<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 1999
-------------------------------
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
---------------------
CENTENNIAL HEALTHCARE CORPORATION
------------------------------------------------------------
(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
----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 770-698-9040
-------------
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
--------- -------
Indicated 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 10,
1999
<PAGE>
CENTENNIAL HEALTHCARE INC
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
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 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
<PAGE>
ITEM I - FINANCIAL STATEMENTS
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 5,800 $ 5,046
Patient accounts receivable and third-party payor settlements, net
of allowance for doubtful accounts of approximately
$5,100 and $5,000 ............................................................... 100,426 99,910
Other receivables ................................................................ 5,038 4,382
Deferred income taxes ............................................................ 3,738 3,738
Prepaid expenses and other current assets ........................................ 3,129 2,250
-------- --------
Total current assets ......................................................... 118,131 115,326
Property and equipment, net ...................................................... 73,838 74,813
Intangible assets, net ........................................................... 34,964 40,104
Notes receivable and other assets ................................................ 59,540 55,088
-------- --------
Total assets.................................................................. $286,473 $285,331
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.......................................... $ 40,157 $ 45,935
Other current liabilities ........................................................ 25,745 12,816
-------- --------
Total current liabilities .................................................... 65,902 58,751
Long-term debt, less current maturities ............................................ 112,357 112,849
Other long-term liabilities ........................................................ 457 48
-------- --------
178,716 171,648
Commitments and contingencies
Shareholders' equity:
Common stock with par value of $.01; 50,000,000 shares
authorized; 11,923,618 shares issued
and outstanding ............................................................. 119 119
Paid-in capital .................................................................. 102,015 102,015
Retained earnings ................................................................ 5,973 11,899
-------- --------
108,107 114,033
Note receivable from shareholder ................................................... (350) (350)
-------- --------
Net shareholders' equity ..................................................... 107,757 113,683
-------- --------
Total liabilities and shareholders' equity ................................... $286,473 $285,331
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
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,
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net patient service revenues........................................... $96,876 $85,738 $290,241 $253,159
Management fees and other revenues..................................... 2,899 3,847 7,439 11,398
------- ------- -------- --------
Total revenues........................................................ 99,775 89,585 297,680 264,557
------- ------- -------- --------
Expenses:
Facility operating expenses:
Salaries, wages and benefits.......................................... 54,980 49,526 149,419 134,446
Other operating expenses.............................................. 22,243 18,828 82,881 66,807
Lease expense.......................................................... 8,433 5,756 24,501 16,911
Corporate administrative costs......................................... 6,420 5,837 18,341 16,027
Depreciation and amortization.......................................... 3,153 1,912 9,187 6,574
Loss on closure of nursing facility.................................... - 4,010 - 4,010
Terminated merger transaction costs.................................... - - 600 -
Provision for asset revaluation........................................ - 12,152 14,530 12,152
------- ------- -------- --------
Total operating expenses.............................................. 95,229 98,021 299,459 256,927
------- ------- -------- --------
4,546 (8,436) (1,779) 7,630
------- ------- -------- --------
Other income (expense):
Interest income........................................................ 322 540 1,224 1,461
Interest expense....................................................... (3,087) (2,499) (8,495) (6,728)
------- ------- -------- --------
Total other expense................................................... (2,765) (1,959) (7,271) (5,267)
------- ------- -------- --------
1,781 (10,395) (9,050) 2,363
Provision for income taxes (income tax benefit).......................... 743 (3,123) (3,263) 1,852
------- ------- -------- --------
Income (loss) before minority interest................................... 1,038 (7,272) (5,787) 511
Minority interest in net income of subsidiary,
net of income taxes.................................................... (3) (91) (139) (214)
------- ------- -------- --------
Income (loss) applicable to common stock................................. $ 1,035 $(7,363) $ (5,926) $ 297
======= ======= ======== ========
Income (loss) applicable to common stock
per common stock and common stock equivalent share:
Basic.................................................................. $ .09 $ (0.62) $ (0.50) $ 0.02
======= ======= ======== ========
Diluted................................................................ $ .09 $ (0.62) $ (0.50) $ 0.02
======= ======= ======== ========
Weighted average number of common stock and
common stock equivalents outstanding:
Basic.................................................................. 11,924 11,924 11,924 11,900
======= ======= ======== ========
Diluted................................................................ 11,924 11,942 11,924 12,123
======= ======= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
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, 1998............ 11,924 $119 $102,015 $11,899 $(350) $113,683
Net income (loss) ...................... - - - (5,926) - (5,926)
------ ---- -------- ------- ----- --------
Balance at September 30, 1999........... 11,924 $119 $102,015 $ 5,973 $(350) $107,757
====== ==== ======== ======= ===== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-----------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
Operating Activities:
Net income (loss)............................................................ $ (5,926) $ 297
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization............................................ 9,187 6,574
Deferred income taxes.................................................... (5,373) (1,100)
Provision for asset revaluation.......................................... 14,530 12,152
Consulting expenses offset against note receivable....................... 63 94
Minority interest........................................................ 238 350
Provision for doubtful accounts.......................................... 1,270 1,144
Change in assets and liabilities:
Accounts receivable................................................... (1,938) (16,431)
Prepaid expenses and other assets..................................... (1,892) (7,471)
Accounts payable, accrued liabilities and other current liabilities... (6,384) 3,301
Other................................................................. (679) (930)
-------- --------
Cash provided by (used in) operating activities................... 3,096 (2,020)
-------- --------
Investing Activities:
Purchases of property and equipment.......................................... (4,919) (5,046)
Notes and other receivables, net of repayments............................... (5,464) (9,422)
Acquisition of leasehold interest............................................ (500) (591)
Decrease in restricted cash.................................................. (395) (531)
Payments for financing and other deferred costs.............................. (2,853) (1,964)
-------- --------
Cash used in investing activities................................. (14,131) (17,554)
-------- --------
Financing Activities:
Proceeds from the exercise of stock options.................................. -- 294
Proceeds from borrowings..................................................... 15,146 24,200
Distributions paid to minority partners...................................... (148) (222)
Borrowings from related party, net of repayments............................. (335) (480)
Principal payments on long-term debt......................................... (2,874) (1,065)
-------- --------
Cash provided by financing activities............................. 11,789 22,727
-------- --------
Net change in cash and cash equivalents........................................ 754 3,153
Cash and cash equivalents, beginning of period................................. 5,046 4,011
-------- --------
Cash and cash equivalents, end of period....................................... $ 5,800 $ 7,164
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
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, 1998
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. 000-22771).
