be applied beginning with the
Company's 1998 annual financial statements. The Company has not yet determined
the effect, if any, of this statement on its consolidated financial statements.
NOTE 7--SUBSEQUENT EVENTS
On October 22, 1998, Centennial announced that its Board of Directors had
approved the sale of the Company for $16.00 per share in cash to a new company
formed by Welsh, Carson, Anderson & Stowe ("WCAS"), whose affiliates currently
hold approximately 23% of the Company's common stock.
Under the definitive merger agreement, each outstanding share of the Company's
common stock, other than certain shares currently held by the Company's
management, will be converted into the right to receive $16.00 in cash. Certain
shares held by the Company's management will be converted into shares of the
surviving corporation so that management will maintain an equity interest in
such surviving corporation.
The proposed transaction is subject to certain conditions, including regulatory
approvals, approval by the Company's shareholders holding a majority of the
outstanding shares, as well as the approval of a majority of the shares voted by
disinterested shareholders other than those members of management converting
shares into shares of the surviving corporation and WCAS or its affiliates, and
other customary closing conditions. The definitive merger agreement contains no
financing contingencies.
In the fourth quarter of 1998, the Company financed six nursing facilities under
the lease component of the Senior Credit Facility. Lincoln Centers for
Rehabilitation and Healthcare-East, and Lincoln Centers for Rehabilitation and
Healthcare-West, a 90-bed facility and a 76-bed facility, respectively, both
located in Connersville, Indiana, were previously leased by the Company.
Riverbend Health Care Center, a 78-bed facility located in Fort Wayne, Indiana,
and Sheridan Healthcare Center, an 80-bed facility located in Sheridan, Indiana,
were also previously leased by the Company. Ashton Court Care and
Rehabilitation Centre, a 140-bed facility located in Liberty, Missouri and
Woodbine Healthcare and Rehabilitation Centre, a 300-bed facility located in
Gladstone, Missouri are being leased by the Company effective November 1, 1998.
In October 1998, Centennial signed a management contract to manage a facility in
Ackerman, Mississippi, with 22 acute care hospital beds and 68 skilled nursing
beds, which the Company anticipates leasing beginning December 1, 1998,
following receipt of all necessary consents and approvals.
As part of management's decision to close the facility, in October 1998, the
Company acquired its formerly leased facility in South Bend Indiana and
terminated the lease, thereby eliminating the ongoing lease obligation.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
Unaudited Condensed Consolidated Statements of Operations for the three and
nine-month period ended September 30, 1998 and 1997.
CERTAIN STATEMENTS IN THIS FORM 10-Q/A, INCLUDING INFORMATION SET FORTH UNDER
THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS", CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS INCLUDE
STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF CENTENNIAL
HEALTHCARE CORPORATION AND MEMBERS OF ITS MANAGEMENT TEAM. MANAGEMENT CAUTIONS
THAT A VARIETY OF FACTORS COULD CAUSE CENTENNIAL HEALTHCARE'S ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THE ANTICIPATED RESULTS EXPRESSED IN 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 CENTENNIAL HEALTHCARE'S CAUTIONARY STATEMENTS REGARDING FORWARD-
LOOKING STATEMENTS (EXHIBIT 99.1 TO THIS REPORT), WHICH STATEMENTS ARE
INCORPORATED HEREIN BY REFERENCE.
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.
The Company currently operates 103 owned, leased and managed skilled nursing
facilities with approximately 11,200 licensed available beds in 19 states and
the District of Columbia. 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, the Company provides, through
its subsidiaries, comprehensive rehabilitation services and home health
services.
In August 1998, the Company began leasing Riley Nursing Center, an 82-bed
skilled nursing facility located in Mississippi; Walnut Cove Healthcare Center,
a 104-bed skilled nursing facility located in North Carolina; Omro Care Center,
an 80-bed skilled nursing facility located in Wisconsin; and Chenal Health and
Rehabilitation Center, ("Chenal"), an 83-bed skilled nursing facility located in
North Carolina. Chenal was previously managed by the Company. Together, these
acquisitions are hereafter referred to as the "August Facility Acquisitions".
In December 1995, as part of the Company's merger with Transitional Health
Services, Inc., the Company assumed operations of THS of South Bend, a 191-bed
skilled nursing facility located in South Bend, Indiana. Prior to its
acquisition by the Company, this facility had a history of operating losses, had
11
<PAGE>
received negative state licensure surveys, and was in jeopardy of losing its
license. At the time of the acquisition, the Company recorded a $3.0 million
reserve against a future loss on the disposition of the facility, which the
Company intended to complete within two years. The Company has been unable to
sell the facility, and as a result, management has determined that the
best course of action is to close the facility. All necessary notices for
closure have been sent and it is anticipated that the facility will close during
late November 1998. During the third quarter of 1998, the Company recorded an
estimated loss of $4.0 million associated with the closure of this facility and
the relocation of its residents. The Company will continue to market the
facility for sale.