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, 1999 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1999 or any interim period.
Certain amounts in the 1998 financial statements have been reclassified for
comparative purposes.
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, September 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Income applicable to common stock.................... $ 1,035 $(7,362) $(5,926) $ 297
Weighted average common shares outstanding........... 11,924 11,924 11,924 11,900
BASIC EARNINGS PER COMMON SHARE...................... $ 0.09 $ (0.62) $ (0.50) $ 0.02
======= ======= ======= =======
Income applicable to common stock.................... $ 1,035 $(7,362) $(5,926) $ 297
Weighted average common shares outstanding........... 11,924 11,924 11,924 11,900
Dilutive effect of stock options.................... - 18 - 223
------- ------- ------- -------
Average diluted common shares outstanding........... 11,924 11,942 11,924 12,123
DILUTED EARNINGS PER COMMON SHARE.................... $ 0.09 $ (0.62) $ (0.50) $ 0.02
======= ======= ======= =======
</TABLE>
NOTE 3 - FACILITY ACQUISITIONS
In January 1999, Centennial acquired leasehold interests in six nursing
facilities, totaling 795 licensed available beds, located in Massachusetts. The
total purchase price of $64.0 million was funded under the portion of the
Company's Senior Credit Facility with Bank of America, N.A., ("Bank of America")
and First Union National Bank, as agents and lenders and the other lenders named
therein, (the "Senior Credit Facility"), designated for use in financing certain
facility lease transactions, (the "Lease Facility").
Also, in January 1999, the Company acquired leasehold interests in two
facilities that were previously managed by the Company: Hunter Woods Nursing and
Rehabilitation Center, ("Hunter Woods"), a 130-bed facility located in
Charlotte, North Carolina and Choctaw County
7
<PAGE>
Medical Center, ("Choctaw"), a facility with 68 nursing home beds and 22
hospital beds located in Ackerman, Mississippi. The Company paid a total
purchase price of $3.4 million for Hunter Woods comprised of cash of $2.0
million and assumed liabilities of $1.4 million; there were no lease acquisition
costs associated with Choctaw.
NOTE 4 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards ("SFAS") 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 133. SFAS 133 is effective for
fiscal years beginning after June 15, 1999. The effect on the financial
statements upon adoption of SFAS 133 has not been determined.
NOTE 5 - SEGMENT INFORMATION
In 1998, Centennial adopted Statement of Financial Accounting Standards ("SFAS")
131, "Disclosures about Segments of an Enterprise and Related Information".
SFAS 131 supersedes FAS 14, "Financial Reporting for Segments of a Business
Enterprise", replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS 131 also requires
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS 131 did not affect results of operations or financial
position.
The Company has determined that its reportable segments are those that are based
on the Company's method of internal reporting, which desegregates its business
by services provided. The Company's reportable segments are management
services/corporate, long-term care facilities and rehabilitative therapy
services. Management fee revenues and all corporate expenses and overhead are
recorded in the management services/corporate segment. The long-term care
facilities segment provides basic health care services to patients in a long-
term care setting, including skilled nursing and support, housekeeping, laundry,
dietary, recreational and social services. The rehabilitative therapy services
segment provides specialty health care services, including comprehensive
rehabilitation therapy, respiratory therapy and infusion therapy. The "All
Other" category represents the Company's hospital services, home health
services, and the Company's subsidiary providing intravenous therapy and other
services.
Centennial evaluates the performance of its segments and allocates resources to
them based on earnings before interest, taxes, depreciation, amortization, rent
and nonrecurring charges (EBITDAR).
The tables below presents information about EBITDAR and total assets used by the
chief operating decision maker of Centennial as well as specific items included
in segment profit/loss as of and for the three and nine month periods ended
September 30, 1999 and 1998:
8
<PAGE>
As of and for the nine months ended September 30, 1999:
(in thousands)
<TABLE>
<CAPTION>
Management Long-Term Rehabilitation
Services/ Care Therapy All Reconciling
Corporate Facilities Services Other Items Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues 7,849 238,347 28,784 41,955 (19,255) 297,680
EBITDAR (5,412) 45,753 981 5,717 -- 47,039
Total Assets 129,635 136,013 16,609 29,401 (25,185) 286,473
Interest revenue 1,146 32 22 24 -- 1,224
Interest expense (3,652) (3,886) (473) (484) -- (8,495)
Lease expense (1,284) (22,093) (395) (729) -- (24,501)
Depreciation and Amortization (3,691) (3,668) (1,407) (421) -- (9,187)
Minority Interest (net of tax) (139) -- -- -- -- (139)
Provision for Asset Revaluation (1,285) (10,558) (2,687) -- -- (14,530)
Terminated Merger Costs (600) -- -- -- -- (600)
Income tax benefit (expense) 6,056 (2,645) 1,546 (1,694) -- 3,263
Net income (loss) (8,861) 2,935 (2,413) 2,413 -- (5,926)
As of and for the nine months ended September 30, 1998:
(in thousands)
Management Long-Term Rehabilitation
Services/ Care Therapy All Reconciling
Corporate Facilities Services Other Items Total
----------------------------------------------------------------------------------------
Revenues 11,704 181,514 56,196 35,128 (19,985) 264,557
EBITDAR 1,208 33,663 7,140 5,266 -- 47,277
Total Assets 118,129 137,537 34,082 12,409 (30,856) 271,301
Interest revenue 1,241 84 88 48 -- 1,461
Interest expense (1,597) (4,133) (473) (525) -- (6,728)
Lease Expense (972) (14,901) (364) (674) -- (16,911)
Depreciation and Amortization (1,679) (3,272) (1,273) (350) -- (6,574)
Minority Interest (net of tax) (214) -- -- -- -- (214)
Loss on closure of nursing facility -- (4,010) -- -- -- (4,010)
Provision for Asset Revaluation (7,552) (3,409) -- (1,191) -- (12,152)
Income tax benefit (expense) 2,716 (1,569) (1,996) (1,003) -- (1,852)
Net income (loss) (6,849) 2,453 3,122 1,571 -- 297
For the three months ended September 30, 1999:
(in thousands)
Management Long-Term Rehabilitation
Services/ Care Therapy All Reconciling
Corporate Facilities Services Other Items Total
----------------------------------------------------------------------------------------
Revenues 3,014 80,481 9,062 12,998 (5,780) 99,775
EBITDAR (1,689) 15,373 836 1,612 -- 16,132
Interest revenue 302 13 1 6 -- 322
Interest expense (1,453) (1,341) (158) (135) -- (3,087)
Lease expense (475) (7,595) (130) (233) (8,433)
Depreciation and Amortization (1,269) (1,235) (493) (156) -- (3,153)
Minority Interest (net of tax) (3) -- -- -- -- (3)
Income tax benefit (expense) 1,930 (2,190) (24) (459) -- (743)
Net income (loss) (2,657) 3,025 32 635 -- 1,035
For the three months ended September 30, 1998:
(in thousands)
Management Long-Term Rehabilitation
Services/ Care Therapy All Reconciling
Corporate Facilities Services Other Items Total
---------------------------------------------------------------------------------------
Revenues 3,964 61,926 18,828 12,553 (7,686) 89,585
EBITDAR (27) 11,034 2,439 1,948 -- 15,394
Interest revenue 435 70 23 12 -- 540
Interest expense (709) (1,458) (158) (174) -- (2,499)
Lease expense (322) (5,072) (136) (226) (5,756)
Depreciation and Amortization (343) (1,116) (328) (125) -- (1,912)
Minority Interest (net of tax) (91) -- -- -- -- (91)
Loss on closure of nursing facility -- (4,010) -- -- (4,010)
Provision for Asset Revaluation (7,552) (3,409) -- (1,191) -- (12,152)
Income tax benefit (expense) 2,391 1,544 (718) (94) -- 3,123
Net income (loss) (6,218) (2,417) 1,122 150 -- (7,363)
</TABLE>
9
<PAGE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
In June 1999, the Company amended its Senior Credit Facility. As part of the new
agreement, the Company transferred $5.7 million of availability under the lease
portion of its credit facility to the revolver portion. The amendment, coupled
with previous 1998 amendments to the Lease Facility, increased the Company's
interest rate to 3.0% over LIBOR and calls for amortization of principal, or
reduction in availability, of $5.7 million on December 31, 1999, $11.0 million
on December 31, 2000, and $22 million during each of the years ending December
31, 2001 and 2002. As of September 30, 1999, the Company had $89.1 million
outstanding under its Senior Credit Facility, net of issued standby letters of
credit of approximately $6.7 million, with no remaining availability. The
Company is in full compliance with all covenants of the Senior Credit Facility
as of September 30, 1999.
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. Accordingly, the Company has entered into interest rate swap
agreements with certain lenders providing bank financing under the Senior Credit
Facility. Pursuant to the interest rate swap agreements, the Company has
exchanged its floating rate interest obligations on $38.0 million in principal
at an average fixed rate of 5.61% per annum for an average maturity of 4.25
years. 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 agreements is recognized
as an adjustment to interest expense. The Company is exposed to credit loss in
the event of nonperformance by the counterparties to the interest rate swap
agreements. However, the Company does not anticipate nonperformance by these
counterparties, and no material loss would be expected from their
nonperformance. The fair value of the interest rate swap agreements was not
recognized in the condensed consolidated financial statements since they are
accounted for as hedges. At September 30, 1999, the estimated fair value of the
interest rate swap agreements based on current market rates, approximated a net
receivable to the Company of $173,000.
In January 1999, the Company obtained a $5.0 million line of credit from
Bank of America, which bears interest at Bank of America's Prime Rate or 3.0%
over LIBOR for selected portions, and expires on December 31, 1999. As of
September 30, 1999, the Company had $5.0 million outstanding under this
agreement which is included in "other current liabilities" in the Company's
accompanying Condensed Consolidated Balance Sheets at September 30, 1999.
On March 26, 1999 the Company received an investigatory subpoena from the
Department of Health and Human Services, Office of Inspector General ("OIG"),
requesting records in connection with an investigation of possible or otherwise
improper claims for payment under Title XVIII (Medicare) of the Social Security
Act. The request relates to records for the period January 1, 1994 to the
present concerning certain of the Company's internal policies and supporting
documentation for labor allocations in four long-term care facilities operated
by the
10
<PAGE>
Company. The Company has provided all requested records and is cooperating fully
with the OIG.
NOTE 7 - TERMINATED MERGER
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,
("Centennial HealthCare Holdings Corporation), formed by Welsh, Carson, Anderson
& Stowe, whose affiliates currently hold approximately 23% of the Company's
common stock.