During the third quarter of 1998, the Company completed its review of the
effects of the upcoming prospective payment system ("PPS") on its operations.
Based upon the Company's projections of future revenue and expense changes
associated with the phase-in of PPS, the Company determined that profitability
at certain of its nursing centers acquired in the THS Merger would be less than
expected. In addition, the Company has experienced continued declines in
revenue at Total Care, Inc., ("TC"), the Company's subsidiary providing home
health services, due to decreases in home health visits during 1998 and
decreases in Medicare reimbursement for home health services. Accordingly,
during the third quarter of 1998, the Company recorded write-downs of
certain long-lived assets at its nursing facilities and TC of $11.0 million and
$1.2 million, respectively.
During the first quarter of 1998, the Company entered into management agreements
for six skilled nursing facilities, with a total of 836 licensed available beds,
located in North Carolina. Also in the first quarter of 1998, Centennial
entered into a management agreement for a 59-bed rural hospital in northern
Florida.
In December 1997, Centennial acquired a 58-bed skilled nursing facility in St.
Petersburg, Florida, (the "Florida Facility") which had previously been managed
by the Company since June 1991. The Florida Facility was formerly owned by an
affiliate of the president of the Company. Total consideration of approximately
$3.3 million included borrowings under the Company's 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.
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. The
Company paid total consideration of $7.0 million, utilizing borrowings under its
Senior Credit Facility. The Company may pay additional consideration under an
earn-out agreement.
In May 1997, the Company acquired by merger Total Care Consolidated, Inc.,
("TC"), a provider of home health services, with 25 home health offices. 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.
In March 1997, the Company acquired a leasehold interest in a rural hospital
located in northern Florida. In October 1996, the Company entered into a
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management agreement and a lease agreement with the owner of a 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 above hospital leases
together are hereafter referred to as the "Hospitals".
RESULTS OF OPERATIONS
Centennial's revenues and earnings for both the three-month and nine-month
period ended September 30, 1998 as compared to the same period for 1997
continued to grow from both expansion and increases in current operations and as
a result of acquisitions.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
NET PATIENT SERVICE REVENUES. Net patient service revenues increased from $80.0
million in the third quarter of 1997 to $85.7 million in the same period in
1998, an increase of $5.7 million or 7.2%. Total revenues associated with the
CCI contracts added approximately $1.7 million in the three months ended
September 30, 1998, compared to the same period in 1997. Revenues associated
with the Florida Facility and the August Facility Acquisitions approximated
$829,000 and $2.1 million, respectively, for the third quarter of 1998. Revenues
from home health services decreased approximately $1.4 million during the
quarter due to a decline in home health visits and Medicare rate decreases
implemented in 1998. Revenues from PTS, the Company's subsidiary providing
intravenous therapy and other services, increased approximately $1.5 million in
the third quarter of 1998 compared to the same period in 1997 due primarily to
the addition of new contracts with third parties. Existing facility revenues
increased approximately $1.0 million during the third quarter of 1998 compared
to the same period in 1997, resulting primarily from an increase in the quality
revenue mix of the facilities due to increasing admissions of higher acuity
patients. The Company also experienced general rate increases at certain of its
nursing facilities, which increased patient service revenues in the third
quarter of 1998 compared to the same period in 1997.
MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues
increased from $2.0 million in the third quarter of 1997 to $3.8 million in the
third quarter of 1998, an increase of $1.8 million or 94.1%, which was
attributable primarily to the net addition of facility management agreements
subsequent to the third quarter of 1997 and the performance of additional fee-
generating services to existing managed facilities.
FACILITY OPERATING EXPENSES. Facility operating expenses increased from $62.8
million in the third quarter of 1997 to $68.4 million in the same period in
1998, an increase of $5.6 million or 8.8%, of which the CCI therapy contracts
added approximately $1.3 million in the third quarter of 1998 compared to the
same period in 1997. The Florida Facility and the August Facility Acquisitions
added approximately $601,000 and $1.8 million, respectively, to operating
expenses during the third quarter of 1998. Existing facility operating expenses
increased $2.0 million in the third quarter of 1998 compared to the third
quarter of 1997 due to regular increases in salary costs and costs associated
with PPS training for the Company's nursing and support staff. Operating
expenses from home health services decreased approximately $1.4 million during
the quarter resulting from decreased home health visits in 1998 and costs
reductions in the Company's delivery of care. Expenses from PTS increased $1.3
million over the third quarter of 1998 due to the addition of new third party
contracts.