On April 2, 1999, Centennial HealthCare Holdings Corporation notified the
Company that it was terminating the definitive merger agreement. As of
September 30, 1999, the Company had expensed approximately $4.2 million in
transaction costs associated with the terminated merger. Approximately $600,000
of these costs were expensed during 1999. The Company does not anticipate any
further accruals of merger costs.
NOTE 8 - PROVISION FOR ASSET REVALUATION
During the second quarter of 1999, the Company continued its evaluation of the
effects of the Medicare Prospective Payment System ("PPS") on the profitability
of its nursing centers and ancillary businesses. Based on operational results
through six months under PPS, the Company noted that profitability at certain of
its nursing centers as well as Paragon, were significantly less than amounts
projected in 1998. Accordingly, during the second quarter of 1999, the Company
has recorded write-downs of property and equipment and intangible assets
(primarily goodwill) at several of its nursing centers totaling approximately
$1.2 million and $2.8 million, respectively. In addition, the Company wrote-off
approximately $2.7 million of goodwill associated with Paragon. The total
carrying value of goodwill after the write-down associated with Paragon and the
nursing facilities was approximately $17.0 million and $18.5 million,
respectively. Amortization expense recorded during the six months ended June
30, 1999 on the fixed assets and intangibles written-off approximates 54,000.
In connection with the Company's facility management agreements for several
facilities, 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 flow and other
funds provided by the owners. It is the Company's policy to periodically review
the collectibility of its advances based upon several factors, including the
projected cash flow of the respective facility, the value of any collateral
held by the Company, the owner's financial position and the underlying asset
value of the nursing center. During the first half of 1999, operating cash flow
at several of the Company's managed facilities, primarily in North Carolina,
declined due to deterioration in census and payor mix. In June, 1999, the
Company determined that the operational declines noted during 1999 were unlikely
to dissipate in the near term and, as a result, the ability of the respective
nursing facilities to fully repay cash advanced by the Company was impaired.
Accordingly, during the second quarter of 1999, the Company increased its
reserve for managed facility advances by $7.8 million. The charge represents
the carrying value of advances made to the respective centers considered
impaired.
11
<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 periods ended September 30, 1999 and 1998.
Certain statements in this Form 10-Q, 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.
GENERAL
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 101 owned, leased and managed skilled nursing
facilities with approximately 10,833 licensed available beds in 21 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 may
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 September 30,
1999, Centennial provided rehabilitation therapy services on a contract basis to
third-party owned and Company-operated skilled nursing facilities pursuant to
135 internal and external contracts and provided home health care services
through licensed home health offices primarily in North Carolina.
In January 1999, Centennial acquired leasehold interests in six nursing
facilities, totaling 795 licensed available beds, located in Massachusetts, (the
"Flatley Facility Leases").
Also, in January 1999, the Company acquired leasehold interests in two
facilities that were previously managed by the Company: Hunter Woods Nursing and
Rehabilitation Center, a 130-bed facility located in Charlotte, North Carolina,
and Choctaw County Medical Center, a facility with 68
12
<PAGE>
nursing home beds and 22 hospital beds, located in Ackerman, Mississippi.
Together, these two facilities are hereafter referred to as the "New Facility
Leases".
In August 1998, the Company began leasing four skilled nursing facilities
totaling 349 licensed available beds, located in Mississippi, North Carolina,
Arkansas and Wisconsin. One of these facilities was previously managed by the
Company. In October 1998, the Company began leasing six skilled nursing
facilities totaling 608 licensed available beds, located in Florida, Arkansas,
Kansas, and Wisconsin. In November 1998, the Company began leasing four skilled
nursing facilities totaling 675 licensed available beds, located in Florida and
Missouri. Together, these transactions are hereafter referred to as the "1998
Facility Leases".
In April 1998, the Company entered into management agreements for two skilled
nursing facilities, with a total of 174 licensed available beds, located in
Virginia. In October 1998, the Company discontinued its operations of Wellington
Nursing and Rehabilitation Center, ("Wellington"), a 140-bed facility located in
Charlotte, North Carolina, through a sub-lease to a third party operator. In
November 1998, the Company closed THS of South Bend, ("South Bend"), a 191-bed
skilled nursing facility located in South Bend, Indiana, which is currently held
for sale. In August 1999, the Company terminated management agreements for six
skilled nursing facilities with a total of 862 licensed beds, located in North
Carolina.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998:
Net patient service revenues. Net patient service revenues increased from $85.7
million in the third quarter of 1998 to $96.8 million in the same period in
1999, an increase of $11.1 million or 13.0%. The 1998 Facility Leases
contributed approximately $13.1 million to revenues during the third quarter of
1999. The New Facility Leases and the Flatley Facility Leases contributed
approximately $2.8 million and approximately $10.4 million, respectively, to
revenues during the third quarter of 1999. Wellington and South Bend together
contributed approximately $2.0 to revenues for the quarter ended September 30,
1998. Same store nursing facility revenues decreased by approximately $5.6
million in the third quarter of 1999 compared to the prior year period due
primarily to decreases in Medicare revenues associated with the advent of the
Medicare prospective payment system ("PPS") that went into effect for the
majority of the Company's owned and leased nursing facilities on January 1,
1999. Payor mix at the Company's nursing facilities remained consistent during
1999 as compared to 1998. The Company experienced a 24% decrease in its average
Medicare Part A rates during the third quarter of 1999 as well as a slight
decrease in overall occupancy percentage as compared to the prior period.
Revenues from Paragon decreased by approximately $8.3 million in the third
quarter of 1999 compared to the prior year period, due to the loss of twenty
nine external contracts subsequent to the third quarter of 1998 and a general
decrease in average revenue per contract. The decrease in revenue per contract
is associated primarily with the pass through effect of Medicare PPS rate
decreases affecting Paragon's nursing center customers. Revenues from Total Care
increased approximately $1.4 million during the third quarter of 1999 associated
with an increase in home health visits over third quarter 1998.
13
<PAGE>
Management fees and other revenues. Management fees and other revenues
decreased from $3.8 million in the third quarter of 1998 to $2.9 million in the
third quarter of 1999, a decrease of $948,000, or 24.6%. Approximately $330,000
of this decrease is due to the loss of one management contract subsequent to the
third quarter of 1998, and approximately $263,000 of this decrease is due to the
conversion of two management contracts to leases subsequent to September 30,
1998. The remaining decrease is attributable to revenue recognized during the
third quarter of 1998 for performance of additional services to certain third
party owners and declines in 1999 revenues earned under certain management
agreements in which the Company's fee is based on facility profits.
Facility operating expenses. Facility operating expenses increased from $68.3
million in the third quarter of 1998 to $77.2 million in the same period in
1999, an increase of $8.9 million or 12.9%. The 1998 Facility Leases contributed
approximately $11.5 million to operating expenses during the second quarter of
1999. The New Facility Leases and the Flatley Facility Leases contributed
approximately $2.4 million and approximately $8.1 million, respectively, to
operating expenses during the third quarter of 1999. Wellington and South Bend
combined contributed approximately $2.7 million, respectively, to operating
expenses for the prior year period ended September 30, 1998. Same store nursing
facility operating expenses decreased by approximately $5.1 million in the third
quarter of 1999 compared to the prior year period, primarily resulting from
decreases in therapy and other ancillary costs associated with the re-
negotiation of the Company's ancillary contracts under the PPS methodology.
These gains were offset in part by additional costs associated with continued
PPS training during the third quarter of 1999 at the Company's nursing
facilities. Operating expenses from Paragon decreased by approximately $6.5
million in the third quarter of 1999 compared to the prior year period, due to
the cost-cutting measures put in place by management in response to the decrease
in revenues associated with PPS. Expenses from Total Care increased by
approximately $1.4 million associated with an increase in home health visits
over 1998
Lease expense. Lease expense increased from $5.8 million in the third quarter
of 1998 to $8.4 million in the third quarter of 1999, an increase of
approximately $2.7 million, or 46.5%. Lease expense from the 1998 Facility
Leases approximated $1.6 million during the third quarter of 1999, while lease
expense from the New Facility Leases and the Flatley Facility leases
approximated $187,000 and $1.3 million, respectively, in the third quarter of
1999. Wellington and South Bend combined contributed approximately $366,000 to
lease expense during the prior year period ended September 30, 1998.
Corporate administrative costs. Corporate administrative costs increased from
$5.8 million in the third quarter of 1998 to $6.4 million in the third quarter
of 1999, an increase of $583,000 or 10.0%. The increase is due primarily to
additional overhead incurred to accommodate the 1998 Facility Leases, the New
Facility Leases, and the Flatley Facility Leases as well as training and
transition costs related to the implementation of PPS.
Depreciation and amortization. Depreciation and amortization increased from
$1.9 million in the third quarter of 1998 to $3.1 million in the same period in
1999, an increase of approximately $1.2 million, or 64.9%. This increase is
primarily attributable to additional depreciation expense incurred as a result
of fixed asset purchases and amortization of management contract and acquisition
costs.
14
<PAGE>
Provision for asset revaluation. During the third quarter of 1998, the company
recorded write-downs of certain long-lived assets at its nursing facilities and
at Total Care of $11.0 million and $1.2 million, respectively.
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.
Interest expense. Interest expense increased from $2.4 million in the third
quarter of 1998 to $3.1 million in the third quarter of 1999, an increase of
approximately $588,000, or 23.5%, that is primarily attributable to the increase
in debt of approximately $26.1 million subsequent to the third quarter of 1998,
related to borrowings for working capital, and an increase in the Company's
average borrowing rate under its line of credit of approximately 2%.
Provision for income taxes. The Company's effective tax rate increased from
39.0% in the third quarter of 1998 (gross of tax benefits associated with
nonrecurring third quarter 1998 losses), to 41.6% in the third quarter of 1999,
an increase in the rate of 2.6%. This increase is primarily attributable to
increases in the Company's average state tax rate due to the Company's expansion
into several new states resulting from the Flatley Facility Leases and the 1998
Facility Leases and the proportional increase in the effect of nondeductible
expenses.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998:
Net patient service revenues. Net patient service revenues increased from
$253.1 million in the first nine months of 1998 to $290.2 million in the same
period in 1999, an increase of $37.1 million or 14.6%. The 1998 Facility Leases
contributed approximately $39.9 million to revenues during 1999. The New
Facility Leases and the Flatley Facility Leases contributed approximately $7.9
million and $30.3 million, respectively, to revenues during the first nine
months of 1999. Wellington and South Bend combined contributed approximately
$7.3 million to revenues for the nine months ended September 30, 1998. Same
store nursing facility revenues decreased by approximately $13.2 million during
1999 compared to the prior year period due primarily to decreases in Medicare
associated with the advent of the Medicare prospective payment system ("PPS"),
which went into effect for the majority of the Company's owned and leased
nursing facilities on January 1, 1999. Payor mix at the Company's nursing
facilities remained consistent during 1999 as compared to 1998. The Company
experienced a 24% decrease in its average Medicare Part A rates during the first
nine months of 1999 as well as a slight decrease in census. Revenues from
Paragon decreased by approximately $23.8 million for the first nine months of
1999 compared to the prior year period, due to the loss of twenty nine external
contracts subsequent to the third quarter of 1998 and a general decrease in
average revenue per contract. The decrease in revenue per contract is
associated primarily with the pass through of Medicare PPS rate decreases
affecting Paragon's nursing center customers. Revenues from PTS increased by
approximately $1.6 million due to increased volume from existing contracts and
the expansion of services provided to both the Company's managed nursing
facilities and other third parties. Revenues from Total Care increased by
approximately $1.5 million associated with an increase in home health visits
during 1999.