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<PAGE>
CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased from
$4.1 million in the third quarter of 1997 to $5.8 million in the third quarter
of 1998, an increase of $1.7 million, or 41.6%, which was due primarily to the
addition of long-term care facility management agreements and costs incurred in
preparing for the Medicare prospective payment system.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$1.8 million in the third quarter of 1997 to $1.9 million in the same period in
1998, an increase of approximately $101,000, or 5.6%, which was primarily
attributable to additional depreciation expense incurred as a result of fixed
asset purchases.
INTEREST EXPENSE. Interest expense increased from $1.8 million in the third
quarter of 1997 to $2.5 million in the same period in 1998, an increase of
approximately $692,000, or 38.3%, which was primarily attributable to the
increase in debt of approximately $39.0 million subsequent to the third quarter
of 1997 related to borrowings for working capital.
LEASE EXPENSE. Lease expense for the third quarter of 1998 approximated lease
expense in the prior year period.
LOSS ON CLOSURE OF NURSING FACILITY. During the third quarter of 1998, the
Company recorded an estimated loss of $4.0 million associated with the closure
of THS of Southbend and the relocation of the facility's residents.
PROVISION FOR ASSET REVALUATION. During the quarter, Company recorded write-
downs of certain long-lived assets at its nursing facilities and at TC of $11.0
million and $1.2 million, respectively.
PROVISION FOR INCOME TAXES. The Company's effective tax rate decreased from
39.0% in the third quarter of 1997 to 30.0% in the third quarter of 1998, a
decrease in the rate of 9.0%, due to an increase in permanent tax differences
associated with the write off of non-deductible goodwill.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
NET PATIENT SERVICE REVENUES. Net patient service revenues increased from
$212.5 million in the first nine months of 1997 to $253.2 million in the same
period in 1998, an increase of $40.7 million or 19.1%. Revenues associated with
the acquisition of TC and the acquisition of the CCI contracts added
approximately $9.0 million and $10.7 million, respectively, during the first
nine months of 1998. Revenues from the acquisitions of the Hospitals added
approximately $3.1 million during the first nine months of 1998. Revenues for
the Florida Facility and the August Facility Acquisitions approximated $2.5
million and $2.1 million, respectively, for the first nine months of 1998. The
remaining increase of $13.3 million was primarily attributable to growth in
existing facility revenues, therapy contract revenues and revenues from PTS.
Revenues associated with existing facilities increased by approximately $9.1
million during the first nine months of 1998 as compared to the same period in
the prior year, and resulted primarily from an increase in the quality revenue
mix of the facilities due to increasing admissions of higher acuity patients and
from an increase in the delivery of specialty services. The Company also
experienced general rate increases at its nursing facilities, which increased
patient service revenues in the first nine months of 1998 compared to the same
period in 1997. The increase in revenues at the Company's subsidiary providing
therapy services of approximately $4.0 million resulted from the net addition of
two rehabilitation therapy services contracts subsequent to the third quarter of
1997 as well as growth in existing contract revenue. This same store growth was
primarily the result of favorable salary equivalency rate changes in certain
states in which the Company operates as well as improvements in productivity of
the CCI contracts following a short downturn in volume subsequent to the 1997
contracts acquisition. Revenues from home health services decreased
approximately $2.0 million during the first nine months of 1998 due to a decline
in home health visits and Medicare rate decreases implemented in 1998. Revenue
from PTS increased $2.2 million in the first nine months of 1998 compared to
1997 due to increased volume from existing contracts and the addition of new
third party contracts in 1998.
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<PAGE>
MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues
increased from $5.6 million in the first nine months of 1997 to $11.4 million in
the first nine months of 1998, an increase of $5.8 million, which was
attributable primarily to the net addition of facility management agreements
subsequent to the third quarter of 1997 and the performance of additional fee-
generating services to existing managed facilities.
FACILITY OPERATING EXPENSES. Facility operating expenses increased from $167.9
million in the first nine months of 1997 to $201.3 million in the same period in
1998, an increase of $33.4 million or 19.9%, of which the acquisition of TC and
the acquisition of the CCI therapy contracts added approximately $8.3 million
and $8.0 million, respectively, in the first nine months of 1998. The
acquisitions of the Hospitals added $2.7 million to operating expenses during
the first nine months of 1998 compared to 1997. Operating expenses for the
Florida Facility and the August Facility Acquisitions totaled $1.9 million and
$1.8 million, respectively, in the first nine months of 1998. The remaining
increase of $10.7 million was attributable primarily to increases in operating
expenses at existing long-term care facilities, increases in expenses from
existing contract therapy services, and increases at PTS. Operating expenses at
existing facilities increased $7.7 million, due to providing care for higher
acuity patients in the first nine months of 1998 as compared to the prior year
period, as well as costs associated with PPS training for the Company's nursing
and support staff. Operating expenses at the Company's subsidiary providing
therapy services increased $2.5 million as compared to the prior year period,
due to the net addition of two rehabilitation therapy services contracts as well
as increases in therapy volume on certain of the Company's existing contracts.