Management fees and other revenues. Management fees and other revenues
decreased from $11.4 million during the first nine months of 1998 to $7.4
million for the same period of 1999, a
15
<PAGE>
decrease of $3.9 million, or 34.7%. Approximately $990,000 of this decrease was
due to the loss of one management contract subsequent to the third quarter of
1998, and approximately $1.1 million of this decrease was due to the conversion
of three management contracts to leases subsequent to September 30, 1998. The
remaining decrease is primarily attributable to revenue recognized during the
first nine months of 1998 for performance of additional services to certain
third party owners as well as decreases in 1999 revenues earned under certain
management agreements in which the Company's fee is based on facility profits.
Facility operating expenses. Facility operating expenses increased from $201.2
million during the first nine months of 1998 to $232.3 million for the same
period in 1999, an increase of $31.0 million or 15.4%. The 1998 Facility Leases
contributed approximately $33.6 million to operating expenses during the 1999.
The New Facility Leases and the Flatley Facility Leases contributed
approximately $6.9 million and approximately $23.4 million, respectively, to
operating expenses during the nine months ended September 30, 1999. Wellington
and South Bend combined contributed approximately $8.2 million to operating
expenses for the prior year period ended September 30, 1999. Same store nursing
facility operating expenses decreased by approximately $10.6 million during the
first nine months of 1999 compared to the prior year period, primarily resulting
from decreases in therapy and other ancillary costs associated with the re-
negotiation of the Company's therapy contracts under the PPS methodology. These
gains were offset in part by additional costs associated with continued PPS
training during 1999 at the Company's nursing facilities. Operating expenses
from Paragon decreased by approximately $17.2 million in the first nine months
of 1999 compared to the prior year period, due to the cost-cutting measures put
in place by management in response to the decrease in revenues associated with
PPS. Operating expenses from PTS increased by approximately $1.5 million due to
increased volume from existing contracts and the expansion of services provided
to both the Company's managed nursing facilities and other third parties.
Operating expenses from Total Care increased by approximately $1.5 million
during the nine months ended September 1999 as compared to the prior year period
due primarily to an increase in home health visits during 1998.
Lease expense. Lease expense increased from $16.9 million during the nine
months ended September 30, 1998 to $24.5 million during the same period in 1999,
an increase of approximately $7.5 million, or 44.8%. Lease expense from the
1998 Facility Leases approximated $2.9 million during 1999, while lease expense
from the New Facility Leases and the Flatley Facility leases approximated
$537,000 and $4.6 million, respectively, through September 30, 1999. Wellington
and South Bend combined contributed approximately $1.0 million to lease expense
during the prior year period ended September 30, 1998.
Corporate administrative costs. Corporate administrative costs increased from
$16.0 million in 1998 to $18.3 million during the first nine months of 1999, an
increase of $2.3 million, or 14.3%, that is due primarily to additional overhead
incurred to accommodate the 1998 Facility Leases, the New Facility Leases, and
the Flatley Facility Leases as well as training and transition costs related to
the implementation of PPS.
Depreciation and amortization. Depreciation and amortization increased from
$6.6 million during the nine months ended September 30, 1998 to $9.2 million in
the same period in 1999, an increase of approximately $2.6 million, or 39.7%.
This increase is primarily attributable to additional depreciation expense
incurred as a result of fixed asset purchases and amortization of management
contract and acquisition costs.
16
<PAGE>
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 third quarter of 1998, the Company
recorded write-downs of certain long-lived assets at its nursing facilities and
at Total Care of $11.0 million and $1.2 million, respectively. During the second
quarter of 1999, the Company recorded a provision for asset revaluation of
approximately $14.5 million. This charge was comprised of a $7.8 million
reserve for advances and notes receivable from managed facilities and a write-
down of fixed assets and intangible assets of $6.7 million related to certain of
the Company's nursing facilities and Paragon.
Interest expense. Interest expense increased from $6.7 million in 1998 to $8.5
million in 1999, an increase of approximately $1.7 million, or 26.2%. This
increase primarily attributable to the increase in debt of approximately $26.1
million subsequent to the third quarter of 1998, related to borrowings for
working capital, and an increase in the Company's average borrowing rate under
its line of credit of approximately 2%.
Provision for income taxes. Prior to nonrecurring losses in the both 1998 and
1999, the Company's effective tax rate increased from 39.0% for the nine months
ended September 30, 1998 to 41.0% in the third quarter of 1999, an increase in
the rate of 2.0%. This increase was primarily attributable to increases in the
Company's average state tax rate due to the Company's expansion into several new
states resulting from the Flatley Facility Leases and the 1998 Facility Leases
and the proportional increase in the effect of nondeductible expenses.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash during the first quarter of 1999 was
borrowings under its Senior Credit Facility. Cash was used by the Company for
capital improvements at several existing facilities, notes and advances
receivable from certain third parties and the day-to-day operations of the
Company's business. The Company anticipates utilizing cash from operations
(through anticipated reductions of accounts receivable) to fund the growth in
operations of its existing facilities.