Expenses from home health services decreased approximately $1.5 million in the
first nine months of 1998 as compared to 1997 due to the decline in home health
visits in 1998 and cost reductions in the Company's delivery of care. Operating
expenses at PTS increased $2.0 million in the first nine months of 1998 compared
to the prior year period due to increased volume from existing contracts and the
addition of new third party contracts.
LEASE EXPENSE. Lease expense increased from $16.3 million in 1997 to $16.9
million in 1998, an increase of approximately $569,000, or 3.5%. The
acquisitions of TC and the Hospitals added approximately $138,000 and $120,000,
respectively, in the first nine months of 1998 compared to the first nine months
of 1997. Lease expense for the August Facility Acquisitions totaled
approximately $244,000 for the first nine months of 1998.
CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased from
$11.3 million in 1997 to $16.0 million in 1998, an increase of $4.7 million, or
41.4%, which was due primarily to additional overhead incurred to accommodate
the acquisition of the CCI contracts, the addition of long-term care facility
management agreements, the acquisition of TC, the Hospitals and the August
Facility Acquisitions, and costs incurred in preparing for the prospective
payment system.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$4.9 million in the first nine months of 1997 to $6.6 million in the same period
in 1998, an increase of approximately $1.7, or 32.9%, which was primarily
attributable to acquisitions and additional depreciation expense incurred as a
result of fixed asset purchases.
INTEREST EXPENSE. Interest expense decreased from $7.1 million in 1997 to $6.7
million in 1998, a decrease of approximately $367,000, or 5.2%, which was
primarily attributable to the repayment of $25.3 million of subordinated debt in
the third quarter of 1997, repayment of $35.1 million outstanding under the
Senior Credit Facility in the third and fourth quarters of 1997 as a result of
the completion of the Company's initial public offering, (which occurred in July
1997), and the increase in debt of approximately $39.0 million subsequent to the
third quarter of 1997 related to borrowings for working capital.
PROVISION FOR INCOME TAXES. The Company's effective tax rate increased from
39.0% for the first nine months of 1997 to 78.4% for the first nine months of
1998, an increase in the rate of 39.4%, due to an increase in permanent tax
differences associated with the write off of non-deductible goodwill.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash during the first nine months of 1998 was
borrowings under its Senior Credit Facility. Cash was used by the Company for
capital improvements at several existing facilities, working capital advances
under arrangements with certain of the Company's managed 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.
Working capital increased from $45.6 million at December 31, 1997, to $76.0
million at September 30, 1998 primarily attributable to increases in patient
accounts receivable, working capital advances under arrangements with certain of
the Company's managed facilities, increases in management fees receivable due to
additional fee-generating services provided to managed facilities, and accrued
liabilities associated with the closure of THS of Southbend. Patient accounts
receivable increased from $72.2 million at December 31, 1997 to $87.6 million at
September 30, 1998, an increase of $15.4 million. This increase was comprised of
$10.3 million associated with the Company's long-term care facilities, with the
remaining $5.1 million resulting from increases in rehabilitation therapy
contract receivables. The increase in receivables at the Company's long-term
care facilities is due primarily to increases in settlement receivables due from
the Medicare program associated with the Company's continued expansion of
specialty services during 1998. Costs incurred under the Medicare program are
reimbursed on a retroactive basis, which extends the collection time of these
receivables. The Company received interim payments totaling $9.1 million from
Medicare on its 1997 and 1998 settlement receivables (up to the routine cost
limits) during the third quarter of 1998. The increase in therapy receivables
during 1998 relates primarily to slowdown in payments from skilled nursing
facilities associated with increases in those providers' Medicare settlements.
As these settlements are collected, obligations to the Company should be
reduced. Working capital advances under arrangements with certain of the
Company's managed facilities increased by approximately $9.5 million, and
management fees related to additional fee-generating services to managed
facilities increased $3.6 million during the first nine months of 1998.
Additional accrued liabilities of $2.4 million, net of tax, were recorded in the
third quarter of 1998 associated with the closure of THS of Southbend.