During the nine months ended September 30, 1999, the Company generated $3.1
million in cashflow from operating activities. This was comprised of operating
income before noncash charges and changes in assets and liabilities of
approximately $13.9 million, an increase in accounts receivable of $1.9 million,
an increase in prepaid expenses of $1.9 million and a decrease in accounts
payable of $6.4 million. The significant decrease in accounts payable resulted
from $3.6 million of payments on accounts receivable purchased for the Flatley
Facility Leases as of December 31, 1998 as well as reductions in the Company's
nursing facility outstanding vendor account balances during the second and
third quarters of 1999. The Company continues to focus on reduction of its
accounts receivable balances to fund continued growth in operations. During the
third quarter of 1999, the Company experienced a $3.0 million decrease in its
nursing facility accounts receivable and a slight decrease in days sales
outstanding from June 1999 to September 1999. These decreases were primarily
attributable to collections of past due Medicaid and Medicare receivables
associated with the 1998 Facility Leases and the Flatley Facility Leases. Prior
to the third quarter of 1999, the Company had been unable to collect the
majority of these balances due to delays associated with the change in ownership
process. As of September 30, 1999, the Company had receivables totaling $7.5
million remaining to be collected associated with prior year acquisitions. The
Company anticipates that a substantial portion of these balances can be
collected in the fourth quarter of 1999.
Notes and other receivables from certain third party owners increased by
approximately $5.4 million during the first nine months of 1999. The Company
continued to invest in its leased and owned facilities through capital
expenditures of approximately $4.9 million or approximately $612 per bed for the
nine month period. These expenditures included the expansion of existing
facilities and the selected rehabilitation of certain facilities. Also during
the period, the Company paid $2.8 million for deferred costs including loan fees
associated with the refinancing of the Senior Credit Facility.
During the first nine months of 1999, the Company borrowed a net $15.1 million
in working capital loans under the Senior Credit Facility which were utilized
primarily to finance working capital at its new facilities and for capital
expenditures at existing facilities and other investing activities. As of
September 30, 1999, the Company had $89.0 million outstanding under its Senior
Credit Facility, net of issued standby letters of credit of approximately $6.7
million, and had no availability on this facility.
Effective May 28, 1999, the Company amended its Senior Credit Facility to
transfer $5.7 million of availability from the lease portion of its commitment
to the revolver. Also included in the amendment are required amortization of
principal, or reduction of availability, of approximately $5.7 million, $11.0
million , $22.0 million and $22.0 million during each of the years ended
18
<PAGE>
December 31, 1999, 2000, 2001 and 2002, respectively. In January 1999, the
Company obtained a $5.0 million Line of Credit from Bank of America, which bears
interest at Bank of America's Prime rate or 3.0% over Libor for selected
portions. Through an amendment during the second quarter of 1999, the Company
extended the maturity date of this commitment to December 31, 1999. As of
September 30, 1999, the Company had $5.0 million outstanding under this
agreement. The Company anticipates meeting its required principal reductions in
1999 through the sale of certain assets. During the fourth quarter of 1999, the
Company expects to close the sale of three facilities which will generate
approximately $9.1 million in cash proceeds and use those proceeds for meeting
the required principal reductions and to satisfy the Bank of America line of
credit. The Company will retain management of these facilities subsequent to the
sale. The Company was in full compliance with all covenants of the Senior Credit
Facility as of September 30, 1999.
The Company's Amended Senior Credit Facility restricts the Company's ability to
add new facilities through either acquisitions or leases. Due to these
restrictions, the Company is evaluating the market potential of establishing
management relationships with investor groups interested in acquiring nursing
facilities and outsourcing management. All discussions by the Company with any
investor groups are in a preliminary stage and the availability of such
management opportunities is uncertain.
Depending on the outcome, a settlement of the currently pending investigatory
subpoena from the Department of Health and Human Services, office Inspector
General, could result in a substantial liability for the Company. Neither the
amount nor timing of any potential liability can, at this time, be estimated
with any reasonable certainty. It is, however, possible that resolution of this
investigation could have a material adverse effect on the Company's cash flow,
results of operations and consolidated financial position.
19
<PAGE>
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 ("SNF's") over the next five years,
primarily through the implementation of a Medicare prospective payment system
("PPS") for skilled services. Under the Act, PPS will be phased in over three
cost reporting periods beginning on or after July 1, 1998. Recent data from the
Congressional Budget Office indicates that the estimated reductions to SNF
payments resulting from the implementation of PPS actually approach $16.6
billion.
Generally, the PPS per diem, which covers routine service, ancillary and capital
related costs, has initially been 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 SNF 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 previously indicated a belief that revenues would be lower under PPS
but noted that reductions in ancillary service costs and proper Minimum Data Set
("MDS") documentation should offset the effect of rate reductions. The Company
can give no assurance that payments under the PPS program in the future will
remain at a level comparable to the present or increase, nor can the Company
give assurance that the trend in cost reductions or utilization remain
consistent with current levels.
Currently, there are legislative efforts underway to provide relief to SNF
providers and restore a portion of the savings estimated in excess of the
targeted $9.5 billion. While it is currently expected that favorable legislation
will be passed during the fourth quarter 1999, there is no assurance that
legislation will be passed, or if passed, the timing of its implementation or
its effect on the Company.
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 October 1, 2000.
The interim payment system is effective for cost reporting periods beginning on
or after October 1, 1997. Under the IPS, home health agencies, in general, are
reimbursed at the lessor of (i) actual costs, (ii) per visit cost limits reduced
to 105% of the median per visit costs for freestanding home health agencies; or
(iii) a blended agency-specific per beneficiary annual limit ("PBL") applied to
the agency's unduplicated census count of Medicare patients.
The Act also provides that cost limits and PBL's must be reduced by 15% from the
amount that would otherwise be in effect on September 30, 1999, regardless of
whether the new prospective payment system is ready for implementation on
October 1, 2000. Implementation of these new limits will effectively reduce
reimbursement 15-20% according to industry experts.
20
<PAGE>
Provisions of the Act also include limitations on coverage for outpatient
therapy services and the inclusion of inpatient therapy services in a per diem
payment rate based on an acuity measurement tool which classifies patients into
several intensity-based levels of care. The outpatient therapy limits are
$1,500 per year for the combination of Physical and Speech therapy and a
separate $1,500 for Occupational therapy. For payment purposes, inpatient
services are based upon minutes of care delivered and range from 45 minutes per
week to a maximum of 720 minutes per week.