The Company continued to invest in its leased and owned facilities through
capital expenditures of approximately $5.0 million or approximately $800 per bed
for the nine-month period. These expenditures included the expansion of
existing facilities and the selected rehabilitation of certain facilities.
In July 1998, the Company expanded the Senior Credit Facility from $125 million
to $160 million through syndication with an expanded bank group led by
NationsBank and First Union as agents. Under the expansion, an initial amount
of $40.0 million has been reserved for leases of existing and future facilities.
The Company has the ability to expand the lease portion of the commitment up to
$80.0 million, and in October 1998, the lease portion was expanded to $70.0
million.
In August 1998, the Company financed three skilled nursing facilities under the
lease component of the expanded credit facility. Royal Terrace Nursing and
Rehabilitation Center, a 147-bed facility located in Kansas, was previously
leased by the Company. Chenal Rehabilitation and Healthcare Center, a 70-bed
facility located in Arkansas, was previously managed by the Company. The third
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facility, 82-bed Riley Nursing Center, is Centennial's sixth skilled nursing
facility in Mississippi.
During the first nine months of 1998, the Company borrowed a net of $24.2
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. As of September 30, 1998, the Company had $65.5 million
outstanding and approximately $52.8 million available under its Senior Credit
Facility, net of issued standby letters of credit of approximately $6.7 million.
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.
In June 1998 the Company signed an agreement to lease ten skilled nursing
facilities totaling 1,024 licensed available beds, located throughout Arkansas,
Florida, Kansas, Wisconsin and North Carolina. The leases, with an initial
fourteen-year term and two ten-year renewal options, will be effective upon
transfer of the licenses. Two of the licenses transferred on August 1, 1998, six
of the licenses transferred on October 1, 1998 and the two remaining facility
licenses transferred on November 1, 1998. Centennial anticipates using cash
resources in the fourth quarter of 1998 to fund working capital requirements
under these leases.
In the fourth quarter of 1998, the Company financed six nursing facilities under
the lease component of the Senior Credit Facility. Lincoln Centers for
Rehabilitation and Healthcare-East, and Lincoln Centers for Rehabilitation and
Healthcare-West, a 90-bed facility and a 76-bed facility, respectively, both
located in Connersville, Indiana, were previously leased by the Company.
Riverbend Health Care Center, a 78-bed facility located in Fort Wayne, Indiana,
and Sheridan Healthcare Center, an 80-bed facility located in Sheridan, Indiana,
were also previously leased by the Company. Ashton Court Care and
Rehabilitation Centre, a 140-bed facility located in Liberty, Missouri and
Woodbine Healthcare and Rehabilitation Centre, a 300-bed facility located in
Gladstone, Missouri are being leased by the Company effective November 1, 1998.
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 ("PPS") for
skilled services. The PPS per diem, which would cover routine service,
ancillary and capital related 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 for case mix and geographic variations in labor costs. The
blended rate will be further adjusted by a facility-specific case mix (acuity)
index.
Management believes that revenues will be lower under PPS; however, reductions
in therapy costs, use of general purchasing agents and other expense reduction
measures should offset the effect of any rate reductions. 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. During both the
third quarter and first nine months of 1998, the Company derived approximately
19% of its revenues from Medicare at its long-term care facilities. The Company
will incur, over the next three quarters, training costs, implementation costs
and other costs in order to prepare for PPS. For the remainder of 1998, the
Company has increased it's budgeted expenses by $1.5 million related to these
costs. Additionally, the Company expects to incur an additional $3.0 million in
the first half of 1999 related to these costs.
<PAGE>
The Act has also targeted the Medicare home health program for reductions in
spending of approximately $16.2 billion over the next five years, also primarily
through the implementation of a prospective payment system. An interim payment
system ("IPS") will remain in effect until the new prospective payment system is
implemented for cost reporting periods beginning on or after
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October 1, 1999. The interim payment system is effective for cost reporting
periods beginning on or after October 1, 1997. Under the IPS, home health
agencies are reimbursed at the lessor of:
. Actual costs
. Per visit cost limits reduced to 105% of the median per visit costs for
freestanding home health agencies; or
. A new blended agency-specific per beneficiary annual limit applied to the
agency's unduplicated census count of Medicare patients and based 75% on 98%
of reasonable costs for the agency's twelve- month cost reporting period
ending during fiscal year 1994.
Implementation of these new limits will effectively reduce reimbursement 15-20%
according to industry experts. For the third quarter and first nine months of
1998, the Company derived approximately 6 % and 7%, respectively, of its
revenues from home health care.
Effective April 10, 1998, regulations were adopted by Health Care Financing
Administration, which revise the methodology for determining the reasonable
cost for contract therapy services, including physical therapy, respiratory
therapy, occupational therapy and speech language pathology. Under the
regulations, the reasonable costs for contract therapy services are limited to
geographically-adjusted salary equivalency guidelines. However, the revised
salary equivalency guidelines will no longer apply when the PPS system
applicable to the particular setting for contract therapy services (e.g. skilled
nursing facilities, home health agencies, etc.) goes into effect. In most
locations the reduced rates have the effect of reducing the amount of
reimbursement for an hour of occupational or speech therapy and increasing the
amount of reimbursement for an hour of physical and respiratory therapy. The
Company believes that such rate reductions will be completely or partially
offset by cost reductions, changes in the method of delivering such services and
the addition of new therapy contracts. 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 long-term
adverse effect on the Company. For the third quarter and first nine months of
1998, the Company derived approximately 14 % and 15%, respectively, of its
revenues from third-party contract therapy services.
IMPACT OF THE YEAR 2000 ISSUE
Computer systems and other equipment, including biomedical equipment and
building controls, with embedded computer microchips or processors
(collectively, "Business Systems") may use only two digits to represent the
year, which could result in the inability to process accurately certain date
sensitive data or operations before, during or after the year 2000. Business
and governmental entities are at risk for possible miscalculations or systems
failures causing disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices or engage in similar
normal business activities. This is commonly known as the Year 2000 Issue.
Problems associated with the Year 2000 Issue could affect many of Centennial's
financial and administrative operations as well as its voice and data
communication systems.
The Company is in the process of implementing a Year 2000 compliance plan (the
"Plan") with the objective of having all of its significant internal Business
Systems fully compliant with respect to the Year 2000 Issue before June 30,
1999.
The first component of the Plan is to identify the internal Business Systems of
the Company that are susceptible to processing errors or system failures as a
result of the Year 2000 Issue. This effort is
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substantially complete, and priorities for all Business Systems that may require
remediation or replacement have been established. Those Business Systems
considered most critical to continuing operations and resident care are being
given the highest priority.
The second component of the Plan involves the actual remediation and replacement
of Business Systems. Business Systems ranked highest in priority have either
been remediated or replaced or scheduled for remediation or replacement. The
Company's objective is to complete substantially all remediation and replacement
of internal Business Systems by March, 1999 to allow time for testing and
verification.
Significant governmental entities, service providers, vendors and suppliers that
are believed to be critical to business operations after January 1, 2000, have
been identified and steps are being undertaken in an attempt to reasonably
ascertain their stage of Year 2000 compliance through questionnaires,
interviews, and other available means.
It is currently estimated that the aggregate cost of the Company's Year 2000
efforts will be approximately $250,000 to $500,000, of which approximately
$80,000 has been spent to date. These costs are being expensed as they are
incurred and are being funded through operating cash flow. These amounts do not
include any costs associated with the implementation of contingency plans, which
are in the process of being developed. The costs associated with the replacement
of computerized systems, hardware or equipment (currently estimated to be
approximately $300,000), substantially all of which would be capitalized, are
not included in the above estimates. The Company does not expect the costs
relating to Year 2000 remediation to have a material effect on Centennial's
results of operations or financial condition.
Because of the interdependent nature of Business Systems, the Company could be
materially adversely affected if federal and state agencies that administer
Medicare and/or Medicaid or private businesses with which the Company does
business or that provide essential services are not Year 2000 compliant. The
business and results of operations of the Company could be materially adversely
affected by a temporary inability of the Company to conduct its business in
the ordinary course for a period of time after January 1, 2000. Any related
costs to the Company are not included in the above cost estimates.
Concurrently with the Plan described above, the Company is developing a
contingency plan intended to mitigate the possible disruption in business
operations that may result from the Year 2000 Issue, and is developing cost
estimates for this plan. Once developed, the contingency plan and related cost
estimates will be continually refined as additional information becomes
available. Management expects that the contingency plan will be in place by the
end of the second quarter of 1999.
The Company's Plan is an ongoing process and the estimates of costs and
completion dates for various components of the Plan described above are subject
to change.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As of September 30, 1998, the Company did not have any pending legal
proceedings that, based on current information and beliefs,
separately or in the aggregate, would be likely to have a material
adverse effect on the business or the results of operations of the
Company. The Company is, and may be in the future, party to
litigation or administrative proceedings which arise in the normal
course of its business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------- -----------
2.1 Agreement and Plan of Merger between Cougar Holdings Corporation,
Cougar Acquisition Corporation and the Company, dated October 22,
1998 (incorporated by reference to Exhibit 2.1 of the Company's
Current Report on Form 8-K filed on October 28, 1998.)