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 by December 31,
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 substantially complete, and
priorities for all Business Systems that may require modification 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 modification and
replacement of Business Systems. As of September 30, 1999, substantially all
modifications and replacement of internal Business Systems has been completed.
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 $150,000 to $200,000. 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 $350,000), substantially all of which
has
21
<PAGE>
been capitalized, are not included in the above estimates. The Company does
not expect the costs relating to Year 2000 modifications 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 businesses in
the ordinary course for a period of time after January 1, 2000.
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
December 31, 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 based on
Management's best estimates using assumptions of future events are subject to
change. There can be no assurances that these estimates will be achieved.
22
<PAGE>
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As of September 30, 1999, 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 that arise in the normal course of its
business.
On March 26, 1999, the Company received an investigatory subpoena from
the Department of Health & Human Services, Office of Inspector General,
requesting records in connection with an investigation of possible or
otherwise improper claims for payment under Title XVIII (Medicare) of
the Social Security Act. The request currently relates to records for
the period January 1, 1994 to present at four long-term care facilities
operated by the Company. The Company has supplied the requested records
and is continuing to cooperate in this investigation.
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.
The annual meeting of shareholders was held on August 11, 1999. At
this meeting, the following matters were voted upon by the Company's
shareholders:
(a) Election of Class II Directors.
James B. Hoover, Bertil D. Nordin and Charles D. Nash were elected to serve
as directors until the 2002 Annual Meeting of Shareholders or until their
successors are elected and qualified. The vote was as follows:
<TABLE>
<CAPTION>
Votes Cast in Votes Cast
Name Favor Against or Withheld Abstentions
---- ------------- ------------------- -----------
<S> <C> <C> <C>
James B. Hoover 10,544,936 345,854 1,032,828
Bertil D. Nordin 10,545,436 340,354 1,032,828
Charles D. Nash 10,544,936 345,854 1,032,828
</TABLE>
The following directors continued in office following the meeting:
23
<PAGE>
Name Term Expires
---- -------------
Alan C. Dahl 2000
Robert A. Ortenzio 2000
J. Stephen Eaton 2001
Andrew M. Paul 2001
(b) Approval of Amendment to 1997 Stock Plan.
The shareholders of the Company approved (i) an increase in the number of
shares of common stock which may be issued subject to options granted under
the 1997 Stock Plan from 800,000 to 1,390,000, subject to certain anti-
dilution provisions contained in the Plan, and (ii) amended the Plan to
give the Compensation Committee of the Board of Directors of the Company
the authority and discretion to administer the grants of options to Non-
Employee Directors of the Company rather than providing for automatic
formula grants. The vote was as follows:
Votes Cast in Favor Votes Cast Against or Withheld Abstentions
------------------- ------------------------------ -----------
10,285,898 578,287 1,059,433
(c) The shareholders of the Company ratified the appointment of Arthur
Andersen LLP by the Audit Committee to serve in the capacity of auditor for
the Company and its subsidiaries for fiscal year 1999. The vote was as
follows:
Votes Cast in Favor Votes Cast Against or Withheld Abstentions
------------------- ------------------------------ -----------
10,886,139 4,651 1,032,828
ITEM 5. OTHER INFORMATION.
On October 7, 1999, the Company received the resignation of Robert A.
Ortenzio as a director of the Company effective September 10, 1999.
24
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description
- ------ -----------
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).
27.1 Financial Data Schedule (for SEC use only)
99.1 Cautionary Statements
(b) Reports on Form 8-K:
None
25
<PAGE>
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: November 15, 1999 CENTENNIAL HEALTHCARE CORPORATION
By: /s/ J. Stephen Eaton
----------------------------------------
J. Stephen Eaton, Chairman of the Board,
President and Chief Executive Officer
Date: November 15, 1999 By: /s/ Alan C. Dahl
------------------------------------------
Alan C. Dahl, Executive Vice President and
Chief Financial Officer
26
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
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).
27.1 Financial Data Schedule (for SEC use only)
99.1 Cautionary Statements
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JUL-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 5,800 5,800
<SECURITIES> 0 0
<RECEIVABLES> 105,558 105,558
<ALLOWANCES> (5,132) (5,132)
<INVENTORY> 0 0
<CURRENT-ASSETS> 118,131 118,131
<PP&E> 98,578 98,578
<DEPRECIATION> (24,740) (24,740)
<TOTAL-ASSETS> 286,473 286,473
<CURRENT-LIABILITIES> (65,902) (65,902)
<BONDS> (112,357) (112,357)
0 0
0 0
<COMMON> (119) (119)
<OTHER-SE> (107,638) (107,638)
<TOTAL-LIABILITY-AND-EQUITY> (107,757) (107,757)
<SALES> (297,680) (99,775)
<TOTAL-REVENUES> (298,904) (100,097)
<CGS> 0 0
<TOTAL-COSTS> 284,468 95,232
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 15,130 0
<INTEREST-EXPENSE> 8,495 3,087
<INCOME-PRETAX> 9,189 (1,778)
<INCOME-TAX> (3,263) 743
<INCOME-CONTINUING> 5,926 (1,035)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,926 (1,035)
<EPS-BASIC> 0 0
<EPS-DILUTED> 0.50 0.09
</TABLE>
<PAGE>
EXHIBIT 99.1
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q, 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 (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 reference to enable the Company to
do so. Forward-looking statements included in this Form 10-Q 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 continue 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.
16. The Company's ability to achieve required reductions in expenses or reach
required levels of revenue as PPS is fully implemented.
17. The assertion of liabilities and claims against the Company, including the
outcome of the pending investigation by the Department of Health and Human
Services, office of Inspector General.
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.