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 of 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,
included without limitation Article III and Article VII
(incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1, Registration No. 333-24267, as
amended).
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10.1 Lease between Health Care Property Investors, Inc. as Lessor and
Centennial HealthCare Investment Corporation as Lessee dated as of
June 15, 1998.
10.2 Guaranty of Obligations by the Company concerning obligations of
Centennial HealthCare Investment Corporation as Lessee under that
certain Lease dated June 15, 1998 with Health Care Property
Investors, Inc.
10.3 Participation Agreement dated as of July 29, 1998 among the Company
as Construction Agent and Lessee, certain of subsidiaries of the
Company as Guarantors, First Security Bank, National Association, as
Owner Trustee, the various banks and lending institutions named
therein as the Holders, the various banks and lending institutions
named therein as the Lenders, First Union Capital Markets, as
Syndication Agent, and NationsBank, N.A. as Agent
10.4 Lease Agreement dated as of July 29, 1998 between First Security
Bank, National Association, not individually, but solely as the Owner
Trustee under the Centennial Real Estate Trust 1998-1, as Lessor, and
the Company as Lessee
10.5 Agency Agreement dated as of July 29, 1998 between the Company and
First Security Bank, National Association
10.6 Security Agreement dated as of July 29, 1998 between First Security
Bank, National Association, not individually but solely as the Owner
Trustee under the Centennial Real Estate Trust 1998-1 and
NationsBank, N.A. as the Agent for the Lenders and the Holders, and
accepted and agreed to by the Company
10.7 Lease Supplement No. 1 by and between First Security Bank, National
Association and the Company dated August 5, 1998
10.8 Lease Supplement No. 2 by and between First Security Bank, National
Association and the Company dated August 5, 1998
10.9 Lease Supplement No. 3 by and between First Security Bank, National
Association and the Company dated August 5, 1998
10.10 Lease Supplement No. 4 by and between First Security Bank, National
Association and the Company dated October 9, 1998
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10.11 Lease Supplement No. 5 by and between First Security Bank, National
Association and the Company dated October 9, 1998
10.12 Lease Supplement No. 6 by and between First Security Bank, National
Association and the Company dated October 9, 1998
10.13 Second Amended and Restated Lease Agreement by and between EBT
Healthcare Properties, L.P. and Centennial HealthCare Properties
Corporation dated October 1, 1998
10.14 Lease Guarantee Agreement by and between EBT Healthcare Properties,
L.P. and the Company dated October 1, 1998.
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule (for SEC use only)
99.1 Cautionary Statements
(b) Reports on Form 8-K
On October 28, 1998, the Company filed a Form 8-K reporting a proposed merger of
the Company with a company founded by Welsh, Carson, Anderson & Stowe, whose
affiliates currently own approximately 23% of the Company's outstanding stock.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: April 05, 1999 CENTENNIAL HEALTHCARE CORPORATION
By: /s/ J. Stephen Eaton
----------------------------------------
J. Stephen Eaton, Chairman of the Board,
President and Chief Executive Officer
Date: April 05, 1999
By: /s/ Alan C. Dahl
------------------------------------------
Alan C. Dahl, Executive Vice President and
Chief Financial Officer
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<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
2.1 Agreement and Plan of Merger between Cougar Holdings Corporation,
Cougar Acquisition Corp. and the Company, dated October 22, 1998
(incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K filed on October 28, 1998).
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 of 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,
included without limitation Article III and Article 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 Lease between Health Care Property Investors, Inc. as Lessor and
Centennial HealthCare Investment Corporation as Lessee dated as of
June 15, 1998.
10.2 Guaranty of Obligations by the Company concerning obligations of
Centennial HealthCare Investment Corporation as Lessee under that
certain Lease dated June 15, 1998 with Health Care Property
Investors, Inc.
10.3 Participation Agreement dated as of July 29, 1998 among the Company
as Construction Agent and Lessee, certain of subsidiaries of the
Company as Guarantors, First Security Bank, National Association, as
Owner Trustee, the various banks and lending institutions named
therein as the Holders, the various banks and lending institutions
named therein as the Lenders, First Union Capital Markets, as
Syndication Agent, and NationsBank, N.A. as Agent
10.4 Lease Agreement dated as of July 29, 1998 between First Security
Bank, National Association, not individually, but solely as the Owner
Trustee under the Centennial Real Estate Trust 1998-1, as Lessor, and
the Company as Lessee
10.5 Agency Agreement dated as of July 29, 1998 between the Company and
First Security Bank, National Association
10.6 Security Agreement dated as of July 29, 1998 between First Security
Bank, National Association, not individually but solely as the Owner
Trustee under the Centennial Real Estate Trust 1998-1 and
NationsBank, N.A. as the Agent for the Lenders and the Holders, and
accepted and agreed to by the Company
10.7 Lease Supplement No. 1 by and between First Security Bank, National
Association and the Company dated August 5, 1998
10.8 Lease Supplement No. 2 by and between First Security Bank, National
Association and the Company dated August 5, 1998
10.9 Lease Supplement No. 3 by and between First Security Bank, National
Association and the Company dated August 5, 1998
10.10 Lease Supplement No. 4 by and between First Security Bank, National
Association and the Company dated October 9, 1998
24
<PAGE>
10.11 Lease Supplement No. 5 by and between First Security Bank, National
Association and the Company dated October 9, 1998
10.12 Lease Supplement No. 6 by and between First Security Bank, National
Association and the Company dated October 9, 1998
10.13 Second Amended and Restated Lease Agreement by and between EBT
Healthcare Properties, L.P. and Centennial HealthCare Properties
Corporation dated October 1, 1998
10.14 Lease Guarantee Agreement by and between EBT Healthcare Properties,
L.P. and the Company dated October 1, 1998.
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule (for SEC use only)
99.1 Cautionary Statements
25
<PAGE>
EXHIBIT 11.1
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------- ------- ------- ------
<S> <C> <C> <C> <C>
Income (loss) before dividends and accretion on
preferred stock.......................................... $(7,363) $ 3,383 $ 297 $6,508
Dividends and accretion on preferred stock................. - (4,654) - (5,873)
------- -------- ------- ------
Income (loss) applicable to common stock before
extraordinary loss....................................... (7,363) (1,271) 297 635
Extraordinary loss on extinguishment of debt
(net of tax)............................................. - (537) - (537)
------- -------- ------- ------
Income (loss) applicable to common stock................... $(7,363) $ (1,808) $ 297 $ 98
Weighted average common shares outstanding................. 11,924 11,579 11,900 7,084
Basic earnings (loss) per common share:
Income (loss) applicable to common stock
before extraordinary loss................................ $ (0.62) $ (0.11) $ 0.02 $ 0.09
Extraordinary loss on extinguishment of debt............... - (0.05) - (0.08)
------- -------- ------- ------
Basic Earnings (Loss) Per Common Share..................... $ (0.62) $ (0.16) $ 0.02 $ 0.01
======= ======== ======= ======
Income (loss) applicable to common stock
before extraordinary loss................................ $(7,363) $ (1,271) $ 297 $ 635
Interest savings on convertible debt
(net of tax)............................................. - 24 - 41
Extraordinary loss on extinguishment of
debt (net of tax)........................................ - (537) (537)
------- -------- ------- ------
Income (loss) applicable to common stock................... $(7,363) $ (1,784) $ 297 $ 139
Weighted average common shares outstanding................. 11,924 11,579 11,900 7,084
Dilutive effect of stock options........................... 18 166 223 80
Conversion of convertible debt............................. - 125 - 42
------- -------- ------- ------
Average diluted common shares outstanding.................. 11,942 11,870 12,123 7,206
Diluted earnings (loss) per common share:
Income (loss) applicable to common stock before
extraordinary loss....................................... $ (0.62) $ (0.10) $ 0.02 $ 0.09
Extraordinary loss on extinguishment of debt............... - (0.05) - (0.07)
------- -------- ------- ------
Diluted Earnings (Loss) Per Common Share................... $ (0.62) $ (0.15) $ 0.02 $ 0.02
======= ======= ======= ======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,164
<SECURITIES> 0
<RECEIVABLES> 120,828
<ALLOWANCES> (3,600)
<INVENTORY> 0
<CURRENT-ASSETS> 129,204
<PP&E> 90,169
<DEPRECIATION> (18,316)
<TOTAL-ASSETS> 271,303
<CURRENT-LIABILITIES> (53,224)
<BONDS> (101,641)
0
0
<COMMON> (119)
<OTHER-SE> (114,223)
<TOTAL-LIABILITY-AND-EQUITY> (271,303)
<SALES> 0
<TOTAL-REVENUES> (264,557)
<CGS> 0
<TOTAL-COSTS> 255,783
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,144
<INTEREST-EXPENSE> 6,728
<INCOME-PRETAX> (2,363)
<INCOME-TAX> 1,852
<INCOME-CONTINUING> (511)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (297)
<EPS-PRIMARY> (0.02)<F1>
<EPS-DILUTED> (0.02)<F2>
<FN>
<F1>The EPS-Primary tag represents basic EPS under SFAS No. 128.
<F2>The EPS-Diluted tag represents diluted EPS under SFAS No. 128.
</FN>
</TABLE>
